CITY OF CLEVELAND, OHIO Single Audit Reports Year Ended December 31, 2012 Q) CLARK SCHAEFER HACKETT STRENGTH IN NUMBERS City Council City of Cleveland 601 Lakeside Avenue Cleveland, Ohio 44114 We have reviewed the Independent Auditors' Report of the City of Cleveland, Cuyahoga County, prepared by Clark, Schaefer, Hackett & Co., for the audit period January 1, 2012 through December 31, 2012. Based upon this review, we have accepted these reports in lieu of the audit required by Section 117.11, Revised Code. The Auditor of State did not audit the accompanying financial statements and, accordingly, we are unable to express, and do not express an opinion on them. Our review was made in reference to the applicable sections of legislative criteria, as reflected by the Ohio Constitution, and the Revised Code, policies, procedures and guidelines of the Auditor of State, regulations and grant requirements. The City of Cleveland is responsible for compliance with these laws and regulations. Dave Yost Auditor of State August 26, 2013 88 East Broad Street, Fifth Floor, Columbus, Ohio 43215-3506 Phone: 614-466-4514 or 800-282-0370 Fax: 614-466-4490 www.ohioauditor.gov This page intentionally left blank. TABLE OF CONTENTS Schedule of Expenditures of Federal Awards ............................................................................1 - 8 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards............................................................9 - 10 Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by OMB Circular A-133 .............................................................11 - 13 Schedule of Findings and Questioned Costs .........................................................................14 - 17 Schedule of Prior Audit Findings ....................................................................................................18 CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number Department of Agriculture Summer Food Service Program for Children 2012 2 Total Department of Agriculture Federal CFDA Number 10.559 Department of Energy Weatherization Assistance for Low-Income Persons 2011 Weatherization Assistance for Low-Income Persons 2012 ARRA-Weatherization Assistance for Low-Income Persons 2009 Federal Expenditures $ 294,258 294,258 81.042 81.042 3,506,926 700,804 715,655 4,923,385 ARRA-Energy Efficiency Appliance Rebate Program Grant 81.127 91,337 ARRA-Energy Efficiency And Conservation Block Grant Program (EECBG) 81.128 1,685,483 3 81.042 Total Department of Energy 6,700,205 Department of Health and Human Service Healthy Start Initiative Yr 11 Healthy Start Initiative Yr 12 Subtotal 93.926 93.926 1,140,029 920,682 2,060,711 93.217 93.217 176,430 98,527 274,957 93.243 93.243 86,248 13,703 1H79TI023734-01 93.243 67,974 167,925 18-100-1-2-IM-0110 18-100-1-2-IM-0111 93.268 93.268 226 93,132 93,358 18-2-001-1-BD-11 93.197 47,110 93.069 93.069 93.069 2,085 440,705 53,171 93.069 346 136,633 67,421 Family Planning Services Title X FY 2012 Family Planning Services Title X FY 2013 Subtotal Pass Through Programs: Ohio Department of Health: Centers for Disease Control and Prevention - Investigations and Technical Assistance: Substance Abuse and Mental Health Services Administration 5H79TI019946-02 Substance Abuse and Mental Health Services Administration 5H79TI019946-03 Substance Abuse and Mental Health Services Administration Subtotal Ohio Department of Health: Immunization Grants 2010 Immunization Grants 2011 Subtotal Ohio Department of Health: Childhood Lead Poisoning Prevention 2011/2012 Ohio Department of Health: Centers for Disease Control and Prevention - Investigations and Technical Assistance: City Readiness Initiative 2011 18-200-1-2-PI-0211 City Readiness Initiative 2012 18-200-1-2-PI-0312 City Readiness Initiative 2013 18-200-1-2-PI-0413 Public Health Collaborative 2011 Public Health Collaborative 2012 Public Health Collaborative 2013 18-1-001-2-BI-11 18-1-001-2-BI-12 18-1-001-2-BI-13 PHER Area 3 2011 93.069 93.069 93.069 Subtotal 1 5,590 705,951 (Continued) CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number Federal CFDA Number Federal Expenditures Department of Health and Human Service (continued): WRAAA OAA/ADRC Project WRAAA Supportive Services WRAAA OAA/ADRC Project WRAAA Supportive Services 93.044 93.044 93.044 93.044 Subtotal WRAAA Supportive Services/MIPPA 93.779 Ohio Department of Health: HIV Prevention 2010 HIV Prevention 2011 HIV Prevention 2012 2,995 18-2-001-2-BX-11 18-2-001-2-SD-0112 93.977 93.977 26,282 120,649 146,931 18-2-001-2-AS-10 18-2-001-2-AS-11 18-2-001-2-AS-12 Ohio Department of Health: Preventive Health Services-Sexually Transmitted Diseases: Sexually Transmitted Diseases Diagnosis & Treatment 2011 Sexually Transmitted Diseases Diagnosis & Treatment 2012 Subtotal 93.940 93.940 93.940 3,381 72,520 721,094 796,995 93.959 93.959 175,275 5 175,280 93.568 93.568 93.568 41,407 781,879 998,089 1,821,375 Subtotal Cuyahoga County Board of Health: Block Grants for Prevention and Treatment of Substance Abuse: Student Assistance 2012 Treatment Student Assistance 2012 Prevention Subtotal Ohio Department of Development: Low-Income Home Energy Assistance-HHS 2011 Low-Income Home Energy Assistance-HHS 2012 Low-Income Home Energy Assistance-HHS 2009 Subtotal 4 5,591 9,265 144,092 91,778 250,726 11-111 12-111 10-111 Total Department of Health and Human Services Department of Housing & Urban Development Ohio Department of Health: Lead Hazard Reduction Demonstration Grant Program 2010 6,544,314 OHLHD0188-08 Lead Technical Studies Grants 2009 Lead Technical Studies Grants 2010 Subtotal 197,115 74,592 33,094 170,313 567,363 3,080,150 13,508,795 8,793,866 4,494,036 2,640,302 105,563 1,019,087 34,684,276 14.218 14.218 14.218 14.218 14.218 14.218 14.218 14.218 14.218 14.253 OHLHB0400-08 OHLHB0400-08 2 695,344 14.218 14.218 CDBG Yr 30 CDBG Yr 31 CDBG Yr 32/33 CDBG Yr 34 CDBG Yr 35 CDBG Yr 36 CDBG Yr 37 CDBG Yr 38 CDBG Neighborhood Stabilization Program NSP 3 SHAP/CHORE 2007-2008 ARRA-CDBG Entitlement Grants (CDBG-R) (Recovery Act Funded) Subtotal 14.905 14.900 14.900 258,392 587,003 845,395 (Continued) CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number CFDA Number OHHP0001-11 14.913 59,431 HOME Investment Partnerships Program 1992 HOME Investment Partnerships Program 2001 HOME Investment Partnerships Program 2003 HOME Investment Partnerships Program 2005 HOME Investment Partnerships Program 2007 HOME Investment Partnerships Program 2008 HOME Investment Partnerships Program 2009 HOME Investment Partnerships Program 2011 HOME Investment Partnerships Program 2012 Subtotal 14.239 4,185 15,712 285,000 170,000 44,568 418,259 4,623,826 2,531,172 12,645 8,105,367 Emergency Shelter Grants Program 2010 Emergency Shelter Grants Program 2011 Subtotal 14.231 14.231 89,872 923,129 1,013,001 Housing Opportunities for Persons With Aids 2009 Housing Opportunities for Persons With Aids 2010 Housing Opportunities for Persons With Aids 2011 Subtotal 14.241 14.241 14.241 92,492 337,996 937,760 1,368,248 Empowerment Zones Program 14.244 2,168,446 Evergreen HUD 108 Hemingway HUD 108 14.248 14.248 25,979 399,457 425,436 A-Z-08-264-1 14.228 855,278 S-09-MY-39-0004 14.257 2,050,569 B-09-CN-OH-0032 14.256 12,151,599 Federal Federal Expenditures Department of Housing & Urban Development (continued): Healthy Homes Production Program Grant 14.239 14.239 14.239 14.239 14.239 14.239 14.239 14.239 Subtotal Pass Through Programs: Ohio Department of Development: CDBG - Neighborhood Stabilization Program Ohio Department of Development: ARRA Homeless Prevention ARRA-Neighborhood Stabilization Program NSP HUD 5 Total Department of Housing & Urban Development Department of Justice Public Safety Partnership and Community Policing Grants: Cleveland Universal Hiring II ARRA Cleveland Universal Hiring II Federal DOJ-COPS Technology GR Subtotal 64,422,390 16.710 16.710 16.710 1,716,018 3,678,009 660,157 6,054,184 2010-Edward Byrne Memorial-JAG 2010-DJ-BX-0251 16.738 105,531 ARRA-Recovery Act - Edward Byrne Memorial Justice Assistance Grants to Units of Local Government 2009-SB-B9-0367 16.804 226,777 2010-JG-A01-6444 2011-JG-A01-6444 16.738 16.738 392 140,250 2011-JG-A02-6947 16.738 Pass Through Programs: Ohio Department of Public Safety: 2010-Edward Byrne Memorial-NOLETF 2011-Edward Byrne Memorial-NOLETF 2011-Edward Byrne Memorial-NOVCC 32,215 (Continued) 3 CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number CFDA Number 2009-SB-B9-0367 16.804 12,126 08-JAG-MUN-01 16.738 378,828 896,119 2010-CD-BX-0071 16.742 16,030 16.000 34,719 2011-FW-AX-K004 16.529 5,255 2009-VP-VA2-V041 2010-VP-VA2-V041 2010-VP-VA2-V041 2011-WC-AX-0002 16.588 16.588 16.588 16.588 1,375 119,001 94,153 11,612 226,141 2010-VP-VA2-V042 2010-VP-VA2-V042 2010-VP-VA2-V042 16.590 16.590 16.590 153,477 153,571 131,516 438,564 2010-JB-MUN-1001 2011-JB-MUN-1001 2012-JB-MUN-1001 16.523 16.523 16.523 6,992 45,872 275 53,139 2007-PS-PSN-347A 2009-PS-PSN-347A 16.609 16.609 11,216 18,000 29,216 2006-PS-CAG-372 16.744 119,642 2009-JV-FX-0001 16.737 Federal Federal Expenditures Department of Justice (continued): ARRA-Edward Byrne Memorial Justice Assistance Grant Local Cuyahoga County - Department of Justice Affairs: Edward Byrne Memorial Justice Assistance Grant Programs (JAG): 2012-Edward Byrne Memorial-JAG Subtotal 2010 Paul Coverdell State of Ohio - Office of Criminal Justice Services: Law Enforcement Trust Federal State of Ohio - Office of Criminal Justice Services: Violence Against Women Formula Grants : Education, Training, and Enhanced Services to End Violence Against and Abuse of Women with Disabilities State of Ohio - Office of Criminal Justice Services: Violence Against Women Formula Grants : VAWA Team Approach 2009 Law VAWA Team Approach 2010 Law VAWA Team Approach 2011 Law VAWA Team Approach 2011 Law Court Training Program Subtotal State of Ohio - Office of Criminal Justice Services: VAWA Team Approach 2010 Safety VAWA Team Approach 2010 Safety VAWA Team Approach 2011 Safety Department of Justice (continued): Subtotal State of Ohio - Office of Criminal Justice Services: Juvenile Accountability Incentive Block Grants 2010 Juvenile Accountability Incentive Block Grants 2011 Juvenile Accountability Incentive Block Grants 2012 Subtotal Ohio Department of Public Safety: Cleveland V-Grip Cleveland V-Grip Subtotal Ohio Department of Public Safety: Anti-Gang Initiative 2006 Ohio Department of Public Safety: Gang Resistance Education and Training 2009 6 Total Department of Justice 61,234 7,934,243 (Continued) Department of Commerce Ohio Department of Jobs and Family Services: U S Department of Commerce, Economic Development Administration: Revolving Loan Fund Grant - Economic Adjustment Assistance 7 Total Department of Commerce Department of Labor Ohio Department of Jobs and Family Services: WIA Adult Program WIA Youth Program WIA Dislocated Worker Program 8 Total Department of Labor See Footnote 1 11.307 3,055,860 3,055,860 G-1011-15-0258 G-1011-15-0258 G-1011-15-0258 4 17.258 17.259 17.278 1,111,779 20,812 409,721 1,542,312 (Continued) CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number Federal CFDA Number Federal Expenditures Department of Transportation Airport Improvement Program 20.106 PID 90183 CUY-SRTS-2009-CLE3 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 20.205 99,650 16,896 431,055 55,000 19,044 49,383 40,929 17,200 11,680 17,452 32,592 49,806 43,160 1,485,629 4,897,228 66.001 66.001 66.001 817,479 145,916 963,395 66.818 66.818 1,046,401 200,000 1,246,401 66.814 92,884 66.810 66.810 Chemical Emergency Preparedness and Prevention: Bio-Watch Program 2011 Bio-Watch Program 2012 Bio-Watch Program 2013 Subtotal 66.468 66.468 2B-00E97301-0 BL-00E45201-1 Brownfield Assessment Grant 104,295 2,178,494 430,155 2,712,944 5133 6213 Pass Through Programs: Cuyahoga County: ARRA-Warner Swasey Brownfield ASBES Warner Swasey Clean Ohio Subtotal 10 596,135 5,647 PID 84338 PID 84338 PID 84338 PID 84338 PID 84338 PID 84339 PID 84339 PID 84339 PID 84339 PID 84339 9 Total Department of Transportation Department of Environmental Protection Agency Direct Programs: Air Pollution Control Program Support 2011 Air Pollution Control Program Support 2012 Air Pollution Control Program Support 2013 Subtotal Pass Through Programs: Ohio Water Development Authority OWDA Water OWDA Water Subtotal Department of Environmental Protection Agency (continued): 20.205 PID 87358 PID 86251 PID 86255 Pass Through Programs: Ohio Department of Transportation: Lakes to Lakes Trail/Woodland SRTS FY 2009 Signals Ohio Department of Transportation: ARRA- East 14th Street ARRA- Avenue District Ph IV ARRA- KAMM'S CORNER Northeast Ohio Areawide Coordinating Agency: Federal NOACA Miles Ave Street Federal NOACA Kamm's Corner Federal NOACA East 22 Trans Plan Federal NOACA League Park Plan Federal NOACA Westside Market Revival Federal NOACA Variety Village Study Federal NOACA UCI Bicycle Network Study Federal NOACA W. 65 Corridor Study Federal NOACA E. 55 & Euclid Ave. Federal NOACA E. 131 St. Corridor Plan Subtotal 3,411,599 3,606 248,113 119,870 371,589 66.810 Total Environmental Protection Agency 5,387,213 Department of Homeland Security Metropolitan Medical Response System 2004 Metropolitan Medical Response System 2004-6 Metropolitan Medical Response System 2006 Metropolitan Medical Response System 2007 Metropolitan Medical Response System 2008 Metropolitan Medical Response System 2009 Metropolitan Medical Response System 2010 Subtotal 97.071 97.071 97.071 97.071 97.071 97.071 97.071 5 12,548 6,601 5,857 4,250 150,802 241,790 246,205 668,053 (Continued) CITY OF CLEVELAND CUYAHOGA COUNTY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended December 31, 2012 Federal Grant/ Pass Through Grantor/ Program Title Pass Through Entity Number Federal CFDA Number Federal Expenditures Department of Homeland Security (continued): Assistance to Firefighters Grant Assistance to Firefighters Grant Assistance to Firefighters Grant Subtotal 97.044 Port Security Grant Program Port Security Grant Program 97.056 97.056 97.044 97.044 Subtotal 999 48,497 42,880 92,376 378,808 159,430 538,238 National Explosives Detection Canine Team Program 97.072 122,193 FEMA Diaster Grant Federal Portion 97.036 1,022,449 2009 Safer Grant 2010 Safer Grant 97.083 97.083 11,473 1,875,876 1,887,349 97.074 97.074 9,300 678,944 688,244 97.090 356,788 97.008 97.008 97.008 132,026 111,745 726,712 405,456 9,143 9,785 1,394,867 Subtotal 2008 (LETPP) Law Enforcement Terrorism Prevention Program 2009 (LETPP) Law Enforcement Terrorism Prevention Program Subtotal Law Enforcement Officer Reimbursement Agreement Program Cuyahoga County Department of Justice Affairs Urban Area Security Initiative 2007 Urban Area Security Initiative 2008 Urban Area Security Initiative 2009 Urban Area Security Initiative 2010 Urban Area Security Initiative 2005 Urban Area Security Initiative 2006 Subtotal 2007-GE-T7-0030 2008-GE-T8-0025 2009-SS-T9-0089 2010-SS-T0-0012 97.008 97.008 97.008 Pass Through Programs: State of Ohio Emergency Management Agency: Public Safety Fire Grants: Buffer Zone Protection FY 05 Buffer Zone Protection FY 07 Buffer Zone Protection FY 09 2005-GR-T5-0012 2007-BZ-T7-0048 2009-BF-T9-0046 Subtotal 11 Total Department of Homeland Security 1 Grand Total 2 5,768 102,514 97.078 Wind Power Project 12 97.078 97.078 97.078 1,575 109,859 6,880,416 $ 107,658,439 (Concluded) 6 CITY OF CLEVELAND CUYAHOGA COUNTY NOTES TO THE "SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS" FOR THE YEAR ENDED DECEMBER 31, 2012 Basis of Presentation The accompanying "Schedule of Expenditures of Federal Awards" includes the federal grant activity of the City of Cleveland (the "City") and is presented on the cash basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Longwood Apartments Grant The United States Department of Housing and Urban Development (HUD) made available an UpFront grant, CFDA 14.199, to the City in connection with the demolition, rebuilding and redevelopment of the Longwood apartments. The funding for the plan is to come from a variety of public and private sources, including, tax-exempt bonds issued under Section 103 of the Internal Revenue Code of 1986, private sector equity derived from benefits associated with the low income housing tax credits, HUD Section 221 (d)(4) mortgage insurance, HUD UpFront Grant Program Funds, and City general obligation bond, public utility, Housing Trust Fund, and NDA funds. The UpFront Grant will be allocated and loaned to the developer throughout the various phases of the project in accordance with a Promissory Note, Interest on this Note began to accrue on April 1, 2006 at a fixed annual rate of 0.25% with this Note maturing on April 1, 2046. Park Village Apartment Grant The United States Department of HUD made available an UpFront Grant in the amount of $981,836 for the rehabilitation of the Park Village Apartments, CFDA 14.199. In addition to the Upfront Grant, funding for the plan includes a private lender first mortgage, a Community Development Block Grant Float Loan and private sector equity derived from benefits associated with low income housing tax credits. The UpFront Grant funds are being loaned to the developer in accordance with the Promissory Note. Interest on this Note began to accrue on March 19, 2003 at a fixed annual rate of 5.23% per annum with this Note maturing on March 19, 2033. Footnote 1: Revolving Loan Fund Activity in the Economic Adjustment Assistance, CFDA 11.307 revolving loan fund during 2012: Beginning loans receivable balance as of January 1, 2012 Loans made during 2012 $1,713,599 1,201,599 Loan principal repaid on loans issued prior to 2012 Loan principal repaid on 2012 loans issued Ending loans receivable balance as of December 31, 2012 Cash balance on hand in the revolving loan fund as of December 31, 2012 Cash balance, unobligated Revolving loan committed but not disbursed (936,105) (39,848) 1,939,245 808,774 647,381 Total unobligated cash and committed but not disbursed cash 1,456,155 Total value of revolving loan portion of the EDA 11.307 program Less: City's matching share 3,395,400 (339,540) Total federal value of revolving loan portion as of December 31, 2012 7 3,055,860 CITY OF CLEVELAND CUYAHOGA COUNTY NOTES TO THE "SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS" FOR THE YEAR ENDED DECEMBER 31, 2012 Revolving Loan Fund (Continued) 4500 LTD Binkowsky-Dougherty Distribution, LLC $25,521 $200,000 Bula Forge & Machine Inc. 70,253 Cardioninsight Tech, INC 163,879 CEAM Investment Co. 108,310 Evergreen Cooperative 22,922 Evergreen Real Estate Corporation 229,863 Hemingway 500,000 Jane and Arthur Ellison LTD 94,824 Northern Ohio Lumber & Timber Co. 179,448 Ohio Cooperative Solar INC 48,207 Otto Konigslow Manufacturing Co. 16,477 Proxy Biomedical 65,999 Replica Engineering Inc. 2,891 Sparkbase LLC 12,892 Unger Company 90,183 Zen Industries Inc. 23,244 Northeast Ohio Neighborhood Real Estate Northeast Ohio Neighborhood Real M & E 8 60,413 23,921 $1,939,245 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee City of Cleveland, Ohio: We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Cleveland, Ohio ("City") as of and for the year ended December 31, 2012 and the related notes to the financial statements, which collectively comprise the City's basic financial statements and have issued our report thereon dated June 25, 2013, wherein we noted the City implemented Governmental Accounting Standards Board Statement No. 60, 62, 63 and 64. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify a certain deficiency in internal control, described in the accompanying schedule of findings and questioned costs as finding 2012-1 that we consider to be a significant deficiency. Compliance And Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. City's Response to Finding The City's response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The City's response was not subjected to the auditing procedures applied in the audit of the financial statements and accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 10 REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY OMB CIRCULAR A-133 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee City of Cleveland, Ohio: Report on Compliance for Each Major Federal Program We have audited the City of Cleveland, Ohio's (the "City") compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of the City's major federal programs for the year ended December 31, 2012. The City's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors' Responsibility Our responsibility is to express an opinion on compliance for each of the City's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the City's compliance. Opinion on Each Major Federal Program In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2012. Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as items 2012-2, 2012-3 and 2012-4. Our opinion on each major federal program is not modified with respect to these matters. The City's responses to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The City's responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses. Report on Internal Control Over Compliance Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City's internal control over compliance with the types of compliance requirements that could have a direct and material effect on a major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified certain deficiencies in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as items 2012-2, 2012-3 and 2012-4 that we consider to be significant deficiencies. The City's responses to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The City's responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. 12 Report on Schedule of Expenditures of Federal Awards Required by OMB Circular A-133 We have audited the financial statements of the City as of and for the year ended December 31, 2012, and have issued our report thereon dated June 25, 2013, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by OMB Circular A-133 and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditure of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 13 CITY OF CLEVELAND, OHIO Schedule of Findings and Questioned Costs Year Ended December 31, 2012 Section I - Summary of Auditors' Results Financial Statements Type of auditors' report issued: Internal control over financial reporting: ! Material weakness(es) identified? ! Significant deficiency(ies) identified not considered to be material weaknesses? Unmodified Noncompliance material to the financial statements noted? None None Yes Federal Awards Internal control over major programs: ! Material weakness(es) identified? ! Significant deficiency(ies) identified not considered to be material weaknesses? None Yes Type of auditors' report issued on compliance for major programs: Unmodified Any audit findings that are required to be reported in accordance with 510(a) of Circular A-133? Yes Identification of major programs: ! ! ! ! ! ! CFDA 14.239 - HOME Investment Partnerships Program CFDA 14.256 - ARRA - Neighborhood Stabilization Program CFDA 14.257 - ARRA - Homelessness Prevention and Rapid Re-Housing Program CFDA 16.710 - ARRA - Public Safety Partnership and Community Policing Grants CFDA 20.205 - ARRA - Highway Planning and Construction CFDA 81.128 - ARRA - Energy Efficiency and Conservation Block Grant Program Dollar threshold to distinguish between Type A and Type B Programs: $3,000,000 Auditee qualified as low-risk auditee? Yes 14 Section II - Financial Statement Findings Finding 2012-1 - Correction of an Error During 2012, new fiscal management of the Department of Public Utilities, Division of Water determined the City had not previously reported nearly $165 million of infrastructure capital assets in the City's financial statements. These capital assets were obtained by the City through water service agreements signed over a period of years beginning in 2005 with surrounding cities served by the Division of Water. The agreements specify the City will maintain the water system infrastructure in exchange for ownership of the assets. The unrecorded capital assets acquired prior to 2012 have been reported in the current year financial statements as a prior period restatement. The Division of Water capitalized assets relating to new water service agreements signed in 2012. We recommend the City develop procedures for future significant contracts and agreements to determine the appropriate accounting and reporting. Management Response: The City recognizes the importance of ensuring Division of Water's financial statements are correct, the Division of Fiscal Control inadvertently did not add the assets as water service agreements were entered into. As part of the Department's reorganization, the process of recognizing all assets in the year they were required has been assigned to our capital assets unit which will work with the Division's engineering unit to make the appropriate updates within the Advantage Accounting system at the time that the agreements are entered into. Section III - Federal Award Findings and Questioned Costs DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Finding 2012-2 - ARRA - Neighborhood Stabilization Program - CFDA 14.256 Condition: We performed tests to determine if the City was in compliance with time and effort documentation requirements for payroll charged to the federal program. The City allocates payroll and benefits for certain employees working on the federal program. Employees spending less than 100% of their time on the program do not track actual time spent on the program, instead their time is charged based on a budget estimate. Criteria: 2 CFR 225, Appendix B requires where employees work on multiple activities or cost objectives, a distribution of their salaries and wages to be supported by personnel activity reports or equivalent documentation. Personnel activity reports are required under various circumstances, including when employees work on more than one federal award. Personnel activity reports must reflect after-the-fact distribution of actual activity of each employee, must account for the total activity for which each employee is compensated, must be prepared at least monthly and must be signed by the employee. 2 CFR 225, Appendix B goes on to state, budget estimates or other distribution percentages determined before the services are performed do not qualify as support for charges to Federal awards. Context: The City charged $207,891 for payroll costs to the program for employees charging less than 100% of their time to this program. None of these employees prepared personnel activity reports or equivalent documentation. Cause: The Department of Community Development was unaware of time and effort documentation requirements for employees charging less than 100% to the program. Effect: Costs of $207,891 are questioned as a result of not maintaining appropriate time and effort documentation. 15 Recommendation: We recommend the City communicate the importance of maintaining time and effort documentation to all departments and divisions operating federal programs and ensure proper documentation is maintained. Views of Responsible Officials: The NSP-ARRA costs in question ($207,891, 0.82% of the grant) are real, eligible, reasonable, and NSP-related. In the future, the Department of Community Development agrees to use either timesheets or develop an alternative method pre-approved by HUD. The importance of keeping timesheets reflecting actual time spent on each grant has been communicated to administrative staff and is being maintained for 2013. Finding 2012-3 - Neighborhood Stabilization Program - CFDA 14.218 Condition: While testing the ARRA Neighborhood Stabilization program, we noted employees charging time to that program also charged time to the Neighborhood Stabilization Program. Employees spending less than 100% of their time on the program do not track actual time spent on the program, instead their time is charged based on a budget estimate. Criteria: 2 CFR 225, Appendix B requires where employees work on multiple activities or cost objectives, a distribution of their salaries and wages to be supported by personnel activity reports or equivalent documentation. Personnel activity reports are required under various circumstances, including when employees work on more than one federal award. Personnel activity reports must reflect after-the-fact distribution of actual activity of each employee, must account for the total activity for which each employee is compensated, must be prepared at least monthly and must be signed by the employee. 2 CFR 225, Appendix B goes on to state, budget estimates or other distribution percentages determined before the services are performed do not qualify as support for charges to Federal awards. Context: The City charged $337,511 of payroll costs for employees charging less than 100% of their time to this program. None of these employees prepared personnel activity reports or equivalent documentation. Cause: The Department of Community Development was unaware of time and effort documentation requirements for employees charging less than 100% to the program. Effect: Costs of $337,511 are questioned as a result of not maintaining appropriate time and effort documentation. Recommendation: We recommend the City communicate the importance of maintaining time and effort documentation to all departments and divisions operating federal programs and ensure proper documentation is maintained. Views of Responsible Officials: The NSP1 costs in question ($336,511, 2.09% of the grant) are real, eligible, reasonable, and NSP-related. In the future, the Department of Community Development agrees to use either timesheets or develop an alternative method pre-approved by HUD. The importance of keeping timesheets reflecting actual time spent on each grant has been communicated to administrative staff and is being maintained for 2013. 16 DEPARTMENT OF ENERGY Finding 2012-4 - ARRA - Energy Efficiency and Conservation Block Grant Program - CFDA 81.128 Condition: We performed tests to determine if the City was in compliance with time and effort requirements for payroll charged to the federal program. The City allocates payroll and benefits for certain employees working on the federal program. Employees spending less than 100% of their time on the program do not track actual time spent on the program, instead their time is charged based on budget estimates. Criteria: 2 CFR 225, Appendix B requires where employees work on multiple activities or cost objectives, a distribution of their salaries and wages to be supported by personnel activity reports or equivalent documentation. Personnel activity reports are required under various circumstances, including when employees work on an unallowable activity and a direct cost activity. Personnel activity reports must reflect after-the-fact distribution of actual activity of each employee, must account for the total activity for which each employee is compensated, must be prepared at least monthly and must be signed by the employee. 2 CFR 225, Appendix B goes on to state, budget estimates or other distribution percentages determined before the services are performed do not qualify as support for charges to Federal awards. Context: The City charged $67,286 payroll costs for an employee which represented 90% of the employee's salary even though the City asserts the employee actually spends 100% of his time on the program. For employees that spend 100% of their time on a federal program, a semiannual certificate should be prepared which indicates the employee fully devotes their time to the program in lieu of preparing personnel activity reports. No such certificates were prepared for the employee nor did the employee prepare personnel activity reports which support the allocation of 90% of their salary to the program. Cause: The Office of Sustainability was unaware of time and effort documentation requirements for employees charging less than 100% to the program. Effect: Costs of $67,286 are questioned as a result of not maintaining appropriate time and effort documentation. Recommendation: We recommend the City communicate the importance of maintaining time and effort documentation to all departments and divisions operating federal programs and ensure proper documentation is maintained. Views of Responsible Officials: We reviewed the importance of the time and effort documentation with personnel who oversee the grant. In addition, all personnel who are charged to the grant part time will submit detailed timesheets weekly to the Utilities CFO office. Any employees who spend 100% of their time on the grant will complete a semi-annual certificate indicating the employee fully devotes their time to the program. 17 CITY OF CLEVELAND, OHIO Schedule of Prior Audit Findings Year Ended December 31, 2012 Finding 2011-1 - Highway Planning and Construction - CFDA 20.205 We performed tests to determine if the City was in compliance with matching requirements of this grant agreement. The Westside Market Revival project required a local match of $10,000. The City met this matching requirement with the use of funds from another Federal grant program. 49 CFR 18.24 prohibits using costs borne by other Federal grant agreements to meet a cost sharing or matching requirements. Status: Corrected. 18 CITY OF CLEVELAND, OHIO COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended December 31, 2012 CITY OF CLEVELAND Comprehensive Annual Financial Report For the year ended December 31, 2012 Issued by the Department of Finance Sharon Dumas Director James E. Gentile, CPA City Controller This Page Intentionally Left Blank. CITY OF CLEVELAND, OHIO TABLE OF CONTENTS COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2012 Page Introductory Section Transmittal Letter ........................................................................................................................................... City Officials .................................................................................................................................................. City Council ................................................................................................................................................... Certificate of Achievement for Excellence in Financial Reporting ................................................................ Administrative Organization Chart ................................................................................................................ Financial Highlights ....................................................................................................................................... Financial Section Independent Auditors' Report ........................................................................................................................ Management's Discussion and Analysis ........................................................................................................ Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Position ....................................................................................................................... Statement of Activities ............................................................................................................................ Fund Financial Statements: Balance Sheet - Governmental Funds ..................................................................................................... Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds .............. Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities of Governmental Funds ....................................................................... Statement of Revenues, Expenditures and Changes in Fund Balances (Budget and Actual) General Fund ....................................................................................................................................... Statement of Net Position - Proprietary Funds ....................................................................................... Statement of Revenues, Expenses and Changes in Fund Net Position - Proprietary Funds ................... Statement of Cash Flows - Proprietary Funds......................................................................................... Statement of Fiduciary Assets and Liabilities ......................................................................................... Notes to Financial Statements .................................................................................................................... Supplementary Information: Combining and Individual Fund Financial Statements and Schedules: General Fund: Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual (Non-GAAP Budgetary Basis) - General Fund-Legal Appropriation Level ................................... Nonmajor Governmental Funds: Nonmajor Governmental Funds.......................................................................................................... Combining Balance Sheet - Nonmajor Governmental Funds ............................................................ Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Governmental Funds ....................................................................................................................... Combining Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - Budgeted Special Revenue Funds - Legal Appropriation Level ..................................................................................................................... Combining Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - Budgeted Debt Service Funds - Legal Appropriation Level ..................................................................................................................... 3 7-19 21 22 23 24 25 29-31 33-51 54-55 56-57 58 59 60 61 62-63 64 65-66 67 69-116 118-125 127-129 130-137 138-145 146-149 150-153 Page Nonmajor Enterprise Funds: Nonmajor Enterprise Funds................................................................................................................. Combining Statement of Net Position - Nonmajor Enterprise Funds.................................................. Combining Statement of Revenues, Expenses and Changes in Fund Net Position Nonmajor Enterprise Funds ............................................................................................................. Combining Statement of Cash Flows - Nonmajor Enterprise Funds................................................... Internal Service Funds: Internal Service Funds ......................................................................................................................... Combining Statement of Net Position - All Internal Service Funds.................................................... Combining Statement of Revenues, Expenses and Changes in Fund Net Position All Internal Service Funds ............................................................................................................... Combining Statement of Cash Flows - All Internal Service Funds ..................................................... Agency Funds: Agency Funds...................................................................................................................................... Combining Statement of Changes in Assets and Liabilities - All Agency Funds ............................... Capital Assets Used in the Operation of Governmental Funds: Schedule by Type ................................................................................................................................ Schedule by Function and Activity ..................................................................................................... Schedule of Changes by Function and Activity .................................................................................. Statistical Section Table of Contents ................................................................................................................................ Net Position by Component - Last Ten Years ..................................................................................... Changes in Net Position - Last Ten Years .......................................................................................... Fund Balances, Governmental Funds - Last Ten Years...................................................................... Changes in Fund Balances, Governmental Funds - Last Ten Years ................................................... Assessed Valuation and Estimated Actual Values of Taxable Property - Last Ten Years ................................................................................................................................. Property Tax Rates - Direct and Overlapping Governments - Last Ten Years .................................. Property Tax Levies and Collections - Last Ten Years ...................................................................... Principal Taxpayers - Real Estate Tax, 2012 and 2003 ...................................................................... Income Tax Revenue Base and Collections - Last Ten Years ............................................................ Ratio of Outstanding Debt to Total Personal Income and Debt Per Capita - Last Ten Years ................................................................................................................................. Ratio of General Obligation Bonded Debt to Assessed Value and Bonded Debt Per Capita - Last Ten Years ............................................................................................................ Computation of Direct and Overlapping Governmental Activities Debt ............................................ Legal Debt Margin - Last Ten Years .................................................................................................. Pledged Revenue Coverage, Airport Revenue Bonds - Last Ten Years ............................................. Pledged Revenue Coverage, Power System Revenue Bonds - Last Ten Years .................................. Pledged Revenue Coverage, Water System Revenue Bonds - Last Ten Years .................................. Principal Employers, 2012 and 2003................................................................................................... Demographic and Economic Statistics - Last Ten Years .................................................................... Full-Time Equivalent City Government Employees by Function/Program - Last Nine Years ............................................................................................................................... Operating Indicators by Function/Program - Last Ten Years ............................................................. Capital Assets Statistics by Function/Program - Last Ten Years ....................................................... Schedule of Statistics - General Fund ................................................................................................. 4 155 156-159 160-161 162-165 167 168-171 172-173 174-175 177 178-179 182 183 184 S2 S3 S4 S5 S6 S7 S8 S9 S10 S11 S12 S13 S14 S15 S16 S17 S18 S19 S20 S21 S22 S23 S24 INTRODUCTORY SECTION This Page Intentionally Left Blank. June 25, 2013 Honorable Mayor Frank G. Jackson City of Cleveland Council and Citizens of the City of Cleveland, Ohio Introduction We are pleased to submit the Comprehensive Annual Financial Report of the City of Cleveland (the City) for the year ended December 31, 2012. This report, prepared by the Department of Finance, includes the basic financial statements that summarize the various operations and cash flows related to the City's 2012 activities. Our intention is to provide a clear, comprehensive and materially accurate overview of the City's financial position at the close of last year. The enclosed information has been designed to allow the reader to gain an understanding of the City's finances, including financial trends, financial instruments and fund performances. The City has complete responsibility for all information contained in this report. This report consists of management's representations concerning the finances of the City. Consequently, management assumes full responsibility for the completeness and reliability of all of the information presented in this report. To provide a reasonable basis for making these representations, management of the City has established a comprehensive internal control framework that is designed both to protect the City's assets from loss, theft, or misuse and to compile sufficient reliable information for the preparation of the City's financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP). Because the cost of internal controls should not outweigh their benefits, this comprehensive framework of internal controls has been designed to provide reasonable, rather than absolute, assurance that the financial statements will be free of material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The City's financial statements have been audited by Clark, Schaefer, Hackett & Co. The goal of the independent audit is to provide reasonable assurance that the financial statements of the City for the year ended December 31, 2012, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. Clark, Schaefer, Hackett & Co. concluded, based upon its audit, that there was a reasonable basis for rendering an unmodified opinion that the City's financial statements for the year ended December 31, 2012 are fairly presented in conformity with GAAP. The Independent Auditors' Report is presented as the first component of the financial section of this report. The independent audit of the financial statements of the City was part of a broader, federally mandated "Single Audit" designed to meet the special needs of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the audited government's internal controls and compliance with legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the City's separately issued Single Audit Report. 7 GAAP requires that management provide a narrative introduction, overview and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The City's MD&A can be found immediately following the Independent Auditors' Report. Structure of this Comprehensive Annual Financial Report This Comprehensive Annual Financial Report (CAFR) is designed to assist the reader in understanding the City's finances. This CAFR consists of the following sections: The Introductory Section, which includes this letter of transmittal and contains information pertinent to the City's management and organization. The Financial Section contains the Independent Auditors' Report, Management's Discussion and Analysis (MD&A), Basic Financial Statements and various other statements and schedules pertaining to the City's funds and activities. The Statistical Section contains numerous tables of financial and demographic information. Much of this information is shown with comparative data for the ten-year period from 2003 through 2012. References throughout this report to Note 1, Note 2, etc., are to the Notes to Financial Statements included in the Financial Section of this CAFR. Profile of the Government The City The City is a municipal corporation and political subdivision of the State of Ohio. It is located on the southern shore of Lake Erie and is the county seat of Cuyahoga County. The City is included in the Cleveland-Elyria-Mentor, OH Metropolitan Statistical Area (MSA), comprised of Cuyahoga, Lake, Lorain, Geauga and Medina counties. This MSA is the 28th largest of 366 Metropolitan Areas in the United States and the largest Metropolitan Area in the State of Ohio. Cleveland is located in the northeast part of the state, approximately 150 miles north-east of Columbus. Bordering Lake Erie, Cleveland is home to world-renowned medical facilities, professional sports venues, Severance Hall, numerous State of Ohio lakefront parks, the Port of Cleveland, the Rock and Roll Hall of Fame and operates the nation's ninth largest water system. Interstate highways I-71, I-480, I-77 and I-90 serve as some of the City's major transportation arteries. The City is rich in educational and medical facilities, including Cleveland State University, Case Western Reserve University, the Cleveland Clinic and University Hospitals of Cleveland. City Government The City operates under, and is governed by, the Charter which was first adopted by the voters in 1913 and has been and may be further amended by the voters from time to time. The City is also subject to certain general State laws that are applicable to all cities in the State. In addition, under Article XVIII, Section 3 of the Ohio Constitution, the City may exercise all powers of local self-government and may exercise police powers to the extent not in conflict with applicable general State laws. The Charter provides for a mayor-council form of government. The City's chief executive and administrative officer is the Mayor, elected by the voters for a four-year term. Frank G. Jackson was elected as Mayor of the City in November 2005 and began his first term on January 2, 2006. He was reelected to a second term in November 2009. Prior to assuming office as Mayor, Mr. Jackson served as a Ward 5 City Council member for 16 years and in 2002, was elected by the 21-member City Council to serve as Council President. Under the Charter, the Mayor may veto any legislation passed by Council, but a veto may be overridden by a two-thirds vote of all members of the Council. 8 Legislative authority is currently vested in a 19-member Council. Council members serve four year terms and are elected from wards. The present terms of the Mayor and Council members expire on December 31, 2013. The Council fixes compensation of City officials and employees and enacts ordinances and resolutions relating to City services, tax levies, appropriating and borrowing money, licensing and regulating businesses and trades, and other municipal functions. The presiding officer is the President of Council, elected by the Council members. Martin J. Sweeney was re-elected as President of Council in November 2009. The Clerk of Council is appointed by Council. The Charter establishes certain administrative departments; the Council may establish divisions within departments or additional departments. The Mayor appoints all of the directors of the City's 12 departments. The Director of Finance and City Controller believe that, to the best of their knowledge, the data contained in this report present fairly the financial position and results of operations of the various funds of the City. All necessary disclosures are included in this report to enable the reader to understand the City's financial activities. Financial Reporting Entity The City has applied guidelines established by Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity. Provisions outlined in this statement define the operational, functional and organizational units for which the City, "acting as Primary Government", is required to include as part of its reporting entity. The inclusion of a component unit as part of the City's reporting entity requires the appointment of a voting majority of the component unit's board and either (1) the City's ability to impose its will over the component unit or (2) the possibility that the component unit will provide a financial benefit to or impose a financial burden on the City. Under these provisions, the City's financial reporting entity acts as a single rather than multi-component unit. The provisions permit the entity to include all funds, agencies, boards and commissions that, by definition, comprise components within the primary government itself. For the City, these components include police and fire protection services, waste collection, parks and recreation, health, select social services and general administrative services. Primary enterprise activities owned and operated by the City include a water system, electric distribution system and two airports. In accordance with GASB Statement No. 14, the Cuyahoga Metropolitan Housing Authority, Cleveland-Cuyahoga Port Authority and Cleveland Municipal School District are defined as related organizations and Gateway Economic Development Corporation of Greater Cleveland is defined as a jointly governed organization. None of these organizations are included within the City's reporting entity. Internal Control Management of the City is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure ensures that accounting data is compiled to allow for the preparation of financial statements in conformity with GAAP. The internal control structure is designed to provide reasonable assurances that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. As a recipient of federal, state and county financial assistance, the City is also responsible for maintaining a rigorous internal control structure that ensures full compliance with applicable laws and regulations related to those programs. This internal control structure is subject to periodic evaluation by management, external auditors and the internal audit staff of the City. The City is required to undergo an annual audit in conformity with the provisions of the Single Audit Act Amendments of 1996 and U.S. Office of Management and Budget Circular A-133, Audits of State and Local Governments and Non-profit Organizations. The information related to the Single Audit, including the schedule of federal awards expenditures, findings and recommendations and auditor's reports on the internal control structure and compliance with applicable laws and regulations are included in a separate report. Accounting and Financial Reporting The City's accounting system is organized and operated on a fund basis. A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts. The types of funds to be used are determined by GAAP and the number of individual funds established is determined by sound financial administration. Each fund is a separate accounting entity with its own self-balancing set of accounts, assets, liabilities and fund balance. The City's governmental funds include the General Fund, Special Revenue Funds, Debt Service Funds and Capital Projects Funds. The City's proprietary funds are its Enterprise Funds that provide services to the general public, including utilities and airport service and Internal Service Funds that provide services to City departments, divisions and other governments. The City also maintains Fiduciary Funds to account for assets held by the City in an agent capacity for individuals, private organizations and other governments. 9 Except for budgetary purposes, the basis of accounting used by the City conforms to GAAP as applicable to governmental units. All governmental funds are accounted for using a current financial resources (current assets and current liabilities) measurement focus. The modified accrual basis of accounting is utilized for governmental funds. Revenues are recognized when they are susceptible to accrual (both measurable and available). Expenditures are recognized when the related liability is incurred, except for interest on long-term debt which is recorded when due. The measurement focus of the City's proprietary funds is on the flow of total economic resources (all assets and liabilities). The accrual basis of accounting (revenues are recognized when earned and expenses when incurred) is utilized for the Enterprise and Internal Service Funds. The City's basis of accounting for budgetary purposes differs from GAAP in that revenues are recognized when received, rather than when susceptible to accrual (measurable and available) and encumbrances and pre-encumbrances are included as expenditures rather than included in fund balances. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or public-public partnership. As used in this Statement, an SCA is an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a "facility") in exchange for significant consideration and (2) the operator collects and is compensated by fees from third parties. As required, the City has implemented GASB Statement No. 60 effective for the 2012 fiscal year. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the City has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net position by the government that is applicable to a future reporting period and an acquisition of net position by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities. As required, the City has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. This Statement sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. As required, the City has implemented GASB Statement No. 64 effective for the 2012 fiscal year. 10 Budgeting Procedures Detailed provisions regulating the City's budget, tax levies and appropriations are set forth in the Ohio Revised Code and the City Charter. The Mayor is required to submit the appropriation budget, called "The Mayor's Estimate" to City Council by February 1 of each year. The Council may adopt a temporary appropriation measure for the first three months of the year, but must adopt a permanent appropriation measure for the fiscal year by April 1. The Cuyahoga County Auditor must certify that the City's appropriation measure does not exceed the amounts set forth in the County Budget Commission's Certificate of Estimated Resources. The City maintains budgetary control on a non-GAAP basis at the character level (personnel and related expenditures and other expenditures) within each division. Lower levels within each character are accounted for and reported internally. Lower levels are referred to as the program level. Estimated expenditure amounts must be pre-encumbered and subsequently encumbered prior to the release of purchase orders to vendors or finalization of other contracts. Preencumbrances and encumbrances that would exceed the available character level appropriation are not approved or recorded until the Council authorizes additional appropriations or transfers. Unencumbered appropriations lapse at the end of each calendar year. As an additional control over expenditures, the City Charter requires that all contracts in excess of $50,000 shall first be authorized and directed by ordinance of City Council. Budget-to-actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the General Fund, this comparison is shown on page 61 as part of the basic financial statements. For other governmental funds with appropriated annual budgets, this comparison is presented in the supplementary information subsection of this report along with more detailed information regarding the General Fund, which starts on page 118. Factors Affecting Financial Condition Local Economy The information presented in the financial statements is perhaps best understood when it is considered from the broader perspective of the specific environment within which the City operates. Cleveland's economic condition draws strength and stability from its evolving role as the focal point of a growing, changing and substantial regional economy. The City is located at the center of one of the nation's heaviest population concentrations. The Cleveland metropolitan area is a significant local market, housing 2.1 million people. Cleveland also provides superior links to the global markets. The Cleveland-Cuyahoga Port Authority handles the largest amount of overseas cargo on Lake Erie and includes a Foreign Trade Zone. The City is also well-served with extensive highways and Cleveland Hopkins International Airport serves as a United Airlines Hub and is serviced by all major airlines. The reemergence of downtown Cleveland as a vibrant center for national and regional entertainment and major cultural activities signals a turning point in the City's overall fortunes and is paving the way for further economic expansion that will be significantly more entrepreneurial in scope. Major Industries, Economic Conditions and Employment Cleveland, as well as most large urban municipalities across the nation, has faced significant economic challenges in recent years. Like all manufacturing cities across the country, Cleveland has tried to combat the declining industry base with more professional and service industry opportunities. The City's budget basis income tax collections increased 5.3% in 2012. While the City's economy has shifted more toward health care and financial services, its manufacturing base has assumed a smaller, yet still vital role. Competitive pressures in manufacturing have limited job creation, but the competitive position of Cleveland based industrial companies has improved. 11 The 2007 economic census indicates that Cleveland's employment base continues to become more diversified. The following table summarizes the percentage of Clevelanders employed by industry type based on 2007 census figures. Percent of Workforce Industry Utilities Administration and Support of Waste Management and Remediation Services Manufacturing Wholesale Trade Retail Trade Transportation and Warehousing Information Finance, Insurance and Real Estate Professional, Scientific Management Education, Health, Social Services Arts, Entertainment, Recreation Accomodation and Food Services Other Services Total 0.39 % 8.40 16.77 6.54 12.60 3.28 2.42 9.57 6.09 19.43 1.62 9.47 3.42 100.00 % Current Projects and 2012 Accomplishments The 2012 budget focused on continuing the City's commitment to improve the quality of life of its citizens by strengthening our neighborhoods, fostering a favorable business climate and providing superior services. Despite fiscal constraints and economic challenges, the City achieved the following 2012 programmatic goals and projects without an income or property tax increase: Department of Community Development Expended $20,141,000 of Neighborhood Stabilization Program (NSP-1 and NSP-2), $1,019,000 of Community Development Block Grant - American Recovery and Reinvestment Act (CDBG-ARRA) and $716,000 of ARRA Home Weatherization Assistance Program (HWAP) funds to support demolition, land reutilization, housing renovation, home repair and energy efficiency improvements to strengthen the local housing stock. The City and the Cuyahoga County Office of Homeless Services successfully completed the $9.8 million Homeless Prevention & Rapid Re-housing stimulus grant designed to help families avoid homelessness as well as helping homeless persons find permanent housing. Under this program: o 2,692 households avoided homelessness; and o 1,407 homeless households found housing. The City, through the Housing First Initiative, completed the Greenbridge Permanent Supportive Housing (PSH) project on the Health Line corridor. Two more PSH projects are under construction: the 65-unit Emerald Alliance VI in the Buckeye-Shaker neighborhood and the 40-unit Winton on Lorain apartments in the Cudell neighborhood. Completed the $31 million stimulus funded HWAP by weatherizing 4,236 homes to be energy efficient during the term of the grant, with 1,312 homes completed in 2012. The Department also completed the installation of energy efficiency improvement plans for 103 moderate and middle income homes using low-cost loans from the new Energy Savors Pilot Program, which used stimulus funds from the U.S. Department of Energy. 12 In anticipation of and to prepare for a rebound in the housing market, the City has assembled viable land tracts including: o Morgana Run, St. Luke's Point, Cliffview, Battery Park and Upper Chester. o Coordinated with the Cuyahoga County Land Reutilization Corp. to assemble 1,965 vacant parcels for redevelopment or interim uses. Successfully restructured our lead abatement services by completing the final 87 of the 130 units required under the Lead Hazard Control grant. Reinforced the City's position as a leader and innovator in urban agriculture by continuing to expand programs for the reuse of vacant land, particularly for urban gardens and agriculture programs, including: o Increased community gardening in the City through the Summer Sprout program from 169 to 180 gardens, representing over 40 acres, in all 19 wards of the City, with more than 3,630 gardeners participating. o Worked with the Office of Sustainability and the United States Department of Agriculture (USDA) to facilitate the utilization of Environmental Quality Incentives Program funds, through which the USDA made 26 grants, totaling over $135,000, to urban agriculture entrepreneurs and community gardens for the purchase and installation of season extension high tunnels. With the use of these high tunnels, gardeners can nearly double their growing season. Department of Building and Housing Demolished 758 condemned structures. Since January 2006, the Department has inspected, condemned and razed over 6,517 structures. Initiated 1,745 court cases against negligent property owners. Issued 7,745 violation notices. Issued 16,245 construction permits valued at $1.033 billion in new construction. Boarded-up and secured 4,854 vacant structures. Deconstructed 13 structures to achieve a more sustainable demolition process. Issued 4,122 condemnation notices. Department of Economic Development Provided a $4,000,000 Housing & Urban Development (HUD) loan and a $500,000 Economic Development Administration loan to Midtown Tech Park for the third phase of the project. The loans will be used to add 66,000 square feet of high quality office space to the heart of the Health Tech Corridor. Upon completion, the project will create 80 jobs in the City. Assisted with securing the new headquarters for Manitowoc/Cleveland Range. The Department coordinated the acquisition of land, street repair, demolition of vacant buildings and financial incentives to offer a more attractive package than competing cities. The company is expected to retain 260 employees and add 120 more. The City provided $200,000 to the National Development Council's Grow America Fund (GAF). The GAF operates as a community development leader to support creation of jobs and the expansion of eligible small businesses in underserved areas, particularly minority and women-owned businesses. Supplied a $180,000 forgivable loan to the historic Agora complex. The loan will be used to add 56,000 square feet of needed office space in the Health Tech Corridor. The renovation will retain 15 jobs and create at least 25 new ones. 13 The City is providing $200,000 to the Economic and Community Development Institute (ECDI) to structure microloans to small businesses that would not be eligible for traditional bank funding. A portion of the funding ($50,000) is specifically geared toward immigrant and refugee businesses. The City's funding will leverage more than $4 for every dollar the City has committed. The ECDI's lending efforts have resulted in $516,500 in loans to Cleveland based businesses, the retention of 6 jobs and the creation of an anticipated 35 jobs in the City. Assisted North Coast Media LLC, a start-up business-to-business media company, with a $50,000 grant. The company projects 30 new jobs with an estimated payroll of $1.7 million will be created within the first year of operations. Department of Health Performed 21,118 proactive nuisance inspections in 2012, exceeding the target by 4%. Environmental ticketing and summons increased by 26% and 28%, respectively, over 2011. Completed 7,674 food shop inspections, an increase from the 7,369 done in 2011. The increase depicts a growing food service industry in Cleveland during 2012. Administered 1,208 seasonal influenza vaccinations at the city's health centers and off-site events. Helped launch the second phase of the Healthy Cleveland Initiative designed to engage the community in improving the health of Clevelanders. The initiative includes, but is not limited to, the following tasks: o Remove all sugar-based drinks and trans-fats from vending machines in all city facilities and replace them with water, 100% juice and trans-fat free foods. o Encourage local restaurants to remove trans-fats from their menus. o Establish a task force to provide healthier food options within Cleveland Metropolitan School District. o Require all new school construction plans to include a full-service kitchen to prepare healthier food. o Reincorporate school gardens into every new school plan. o Ensure the existence of a community garden within walking distance of every Cleveland citizen by 2020. Continued to show considerable improvement in the infant mortality rate (IMR). In 2009, the IMR was 8.5%, declined to 2.6% in 2010 and dropped again to 1.3% in 2011. Rates are on pace to decline again when data is released for the 2012 year. Since MomsFirst participants are reflective of women at the highest risk for poor birth outcomes, the data supports the impact the program is having in reducing infant mortality in our community. Conducted 4,220 HIV tests at City health centers during 2012. Additionally, our contractual partners completed 8,031 tests in the community to exceed its target by 34%. Received additional Title X funding for the city's health centers to provide expanded medical care to support reproductive health services. This enabled the health centers to screen 40% more patients than in 2011. Collected $166,853 in air permit fees and completed 474 Ohio EPA-mandated inspections. Distributed 117,470 birth and death certificates to Clevelanders and 34 Cuyahoga County suburbs. 14 Conducted a comprehensive marketing campaign using channels 19 and 43, as well as Clear Channel Broadcasting to promote reproductive health and wellness programs. Additional marketing campaigns promoted lead poisoning prevention and the impact of HIV/AIDS on the community. Nearly 500 TV ads on channels 19 and 43 were shown throughout all hours of the day and over 500 radio commercials were heard promoting CDPH programs and services. Additionally, the Department utilized social media as a marketing tool by posting to its Facebook page and Twitter feed. Department of Aging Provided core services to 5,620 clients including senior citizens and adults with disabilities. Secured approximately $500,000 of external grants. The Annual Senior Day Program held in May 2012 attracted more than 2,000 senior citizens; the Annual Senior Walk attracted over 1,000 senior citizens. Provided the following services: 1,424 received Benefit Checkups, 135 units, in which a low income senior or adult with a disability own and reside, received a major home repair(s), 691 received grass cutting services, 717 received assistance with snow removal and 3,802 received other supportive services. The Office of Equal Opportunity Assessed approximately $52,000 in penalties from contractors for non-compliance with the Codified Ordinance 188. Under Codified Ordinance 123.08, OEO is assuming a leadership role in coordinating touch points for Prevailing Wage citywide. The OEO completed the Citywide Disparity Study (conducted by National Employment Rights Authority) in 2012. In 2013, OEO will review the recommendations and make appropriate legislative and administrative changes. Business to Government Now (B2GNow) & Labor Compliance Tracker, OEO's new real-time compliance software, went live in January 2013. OEO will continue internal and external technical assistance sessions in 2013. Monitored over 133 construction contracts exceeding $100,000 to ensure compliance with the Cleveland Resident Employment Law (aka Fannie M. Lewis Law) requiring that at least 20% construction worker hours are City of Cleveland residents. Department of Public Works The Division of Recreation served 88,102 summer lunches during 2012. The Division of Park Maintenance serviced 44,141 vacant properties in 2012. The Division of Motor Vehicle Maintenance purchased 256 new vehicles. The Division of Urban Forestry trimmed 3,905 trees. The Division of Waste Collection collected and disposed of 212,367 tons of debris and recycled 22,318 tons of materials. They expanded the automated waste collection and curbside recycling program to 30,000 additional households, bringing the citywide total to 70,000. The Division of Parking reassigned the City's four multi-space electronic parking meters to East 12th Street between Superior and St. Clair. The Division of Streets used over 7,276 tons of asphalt for street repairs in 2012. They also resurfaced over 32,356 square yards of roadway. 15 The Division of Traffic Engineering painted over 661 miles of lane lines and replaced over 3,535 traffic light bulbs. Department of Public Safety The Violence, Gun Reduction and Interdiction Program (V-GRIP) was expanded in 2012 to combat violent crimes and firearms. Initiatives were conducted in three distinct neighborhoods in 2012, and there were reductions in felonious assaults with firearms in each respective area. Statistics included: 54 firearms confiscated, 3,499 citations issued and 479 arrests. Conducted monthly Neighborhood Safety Initiatives. Every enforcement strategy is utilized with an emphasis on combating crime in those areas reflecting the greatest volume of violent crimes in the previous six month period. Results included 423 felony arrests, 329 misdemeanor arrests, 41 firearms confiscated and 5,673 traffic citations issued. Realized an overall reduction in the Part One crimes of 3.89%. Part One crimes include (defined by the Federal Bureau of Investigation Uniform Crime Reporting) homicide, rape, robbery, felonious assault, burglary, theft, auto theft and arson. The Division of Fire implemented the Community Risk Reduction program through a grant from the Vision 20/20 Federal Program. The Division installed over 2,200 smoke alarms and 200 carbon monoxide detectors. In addition, the grant provided specialized smoke detectors for the hearing impaired. Continued the integration of the Division of Fire and the Division of Emergency Medical Service to create a single division providing all fire, rescue and pre-hospital emergency medical care for the City of Cleveland. Department of Public Utilities The Division of Water (CWD) reliably provides approximately 1.4 million customers throughout the City and more than 69 surrounding suburbs with high quality, safe water. In 2012, CWD pumped more than 82.1 billion gallons of water to customers and invested more than $58.9 million in its infrastructure. The Division of Cleveland Public Power (CPP) provided 74,000 residential and business customers in the City with reliable and affordable power. In 2012, CPP continued work on its Capacity Expansion Program, which is designed to upgrade infrastructure, increase customer capacity and improve reliability. The Division of Water Pollution Control (WPC) maintains the local sanitary and storm collection system within the boundaries of the City. The system is comprised of 1,434 miles of sewer lines, 127,000 catch basins and 15 pump stations. In 2012, WPC completed the cleaning of 17,034 catch basins and 409,326 linear feet of sewers and the TV inspection of 227,449 linear feet of sewers. Department of Port Control Broke ground on the new U.S. Department of Transportation and Federal Aviation Administration $69 million Air Traffic Control Tower and Terminal Radar Approach Control Facility at Cleveland Hopkins Airport (CLE). The new tower will extend 324 feet to provide a better aerial view of aircraft coming in and out of the airport. Received five 2011 Airport Revenue Awards for exceptional designs and concessions program management at CLE for the AIRMALL, which improved the quality, customer service and brand offerings for patrons at the airport. Currently, there are 60 new restaurants, retail and service locations, resulting in more than 325 new jobs at CLE. We anticipate the number of new jobs will increase as new venues continue to open. Expanded the CLE Temporary Art Exhibition Program to include 3 dimensional art exhibits in order to increase airport ambiance and enhance travelers' experience. The program is in line with the Mayor's initiative to include Art in Everything, inviting travelers and visitors to the airport to take a closer look at the richness of artistic and cultural diversity in Cleveland. 16 Department of Law Drafted approximately 535 contracts and reviewed over 962 contracts for legal form and correctness. Prepared 565 pieces of legislation for introduction to City Council; including legislation to implement the Downtown Lakefront Plan. Obtained 3,107 search warrants for housing court enforcement actions and helped Building and Housing obtain legal authorization for more than 1,228 demolitions of unsafe structures in the City. Responded to 2,519 citizen requests for non-routine public records; provided legal advice as needed in response to almost 8,000 routine requests. Processed 726 general claims for property damage and other losses. Initiated 1,745 criminal prosecutions in Housing Court for health and safety code violations to ensure that property owners adequately maintain their properties. Successfully prosecuted civil nuisance abatement actions for numerous properties across the City. 2013 Budget During 2012, the City continued to strengthen its financial position through increased efficiencies, streamlining of operations, improving accountability, refinancing debt and increasing revenue. The City is seeing moderate growth in income taxes due to heightened construction activity in the downtown and University Circle areas. The Budget Management Strategy for fiscal 2013 includes, but is not limited to, the following: A continuation of additional Public Safety and Public Works services required to support the influx of Horseshoe Casino visitors. A new unit of 25 police officers who will focus on violent crimes and guns. A 27th pay period at a cost of $13 million for the General Fund. An increase in Cleveland Browns Stadium debt service payments by an amount of $9.8 million. The estimate of receipts and expenditures for all General Fund departments and divisions for the 2013 budget are: Revenues and other sources are projected to decrease from $518.0 million in 2012 to $491.8 million in 2013. This decline is primarily attributed to a reduction of $14.2 million of transfers in and a $6.1 million dollar decrease in the local government fund. The change in transfers in is related to the one-time sale of the Convention Center that was transferred in 2012, while the decrease in local government is from State of Ohio cuts. Expenditures and other uses are estimated to increase from $486.5 million to $538.9 million in 2013. This increase is primarily related to the previously noted 27th pay occurring in 2013 and an increase of $13.3 million in subsidies to other funds. Long-term financial planning: The City has a long-term goal of increasing the Rainy Day Reserve Fund to 5% of General Fund expenditures (approximately $25 million). As part of the goal, the City is scheduled to transfer $5 million into the Rainy Day Reserve Fund in 2013, bringing the balance in the fund to approximately $18.5 million. This will allow the City to obtain the lowest rates possible when issuing debt and also withstand economic downturns with minimum disruptions to City services. 17 The City manages its long-term financing of its capital needs through the annual updating of its Capital Improvement Plan (CIP). The CIP schedules capital improvements through the current and succeeding five years. The CIP does not include appropriations or authorizations to expend monies. Capital Projects are approved by City Council when funding sources have been determined. The City usually issues bonds to fund capital projects. The following projects currently underway will provide the momentum necessary to continue rebuilding the City's economic base: Construction is near completion on the $465 million Convention Center and Global Center for Health Innovation (previously Medical Mart) in downtown Cleveland. The project is on-time and under-budget and expected to be completed in June 2013. Phase one of the Flats East Bank project ($272 million) continued construction in 2012. The development will initially include a state-of-the-art office tower with rooftop deck, a 150-room Aloft hotel by Starwood, restaurants, retail and 1,200-foot riverfront boardwalk. The $6 million renovation of League Park that will make Cleveland the only city in the nation to achieve adaptive reuse of an original major league ballpark. The $21 million second phase of the Uptown Development broke ground in early 2013. The development comprises residential, retail and cultural attractions on the eastern edge of University Circle. Major Initiatives As the City plans ahead to achieve increased municipal efficiencies and enhanced infrastructure coordination, the Mayor has launched the following initiatives: Making Cleveland a City of Choice - making Cleveland and its neighborhoods "communities of choice" is a principal goal of the administration. A community of choice is a place that residents and businesses and visitors choose because of the exceptional quality of life and amenities that it offers. The Departments of Economic and Community Development are taking the lead role in implementing the recommendations for development and revitalization. Automated Waste Collection Program - begun in 2009, the program provides automated waste collection and curbside recycling to City residents. The City provides each resident participating in the program with a 96 gallon cart for garbage and a 64 gallon cart for recyclable items. The carts are automatically emptied by vehicles equipped with mechanical arms and semi-automatically by vehicles with a tipper on the back to lift and tip the containers into the truck. This will result in reduced costs, reduced employee injuries, increased productivity, cleaner curbs and increased recycling participation. Connecting Cleveland 2020 Citywide Plan - a comprehensive plan for the future of Cleveland and its neighborhoods. It seeks to create great neighborhoods by creating "connections" between people and places and opportunities. The plan proposes not only to build houses, but build safe, vibrant neighborhoods. It is a plan that proposes not only to create shopping centers, but to create mixed-use "town centers" that can become the focus of community life. The plan not only seeks to create jobs, but to make job opportunities available to all Clevelanders. Awards and Acknowledgements The Independent Audit: The City Charter requires an annual audit of the financial statements of all accounts of the City by an Independent Certified Public Accountant. Accordingly, this year's audit was completed by Clark, Schaefer, Hackett & Co. The year ended December 31, 2012, represents the 32nd consecutive year the City has prepared a Comprehensive Annual Financial Report (CAFR). In addition to the independent auditors, the City maintains its own Internal Audit Division. Along with the duty of assisting the independent auditors, the Internal Audit Division is responsible for strengthening and reviewing the City's internal controls. The Internal Audit Division performs its own independent operational and financial audits of the City's many funds, departments and divisions. We believe that the City's internal control structure adequately safeguards its assets and provides reasonable assurance of proper recording of all financial transactions. 18 GFOA Certificate ofxichievement Award.' The Govemment Finance Officers Association of the United States and Canada awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Cleveland, Ohio for its CAFR for the fiscal year ended December 31, 201]. The Certificate of Achievement is a prestigious national award recognizing conformance with the highest standards for preparation of state and local govemment financial reports. In order to be awarded a Certificate of Achievement, a goventmental unit must publish an easily readable and efficiently organized CAFR, the contents of which confonn to program standards. Such CAFR.s must satisfy both GAAP and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. The City has received a Certificate of Achievement for the last 28 years (years ended 1934 -- 2011). We believe our current report continues to conform to the Certificate of Achievement program requirements and we are submitting it to the GFOA. Acknowledgements.' The preparation of this report could not have been accomplished without the eificient and dedicated service of' the Finance Department, particularly the Division of Financial Reporting and Control. We would also like to thank the Mayor, the cabinet and members of City Council. Without their continued support, the Department of Finance could not have maintained the financial management practices required to ensure the financial integrity of the City. We would like to thank the representatives of Clark, Schaefer, Hackett 3: Co. for their efforts and professional conduct throughout the audit engagement. Very truly yours, 'Sharon Dumas, Director Department of Finance WM cs 13. Gentile, CPA City Controller This Page Intentionally Left Blank. 20 CITY OF CLEVELAND, OHIO City Officials Frank G. Jackson, Mayor EXECUTIVE STAFF Ken Silliman, Esq. ................................................................................................................................................................... Chief of Staff Darnell Brown ........................................................................................................................................................... Chief Operating Officer Valarie J. McCall .............................................................................................................................................. Chief of Government Affairs Chris Warren ................................................................................................................................................ Chief of Regional Development Monyka S. Price ................................................................................................................................................................Chief of Education Maureen R. Harper ................................................................................................................................................. Chief of Communications Jenita McGowan ......................................................................................................................................................... Chief of Sustainability Natoya J. Walker Minor ............................................................................................................................................. Chief of Public Affairs Sharon Dumas ............................................................................................................................................. Director, Department of Finance Barbara A. Langhenry ....................................................................................................................................... Director, Department of Law Martin Flask ........................................................................................................................................Director, Department of Public Safety ADMINISTRATION Jane E. Fumich ............................................................................................................................................... Director, Department of Aging Edward W. Rybka ................................................................................................................. Director, Department of Building and Housing Robert N. Brown ................................................................................................................................... Director, City Planning Commission Lucille Ambroz .................................................................................................................................... Secretary, Civil Service Commission Daryl P. Rush, Esq. ......................................................................................................... Director, Department of Community Development Blaine Griffin ..................................................................................................................................... Director, Community Relations Board Tracey A. Nichols ..................................................................................................................................... Director, Economic Development Karen Butler ....................................................................................................................................... Director, Department of Public Health Natoya J. Walker Minor ......................................................................................................... Interim Director, Office of Equal Opportunity Michael E. Cox .................................................................................................................................. Director, Department of Public Works Deborah Southerington ................................................................................................................Director, Personnel and Human Resources Ricky D. Smith, Sr. .............................................................................................................................. Director, Department of Port Control Jomarie Wasik ........................................................................................................................... Director, Mayor's Office of Capital Projects Paul Bender. ..................................................................................................................................... Director, Department of Public Utilities 21 CITY OF CLEVELAND, OHIO City Council Martin J. Sweeney ......................................................................................................... President of Council / Ward 18 Patricia J. Britt ...................................................................................................................................... Clerk of Council Terrell H. Pruitt ........................................................................................................................................... Ward 1 Zachary Reed ............................................................................................................................................... Ward 2 Joe Cimperman ............................................................................................................................................ Ward 3 Kenneth L. Johnson ..................................................................................................................................... Ward 4 Phyllis E. Cleveland .................................................................................................................................... Ward 5 Mamie J. Mitchell ........................................................................................................................................ Ward 6 TJ Dow ........................................................................................................................................................ Ward 7 Jeffrey D. Johnson ....................................................................................................................................... Ward 8 Kevin Conwell ............................................................................................................................................. Ward 9 Eugene R. Miller.......................................................................................................................................... Ward 10 Michael D. Polensek .................................................................................................................................... Ward 11 Anthony Brancatelli ..................................................................................................................................... Ward 12 Kevin J. Kelley ............................................................................................................................................ Ward 13 Brian J. Cummins. ....................................................................................................................................... Ward 14 Matthew Zone ............................................................................................................................................. Ward 15 Jay Westbrook ............................................................................................................................................ Ward 16 Dona Brady ................................................................................................................................................. Ward 17 Martin J. Keane .......................................................................................................................................... Ward 19 22 Certificate of Achievement for Excellence in Financial Reporting Presented to City of Cleveland Ohio For its Comprehensive Annual Financial Report for the Fiscal Year Ended December 20] 1 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports achieve the highest standards in government accounting and financial reporting. President fie/aw Executive Director 23 24 Bo.o_Euu._ I ream Euom Sim 4.. I I I .ucn_wno_oi BaumFEE fiasco . _coE?mmcw2 mwuhaumz I ocecmi EU .G_.__ma.aEw I I ucsm I E25: SE0 _w.._ccEa_n_ I ?3$2n_ I Ec_.E_225n_ I co_.u_._uo.amm II manage: Efiu I on 3 Eco 33m ucata 4 I Esau <<.552 l_ _E_coo I I I II acfoaam u..2_som I efi..oa._oU_..mEU I _E_co..u con. I EEG .3130 I I I I II 223.558 I 3 SE0 Era 2Eo:8m a 322931 co_fi.a.w I .a aces a "Hana .cw.ubmm 1 I I Eacgou I ac_n..320 9.23 _E__u2._nu 33? _aE2c_ I I 2:3. fl I . 3.8:23 35.25 gram EEO n_O CITY OF CLEVELAND, OHIO FINANCIAL HIGHLIGHTS (Amounts in 000's) General Fund - Fund Balance** General Fund - Expenditures* 540,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 520,000 500,000 480,000 460,000 2008 2009 2010 2011 2008 2012 2009 2010 2011 2012 2011 2012 Income Taxes*** General Fund - Revenues* 340,000 540,000 520,000 320,000 500,000 300,000 480,000 460,000 280,000 2008 2009 2010 For Year Ended 2008 2009 2010 2011 2012 2011 2012 General Fund Fund Balance** 31,545 5,865 12,541 51,594 71,750 2008 General Fund Revenues* 524,744 491,827 499,681 502,703 518,001 General Fund Expenditures* 523,046 520,036 498,504 492,672 486,484 2009 Income Taxes*** 327,338 301,559 296,525 310,197 326,783 * Budget Basis - General Fund revenues and expenditures include other financing sources (uses). ** GAAP Basis. *** Budget Basis - Income Taxes includes General Fund and Restricted Income Tax Fund. 25 2010 This Page Intentionally Left Blank. 26 FINANCIAL SECTION 27 This Page Intentionally Left Blank. 28 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the businesstype activities, each major fund, and the aggregate remaining fund information of the City of Cleveland, Ohio (the "City") as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo 29 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Cleveland, Ohio, as of December 31, 2012, and the respective changes in financial position and, where applicable, cash flows and the budgetary comparison for the General Fund thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note 2, the City adopted the provisions of Governmental Accounting Standards Board Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 33 through 51 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 30 Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining and individual nonmajor fund financial statements and schedules, capital assets schedules, introductory section, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules and capital assets schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 25, 2013 on our consideration of the City of Cleveland's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Cleveland's internal control over financial reporting and compliance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 31 This Page Intentionally Left Blank. 32 CITY OF CLEVELAND, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS As management of the City of Cleveland (the City) we offer readers of the City's financial statements this narrative overview and analysis of the financial activities of the City for the year ended December 31, 2012. Please read this information in conjunction with the City's financial statements and footnotes that begin on page 54. FINANCIAL HIGHLIGHTS The assets and deferred outflows of the City exceeded its liabilities and deferred inflows at December 31, 2012 by approximately $2.707 billion (net position). Of this amount, $481 million (unrestricted net position) may be used to meet the City's ongoing obligations to citizens and creditors. Of the approximately $2.707 billion of net position, governmental activities accounted for approximately $682 million of net position, while business-type activities net position accounted for approximately $2.025 billion. The City's net position increased by $97.3 million as compared to 2011. The governmental activities net position increased by $40.9 million and the business-type activities net position increased by $56.4 million. At the end of the current year, unassigned fund balance for the General Fund was $61.9 million, which represents the amount available for spending at the City's discretion. The unassigned fund balance equals 12.9% of the total current General Fund expenditures and other financing uses. In 2012, the City's total long-term debt and other long-term debt-related obligations, excluding premiums, accreted interest, discounts and unamortized loss on debt refunding, increased by $49.9 million. The increase indicates that the City's new debt issued exceeded debt service payments and debt refunded or defeased in 2012. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City's basic financial statements are comprised of four components: (1) government-wide financial statements, (2) fund financial statements, (3) General Fund budget and actual statement and (4) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements. Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private sector business. The statement of net position presents financial information on all of the City's assets, liabilities and deferred inflows/outflows of resources, with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents information showing how the City's net position changed during the most recent year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City principally include: General Government; Public Works; Public Safety; Community Development; Building and Housing; Public Health and Economic Development. The business-type activities of the City principally include: water; electricity; and airport facilities. 33 The government-wide financial statements can be found on pages 54 - 57 of this report. Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on the near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the City's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City presents 33 individual governmental funds on a modified accrual basis. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures and changes in fund balances for the General Fund, which is considered to be a major fund. Data from the other 32 governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report. The City adopts an annually appropriated budget for its General Fund, Enterprise and Internal Service Funds. The City adopts an annually appropriated budget for some of its Special Revenue and Debt Service Funds. The General Fund budgetary comparison has been provided as a separate financial statement to demonstrate compliance with its budget. The basic governmental fund financial statements can be found on pages 58 - 61 of this report. Proprietary funds. The City maintains two different types of proprietary funds. The first type is Enterprise Funds. They are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses Enterprise Funds to account for its water, electric, airport, sewer, public auditorium, markets, parking lots, cemeteries and golf course operations. The second type of proprietary fund the City uses is Internal Service Funds to account for its motor vehicle maintenance, printing and reproduction, postal services, utilities administration, sinking fund administration, municipal income tax administration, telephone exchange, radio communications operations and workers' compensation reserve. Internal Service Funds are an accounting device used to accumulate and allocate costs internally throughout the City's various functions. Because most of the internal services predominantly benefit governmental rather than business-type functions, they have been included within the governmental activities in the government-wide financial statements, except for the Utilities Administration Fund which has been classified as a business-type activity. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Division of Water, Cleveland Public Power and Department of Port Control Funds, which are considered to be major funds of the City. Conversely, Internal Service Funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the nonmajor Enterprise and Internal Service Funds is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages 62 - 66 of this report. 34 Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the City's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. All of the City's fiduciary funds are Agency Funds. The basic fiduciary fund financial statement can be found on page 67 of this report. Notes to the financial statements. The notes provide additional information that is essential to achieve a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 69 - 116 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS Information regarding the government-wide net position of the City is provided below: Summary Statements of Net Position as of December 31, 2012 and 2011 Governmental Activities 2012 Assets: Current and other assets Capital assets Total assets $ Business-Type Activities (Amounts in 000's) 2012 2011 (restated) 2011 764,488 929,462 1,693,950 $ 728,561 915,743 1,644,304 $ Deferred outflows of resources $ 1,174,729 3,050,381 4,225,110 2012 $ 1,987,211 3,985,168 5,972,379 2011 (restated) $ 1,903,290 3,966,124 5,869,414 27,699 Liabilities: Long-term obligations Other liabilities Total liabilities 27,955 27,699 27,955 774,706 236,687 1,011,393 Net position: Net investment in capital assets Restricted Unrestricted 763,056 239,352 1,002,408 2,065,917 187,605 2,253,522 2,043,248 213,124 2,256,372 2,840,623 424,292 3,264,915 2,806,304 452,476 3,258,780 239 Deferred inflows of resources Total net position 1,222,723 3,055,706 4,278,429 Total 442 28,240 28,737 28,479 29,179 1,303,584 227,826 492,956 1,295,139 234,050 438,767 1,875,797 350,314 480,573 1,838,599 351,815 418,996 572,213 122,488 (12,383) $ 682,318 543,460 117,765 (19,771) $ 641,454 $ 35 2,024,366 $ 1,967,956 $ 2,706,684 $ 2,609,410 As noted earlier, net position may serve, over time, as a useful indicator of a government's financial position. The City's assets and deferred outflows exceeded liabilities and deferred inflows by approximately $2.707 billion at the close of the most recent fiscal year. This represents an increase of 3.7% in 2012. Of the City's net position, 25.2% represents its governmental net position and 74.8% represents its business-type net position. Of the net position from governmental activities, $572.2 million represents its investment in capital assets (e.g., land, land improvements, buildings, infrastructure, furniture, fixtures, equipment and vehicles), net of accumulated depreciation, less any related, still-outstanding debt issued to acquire, construct or improve those assets. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources, since the capital assets themselves cannot be used to liquidate these liabilities. Another significant portion of net position, $122.5 million, represents resources that are subject to external restrictions on how they may be used. There was an increase in unrestricted net position of $7.4 million. In 2012, the total assets from governmental activities increased by $49.6 million. This increase is primarily attributed to increases in cash and cash equivalents and investments of $57.5 million and in loans receivable of $6.2 million. The increase in cash and cash equivalents and investments is mainly due to a $19.4 million increase in income taxes collected and a decrease of $11.3 million in public works expenditures. The total increase was partially offset by a decrease of $17.9 million in local government funds. Also in 2012, the total liabilities from governmental activities increased by $9.0 million. This increase is primarily due to increases of $11.7 million in long-term obligations and $5.3 million in due to other governments. The rise in long-term obligations is predominantly due to a net increase of $11.9 million in Subordinate Lien Income Tax Bonds, while the due to other governments increase is chiefly due to a $4.3 million increase in Economic Development's HUD liability. These increases were offset by a $3.9 million decrease in deferred revenue, mainly caused by a $5.2 million decrease in the City's property tax receivable. In 2012, business-type total assets and deferred outflows of resources increased by $53.1 million, primarily due to increases in cash and cash equivalents and investments of $61.8 million. The rise is mostly due to a $58.4 million increase in the Divisions' of Water and Water Pollution Control cash and cash equivalents due to increased water rates and customer account collections. The increase is partially offset by a decrease in net accounts receivable of $37.9 million due to increased collection activity and account write-offs in the Department of Utilities. Business-type total liabilities and deferred inflows of resources decreased by $3.3 million primarily due to decreases in amounts due to other governments of $15.6 million and accounts payable of $8.4 million. The due to other governments balance decreased primarily because of increased account write-offs in the Division of Water Pollution Control resulting in a lower liability to the Northeast Regional Sewer District. These decreases were partially offset by an increase in long-term obligations of $22.7 million. 36 At the end of the current year, the City is able to report positive balances in total net position for both its governmental activities and its business-type activities. Information regarding government-wide changes in net position is provided below: Changes in Net Position For Fiscal Years Ended December 31, 2012 and 2011 Business-Type Activities (Amounts in 000's) 2012 2011 (restated) Governmental Activities 2012 Revenues: Program revenues: Charges for services Operating grants and contributions Capital grants and contributions General revenues: Income taxes Property taxes Other taxes Shared revenues State local government funds Unrestricted investment earnings Other Total revenues $ 72,938 143,883 25,845 2011 (restated) $ 84,681 135,355 14,005 330,863 56,086 28,680 27,338 25,966 692 18,141 730,432 597,432 5,319 53,562 $ 554,641 4,466 64,591 2012 $ 95,833 139,577 308,051 75,778 14,098 19,596 22,323 27,686 2011 (restated) 670,370 149,202 79,407 $ 639,322 139,821 78,596 623,728 330,863 56,086 28,680 27,338 25,966 692 18,141 1,386,745 311,492 63,839 27,312 19,558 43,821 127 19,086 1,342,974 244,647 163,547 153,627 39,671 Expenses: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Interest on debt Water Electricity Airport facilities Nonmajor activities 311,492 63,839 27,312 19,558 43,821 97 19,086 719,246 106,141 128,276 310,745 70,705 14,729 17,385 13,845 26,153 $ Total 235,313 167,799 167,531 46,302 106,141 128,276 310,745 70,705 14,729 17,385 13,845 26,153 244,647 163,547 153,627 39,671 95,833 139,577 308,051 75,778 14,098 19,596 22,323 27,686 235,313 167,799 167,531 46,302 30 656,313 687,979 702,942 601,492 616,945 1,289,471 1,319,887 Changes in net position before special items and transfers 42,453 16,304 54,821 6,783 97,274 23,087 Special items - gain on sale of capital assets Transfers (1,589) (2,031) 1,589 5,125 2,031 Changes in net position 40,864 14,273 56,410 13,939 97,274 28,212 641,454 627,181 1,967,956 1,954,017 2,609,410 2,581,198 Total expenses Net position at beginning of year (as restated) Net position at end of year $ 682,318 $ 641,454 $ 2,024,366 $ 1,967,956 - $ 2,706,684 5,125 - $ 2,609,410 Business-type net position increased $56.4 million in 2012. Of the business-type net position, $1.303 billion represents its investment in capital assets, net of accumulated depreciation, less any related, still-outstanding debt issued to acquire, construct or improve those assets. These capital assets are used to provide services to their customers. Consequently, these assets are not available for future spending. Although the City's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources, since the capital assets themselves cannot be used to liquidate these liabilities. An additional $228 million of net position is subject to external restrictions on their use. The remaining balance of $493 million is unrestricted and may be used to meet the City's ongoing obligations to customers and creditors. 37 Revenues by Source - Governmental Activities Operating grants and contributions 19.7% Charges for services 10.0% Property taxes 7.7% Other 13.8% State local government funds 3.5% Income taxes 45.3% Other includes capital grants and contributions, other taxes, shared revenues, unrestricted investment earnings and other general revenues. Expenses and Program Revenues Governmental Activities (Amounts in 000's) 350,000 300,000 250,000 200,000 Expenses 150,000 Program revenues 100,000 50,000 0 General Government Public Works Public Safety Community Development Building and Housing 38 Public Health Economic Development Interest on debt Revenues by Source - Business-type Activities Capital grants and contributions 8.2% Operating grants and contributions 0.8% Charges for services 91.0% Expenses and Program Revenues Business-type Activities (Amounts in 000's) Expenses Program revenues 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Water Electricity Airport facilities 39 Nonmajor activities Business-type activities are principally accounted for in the City's Enterprise Funds. The City operates three major Enterprise Funds encompassing two airports, a water system and an electric distribution system. The City also operates other Enterprise Funds consisting of a sewer system, cemeteries, a public auditorium, municipal parking lots and public market facilities. The City owns two golf courses whose management and operations are currently leased to outside entities. The operating results of the City's Major Enterprise Funds are discussed below. Division of Water: The Division operates a major public water supply system, the ninth largest in the United States that serves not only the City, but also 69 suburban municipalities in Cuyahoga, Medina, Summit and Geauga counties. The Division is an emergency standby provider for systems in eight other communities. They provide water to approximately 417,069 city and suburban accounts in the Cleveland Metropolitan Area. Operating revenue in 2012 increased to $280.3 million from $236.6 million in 2011. The increase is mainly due to increased water rates and more timely billing of customer accounts. Operating expenses, exclusive of depreciation, increased approximately 2.0% to $149.2 million compared to $146.2 million in 2011. Also, the Division of Water restated their capital assets balances for 2011. The Division entered into amended Water Service Agreements with 21 member communities prior to 2011. These agreements transferred ownership of the distribution mains from the member communities to the Division of Water. As a result of the restatement the Division increased their capital assets balance $164,961,000 as of 12/31/2011. This is an increase of 11.0% compared to the reported capital assets balance prior to the restatement. Division of Cleveland Public Power: The Division supplies electrical service to approximately 74,000 customers in the City. The Division is responsible for supplying, transmitting and distributing electricity and providing related electrical services to customers within its service area. The Division's 2012 operating revenue decreased 1.9% to $165.2 million from $168.4 million in 2011. Purchased power expense increased 5.9% to $95.8 million in 2012 from $90.5 million in 2011. Operating expenses, exclusive of depreciation and purchased power, decreased 16.6% to $41.2 million compared to $49.4 million in 2011. The decrease is mostly attributed to street light upgrades and higher raw material costs in 2011. Department of Port Control: The City's Department of Port Control consists of the Divisions of Cleveland Hopkins International Airport and Burke Lakefront Airport. Currently, 26 passenger airlines provide scheduled airline service at Cleveland Hopkins International Airport. Burke Lakefront Airport, a federally certified commercial and general aviation reliever airport, provides the majority of its services to air taxi operators serving the City's downtown business activities. The airports' operating income increased $3.4 million in 2012. The increase is generally attributed to minor increases in terminal and concourse rental revenue and a $1.7 million decrease in operating expenses. Also, in 2012 there was a $29.4 million reduction in capital contributions due to the completion of runway 10-28 in 2012, which was partially funded by Federal Aviation Authority grant proceeds. FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. 40 As of the end of the current year, the City's governmental funds reported combined ending fund balances of $409.0 million, an increase of $46.1 million and approximately 12.7% in comparison with the prior year. The components of the governmental fund balances include an unassigned balance of $61.9 million, which indicates the amount available for spending at the City's discretion. An additional $233.8 million of fund balance is available for expenditures that are legally restricted for a particular purpose. The nonspendable portion of fund balance has $1.1 million of items that are not in a spendable form, such as inventory. An additional $102.9 million is committed to fund specific purposes and cannot be reassigned without legislative approval. The remaining assigned balance of $9.3 million represents funds that the City intends to use for a specific purpose. The General Fund is the chief operating fund of the City. At the end of the current year, the unassigned fund balance of the General Fund was $61.9 million and the total fund balance was $71.8 million. As a measure of the General Fund's liquidity, it may be useful to compare both unassigned fund balance and total fund balance to total fund expenditures and transfers out. Unassigned fund balance represents 12.9% of total General Fund expenditures and other financing uses, while total fund balance represents approximately 14.9% of that same amount. 41 A two-year comparison of General Fund activity is shown below. The revenues, expenditures and changes in fund balance shown in these comparisons are presented on the modified accrual basis of accounting applicable to governmental funds. General Fund Statement of Revenues, Expenditures and Changes in Fund Balance Information - GAAP Basis 2012 and 2011 (Amounts in 000's) Restated 2011 2012 Revenues: Income taxes $ 294,648 $ 277,857 Property taxes 36,028 State local government funds 31,821 36,618 45,640 Other taxes and shared revenues 50,489 43,994 Licenses and permits 12,314 14,224 Charges for services 34,230 33,669 Fines, forfeits and settlements 21,451 23,473 Investment earnings 277 Miscellaneous 228 5,724 Grants 3,934 10,074 10,812 497,056 490,449 General Government 76,966 73,103 Public Works 63,622 66,612 Public Safety 294,955 292,594 Building and Housing 7,836 8,333 Public Health 5,326 4,451 Economic Development 1,407 1,400 Total revenues Expenditures: Community Development 157 Other 10,992 2,350 463,563 460,014 33,493 Total expenditures 11,171 2,302 Capital outlay 30,435 Excess (deficiency) of revenues over (under) expenditures Other financing sources (uses): Transfers in 3,602 Transfers out 8,404 (16,941) Sale of City assets (18,789) 2 729 Net change in fund balance 20,156 20,779 Fund balance at beginning of year 51,594 30,815 Fund balance at end of year $ 71,750 42 $ 51,594 Analysis of General Fund Revenues General Fund revenues and other sources totaled $500.7 million in 2012, an increase of approximately $1.1 million from 2011. A discussion of each of the major types of General Fund revenues follows. Municipal Income Taxes Ohio law authorizes a municipal income tax both on corporate income (net profits from the operation of a business or profession) and employee wages, salaries and other compensation at a rate of up to 1% without voter authorization and at a rate above 1% with voter authorization. In 1979 and in 1981, the voters in the City approved increases of one-half of one percent to the rate of the income tax, bringing it to the current 2% rate. By the terms of the 1981 voter approval, as amended in 1985, one-ninth of the receipts of the total 2% tax (the Restricted Income Tax) must be used only for capital improvements, debt service or obligations issued for capital improvements or the payment of past deficits. The remaining eight-ninths of the municipal income tax is recorded in the General Fund and is pledged to, and may also be used for, debt service on General Obligation Bonds of the City, to the extent required and certain other obligations of the City. The income tax is also imposed on gross salaries and wages earned in the City by non-residents of the City and on salaries, wages and other compensation of City residents earned within or outside the City. The income tax liability of a City resident employed outside the City is reduced by a credit equal to 50% of the tax paid to the municipality in which the City resident is employed. The tax on business profits is imposed on that part of profits attributable to business conducted within the City. In 2012, approximately 89% of the total income taxes paid to the City were derived from non-residents employed in the City and business profits. Income tax revenue increased approximately $16.8 million in 2012 from 2011, primarily due to increased construction activity in the University Circle and downtown areas. Property Taxes Taxes collected from real property in one calendar year are levied in the preceding calendar year on assessed values as of January 1 of that preceding year. Public utility real and tangible personal property taxes collected in one calendar year are levied in the preceding calendar year on assessed values determined as of December 31 of the second year preceding the tax collection year. The "assessed valuation" of real property is fixed at 35% of true value and is determined pursuant to rules of the State Tax Commissioner. An exception is that real property devoted exclusively to agricultural use is to be assessed at not more than 35% of its current agricultural use value. Real property devoted exclusively to forestry or timber growing is taxed at 50% of the local tax rate multiplied by the assessed value. The assessed values of taxable property in the City for the past two years were as follows: Tax Collection Year Real Property Public Utility Tangible Personal (Amounts in 000's) Total Assessed Valuation 2012 $ 5,385,180 $ 246,081 $ 5,631,261 2011 $ 5,398,098 $ 242,172 $ 5,640,270 Property tax revenue fell by $590,000 as a result of a decrease in both residential property valuations and lower collection rates. 43 State Local Government Funds and Other Taxes and Shared Revenues State Local Government Funds and Other Taxes and Shared Revenues include taxes levied and collected by the State of Ohio or counties and partially redistributed to the City and other political subdivisions. Other taxes and shared revenues include state income, sales, admission, motor vehicle, parking, hotel, commercial activity, corporate franchise, casino, homestead and rollback, public utility, estate and cigarette taxes as well as liquor fees. State Local Government Funds revenue decreased by $13.8 million or 30.3% due to decreases in the distributions to local governments implemented as part of the State's budget balancing measures. Other Taxes and Shared Revenues increased $6.5 million or 14.8% from 2011 levels primarily as a result of the City beginning to collect revenues from the opening of the new casino in May 2012. Since 1993, the State Local Government Funds (LGF) have been the City's largest source of non-tax General Fund revenue. Through these funds, Ohio subdivisions share in a portion of the State's collection of the sales tax, use tax, personal income tax, corporate franchise tax and public utilities excise tax. The percentages of the five taxes supporting these funds have varied over the years. At times, the dollar amount in the funds has been capped at specified levels. Pursuant to statutory law in Ohio, State LGF revenues are divided into county and municipal portions. The county portion, the larger of the two, is distributed to each of the State's 88 counties and is allocated based upon a statutory formula utilizing county population and county municipal property values. Once received by a county, the funds can either be distributed to all subdivisions using the statutory formula or the county and its subdivisions may agree upon an alternate method for allocating the funds. Cuyahoga County and its recipient communities have chosen the latter method which is comprised of a base allocation and an excess allocation. The excess allocation takes into account such factors as assessed value per capita, per capita income, population density and the number of individuals receiving public assistance. The municipal portion of the LGF is distributed directly by the State to those municipalities that collect an income tax. A municipality receives its share of the funds based upon its percentage of total municipal income taxes collected throughout the state in a given year. Distributions from the State of Ohio and Cuyahoga County (as a conduit between the State and City) have generally decreased since 2000. 44 Analysis of General Fund Expenditures General Fund expenditures and other financing uses totaled $480.5 million in 2012, an increase of 0.4% from 2011. The amount of expenditures and other uses by function on a GAAP basis, including the increases (decreases) over the prior year, are shown in the following table: Expenditures and Other Financing Uses Actual 2012 % of Total Restated Actual % of 2011 Total (Amounts in 000's) Increase (Decrease) % Change Current: 76,966 16.02 73,103 15.27 3,863 5.28 Public Works General Government $ 63,622 13.24 $ 66,612 13.91 $ (2,990) (4.49) Public Safety 294,955 61.38 292,594 61.11 2,361 0.81 Building and Housing 7,836 1.63 8,333 1.74 (497) (5.96) Public Health 5,326 1.11 4,451 0.93 875 19.66 Economic Development Community Development 1,407 157 0.29 0.03 1,400 0.29 7 157 0.50 N/A 10,992 2.29 11,171 2.33 (179) (1.60) 2,302 16,941 0.48 2,350 18,789 0.49 (48) (1,848) (2.04) Other Capital Outlay Transfers Out Total Expenditures and Other Financing Uses $ 3.53 $ 480,504 3.93 478,803 $ (9.84) 1,701 The total expenditures and other financing uses increased by $1.7 million. The growth was primarily caused by a $3.9 million increase in General Government expenditures due to increased costs at Cleveland Municipal Court. This was primarily offset by a decrease of $1.8 million in transfers out which was due to decreases in transfers to service debt and to fund street operations. Proprietary Funds. The City's proprietary fund financial statements provide the same type of information found in the government-wide financial statements, but in more detail. The unrestricted net position of the Division of Water, Cleveland Public Power and the Department of Port Control Funds amounted to $257.6 million, $52.5 million and $137.3 million, respectively, at December 31, 2012. The change in net position for each of the respective funds amounted to increases of $61.7 million, $2.6 million and a decrease of $11.9 million during 2012. Other factors concerning the finances of the City's proprietary funds have already been addressed in the discussion of the City's business-type activities. Major Functional Expense Categories. A discussion of the City's major functional expense categories follows: Employees and Labor Relations As of December 31, 2012 and 2011, the City had approximately 7,126 and 7,398 full-time employees, respectively. Of the 7,126 full-time employees, approximately 5,359 full-time employees are represented by 31 collective bargaining units. The largest collective bargaining units, together with the approximate number of employees represented by such units, include the American Federation of State, County and Municipal Employees, Local 100 - 1,219 members; Cleveland Police Patrolmen's Association - 1,238 members; the Association of Cleveland Firefighters - 768 members; Municipal Foreman and Laborers Union, Local 1099 - 411 members; and Local 244 - 222 members. There have been no significant labor disputes or work stoppages in the City within the last 29 years. 45 The Council, by ordinance, establishes schedules of salaries, wages and other economic benefits for City employees. Generally, the terms of these ordinances have been the product of negotiations with representatives of the employees or bargaining units, and increases in economic benefits have normally been provided on an annual basis. Chapter 4117 of the Ohio Revised Code (the Collective Bargaining Law), establishes procedures for, and regulates public employer-employee collective bargaining and labor relations for the City and other state and local governmental units in Ohio. The Collective Bargaining Law creates a three-member State Employment Relations Board (the SERB), which administers and enforces the Collective Bargaining Law. Among other things, the Collective Bargaining Law: (i) creates rights and obligations of public employers, public employees and public employee organizations with respect to labor relations; (ii) defines the employees it covers; (iii) establishes methods for (a) the recognition of employees and organizations as exclusive representatives for collective bargaining and (b) the determination of bargaining units; (iv) establishes matters for which collective bargaining is either required, prohibited or optional; (v) establishes procedures for bargaining and the resolution of disputes, including negotiation, mediation and fact finding; and (vi) permits all covered employees to strike, except certain enumerated classes of employees, such as police and fire personnel. Over the past two years, the total salaries and wages paid to the City's employees from all funds were as follows: Year Amount Paid (Amounts in 000's) 2012 2011 $ $ 421,023 424,311 In 2012, there was a minor decrease in salaries and wages payable due to a small reduction in employee levels. Employee Retirement Benefits City employees are members of one of two retirement systems. These retirement systems provide both pension and postretirement health care benefits to participants. They were created pursuant to Ohio statutes and are administered by state created Boards of Trustees. The boards are comprised of a combination of elected members from the respective retirement system's membership and ex-officio members from certain state and local offices. These two retirement systems are: Ohio Public Employees Retirement System (OPERS), created in 1935, represents state and local government employees not included in one of the other retirement systems. Management of the system indicates there are 348,235 actively contributing members and total net position of this pension system approximated $81.4 billion as of December 31, 2012, the latest information available. More data on this pension system is shown in Note 13 - Defined Benefit Pension Plans and Note 14 - Other Postemployment Benefits of this report. Ohio Police and Fire Pension Fund (OP&F), created in 1965, represents sworn personnel, not civilians, employed in police and fire divisions of Ohio's local governments. As of December 31, 2012, the latest information available, management of the fund indicates membership of 27,623 active members and net position of this pension fund approximated $11.5 billion. All of the City's police and fire officers are members of this pension fund. More data on this pension fund is shown in Note 13 - Defined Benefit Pension Plans and Note 14 - Other Postemployment Benefits of this report. 46 Over the past two years, the City and its employees have paid the following amounts to OPERS and OP&F: 2012 2011 (Amounts in 000's) Paid by City to: OPERS OP&F $ Total paid by City 35,516 32,607 $ 35,782 32,612 68,123 25,380 15,060 Total paid by employees Total $ 25,529 15,171 40,440 Paid by employees to: OPERS OP&F 68,394 40,700 108,563 $ 109,094 The City is current in all of its required contributions to the respective pension funds. The pension plans and other postemployment benefits for health care are explained in Note 13 - Defined Benefit Pension Plans and Note 14 - Other Postemployment Benefits. GENERAL FUND BUDGETARY ANALYSIS In 2012, the principal difference between the original and the final revenue and other sources budget (see page 61) was a $1.0 million decrease in transfers out. The decline offset minor increases in appropriations to general government and public health. The major differences between the final amended budget and the actual total revenues were increases of $19.4 million in income taxes and $6.5 million in other taxes and shared revenues. The increase in income taxes is primarily attributed to increased construction activity and an improving local economy, while the other taxes and shared revenue increase resulted from uncertainty regarding the opening date of the Cleveland Horseshoe Casino and associated revenue projections. There were minor decreases of all expenditure components due to increased operating efficiencies and reduced payroll costs. 47 CAPITAL ASSETS AND DEBT ADMINISTRATION Capital assets: The City's capital assets for its governmental and business-type activities as of December 31, 2012, amounts to $4.0 billion (net of accumulated depreciation). This capital assets balance includes land; land improvements; utility plant; buildings, structures and improvements; furniture, fixtures, equipment and vehicles; infrastructure; and construction in progress. The total increase in the City's capital assets for the current fiscal year was 0.5% (a 1.5% increase for governmental activities and a 0.2% increase for business-type activities). A summary of the City's capital assets at December 31, 2012 is as follows: Capital Assets, Net of Accumulated Depreciation Governmental Business-Type Activities Activities Total (Amounts in 000's) Land $ Land improvements 66,188 $ 56,209 $ 258,086 51,431 Buildings, structures and improvements 107,640 1,534,664 Utility plant 1,534,664 329,817 $ 646,730 148,218 195,006 315,080 115,380 Infrastructure Construction in progress 316,913 46,788 Furniture, fixtures, equipment and vehicles Total 191,898 519,489 293,093 834,569 408,473 929,462 $ 3,055,706 $ 3,985,168 Additions to construction in progress during the current fiscal year affecting the City's capital assets included the following: Cleveland Public Power incurred $18.2 million of capital expenditures relating to the Holston Substation (4th interconnect), pole replacements, equipment and building betterments. The Division of Water had expenditures for capital improvements totaling $71.5 million. Major expenses were for continuing renovations and enhancements at the Morgan, Baldwin and Nottingham Plants, security enhancements and the automated meter reading system. Port Control expenditures for capital improvements totaled approximately $19.4 million. Major initiatives were the Power Distribution Enhancement Project, installation of a new terrazzo floor in the main concourse and the Regional Transportation Authority (RTA) Level Art Gallery, which replaces various interior infrastructure items to allow for the display of wall and floor artwork. Water Pollution Control had capital expenditures of $4.4 million. Major components included citywide sewer replacement, Big Creek project and emergency repairs. Major capital projects for Governmental Activities included land improvements, building improvements, vehicles and equipment, various computer system upgrades and infrastructure improvements. 48 The primary sources for financing the City's Capital Improvement Projects are general obligation bond proceeds, certificates of participation proceeds, urban renewal bond proceeds, revenue bond proceeds, proceeds from capital leases, interest earned on funds prior to and during the construction period, restricted income taxes and funds from the State Issue 2 and Local Transportation Improvement Programs. The City has three primary goals relating to its Capital Improvements: (1) preservation and revitalization of the City's neighborhoods, (2) economic development and job creation and (3) provision of cost-effective, basic City services to Cleveland residents and the business community. Additional information on the City's capital assets, including commitments made for future capital expenditures, can be found in Note 15 - Capital Assets. Long-term debt and certain other obligations: At the end of the current fiscal year, the City had total long-term debt and certain other obligations outstanding of $2.70 billion as shown below. General Obligation Bonds are typically issued for general governmental activities and are backed by the full faith and credit of the City. Revenue bonds are typically recorded in the applicable Enterprise Fund and are supported by the revenues generated by the respective Enterprise Fund. The remainder of the City's debt represents bonds or notes secured solely by specified revenue sources. The activity in the City's debt obligations outstanding during the year ended December 31, 2012 is summarized below (excluding unamortized discounts, premiums, accreted interest and losses on debt refundings). Balance January 1, 2012 Governmental Activities: General Obligation Bonds Urban Renewal Bonds Subordinated Income Tax Bonds Subordinate Lien Income Tax Bonds Non-Tax Revenue Bonds Annual Appropriation Bonds Certificates of Participation Capital Lease Obligations Gateway Note Payable Total Governmental Activities Business -Type Activities: Revenue Bonds & Notes Ohio Water Development Loans Deferred Payment Obligation Total Business -Type Activities Total $ Debt Issued Debt Refunded Debt or Defeased Retired (Amounts in 000's) $ (28,910) 298,660 4,835 52,975 80,505 58,591 11,000 129,547 12,908 1,250 $ 67,765 650,271 89,452 (28,910) (47,943) 662,870 1,930,163 115,523 6,500 421,595 963 (315,425) (110,130) (6,744) (2,990) 1,926,203 109,742 3,510 2,052,186 422,558 (315,425) (119,864) 2,039,455 $ 2,702,457 $ 512,010 $ (344,335) $ (167,807) 15,180 6,507 49 $ (28,815) (565) (2,955) (3,305) (2,697) (235) (5,942) (3,179) (250) Balance December 31, 2012 $ $ 308,700 4,270 50,020 92,380 55,894 10,765 123,605 16,236 1,000 2,702,325 Funds used to meet the debt service requirements of the City's General Obligation Bonds are from certain ad valorem taxes, restricted income taxes and interest earnings. Ad valorem taxes, the primary source of funds, amounted to $19.28 million in 2012 which represents approximately 44% of the debt service requirements on the General Obligation Bonds. These taxes were derived from a levy of $4.35 per $1,000 of assessed property. The remaining 56% of debt service requirements is retired from a portion of the City's restricted income tax proceeds, homestead and rollback reimbursement from the State, interest earnings and other miscellaneous revenue sources generated within the Debt Service Funds. The City issues its General Obligation Bonds within the context of its Capital Improvement Program. Programs which have benefited due to the issuance of general obligation debt include, but are not limited to, public works improvements, bridge and roadway improvements, recreation facilities, cemeteries and urban redevelopment. The City's Enterprise Funds implement their own individual Capital Improvement Programs and issue revenue bond and note debt necessary to fund their programs. The City's bond ratings for general obligation and revenue bonds are as follows as of December 31, 2012: Moody's Investors Service General Obligation Bonds Standard & Poor's Fitch Ratings A1 AA A+ Subordinate Lien Income Tax Bonds A1 * AA N/A Waterworks Revenue Bonds Aa1 AA N/A Second Lien Water Bonds Aa2 AA- N/A Cleveland Public Power Revenue Bonds A2 A- N/A Airport System Revenue Bonds Baa1 A- A- Parking Revenue Bonds (Insured Ratings) Aa3 AA- N/A * On November 8, 2012, Moody's Investors Service upgraded its rating on the City's Subordinate Lien Income Tax Bonds from A2 to A1 with a stable outlook. The ratio of net general bonded debt to assessed valuation and the amount of bonded debt per capita are useful indicators of the City's debt position to management, citizens and investors. Net general bonded debt is total general bonded debt supported by taxes less amounts available in the Debt Service Fund. This data at December 31, 2012 was: Net General Bonded Debt: $302,484,000 Ratio of Net Bonded Debt to Assessed Valuation: 5.37% Net General Bonded Debt Per Capita: $762.28 The Ohio Revised Code provides that the net debt of the municipal corporation, whether or not approved by the electors, shall not exceed 10.50% of the assessed value of all property in the municipal corporation as listed and assessed for taxation. In addition, the unvoted net debt of municipal corporations cannot exceed 5.50% of total assessed value of property. The City's total debt limit (10.50%) is $591,282,445 and unvoted debt limit (5.50%) is $309,719,376. At December 31, 2012, the City had no capacity under the indirect debt limitation calculation per the Ohio Revised Code to issue additional unvoted debt. However, these debt limitations are not expected to affect the financing of any currently planned facilities or services. In addition, the City has entered into various derivative or hedging agreements since 1999. Derivative instruments are contracts, the value of which depends on, or derives from, the value of an underlying asset, index or rate. The most common types of derivatives used by governments are interest rate swaps and interest rate locks. A detailed description of each outstanding derivative, including its terms, objectives, risks and fair value, can be found in Note 5 - Debt and Other LongTerm Obligations. 50 In accordance with GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, the City has reported a deferred outflow and a liability in the amount of the fair value of the interest rate swaps, which reflect the prevailing interest rate environment at December 31, 2012 and an investment loss or gain as appropriate based on the change in fair value. The specific terms and conditions of each swap have been provided by the respective counterparty for each swap and confirmed by the City's financial advisor. Additional information on the City's long-term debt can be found in Note 5 - Debt and Other Long-Term Obligations. FACTORS EXPECTED TO IMPACT THE CITY'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS The City, like all municipalities both local and national, continues to face the challenges of economic recession. Basic operating costs continue to rise due to negotiated salary increases, higher benefit costs and federal and state mandates being placed upon municipalities at the same time federal and state funding is being reduced. Over the last several years, the City has seen significant reductions in funding from the federal and state governments. To offset these reductions, the City continues to focus on stimulating economic and community development throughout its core business districts and neighborhoods to strengthen its housing stock value and ensure a strong local job market. Other Impacting Factors On January 17, 2013, Moody's Investors Service lowered its rating on Assured Guaranty Municipal Corporation, the insurer of the Series 2006 Parking Facilities Refunding Revenue Bonds. On March 21, 2013, the City completed a conversion of its $69,900,000 2010B Certificates of Participation (Cleveland Stadium Project) to a new index rate for a new index rate period. On April 16, 2013, the City entered into a novation agreement with UBS, AG and PNC Bank, National Association (PNC) under which the basis swap associated with the Parking Facilities Refunding Revenue Bonds, Series 2006, was transferred from UBS to PNC effective March 15, 2013. Effective April 24, 2013, the City issued $58,000,000 Airport System Revenue Bonds, Series 2013A (Taxable). On May 13, 2013, City Council approved legislation authorizing the City to enter into a lease agreement for the purchase of vehicles for various City departments. Effective May 30, 2013 the City issued $35,840,000 Subordinate Lien Income Tax Bonds, Series 2013A. The bonds were issued to provide funds for various public facilities, road and bridges, and parks and recreation improvements throughout the City. On June 20, 2013, the City entered into a lease agreement with Huntington Public Capital Corporation for the purchase of $6,500,000 of vehicles and heavy equipment for various departments. The lease will be paid for over seven years out of the receipts for Restricted Income Tax. See Note 21- Subsequent Events for additional information. NEED ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the City's finances for all those with an interest in the City's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 51 This Page Intentionally Left Blank. 52 BASIC FINANCIAL STATEMENTS 53 CITY OF CLEVELAND, OHIO STATEMENT OF NET POSITION DECEMBER 31, 2012 (Amounts in 000's) Governmental Activities ASSETS Cash and cash equivalents Investments Receivables: Taxes Accounts Grants Loans Unbilled revenue Accrued interest Assessments Less: Allowance for doubtful accounts Receivables, net $ 345,777 9,522 136,030 28,330 12,458 190,860 Business-Type Activities $ 396,119 Internal balances Due from other governments Inventory of supplies Prepaid expenses and other assets Restricted assets: Cash and cash equivalents Investments Accrued interest receivable Accrued passenger facility charge Total restricted assets 1,576 34,730 2,348 Unamortized bond issuance costs $ 741,896 9,522 (29,757) 189,617 136,030 208,088 12,458 190,860 39,616 4 2,615 (50,724) 538,947 (1,576) 2,976 16,384 1,591 37,706 18,732 1,591 179,758 39,616 4 2,615 (20,967) 349,330 Total 585,961 3,739 86 2,244 592,030 585,961 3,739 86 2,244 592,030 21,205 25,582 46,787 181,568 747,894 929,462 1,693,950 484,991 2,570,715 3,055,706 4,278,429 666,559 3,318,609 3,985,168 5,972,379 27,699 27,699 27,699 27,699 - Capital assets: Land and construction in progress Other capital assets, net of accumulated depreciation Total capital assets Total assets DEFERRED OUTFLOWS OF RESOURCES Derivative instruments-interest rate swaps Total deferred outflows of resources - The notes to the financial statements are an integral part of this statement. 54 CITY OF CLEVELAND, OHIO STATEMENT OF NET POSITION DECEMBER 31, 2012 (Amounts in 000's) Governmental Activities LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Accrued interest payable Deferred revenue Unearned revenue Liabilities payable from restricted assets Loans payable Long-term obligations: Due within one year Due in more than one year Total liabilities $ 15,238 44,597 102,986 6,855 55,896 8,725 Business-Type Activities $ 23,290 13,476 96,893 32,844 Total $ 21,102 2,390 38,528 58,073 199,879 39,699 55,896 8,725 21,102 2,390 78,016 696,690 1,011,393 80,578 1,985,339 2,253,522 158,594 2,682,029 3,264,915 239 239 28,064 176 28,240 28,303 176 28,479 572,213 1,303,584 1,875,797 1,586 208,570 19,604 248,667 31,448 50,595 480,573 2,706,684 DEFERRED INFLOWS OF RESOURCES Derivative instruments-interest rate swaps Service concession agreements Total deferred inflows of resources NET POSITION Net investment in capital assets Restricted for: Capital Debt service Loans Other purposes Unrestricted Total net position $ 18,018 40,097 31,448 32,925 (12,383) 682,318 55 $ 17,670 492,956 2,024,366 $ CITY OF CLEVELAND, OHIO STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Charges for Services Expenses Functions/Programs: Governmental activities: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Interest on debt Total governmental activities $ 106,141 128,276 310,745 70,705 14,729 17,385 13,845 26,153 687,979 Total 72,938 143,883 280,323 165,227 116,694 4,567 25,231 2,435 1,739 92 7,381 1,821 972 601,492 $ 5,757 2,967 100 4,345 28,342 13,805 69,004 6,679 10,321 11,387 244,647 163,547 153,627 Business-type activities: Water Electricity Airport facilities Nonmajor activities: Sewer Public Auditorium Westside Market Eastside Market Municipal Parking Lots Cemeteries Golf Courses Total business-type activities 22,894 1,226 1,302 59 7,735 1,495 536 597,432 417 1,289,471 $ $ 30,696 18,369 15,049 Program Revenues Operating Grants and Contributions 670,370 General revenues: Income taxes Property taxes Other taxes Shared revenues State local government funds Unrestricted investment earnings Other Transfers Total general revenues and transfers Change in net position Net position at beginning of year (as restated) Net position at end of year The notes to the financial statements are an integral part of this statement. 56 $ 97 177 2 5,319 $ 149,202 Net (Expense) Revenue and Changes in Net Positon Capital Grants and Contributions Governmental Activities Business-Type Activities $ $ $ 1,330 24,515 25,845 (69,770) (57,050) (281,891) (1,701) (2,293) (4,097) (2,358) (26,153) (445,313) Total $ - (69,770) (57,050) (281,891) (1,701) (2,293) (4,097) (2,358) (26,153) (445,313) 21,800 964 25,025 62,043 2,741 (11,731) 62,043 2,741 (11,731) 364 3,645 210 (1,914) 2,436 (225) (92) 1,267 666 (370) 54,821 (1,914) 2,436 (225) (92) 1,267 666 (370) 54,821 496 992 66 53,562 $ - 79,407 (445,313) 54,821 (390,492) 1,589 330,863 56,086 28,680 27,338 25,966 692 18,141 - 486,177 1,589 487,766 40,864 641,454 682,318 56,410 1,967,956 $ 2,024,366 97,274 2,609,410 $ 2,706,684 330,863 56,086 28,680 27,338 25,966 692 18,141 (1,589) $ 57 CITY OF CLEVELAND, OHIO BALANCE SHEET-GOVERNMENTAL FUNDS DECEMBER 31, 2012 (Amounts in 000's) General ASSETS Cash and cash equivalents Investments Receivables: Taxes Accounts Grants Loans Accrued interest Assessments Less: Allowance for doubtful accounts Receivables, net Due from other funds Due from other governments Inventory of supplies $ Other Governmental Funds 84,869 $ 243,525 9,522 101,021 28,330 Total Governmental Funds $ 35,009 136,030 28,330 12,458 190,860 4 2,615 (20,967) 349,330 13,865 34,730 1,127 12,458 190,860 4 2,615 (20,967) 108,384 1,393 21,240 632 328,394 9,522 240,946 12,472 13,490 495 $ 216,518 LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Deferred revenue Unearned revenue Due to other funds Total liabilities FUND BALANCES Nonspendable Restricted Committed Assigned Unassigned Total fund balances $ 520,450 $ 736,968 $ TOTAL ASSETS $ $ 13,555 43,566 102,231 138,619 8,725 21,292 327,988 4,795 40,426 3,745 89,117 576 6,109 144,768 632 9,239 61,879 71,750 $ 216,518 TOTAL LIABILITIES AND FUND BALANCES Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities (excluding internal service fund capital assets) are not financial resources and, therefore, are not reported in the funds. Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds. Long-term liabilities, including bonds and claims payable, are not due and payable in the current period and therefore are not reported in the funds. The assets and liabilities of most of the internal service funds are included in the governmental activities in the statement of net position. Net position of governmental activities The notes to the financial statements are an integral part of this statement. 58 8,760 3,140 98,486 49,502 8,149 15,183 183,220 495 233,832 102,901 2 1,127 233,832 102,901 9,241 61,879 408,980 337,230 $ 520,450 925,547 82,723 (747,409) 12,477 $ 682,318 CITY OF CLEVELAND, OHIO STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-GOVERNMENTAL FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) General REVENUES: Income taxes Property taxes State local government funds Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total revenues $ 294,648 36,028 31,821 50,489 12,314 34,230 21,451 277 5,724 10,074 497,056 EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Other Capital outlay Inception of capital lease Debt service: Principal retirement Interest General Government Other Total expenditures 76,966 63,622 294,955 157 7,836 5,326 1,407 10,992 2,302 Other Governmental Funds Total Governmental Funds $ $ 331,118 55,312 31,821 86,084 15,070 41,436 26,830 468 129,724 1,364 18,770 737,997 36,470 19,284 35,595 2,756 7,206 5,379 191 124,000 1,364 8,696 240,941 67,643 5,648 85,125 85,753 303,767 69,238 14,542 16,986 12,794 10,992 69,945 5,648 463,563 48,115 33,741 1,264 1,168 295,515 48,115 33,741 1,264 1,168 759,078 33,493 (54,574) (21,081) 3,602 (16,941) (13,337) 56,228 (45,204) 82,945 8,770 (145) (28,910) 322 6,507 80,513 59,830 (62,145) 82,945 8,770 (145) (28,910) 324 6,507 67,176 NET CHANGE IN FUND BALANCES 20,156 25,939 46,095 FUND BALANCES AT BEGINNING OF YEAR 51,594 311,291 362,885 71,750 $ 337,230 $ 408,980 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Issuance of debt Premium on bonds Discount on bonds Payment to refund bonds Sale of City assets Proceeds from capital lease Total other financing sources (uses) FUND BALANCES AT END OF YEAR 2 $ The notes to the financial statements are an integral part of this statement. 59 8,159 22,131 8,812 69,081 6,706 11,660 11,387 CITY OF CLEVELAND, OHIO RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES OF GOVERNMENTAL FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Amounts reported for governmental activities in the statement of activities (pages 56 and 57) are different because: Net change in fund balances - total governmental funds (page 59) $ 46,095 Governmental funds report capital outlays as expenditures; however, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. 15,654 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. (9,512) The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of debt issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences, including accrued interest, in the treatment of long-term debt and related items. (17,982) Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. 3,219 The net revenue of certain activities of internal service funds is reported with governmental activities. 3,390 Change in net position of governmental activities (pages 56 and 57) The notes to the financial statements are an integral part of this statement. 60 $ 40,864 CITY OF CLEVELAND, OHIO STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES (BUDGET AND ACTUAL) - GENERAL FUND FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget REVENUES: Income taxes Property taxes State local government funds Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Miscellaneous Total revenues $ EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Other Final Budget 271,105 36,903 34,673 40,472 11,785 29,994 22,737 130 5,943 18,264 472,006 $ VariancePositive (Negative) Actual* 271,105 36,903 34,673 40,472 11,785 29,994 22,737 130 5,943 18,264 472,006 $ 290,474 36,028 34,673 46,929 12,372 33,837 21,626 250 5,464 19,365 501,018 $ 19,369 (875) 6,457 587 3,843 (1,111) 120 (479) 1,101 29,012 83,655 66,766 299,409 271 9,822 5,299 1,525 19,436 83,820 67,159 299,409 271 9,837 5,653 1,525 19,541 78,496 63,848 294,746 148 8,317 5,346 1,413 16,229 5,324 3,311 4,663 123 1,520 307 112 3,312 486,183 487,215 468,543 18,672 (14,177) (15,209) 32,475 47,684 OTHER FINANCING SOURCES (USES): Transfers in Transfers out Sale of City assets 18,218 (20,873) 18,218 (19,841) Total other financing sources (uses) (2,655) (1,623) 16,981 (17,941) 2 (958) (1,237) 1,900 2 665 (16,832) (16,832) 31,517 48,349 2,181 2,181 50,530 Total expenditures EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER FINANCING USES DECERTIFICATION OF PRIOR YEAR ENCUMBRANCES AND PRE-ENCUMBRANCES NET CHANGE IN FUND BALANCES (16,832) FUND BALANCES AT END OF YEAR $ 33,698 16,861 FUND BALANCES AT BEGINNING OF YEAR (16,832) 16,861 16,861 29 $ 29 * On budgetary basis of accounting (see Note 2 - Summary of Significant Accounting Policies, "D" Budgetary Procedures). The notes to the financial statements are an integral part of this statement. 61 $ 50,559 $ 50,530 CITY OF CLEVELAND, OHIO STATEMENT OF NET POSITION - PROPRIETARY FUNDS DECEMBER 31, 2012 (Amounts in 000's) Business Type Activities - Enterprise Funds Cleveland Department Nonmajor Public of Port Enterprise Power Control Funds Division of Water ASSETS Current assets: Cash and cash equivalents Restricted cash and cash equivalents Receivables: Accounts Unbilled revenue Less: Allowance for doubtful accounts Receivables, net $ $ 58,097 1,310 $ 87,196 7,037 $ 55,679 $ 3,313 546 8,826 90 34 2,976 2,343 323 308,093 80,470 110,955 146,056 286,051 15,927 84 51,122 3,739 1 54,862 288,296 15,927 570,928 5,151 2,646 16,497 1,288 179,758 39,616 (29,757) 189,617 5,249 305 495,234 21,413 81,036 167,457 74,153 13,729 6,728 137,728 106,213 18,903 201,167 (859,199) 1,686,939 46,583 (314,193) 335,627 18,153 25,582 5,463 16,549 1,497,878 238,532 586,549 $ 564,859 3,739 86 2,244 211,843 Governmental Activities Internal Service Funds 645,574 211,759 Capital assets: Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Infrastructure Construction in progress Less: Accumulated depreciation Total capital assets, net 9,732 3,314 (2,000) 11,046 4,713 1,178 Unamortized bond issuance costs 16,310 1,931 (9,407) 8,834 14,662 Noncurrent assets: Restricted assets: Cash and cash equivalents Investments Accrued interest receivable Accrued passenger facility charges Total restricted assets 89,549 2,831 (3,051) 89,329 395,349 21,102 64,167 31,540 (15,299) 80,408 Due from other funds Due from other governments Inventory of supplies Prepaid expenses and other assets Total current assets 18,555 2,976 16,384 1,591 502 1 2,244 334,242 43,819 975,801 29,011 (729,465) 895,018 9,201 1,221 28,575 - 191,898 97,735 2,130,840 700,400 730,307 975,801 293,093 (2,064,808) 3,055,266 16,332 (161,951) 137,682 663 146 3,557 9,513 488 (10,012) 4,355 1,903,933 DEFERRED OUTFLOWS OF RESOURCES Derivative instruments-interest rate swaps Total deferred outflows of resources 393,135 1,199,811 154,897 3,651,776 4,355 2,212,026 Total noncurrent assets TOTAL ASSETS TOTAL ASSETS AND DEFERRED OUTFLOWS 194,377 12,755 Total Enterprise Funds 473,605 1,310,766 300,953 4,297,350 32,930 27,699 27,699 $ 2,239,725 $ 473,605 $ 1,310,766 27,699 27,699 $ 300,953 $ 4,325,049 $ 32,930 (Continued) 62 CITY OF CLEVELAND, OHIO STATEMENT OF NET POSITION - PROPRIETARY FUNDS DECEMBER 31, 2012 (Amounts in 000's) Business-Type Activities - Enterprise Funds Cleveland Department Nonmajor Public of Port Enterprise Power Control Funds Division of Water LIABILITIES Current liabilities: Accounts payable Accrued wages and benefits Due to other funds Due to other governments Accrued interest payable Current payable from restricted assets Current portion of long-term obligations Total current liabilities $ 13,521 12,755 37,804 83,514 $ 10,350 3,855 4,499 $ 499 $ 595 2,870 2,033 11,584 90,925 470 $ 3,045 110,927 206 1,813 23,487 20,050 20,125 96,893 32,844 21,102 73,074 287,575 766,975 869,040 7,768 220,202 228,469 856,702 857,577 28,103 30,122 952,554 262,414 916,766 141,049 DEFERRED INFLOWS OF RESOURCES Derivative instruments-interest rate swaps Service concession agreements Total deferred inflows of resources - 27,699 - 914,193 99 87,602 257,578 52,470 111,467 17,670 137,306 1,259,472 $ 153,436 1,309 3,976 211,191 541 394,000 2,239,725 $ 473,605 127,557 $ 1,310,766 107,958 178 5,525 2,246 2,499 204 755 5,704 28,064 176 28,240 27,699 NET POSITION Net investment in capital assets Restricted for capital projects Restricted for debt service Restricted for passenger facility charges Unrestricted $ 2,272,783 365 176 Governmental Activities Internal Service Funds 2,665 102,513 280 7,768 1,871,982 1,985,208 280 Total liabilities Total net position TOTAL LIABILITIES, DEFERRED INFLOWS AND NET POSITION 1,221 1,310 12,710 33,945 3,546 4,079 1,412 5,968 17,632 7,037 19,515 59,189 1,365 100,700 Long-term liabilities: Accrued wages and benefits Construction loans payable Deferred payment obligation Accreted interest payable Revenue bonds payable Total noncurrent liabilities 6,721 10,083 2,630 Total Enterprise Funds 14,409 20,113 14,409 - 159,363 $ 4,355 45,702 1,303,144 1,586 208,570 17,670 493,056 2,024,026 12,817 300,953 8,462 $ Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 32,930 340 $ NET POSITION OF BUSINESS-TYPE ACTIVITIES The notes to the financial statements are an integral part of this statement. 2,024,366 (Concluded) 63 CITY OF CLEVELAND, OHIO STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION - PROPRIETARY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Business-Type Activities - Enterprise Funds Cleveland Department Nonmajor Public of Port Enterprise Power Control Funds Division of Water OPERATING REVENUES: Charges for services Total operating revenue $ 280,323 280,323 $ 165,227 165,227 OPERATING EXPENSES: Operations Maintenance Purchased power Depreciation Total operating expenses 67,455 216,624 21,379 19,820 95,788 16,971 153,958 OPERATING INCOME (LOSS) 63,699 11,269 1,965 (28,322) $ 80 (9,677) 103,687 45,482 116,694 116,694 $ 35,170 35,170 64,454 4,401 $ 19,827 9,217 50,541 119,396 Total Enterprise Funds 597,414 597,414 Governmental Activities Internal Service Funds $ 46,969 46,969 42,500 2,095 7,684 36,728 209,347 78,920 95,788 142,651 526,706 (2,702) (1,558) 70,708 1,725 484 (1,955) (8) (77) 2,801 (69,525) 15,781 (577) (82) (45) 649 45,244 NON-OPERATING REVENUES (EXPENSES): Investment income (loss) Interest expense Passenger facility charges Sound insulation program Loss on disposal of capital assets Other revenues (expenses) Total non-operating revenues (expenses) (15) 4,284 (59) 272 (29,571) 15,781 (577) (59) (4,193) (22,088) (9,656) (18,347) (1,556) (51,647) INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS 41,611 1,613 (21,049) (3,114) 19,061 1,678 20,118 981 9,149 61,729 2,594 5,616 1,589 4,091 35,864 1,589 56,514 882 726 3,286 Capital contributions Transfers in Change in net position NET POSITION AT BEGINNING OF YEAR (as restated) NET POSITION AT END OF YEAR 1,197,743 $ 1,259,472 $ 208,597 211,191 (11,900) $ 405,900 394,000 $ 155,272 159,363 (104) $ The notes to the financial statements are an integral part of this statement. 64 (68) (47) $ Adjustment to reflect consolidation of internal service fund activities related to enterprise funds CHANGE IN NET POSITION OF BUSINESS-TYPE ACTIVITIES 21 56,410 9,531 12,817 CITY OF CLEVELAND, OHIO STATEMENT OF CASH FLOWS - PROPRIETARY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Business-Type Activities - Enterprise Funds Cleveland Department Nonmajor Public of Port Enterprise Power Control Funds Division of Water CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services Cash payments for purchased power Agency activity on behalf of other sewer authorities Other Net cash provided by (used for) operating activities $ 264,534 $ (66,921) (76,526) 168,740 $ (15,640) (22,056) (95,152) 140 122,327 $ (38,839) (28,850) Total Enterprise Funds 35,426 $ (11,655) (14,256) (4,813) 6,265 121,227 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Cash payments for sound insulation of homes Cash received through transfers from other funds Miscellaneous non-operating revenue (expense) Net cash provided by (used for) noncapital financing activities 31,079 54,638 15,780 591,027 (133,055) (141,688) (95,152) 6,265 (4,673) Governmental Activities Internal Service Funds $ 222,724 (641) 45,578 (25,549) (17,733) 2,296 (641) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Cash receipts for passenger facility charges Proceeds from sale of revenue bonds, loans and notes Acquisition and construction of capital assets Principal paid on long-term debt Interest paid on long-term debt Cash paid to escrow agent for refunding Capital grant proceeds Net cash provided by (used for) capital and related financing activities 1,589 (3,593) 89 - (3,827) 1,589 145 726 89 (4,468) 1,734 (2,645) 726 15,816 192,924 (67,355) (90,239) (34,236) (50,000) 15,325 (16,620) (10,050) (9,746) (16,294) 15,816 252,946 (22,452) (13,903) (32,871) (252,379) 6,846 461,195 (110,423) (117,117) (78,660) (318,673) 7,135 (3,996) (2,925) (1,807) 289 (131) (48,906) (140,727) (28,731) (105,981) 6,022 (228,649) 30,010 120 185,583 449 4,095 111 331,692 2,838 21 14,203 1,399 80,051 10,228 105,881 21 86,524 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (8,439) 112,004 2,158 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (45,997) (99,959) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments Net cash provided by (used for) investing activities (37,385) (4,818) 84,224 19,303 185,233 2,912 296,060 52,303 796,077 15,241 332,367 115,347 (131) . CASH AND CASH EQUIVALENTS AT END OF YEAR $ 418,891 $ 110,529 $ 380,284 $ 71,606 $ 981,310 $ 18,153 (Continued) 65 CITY OF CLEVELAND, OHIO STATEMENT OF CASH FLOWS - PROPRIETARY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Business-Type Activities - Enterprise Funds Cleveland Department Nonmajor Public of Port Enterprise Power Control Funds Division of Water RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Operating income (loss) Adjustment to reconcile operating income (loss) to net cash provided by (used for) operating activities: Depreciation Write-off of bad debt expense Noncash rental income Changes in assets and liabilities: Receivables, net Due from other funds Inventory of supplies Prepaid expenses and other assets Accounts payable Accrued wages and benefits Due to other funds Due to other governments Accrued expenses and other liabilities Total adjustments NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 63,699 $ 67,455 $ (2,702) $ (1,558) $ 50,541 16,971 7,684 20,000 992 (2,213) (991) (40) 81 (95) (140) 3,304 (755) 263 3 135 206 (423) (7,521) 57,528 10,469 (34) (225) 7 (77) 124 443 106 19,810 121,227 $ $ 54,638 17,338 $ 15,780 $ $ 222,724 1,725 649 17,945 (3,084) (993) (30) (145) 189 1,903 (15,097) (7,934) 152,016 (284) (46) 2,023 (15,097) $ 20,044 31,079 $ $ $ 3,180 (82) (40) (519) 57,340 70,708 Governmental Activities Internal Service Funds 142,651 20,000 (3,389) (3,389) NONCASH OPERATING ACTIVITY: Rental income SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES: Contributions of capital assets 11,269 Total Enterprise Funds 1,072 3 (200) (1,392) 1 438 571 $ 2,296 3,389 5,273 (Concluded) The notes to the financial statements are an integral part of this statement. 66 CITY OF CLEVELAND, OHIO STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES FIDUCIARY FUNDS DECEMBER 31, 2012 (Amounts in 000's) Agency Funds ASSETS Cash and cash equivalents Taxes receivable Due from other governments Total assets $ $ $ LIABILITIES Due to other governments Due to others Total liabilities The notes to the financial statements are an integral part of this statement. 67 23,114 19,699 1,171 43,984 26,492 17,492 43,984 This Page Intentionally Left Blank. 68 CITY OF CLEVELAND, OHIO NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF CITY OPERATIONS AND REPORTING ENTITY The City: The City of Cleveland, Ohio (the City) operates under an elected Mayor/Council (19 Council members) administrative/legislative form of government. Reporting Entity: The accompanying financial statements as of December 31, 2012 and for the year then ended have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) applicable to local governments. The Governmental Accounting Standards Board (GASB) is the standardsetting body for establishing governmental accounting and financial reporting principles, which are primarily set forth in the GASB's Codification of Governmental Accounting and Financial Reporting Standards (GASB Codification). In evaluating how to define the governmental reporting entity, the City complies with the provisions of GASB Statement No. 14, The Financial Reporting Entity, under which the financial statements include all the organizations, activities, functions and component units for which the City (primary government) is financially accountable. Financial accountability is defined as the appointment of a voting majority of the component unit's board, and either (1) the City's ability to impose its will over the component unit or (2) the possibility that the component unit will provide a financial benefit to or impose a financial burden on the City. On this basis, the City's financial reporting entity has no component units but includes in its financial statements the financial activities of all departments, agencies, boards and commissions that are part of the primary government, including police and fire protection, waste collection, parks and recreation, health, certain social services and general administrative services. In addition, the City owns and operates several enterprise activities, the principal ones consisting of a water system, an electric distribution system and two airports. The following entities are related organizations of the City of Cleveland; however, the City's accountability does not extend beyond its appointing authority: Cuyahoga Metropolitan Housing Authority - Created under the Ohio Revised Code, the Cuyahoga Metropolitan Housing Authority provides public housing services. The five-member board consists of two appointed by the Mayor of the City of Cleveland, two appointed by Cleveland City Council and one appointed by the Mayor of the City of East Cleveland with approval from its City Council. Cleveland-Cuyahoga County Port Authority - Created under the Ohio Revised Code, the ClevelandCuyahoga County Port Authority conducts port operations and economic development activities. The nine-member Board of Directors consists of three appointed by the Cuyahoga County Commissioners and six appointed by the City of Cleveland. Cleveland Metropolitan School District (Schools) - In November of 1998, the Mayor of the City of Cleveland was given appointing authority for the Schools. As approved by the State Legislature, the Ohio Revised Code provides for the Mayor to appoint a Chief Executive Officer who must be approved by the Board of Education (the Board). The Board is comprised of nine-members. The members of the Board are appointed by the Mayor from a pool of candidates presented to the Mayor by an independent nominating panel. In November 2002, the voters of Cleveland elected to maintain the current governance structure. 69 The following entity is a jointly governed organization of the City; however, the City has no ongoing financial interest or responsibility: Gateway Economic Development Corporation of Greater Cleveland (Gateway) - Gateway is responsible for the operations of a sports complex and related economic development. The five-member board consists of two members appointed by the City, two members appointed by the Board of County Commissioners and one by the President of the Board of County Commissioners with concurrence of the Mayor of the City of Cleveland. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant Accounting Policies: The following is a summary of the more significant policies followed during the preparation of the accompanying financial statements. A. Government-Wide and Fund Financial Statements GASB Statement No. 34 established requirements and a reporting model for the annual financial reports of state and local governments. GASB Statement No. 34 was developed to make annual reports easier to understand and more useful to the people who use governmental financial information to make decisions. Financial information of the City is presented in the following format: Basic Financial Statements: 1. Government-wide financial statements consist of a statement of net position and a statement of activities. These statements report all of the assets, deferred outflows, liabilities, deferred inflows, revenues, expenses, gains and losses of the City. Governmental activities are reported separately from business-type activities. Governmental activities are normally supported by taxes and intergovernmental revenues whereas business-type activities are normally supported by fees and charges for services and are usually intended by management to be financially self-sustaining. Fiduciary funds of the City are not included in these government-wide financial statements. Interfund receivables and payables, bonds and notes issued and held by the City as investments within governmental and business-type activities have been eliminated in the government-wide statement of net position. Related interest amounts are eliminated in the government-wide statement of activities. These eliminations minimize the duplicating effect on assets and liabilities within the governmental and business-type activities total column. Internal Service Fund balances, whether positive or negative, have been eliminated against the expenses and program revenues shown as governmental activities in the statement of activities, except for the Utilities Administration Fund which is shown in the business-type activities column. The statement of activities presents a comparison between direct expenses and program revenues for the different business-type activities of the City and for each function of the City's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenue includes (a) charges paid by the recipients of goods or services offered by the programs and (b) grants and contributions, including special assessments that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. General revenues are considered unrestricted in nature. 70 Program revenues and expenses previously reported as "Other" program revenues and expenses in governmental activities on the statement of activities are now classified as General Government program revenues and expenses as appropriate. Business-type activities on the government-wide statement of activities summarizes other Enterprise Funds as Nonmajor activities. These include Sewer, Public Auditorium, West Side Market, East Side Market, Municipal Parking Lots, Cemeteries and Golf Courses. 2. Fund financial statements consist of a series of statements focusing on information about the City's major governmental and Enterprise Funds. Separate statements are presented for the governmental, proprietary and fiduciary funds. The City's major governmental fund is the General Fund. Of the City's business-type activities, the Division of Water Fund, Cleveland Public Power Fund and Department of Port Control Fund are considered major Enterprise Funds. The General Fund is the primary operating fund of the City. It is used to account for all financial resources, except those required to be accounted for in other funds. Its revenues consist primarily of income and property taxes, investment earnings, other taxes and shared revenues, charges for services, licenses, fees and fines. General Fund expenditures represent costs of General Government; Public Works (including waste collection); Public Safety (including police and fire); Building and Housing; Public Health; Community Development; and Economic Development. General Fund resources are also transferred annually to support other services which are accounted for in other separate funds. The Division of Water Fund is a segment of the Department of Public Utilities of the City. The Division of Water was created for the purpose of supplying water services to customers within the Cleveland Metropolitan Area. The Cleveland Public Power Fund is a segment of the Department of Public Utilities of the City. The Cleveland Public Power Fund was established by the City to provide electrical services to customers within the City. The Department of Port Control Fund was established to account for the operations of the City's airport facilities. While not considered major funds, the City maintains Internal Service Funds used to account for the financing of goods or services provided by one department or division to another department, division or other government on a cost-reimbursement basis. Also maintained by the City are fiduciary funds, such as Agency Funds, used to account for assets held by the City as an agent for individuals, private organizations or other governments. 3. The City's General Fund budget to actual statement is presented as part of the basic financial statements. 4. Notes to the financial statements provide information that is essential to a user's understanding of the basic financial statements. 71 B. Financial Reporting Presentation The accounts of the City are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of selfbalancing accounts that comprise its assets, deferred outflows, liabilities, deferred inflows, fund balance (equity), revenues and expenditures (expenses). The fund types and classifications that the City reports are as follows: GOVERNMENTAL FUNDS 1. General Fund - The general fund should be used to account for and report all financial resources not accounted for and reported in another fund. 2. Special Revenue Funds - Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditures of specified purposes other than debt service or capital projects. The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should be the foundation for a special revenue fund. 3. Debt Service Funds - 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 (i.e. debt payable from property taxes). Financial resources that are being accumulated for principal and interest maturing in future years also should be reported in debt service funds. 4. Capital Project Funds - Capital Project Funds are used to account for and report financial resources that are restricted or committed to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Capital project funds exclude those types of capital-related outflows financed by proprietary funds or for assets that will be held in trust for individuals, private organizations, or other governments. PROPRIETARY FUNDS 1. Enterprise Funds - The Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. 2. Internal Service Funds - The Internal Service Funds are used to account for the financing of goods or services provided by one department or division to other departments or divisions or to other governments on a cost-reimbursement basis. The City's most significant Internal Service Funds are used to account for Motor Vehicle Maintenance, Municipal Income Tax Administration and the Workers' Compensation Reserve. FIDUCIARY FUNDS 1. Agency Funds - Agency Funds are used to account for assets held by the City as an agent for individuals, private organizations and other governments. The Agency Funds are custodial in nature (assets equal liabilities) and do not have a measurement focus. However, the accrual basis of accounting is used to recognize receivables and payables. The City's more significant Agency Funds are used to account for Municipal Court and income tax collections for other municipalities. Fiduciary funds are not included in the government-wide statements. C. Measurement Focus and Basis of Accounting Except for budgetary purposes, the basis of accounting used by the City conforms to GAAP as applicable to governmental units. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. 72 The government-wide, proprietary and fiduciary fund financial statements are reported using the economic resources measurement focus. The government-wide, proprietary and fiduciary fund financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the City gives (or receives) value without directly receiving (or giving) equal value in exchange, include income taxes, property taxes, grants, shared revenue and donations. On an accrual basis, revenue from income taxes is recognized in the period in which the taxpayer's liability occurs and revenue from property taxes is recognized in the fiscal year for which the taxes are levied. On an accrual basis, revenue in the form of shared revenue is recognized when the provider government recognizes its liability to the City. Revenue from grants and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include: (1) timing requirements which specify the year when the resources are required to be used or the year when use is first permitted; (2) matching requirements, in which the City must provide local resources to be used for a specified purpose; and (3) expenditure requirements, in which the resources are provided to the City on a cost-reimbursement basis. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when both measurable and available. Revenues are considered to be available when they are collected within the current period or soon enough thereafter to pay liabilities of the current period. The City generally considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year end. Expenditures are generally recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments and compensated absences, which are recognized as expenditures only when payment is due. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt are reported as other financing sources. In applying the susceptible-to-accrual concept under the modified accrual basis, the following revenue sources are deemed both measurable and available (i.e., collectible within the current year or within sixty days after year end and available to pay obligations of the current period): income taxes, investment earnings and shared revenues. Reimbursements due for federal or state funded projects are accrued as revenue at the time the expenditures are made or, when received in advance, deferred until expenditures are made. Property taxes and special assessments, though measurable, are not available to finance current period obligations. Therefore, property tax receivables are recorded and deferred until they become available. Other revenues, including licenses, fees, fines and forfeitures and charges for services are recorded as revenue when received in cash because they are generally not measurable until actually received. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Operating expenses are necessary costs incurred to provide the goods or services that are the primary activity of the fund. Non-operating revenues, such as investment income and passenger facility charges, result from non-exchange transactions or ancillary activities. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. The City uses unrestricted resources that are committed first, assigned second and unassigned last. 73 Budgetary Procedures The City is required by State law to adopt annual budgets for the General Fund, certain Special Revenue Funds (including the Division of Streets, Restricted Income Tax, Rainy Day Reserve, Schools Recreation and Cultural Activities and Cleveland Stadium Operations Funds), Debt Service Funds (except for Urban Renewal and Urban Renewal Reserve Funds) and Proprietary Operating Funds. Modifications to the original budget are approved by City Council throughout the year. The City maintains budgetary control by not permitting expenditures to exceed appropriations for personnel costs (including benefits) and other costs (including debt service and capital outlay), within a division of the City, without the approval of City Council. Adjustments to the budget can only be made within a division and then within each category. Further legislation is needed in order to move budget amounts from "personnel" to "other" or vice versa, or between divisions. City Council adopted four appropriation amendments during 2012 which reallocated appropriations and decreased the budget less than 1% from the original budget. Unencumbered appropriations for annually budgeted funds lapse at year end. The City's budgetary process does not include annual budgeting for certain Special Revenue Funds and Capital Project Funds. Appropriations in these funds remain open and carry over to succeeding years (i.e., multi-year) until the related expenditures are made or until they are modified or canceled. Appropriations for these funds are controlled on a project basis. The City's budgetary process accounts for certain transactions on a basis other than GAAP. The major differences between the budget basis and the GAAP basis are that: Revenues are recorded when received in cash (budget) as opposed to when susceptible to accrual (GAAP). Expenditures are recorded when paid in cash (budget) as opposed to when the liability is incurred (GAAP). Encumbrances and pre-encumbrances are recorded as the equivalent of expenditures (budget) as opposed to being included in fund balances (GAAP). A reconciliation of the General Fund's results of operations for 2012 reported on the budget basis versus the GAAP basis is as follows: (Amounts in 000's) Excess of Revenues and Other Financing Sources over Expenditures and Other Financing Uses (Budget Basis) E. 31,517 $ Adjustments: Revenue Accruals Expenditure Accruals Encumbrances and Pre-Encumbrances Net Change in Fund Balance $ (17,341) (2,039) 8,019 20,156 Other Significant Accounting Policies Cash and Cash Equivalents: Cash resources of certain individual funds are combined to form a pool of cash and investments which is managed by the City Treasurer. Investments in the Pooled Cash and Segregated Accounts, consists of obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; U.S. Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions are carried at fair value (see Note 4 - Pooled And Segregated Cash And Investments) based on quoted market values, where applicable. Interest earned on pooled cash and investments is distributed to the appropriate funds utilizing a formula based on the monthend balance of cash and investments of each fund. Cash equivalents are defined as highly liquid investments with a maturity of three months or less at the time they are purchased by the City. 74 Investments: The City reports its investments at fair value based on quoted market values, where applicable, and recognizes the corresponding change in the fair value of the investments recorded in investment earnings in the year in which the change occurs. Unbilled Revenue: Unbilled revenues are estimates for services rendered but not billed to customers at year end. Inventory of Supplies: Utility funds' inventory is valued at average cost. All other funds' inventory is valued at cost using the first in/first out method. Inventory generally consists of construction materials, utility plant supplies and parts inventory not yet placed into service. Inventory costs are charged to operations when consumed. Restricted Assets: Issuance of debt and amounts set aside for payment of Enterprise Fund revenue bonds and construction loans are classified as restricted assets since their use is limited by applicable bond indentures. Passenger facility charges are restricted for capital expenditures or related debt. Construction loans are restricted to fund approved capital projects. Capital Assets: Capital assets, which include property, plant, equipment and infrastructure assets (e.g., roads, bridges, sidewalks and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements to the extent the City's capitalization threshold is met. The City defines capital assets as assets with an estimated useful life in excess of one year and an individual cost of more than $5,000 for land, furniture, fixtures, equipment and vehicles; and $10,000 for all other assets or projects. Assets are recorded at historical cost or estimated historical cost, if historical cost is not available. Contributed capital assets are recorded at their estimated fair market value on the date contributed. As permitted under the implementation provisions of GASB Statement No. 34, the historical cost of infrastructure assets acquired, significantly reconstructed or that received significant improvements prior to January 1, 1980 have not been included as part of governmental capital assets in the government-wide financial statements. Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation basis for proprietary fund capital assets are the same as those used for the general capital assets. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. Capitalized interest is amortized on the straight-line basis over the estimated useful lives of such assets. The City applies guidance provided by the Governmental Accounting Standards Board. This guidance requires capitalization of the interest cost of the borrowings less interest earned on investment of the bond proceeds from the date of the borrowing until the assets constructed from the bond proceeds are ready for their intended use. This guidance is applied to Waterworks Revenue Bonds, Public Power Revenue Bonds and Airport Revenue Bonds. Costs for maintenance and repairs are expensed when incurred. However, costs for repairs and upgrading that materially add to the value or life of an asset and meet the above criteria are capitalized. The City depreciates capital assets on a straight-line basis using the following estimated useful lives: Assets Years Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Infrastructure 75 15-100 5-100 5-60 3-60 3-50 Compensated Absences: The City accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. In the government-wide and proprietary funds financial statements, the entire amount of unpaid compensated absences is reported as a liability. A liability for compensated absences is accrued in the governmental funds only if the amount is currently due and payable at year end. These amounts are recorded as accrued wages and benefits in the fund from which the employees who have accumulated leave are paid. The remaining portion of the liability is not reported in the governmental funds. Normally, all vacation time is to be taken in the year available. The City allows employees to carryover vacation time from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three year average base salary rate, with the balance being forfeited. Uniformed police and fire employees are eligible to defer earned vacation time and overtime, with the appropriate approvals, until retirement. Once deferred, the employee cannot use deferred time as vacation. Deferred vacation is paid to the employee upon retirement, calculated using their current hourly rate at the date of retirement. Deferred overtime is paid once a year upon request up to the amount budgeted for the year for such purpose. If requests exceed the budgeted amounts, the requests are to be paid on a pro-rata basis. Long-Term Obligations: In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities and proprietary fund type statements of net position. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Losses on advance refundings are deferred and amortized over the life of the new debt, or the life of the advance refunded debt, whichever is shorter. Bonds payable are reported net of the applicable unamortized bond premium, discount or advance refunding losses. Bond issuance costs are reported as other assets and amortized over the term of the related debt. In the governmental fund financial statements, bond premiums and discounts are reported as other financing sources and uses during the period in which they are incurred. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as expenditures. Swap Agreements: The City may enter into interest rate swap agreements to modify interest rates on outstanding debt. The City has accordingly recorded the fair value of each swap in the Government-wide financial statements. As further described in Note 5 - Debt And Other Long-Term Obligations, the City has four swap agreements outstanding at December 31, 2012, one for its Subordinated Income Tax Variable Rate Refunding Bonds, one on the Parking Facilities Refunding Revenue Bonds and two associated with the 2008 Water Revenue Bonds Series Q and 2010 Water Revenue Bonds Series U and V. Grants and Other Intergovernmental Revenues: Grants and assistance awards made on the basis of entitlement programs are recorded as intergovernmental receivables and revenues when entitlement occurs. Reimbursement-type grants are recorded as intergovernmental receivables and revenues when the related expenditures (expenses) are incurred. The City accounts for loans receivable related to the Economic Development Funds, Urban Development Action Funds, Community Development Block Grants, Neighborhood Development Investment Funds and Supplemental Empowerment Zone as restricted or committed fund balance in the fund financial statements as applicable to the extent that these loans do not have to be repaid to the Federal government. Loans receivable deemed uncollectible are included in the allowance for doubtful accounts. The loan proceeds are earmarked for future reprogramming under federal guidelines and are not available to fund current operating expenditures of the City. Encumbrances and Pre-Encumbrances: Encumbrance accounting, under which purchase orders, requisitions, contracts and other commitments for expenditures are recorded as encumbrances or preencumbrances to reserve the applicable portion of the appropriation. 76 Interfund Transactions: During the course of normal operations, the City has numerous transactions between funds, including the allocation of centralized expenses and transfers of resources to provide services, construct assets and service debt. Such transactions are generally reflected as transfers or direct expenses of the fund that is ultimately charged for such costs. Statement of Cash Flows: The City utilizes the direct method of reporting cash flows from operating activities in the Statement of Cash Flows as defined by the GASB Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities that use Proprietary Fund Accounting. In the statement of cash flows, cash receipts and cash payments are classified according to operating, noncapital financing, capital and related financing and investing activities. Deferred Outflows/Inflows of Resources: In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. F. Accounting Pronouncements In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or public-public partnership. As used in this Statement, an SCA is an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a "facility") in exchange for significant consideration and (2) the operator collects and is compensated by fees from third parties. As required, the City has implemented GASB Statement No. 60 effective for the 2012 fiscal year. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the City has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net position by the government that is applicable to a future reporting period, and an acquisition of net position by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities. As required, the City has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. This Statement sets forth criteria that establish when the effective 77 hedging relationship continues and hedge accounting should continue to be applied. As required, the City has implemented GASB Statement No. 64 effective for the 2012 fiscal year. NOTE 3 - RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of certain differences between the governmental fund balance sheet and the governmentwide statement of net position. The governmental fund balance sheet includes a reconciliation between fund balance - total governmental funds and net position - governmental activities as reported in the government-wide statement of net position. One element of that reconciliation explains that long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. The details of this $747.4 million difference are as follows: (Amounts in 000's) Bonds payable Less: Deferred charge for issuance costs (to be amortized over life of debt) Interest rate swap Unamortized bond premium Accrued interest payable Capital leases payable Loans payable Claims and adjustments Compensated absences $ $ Net adjustments to reduce fund balance - total governmental funds to arrive at net position - governmental activities B. (637,125) 21,205 (239) (20,725) (6,855) (16,236) (2,390) (3,234) (81,810) (747,409) Explanation of certain differences between the governmental fund statement of revenues, expenditures and changes in fund balances and the government-wide statement of activities. The governmental fund statement of revenues, expenditures and changes in fund balances includes a reconciliation between net changes in fund balances - total governmental funds and changes in net position of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains that governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The details of this $15.7 million difference are as follows: (Amounts in 000's) $ 68,176 (52,007) (515) Capital outlay Depreciation expense Capital asset disposal Net adjustment to increase net changes in fund balances total governmental funds to arrive at changes in net position of governmental activities $ 15,654 Another element of that reconciliation states that revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the fund statements. The details of this difference are as follows: (Amounts in 000's) Reversal of prior year deferred revenue Current year deferred revenues $ Net adjustment to decrease net changes in fund balances total governmental funds to arrive at changes in net position of governmental activities 78 (92,235) 82,723 $ (9,512) Another element of that reconciliation states that the issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of issuance costs, premiums, discounts and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. The net effect of these differences, including accrued interest and in the treatment of long-term debt is $18.0 million which is detailed as follows: (Amounts in 000's) Debt issued or incurred: Issuance of general obligation bonds and other obligations Accrued interest Interest rate swap Principal repayments: General obligation debt and other obligations Payment on capital lease Payment on loan Refunding of general obligation bonds and other obligations Amortization of debt issuance cost $ (98,077) 5,119 203 44,764 3,179 85 28,910 (2,165) Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities $ (17,982) Another element of that reconciliation states that some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. The details of this $3.2 million difference are as follows: (Amounts in 000's) Compensated absences Claims judgements $ Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities 4,653 (1,434) $ 3,219 NOTE 4 - POOLED AND SEGREGATED CASH AND INVESTMENTS Monies for the Debt Service Funds, certain Capital Project Funds, certain Agency Funds, Department of Port Control, Division of Water, Division of Water Pollution Control, Division of Cleveland Public Power, Division of Municipal Parking Lots, Cemeteries, Golf Courses, Public Auditorium and certain Special Revenue Funds are deposited or invested in individual segregated bank accounts. Monies of all other funds of the City, including the accounts of the General Fund, other Special Revenue Funds, other Capital Project Funds, other Enterprise Funds, Internal Service Funds and other fiduciary funds are maintained or invested in a common group of bank accounts. Collectively these common bank accounts and investments represent the Pooled Cash Account (PCA). Each fund whose monies are included in the PCA has equity therein. Certain funds have made disbursements from the PCA in excess of their individual equities in the PCA. Such amounts have been classified as due to other funds and due from other funds between the Restricted Income Tax Special Revenue Fund and the respective funds that have made disbursements in excess of their individual equities in the PCA. 79 The City has a restrictive arrangement for certain segregated monies held in escrow at the banks' trust departments in which the City must act in conjunction with a trust officer in order to make investments. The City's role is that of investment manager and the trust officer's role is that of purchasing agent. For other segregated monies, the City acts alone in placing investments with the banks. Amounts held in escrow are designated for a special purpose and are entrusted to a third party to fulfill certain legal provisions. Deposits: Ohio law requires that deposits be placed in eligible banks located in Ohio. The City's policy is to place deposits only with major commercial banks having offices within the City of Cleveland. Any public depository in which the City places deposits must pledge as collateral eligible securities of aggregate market value equal to the excess of deposits not insured by the Federal Deposit Insurance Corporation. Further, City ordinance requires such collateral amounts to exceed deposits by 10%. Collateral that may be pledged is limited to obligations of the following entities: the United States and its agencies, the State of Ohio, the Ohio Student Loan Commission and any legally constituted taxing subdivision within the State of Ohio. The City also requires that non-pooled securities pledged be held by either the Federal Reserve Bank or other trust institution, as designated by the City, as trustee. This collateral is held in joint custody with the financial institution pledging the collateral and cannot be sold or released without written consent from the City. Monthly, the City determines that the collateral has a market value adequate to cover the deposits and that it has been segregated either physically or in book entry form. At year end, the carrying amount of the City's deposits including certificates of deposit was $359,177,000 and the actual bank balance totaled $367,398,000. The difference represents outstanding warrants payable and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $367,398,000 of the bank balance was insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the City will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the City's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by state statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; U.S. Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions as discussed in "Deposits" above or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Generally, investments are recorded in segregated accounts by way of book entry through the bank's commercial or trust department and are kept at the Federal Reserve Bank in the depository institution's separate custodial account for the City, apart from the assets of the depository institution. Ohio statute prohibits the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; therefore, significant changes in market conditions could materially affect portfolio value. Interest rate risk: In accordance with its investment policy, the City limits its exposure to fair value losses caused by rising interest rates, investing primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the City will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The City does not have an investment policy dealing with investment custodial risk beyond the requirement in the State statue. 80 Credit Risk: The City's investments as of December 31, 2012 include U.S. Treasury Bills, U.S. Treasury Notes, STAROhio, commercial paper, money market mutual funds, guaranteed investment contracts and manuscript debt. The City maintains the highest ratings for its investments. The investments in U.S. Agencies carry a Moody's rating of Aaa. Investments in Dreyfus Government Cash Management, First American Government Obligations Fund, First American Treasury Obligations Fund, Victory Money Market Fund, PNC Government Money Market Fund (A) and STAROhio carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. Investments in U.S. Bank N.A. Open Commercial Paper carries a Standard & Poor's rating of A-1+. The City has no investment policy that would further limit its investment choices. The City's investments shown in the following table include those which are classified as cash equivalents in accordance with the provisions of GASB Statement No. 9: Fair Value Type of Investment U.S. Treasury Bills U.S. Treasury Notes STAROhio Commercial Paper Investments in Mutual Funds Guaranteed Investment Contracts $ Manuscript Debt Other 12,215 3,246 283,038 141,635 519,186 36,850 Cost $ Investment Maturities 1-5 One Year (Amounts in 000's) 12,214 3,251 283,038 141,635 519,186 36,850 $ 12,215 3,246 283,038 141,635 519,186 $ 5 Years or More $ 2,521 1,005,059 961,841 359,177 $ 6,364 2,521 1,005,055 Total Deposits Years 36,850 6,364 2,521 Total Investments Total Deposits and Investments Less than 359,177 359,177 1,364,236 $ 1,321,018 1,364,232 $ 6,364 36,850 $ 36,850 6,364 $ 6,364 Investment type "Other" consist of deposits into collective cash escrow pools managed by either Huntington or US Bank, as trustee. STAROhio is an investment pool created pursuant to Ohio statutes and managed by the Treasurer of the State of Ohio. The fair value of the City's position in STAROhio is equal to the value of the shares the City owns in the investment pool. Concentration of Credit Risk: The City places a limitation on the amount it may invest in any one issuer to help minimize the concentration of credit risk. As of December 31, 2012, the investments in U.S. Treasury Bills, U.S. Treasury Notes, STAROhio, commercial paper, mutual funds, guaranteed investment contracts, manuscript debt and other are approximately 1.2%, 0.3%, 28.2%, 14.1%, 51.7%, 3.7%, 0.6% and 0.2%, respectively, of the City's total investments. Reconciliation to Financial Statements: Total cash and investments are reported as follows: Government-Wide Financial Statements (Amounts in 000's) Unrestricted: Cash and cash equivalents Investments $ Restricted: Cash and cash equivalents Investments 741,896 9,522 585,961 3,739 Total $ 81 1,341,118 Fund Financial Statements (Amounts in 000's) Balance Sheet - Governmental Funds: Unrestricted: Cash and cash equivalents Investments $ 328,394 9,522 337,916 Statement of Net Position - Proprietary Funds: Enterprise Funds: Unrestricted: Cash and cash equivalents Restricted: Cash and cash equivalents Investments Internal Service Funds: Unrestricted: Cash and cash equivalents 395,349 585,961 3,739 18,153 Subtotal 1,003,202 Statement of Fiduciary Assets and Liabilities: Unrestricted: Cash and cash equivalents 23,114 Total $ 82 1,364,232 NOTE 5 - DEBT AND OTHER LONG-TERM OBLIGATIONS A summary of the changes in long-term debt and other long-term obligations of the City during the year ended December 31, 2012, are as follows: Balance Balance Due January 1, December 31, Within One 2012 Year Additions 2012 (Reductions) (Amounts in 000's) Governmental Activities General Obligation Bonds due through 2033 $ 298,660 $ 67,765 $ (57,725) $ 308,700 $ 26,150 Other Obligations: Urban Renewal Bonds due through 2018, 6.75% 4,835 (565) 4,270 600 52,975 (2,955) 50,020 3,105 (3,305) 92,380 3,730 11,665 (1,090) 10,575 1,130 40,395 (1,440) 38,955 1,505 6,531 (167) 6,364 151 11,000 (235) 10,765 240 Subordinated Income Tax Refunding Bonds due through 2024, 5.00% to 5.25% Subordinate Lien Income Tax Bonds due through 2031, 2.00% to 6.34% 80,505 15,180 Non-Tax Revenue Bonds: Stadium due through 2020, 3.50% to 5.13% Taxable Economic and Community Dev. (Core City Bonds) due through 2033, 0.15% to 5.40% Lower Euclid Ave. TIF 2003A due through 2032, 1.00% to 4.00% Annual Appropriation Bonds - Flats East Bank due through 2035, 2.60% to 6.00% Certificates of Participation-Stadium due through 2028, 1.41% to 5.70% 129,547 Capital Lease Obligations, due through 2019, 1.41% to 3.22% (5,942) Gateway Note Payable, due through 2016 123,605 5,936 6,507 12,908 (3,179) 16,236 2,899 (250) 1,000 250 Accrued wages and benefits 51,069 1,250 16,526 (19,396) 48,199 27,850 Police and fire overtime Fire deferred vacation Estimated claims payable 48,912 2,999 2,528 1,774 637 3,534 (4,962) (711) (2,290) 45,724 610 2,925 3,772 349 3,511 755,779 111,923 (104,212) 763,490 78,016 Unamortized loss on debt refunding Unamortized (discount)/premium - net Total Governmental Activities, Net (8,325) 15,602 $ 763,056 (2,387) 8,625 $ 118,161 1,203 (3,502) $ (106,511) (9,509) 20,725 $ 774,706 $ 78,016 (Continued) 83 Balance Balance Due January 1, December 31, Within One 2012 Year 2012 Additions (Reductions) (Amounts in 000's) Business-Type Activities (Enterprise Funds) Airport System Revenue Bonds: Series 2000 due through 2031, 4.00% to 5.00% $ Series 2006 due through 2024, 5.00% to 5.25% 398,445 $ $ (249,445) $ 149,000 $ 116,270 (1,245) 115,025 1,310 Series 2007B due through 2027, 4.00% to 5.00% 10,175 (530) 9,645 550 Series 2008D&F due through 2033, Variable Rate 64,925 (950) 63,975 37,075 (1,215) 35,860 1,255 190,610 (9,720) 180,890 10,290 74,385 235,150 2,880 (263,105) 863,930 16,285 7,325 7,325 Series 2009A-B due through 2027, Variable Rate Series 2009C-D due through 2027, 0.11% to 5.00% Series 2011A due through 2024, 3.00% to 5.00% 74,385 235,150 Series 2012A due through 2031, 5.00% 891,885 235,150 Public Power System Revenue Bonds: Series 1994 due through 2013, Zero Coupon 14,650 (7,325) Series 2001 refunded in 2012 15,980 (15,980) Series 2006 due through 2024, 4.25% to 5.00% 107,560 Series 2008 due through 2038, 3.00% to 5.40% 93,713 - Series 2008 Accreted Interest Payable 107,560 (910) 5,948 Series 2010 due through 2017, 3.00% to 5.00% 92,803 1,820 940 7,768 23,915 15,325 261,766 (1,815) 23,915 13,510 445 4,000 17,145 Series 2012 due through 2016, 2.00% (26,030) 252,881 12,710 Waterworks Improvement Revenue Bonds: Series G 1993 due through 2021, 5.50% 81,225 (14,365) 66,860 310 Series N 2005 due through 2023, 3.50% to 5.00% 33,045 (5,030) 28,015 5,280 Series O 2007 due through 2037, 4.25% to 5.00% 133,315 (2,705) 130,610 Series P 2007 due through 2028, 4.00% to 5.00% 119,095 (5,815) 113,280 (6,085) 71,330 Series Q 2008 due through 2033, Variable Rate 90,800 Series T 2009 due through 2021, 2.00% to 5.00% 77,415 90,800 Series U 2010 due through 2033, Variable Rate 54,935 54,935 Series V 2010 due through 2033, Variable Rate 26,495 26,495 Series W 2011 due through 2026, 2.00% to 5.00% 82,090 6,180 82,090 Series X 2012 due through 2042, 3.63% to 5.00% 44,410 76,710 Second Lien Series A 2012 due through 2027, 4.00% to 5.00% 19,330 44,410 76,710 698,415 121,120 (34,000) 785,535 31,100 115,523 963 (6,744) 109,742 7,229 Ohio Water Development Authority and Public Works Commission Loans due through 2032, 0.00% to 4.18% Parking Facilities Refunding Revenue Bonds: 34,045 (2,420) 31,625 2,520 Deferred Payment Obligation Series 2006 due through 2022, 4.00% to 5.25% 6,500 (2,990) 3,510 3,230 Accrued wages and benefits 10,400 1,112 (1,434) 10,078 7,283 1,180 (959) 221 221 2,018,534 376,670 (337,682) 2,057,522 80,578 Estmated claims payable (68,046) Unamortized (discount)/premium - net Total Business-Type Activities, Net Total Debt and Other Long-Term Obligations (8,793) 7,710 (69,129) 42,760 Unamortized loss on debt refunding 39,446 (4,682) 77,524 $ 1,993,248 $ 407,323 $ (334,654) $ 2,065,917 $ 80,578 $ 2,756,304 $ 525,484 $ (441,165) $ 2,840,623 $ 158,594 (Concluded) 84 Internal Service Funds predominantly serve the governmental funds, except the Utilities Administration Fund, which serves only business-type activity funds. Long-term liabilities for all Internal Service Funds, except the Utilities Administration Fund, are included as part of the totals for governmental activities in the government-wide statement of net position. At December 31, 2012, $1,121,460 of the Internal Service Funds, except for Utilities Administration Fund, compensated absences were included in the governmental activities accrued wages and benefits. Long-term liabilities for the Utilities Administration Fund are included as part of the totals for business-type activities in the government-wide statements. At December 31, 2012, $470,515 of the Utilities Administration Fund compensated absences were included in business-type activities accrued wages and benefits. The Subordinated Income Tax Refunding Bonds were issued to fund the City's obligation for the employer's accrued liability to the Police and Firemen's Disability and Pension Fund of the State of Ohio. All other bonds were issued to fund capital related activities. The accrued wages and benefits liability will be paid from the fund from which the employees' salaries are paid. The estimated claims payable liability will be paid from the fund that incurred the liability or from Judgment Bond proceeds. A detailed summary of principal due for General Obligation Bonds and business-type activities debt by purpose is as follows for 2012: Original Issue Amount Balance January 1, 2012 Additions (Amounts in 000's) (Reductions) Balance December 31, 2012 Governmental Activities Obligations: General Obligation Bonds Public Facilities $ Parks & Recreation 14,235 $ (40) 930 13,805 (4,330) 9,475 74,260 (22,905) 71,380 20,025 (9,770) $ 52,025 63,725 (7,535) 27,850 29,025 (12,575) 130,785 5,440 (160) 5,280 18,515 Judgments/Settlements 4,480 114,335 6,020 Revitalization 30,905 201,045 Refunding Bonds Total Governmental Activities 970 161,005 Bridges and Roadways 47,560 $ 25,760 Residential Redevelopment 101,670 $ 1,010 Convention Center 11,385 (410) 10,975 $ 578,750 $ 298,660 $ 67,765 $ (57,725) $ 308,700 $ 1,274,410 $ 891,885 $ 235,150 $ Business-Type Activities Obligations: Revenue Bonds / Notes Airports 15,325 (26,030) 245,113 748,415 171,120 (134,000) 785,535 57,520 34,045 (2,420) 31,625 151,625 112,680 (6,239) 107,404 8,378 Parking Facilities 863,930 255,818 1,131,695 Waterworks (263,105) $ 501,543 Public Power 2,843 (505) 2,338 3,125,171 $ 2,045,686 $ Loans Waterworks Water Pollution Control Total Business-Type Activities $ 85 963 422,558 $ (432,299) $ 2,035,945 The following is a summary of the City's future debt service requirements as of December 31, 2012: Governmental Activities Urban Renewal General Bonds Obligation Bonds Year Ending Principal December 31 Subordinated Interest Principal Income Tax Bonds Interest Principal Interest (Amounts in 000's) 2013 $ 26,150 $ 14,465 $ 600 $ 268 $ 6,835 $ 6,513 2014 24,985 13,378 640 226 7,165 6,334 2015 24,820 12,378 685 181 7,435 6,055 2016 24,355 11,261 730 134 7,740 5,761 2017 24,170 10,058 780 83 8,060 5,426 2018-2022 97,740 34,334 835 28 45,105 21,035 2023-2027 61,090 14,481 37,855 10,059 2028-2032 24,695 2,805 18,060 2,666 2033-2037 695 36 4,145 439 $ 308,700 $ 113,196 $ 4,270 $ 920 $ 142,400 $ 64,288 Non-Tax City Annual Certificates Revenue Bonds Year Ending Appropriation Bonds of Participation Principal December 31 Interest Principal Interest Principal Interest (Amounts in 000's) 2013 $ 2,786 $ 2,388 $ 240 $ 633 $ 5,936 $ 7,448 2014 2,895 2,275 245 626 5,890 4,397 2015 2,954 2,149 260 612 6,185 4,103 2016 3,206 2,013 275 597 6,495 3,793 2017 3,373 1,877 290 582 6,800 3,487 2018-2022 16,302 7,003 1,730 2,635 38,710 12,409 2023-2027 10,410 3,807 2,305 2,057 45,240 5,404 2028-2032 10,858 1,936 3,085 1,277 8,349 251 2033-2037 3,110 126 2,335 286 $ 55,894 $ 23,574 $ 10,765 $ 9,305 $ 123,605 $ 41,292 Capital Gateway Governmental Lease Obligations Year Ending Note Payable Activities Total Principal December 31 Interest Principal Interest Principal Interest (Amounts in 000's) 2013 $ 2,899 $ 324 $ 250 $ $ 45,696 $ 32,039 2014 2,967 256 250 45,037 27,492 2015 3,036 186 250 45,625 25,664 2016 3,108 114 250 46,159 23,673 2017 2,100 56 45,573 21,569 2018-2022 2,126 22 202,548 77,466 2023-2027 156,900 35,808 2028-2032 65,047 8,935 2033-2037 10,285 887 $ 16,236 $ 958 $ 1,000 86 $ - $ 662,870 $ 253,533 Business-Type Activities Revenue Bonds / Notes Principal Interest (Amounts in 000's) Year Ending December 31 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033-2037 2038-2042 Construction Loans Principal Interest $ 62,615 87,870 90,230 92,290 100,920 532,825 484,487 365,619 90,574 18,773 $ 86,909 86,058 82,163 77,952 73,216 290,368 177,702 85,701 39,564 7,578 $ 7,229 7,465 7,656 7,853 7,787 40,993 34,823 6,745 $ 3,710 3,475 3,230 2,981 2,725 9,761 3,245 272 $ 1,926,203 $ 1,007,211 $ 120,551 $ 29,399 Business-Type Activities Total Principal Interest Deferred Payment Obligations (Note 6) Principal Interest Year Ending December 31 (Amounts in 000's) 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033-2037 2038-2042 $ 3,230 280 $ 159 2 $ 73,074 95,615 97,886 100,143 108,707 573,818 519,310 372,364 90,574 18,773 $ 3,510 $ 161 $ 2,050,264 $ 90,778 89,535 85,393 80,933 75,941 300,129 180,947 85,973 39,564 7,578 $ 1,036,771 The schedule of minimum principal and interest payments for construction loans includes the amortization on fifteen loans provided to the Division of Water and the Division of Water Pollution Control by the Ohio Water Development Authority (OWDA) and two loans to the Division of Water Pollution Control by the Ohio Public Works Commission (OPWC). This amortization is based upon the full amount expected to be financed, regardless of whether the Division of Water and the Division of Water Pollution Control have received all the loan proceeds. Therefore, at December 31, 2012, the amount financed on these OWDA loan projects, which is reflected in the amortization schedule, less the principal payments made to date, exceeds the actual loan balances shown on the schedule of long-term debt outstanding and changes in long-term debt obligations by $10,809,000. 87 General Obligation Bonds General Obligation Bonds: General Obligation Bonds are backed by the full faith and credit of the City. Such bonds are payable from ad valorem property taxes levied within the limitations provided by law, irrespective of whether such bonds are secured by other receipts of the City in addition to such ad valorem property taxes. Under the direct debt limitation imposed by the Ohio Revised Code, the City had the capacity to issue $309,719,376 of additional unvoted debt at December 31, 2012. Effective May 22, 2012, the City issued $50,245,000 Various Purpose and Refunding General Obligation Bonds, Series 2012. From the proceeds of the bonds, $38,337,650 will be used to pay costs of various public improvements to roads and bridges, public facilities, cemeteries and parks and recreation facilities. In addition, $11,505,000 of the proceeds were used to refund $11,610,000 outstanding Series 2002, Series 2003 and Series 2004 Various Purpose General Obligation Bonds. Proceeds in the amount of $12,570,041 were placed in an irrevocable escrow account to be used to pay the principal and interest on the refunded bonds. As a result, the refunded bonds are considered to be defeased and the liability for these bonds has been removed from long-term debt. The City completed this refunding to reduce its total debt service by $704,000 and to obtain an economic gain (the difference between the present values of the old and new debt service) of $728,000 or 6.27%. On November 20, 2012, the City issued $17,520,000 Refunding General Obligation Bonds, Series 2012A to refund $17,300,000 of outstanding Series 2003 and Series 2005A General Obligation Bonds. Proceeds in the amount of $19,360,215 were placed in an irrevocable escrow account to be used to pay the debt service on the refunded bonds. Therefore, the refunded bonds are considered to be defeased and the liability for these bonds has been removed from long-term debt. The City refunded these bonds in order to achieve debt service savings which totaled $824,000 and net present value savings of $885,000 or 5.11%. Other Governmental Obligations Urban Renewal Bonds: In 1993, the City issued $10,800,000 of Urban Renewal Bonds (Rock and Roll Hall of Fame and Museum Project) for the purpose of paying a portion of the costs of the acquisition and construction of a "port authority educational and cultural facility" to conduct programs of an educational and instructional nature relating to the field of contemporary music, including rock and roll music, which constitutes the Rock and Roll Hall of Fame and Museum (the Facility). The net proceeds were contributed to the Cleveland-Cuyahoga County Port Authority which owns and leases the facility to Rock and Roll Hall of Fame and Museum, Inc., an Ohio non-profit corporation. The Rock and Roll Hall of Fame and Museum opened in September 1995. The Urban Renewal Bonds are not general obligations of the City and are not secured by the full faith and credit of the City nor are they payable from the general revenues or assets of the City. The Urban Renewal Bonds are secured solely by pledged receipts, consisting of payments to be made in lieu of real property taxes pursuant to Development Agreements between the City and certain property owners and interest income on those payments. Subordinated Income Tax Variable Rate Refunding Bonds: Effective June 1, 1994, the City issued $74,700,000 of Subordinated Income Tax Variable Rate Refunding Bonds, Series 1994. The proceeds were used to fund the City's obligation for the employer's accrued liability to the Ohio Police and Fire Pension Fund (the Fund). The principal use of the proceeds was the current refunding of the City's obligation to the Fund for the employer's accrued liability in the amount of $104,686,400, which was payable in semi-annual installments of $2,696,243 through May 15, 2035. Pursuant to Section 742.30 (C) of the Ohio Revised Code, the City and the Fund entered into an agreement that permitted the City to make a one-time payment to the Fund to extinguish the City's obligation. The payment amount of $70,493,204 was calculated by applying a 35% discount factor to the $104,686,400 accrued liability plus adding accrued interest of $2,447,044. Effective August 6, 2008, the City issued $59,960,000 Subordinate Lien Unrestricted Income Tax Bonds, Series 2008 (Police and Fire Pension Payment) to refund all the outstanding Subordinated Income Tax Variable Rate Refunding Bonds, Series 1994. The interest rate swap related to the Series 1994 Bonds was terminated by the City on July 28, 2008 and the termination payment of $4,325,000 owed to Ambac Financial Services, LLC, the swap counterparty, was paid from the proceeds of the Series 2008 Bonds. The City refunded the Series 1994 Bonds in order to address the increased interest rates incurred on the Bonds as a result of the downgrade of the bond insurer. The Bonds are not general obligations of the City and are not secured by its full faith and credit. The Series 2008 Bonds are unvoted special obligations secured by a pledge of and a lien on the unrestricted municipal income taxes 88 of the City, to the extent that such income taxes are not needed to pay debt service on the City's currently outstanding unvoted General Obligation Bonds or unvoted General Obligation Bonds issued in the future. Interest Rate Swap Transaction: Terms: On February 7, 2003, the City sold an option to JPMorgan Chase Bank (JPM) that gives JPM the right to execute an interest rate swap at its discretion at any time until the option expires on May 15, 2024 on a declining notional amount equal to the outstanding principal amount of the City's Subordinated Income Tax Variable Rate Refunding Bonds, Series 1994. The swaption is now associated with the Series 2008 Bonds. Under the swap agreement, the City will be the fixed rate receiver, receiving the fixed rate of 4.88%, and JPM will be the floating rate receiver, receiving interest on what would have been the outstanding notional amount of the original 1994 Bonds of $47,700,000 at December 31, 2012, at a rate equal to the weekly Securities Industry and Financial Markets Association (SIFMA) index. If the option is exercised, the stated termination date under the swap agreement with JPM will be May 15, 2024. The obligation of the City under the swap agreement to make periodic floating rate payments (but not any termination payment) is secured by a subordinate pledge of the income tax receipts, subordinate to the pledge of the income tax receipts made under the "General Bond Ordinance" securing the City's General Obligation Bonds. The payment of any termination payment is subordinate to the payment of debt service on the Subordinate Lien Unrestricted Income Tax Bonds, Series 2008, and the periodic floating rate payments under the swap agreement. Objective: The City entered into the swaption in order to potentially capture in the future the savings which could be derived from converting these bonds back to a variable rate if or when the option is exercised. In exchange for selling the option to JPM, the City received a premium payment of $1,700,000. Basis Risk: There is no basis risk for the City associated with this transaction with the exception of the risk inherent in all variable rate debt. If the option is exercised, the City will receive a fixed rate of 4.88% which is approximately 29 basis points less than the fixed rate being paid on the Series 2008 Bonds. This transaction would leave the City paying the weekly SIFMA rate plus 29 basis points. Counterparty Risk: The City selected JPM as a counterparty partly due to its credit strength. Over the long-term, it is possible that the credit strength of JPM could change and this event could trigger a termination payment on the part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to JPM, or by JPM to the City, depending upon the prevailing economic circumstances at the time of the termination. Fair Value: The fair value of the swaption at December 31, 2012 as reported by JPM was $239,000 which would be payable by the City. Subordinate Lien Income Tax Bonds: Effective November 29, 2012, the City issued $15,180,000 of Subordinate Lien Income Tax Bonds, Series 2012. These bonds were issued to provide funds for the construction of a new police station and city-wide communications center. Effective June 23, 2010, the City issued $27,380,000 Subordinate Lien Income Tax Bonds, Series 2010. The proceeds of the bonds will be used to pay costs of various municipal improvements including public facilities, parks and recreation, and bridges and roadways. The $5,405,000 Series 2010A-1 Bonds were issued as traditional tax-exempt debt. The City took advantage of several new financing programs created by the American Recovery and Reinvestment Act (ARRA) when issuing the remaining portion of the bonds. The $5,385,000 Series 2010A-2 Bonds were issued as taxable Build America Bonds while the $8,245,000 Series 2010B Bonds and the $8,345,000 Series 2010C Bonds were issued using the City's allocation of taxable Recovery Zone Bonds. Pursuant to these programs, the City will receive federal cash subsidies in amounts equal to a portion of the interest on these bonds. These bonds are special obligations of the City and are not general obligation debt and are not secured by a pledge of the full faith and credit of the City. The bonds are payable from the City's municipal income tax revenues to the extent those revenues are not needed to pay debt service charges on the City's unvoted general obligation debt or unvoted general obligation debt issued in the future. It is the City's intention to continue paying the debt service on these bonds and the Series 2008 Subordinate Lien Income Tax Bonds from the Restricted Income Tax collections. 89 Non-Tax Revenue Bonds - Stadium: Effective December 16, 2004, the City issued $14,835,000 Non-Tax Revenue Bonds, Series 2004 (Cleveland Stadium Project) to refund the Non-Tax Revenue Stadium Bonds, Series 1999A&B. These bonds do not represent a general obligation debt or pledge of the full faith and credit or taxing power of the City, and are payable solely from non-tax revenues of the City. Non-Tax Revenue Bonds - Economic Development Bonds Series 2003A and Series 2003B (Lower Euclid Avenue Project): In November 2003, the City issued $7,200,000 Economic Development Revenue Bonds, Series 2003A and $1,000,000 Economic Development Revenue Bonds, Series 2003B-1 for the Lower Euclid Avenue Project. In November 2004, the final $1,000,000 Economic Development Revenue Bonds, Series 2003B-2 were issued. The proceeds of these bonds were made available to the owners of certain properties on Euclid Avenue for the construction and renovation of commercial restaurant and retail facilities and the construction of a parking garage. These Tax Increment Financing (TIF) Bonds are secured by a pledge of (a) service payments in lieu of taxes received by the City from the owners of certain properties located within a tax increment financing district, (b) loan payments payable to the City and (c) by a pledge of certain non-tax revenues of the City, subject to the prior pledge by the City of such non-tax revenues to secure other obligations of the City. Currently, only the Series 2003A Bonds remain outstanding. Non-Tax Revenue Bonds - Taxable Economic and Community Development Revenue Bonds (Core City): Effective July 24, 2008, the City issued $28,160,000 Taxable Economic and Community Development Refunding Revenue Bonds, Series 2008 (Core City Fund). The proceeds of these bonds were used to refund the outstanding $26,900,000 Series 2003 Taxable Economic and Community Development Revenue Bonds, to fund a bond reserve fund and to pay the costs of issuing the bonds. The Series 2003 Bonds were refunded in order to address increased interest rates incurred on the bonds due to the collapse of the auction rate securities market. The Series 2008 Bonds, which are special obligations of the City, were issued as variable rate demand obligations secured by a letter of credit provided by Citizens Bank. Upon the expiration of the letter of credit in 2011, the City obtained a new letter of credit for the Series 2008 Bonds from PNC. The Bonds are payable from the City's non-tax revenues and net project revenues. On November 10, 2004, the City issued Taxable Economic and Community Development Revenue Bonds, Series 2004 (Core City). The Series 2004 Bonds were issued in the amount of $19,280,000 to pay the costs of certain economic and community development projects. These Series 2004 Bonds were issued as fixed rate securities and are special obligations of the City, payable from non-tax revenues and net project revenues. Annual Appropriation Bonds - Flats East Bank: On December 21, 2010, the City issued $11,000,000 City Annual Appropriation Bonds through the Cleveland-Cuyahoga County Port Authority. The proceeds of the bonds are being used to provide funds for land purchase and public improvements in the area of the Flats East Development Project. The bonds are special obligations of the Port Authority payable from appropriation payments made by the City under a cooperative agreement. The City's obligation to make payments is subject to and dependent upon annual appropriations being made by the City. The City intends to make these debt service payments from the Restricted Income Tax collections. Certificates of Participation (COPS) - Stadium: In June 1997, Certificates of Participation (COPS) in the amount of $139,345,000 were issued to assist in the construction of an open-air stadium for the play of professional football and other events. In October 1999, COPS in the amount of $20,545,000 were issued to retire then outstanding NonTax Revenue Bond Anticipation Notes. The City will make lease payments subject to annual appropriation by City Council and certification by the Director of Finance as to the availability of funds from those appropriations. These obligations do not constitute a debt or pledge of the full faith and credit of the City. Effective October 11, 2007, the City issued $108,390,000 Refunding COPS, Series 2007, to currently refund $105,800,000 of the outstanding COPS, Series 1997. These were issued as auction rate securities and the City realized $753,000 of net present value savings. A swap associated with this transaction went into effect on November 15, 2007. Due to the downgrade of the bond insurers beginning in late 2007 and the collapse of the auction rate securities market, the COPS, Series 2007 experienced failed auctions and interest rates as high as 12% in early 2008. To address these issues, the City converted all of the outstanding $108,390,000 COPS, Series 2007 Auction Rate Certificates to Weekly Rate Certificates effective May 29, 2008. The payment of principal and interest was secured by a direct-pay letter of credit provided by Wachovia Bank, National Association. 90 Effective April 22, 2010, the City issued $63,225,000 COPS, Series 2010A and $69,900,000 COPS, Series 2010B to refund all of the outstanding $108,390,000 COPS, Series 2007, upon the expiration of the Wachovia letter of credit. Proceeds of the COPS, Series 2010, were used to currently refund the COPS, Series 2007, on the day of closing, to fund a required debt service reserve fund in the amount of $8,324,045, to make a termination payment on the existing hedge agreement with UBS in the amount of $17,322,000 and to pay costs of issuing the COPS. This refunding was undertaken (1) to remove Ambac as the bond and swap insurer and eliminate the risk of early termination of the hedge agreement due to Ambac's possible insolvency, (2) to obtain lower credit enhancement costs and (3) to restructure debt service payments. The COPS, Series 2010A, were issued as fixed rate obligations. The COPS, Series 2010B, were purchased by Wells Fargo Bank, National Association, as floating rate obligations for a period of three years, the interest on which is reset weekly based on the SIFMA index plus a spread of 135 basis points. As a result of this refunding, the City achieved an economic gain (the difference between the present values of the old and new debt service) of approximately $3,461,000 or 3.19%. Capital Lease Arrangements: The City has entered into various agreements to lease equipment. Such agreements are treated as lease purchases (Capital Leases) and are classified as long-term lease obligations in the financial statements. The lease contracts contain annual one-year renewal options that can be exercised by the City if sufficient funds are appropriated by City Council. Upon the exercise of each annual one-year renewal option and satisfaction of the lease obligations related thereto, title to the equipment will pass to the City. In July 2005, the City entered into an equipment lease agreement with Chase Equipment Leasing, Inc. which allowed the City to purchase approximately $8,425,000 of heavy duty vehicles and apparatus. The City entered into another equipment lease agreement in February 2010. This lease agreement is with The Fifth Third Leasing Company and resulted in the City purchasing approximately $6,690,000 of heavy duty vehicles and apparatus. On June 30, 2011, the City entered into an equipment lease agreement with PNC Equipment Finance LLC. This enabled the City to purchase approximately $6,585,000 of vehicles and equipment for various departments, including police cars, a fire truck, waste collection equipment and ambulances. On June 5, 2012, the City entered into a $6,507,400 vehicle lease agreement with PNC Equipment Finance LLC. The funds will be used to purchase a variety of vehicles including police cars, EMS ambulances and waste collection equipment. Payments on all of these equipment leases are made over a period of seven years from issuance from the Restricted Income Tax Fund. The final payment on the 2005 lease was made in August 2012. The assets recorded by the City under Capital Leases were as follows as of December 31, 2012: Governmental Activities (Amounts in 000's) Furniture, fixtures and equipment Less - accumulated depreciation Net book value $ $ 35,325 (14,363) 20,962 Gateway Note Payable: In October 1996, the City and Cuyahoga County each agreed to pay $5,000,000 for additional costs associated with the Gateway Sports Complex. The amounts are to be repaid in annual installments of $250,000 for 20 years. The monies are deducted from the monthly distribution of the State Local Government Fund which is recorded in the City's General Fund. The first deduction was made in March 1997. 91 Accrued Wages and Benefits: Accrued wages and benefits, included in long-term obligations, consist of the noncurrent portion of vacation and sick pay benefits earned by employees of the City. The City accrues vacation and sick pay benefits when earned and future compensation is likely. Police and Fire Overtime and Deferred Vacation Pay: Uniformed employees of the Police and Fire Divisions accumulate overtime compensation in accordance with the union contracts and the requirements of the Fair Labor Standards Act. In addition, uniformed employees may defer earned vacation time, with the appropriate approvals, until retirement. The liabilities for overtime and deferred vacation time, at current pay rates including their related fringe benefits and converted to straight time hours, at December 31, 2012, follow: Overtime Deferred Vacation Hours Dollars Hours Dollars (Amounts in 000's) Division Police Fire Total 1,249 200 1,449 $ $ 39,240 6,484 45,724 $ 91 91 $ 2,925 2,925 Business-Type (Enterprise Fund) Obligations Airport System Revenue Bonds: These bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. Further, the City has assigned to the trustee all its interests in and rights to the airline use agreements under the revenue bond indenture. Effective February 23, 2012, the City issued $235,150,000 Airport System Revenue Bonds, Series 2012A. Proceeds of the bonds were used to refund the outstanding $249,445,000 Airport System Revenue Bonds, Series 2000A and to pay the costs of issuing the bonds. Net proceeds of the Series 2012A Bonds, amounts on hand in the Series 2000 interest account and an amount released from the debt service reserve fund totaling $252,378,809 were placed in an irrevocable escrow account to pay the principal and interest on the refunded bonds on March 26, 2012. As a result, the refunded bonds were defeased and the liability for the 2000A Bonds has been removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $25.1 million or an economic gain (the difference between the present values of the old and new debt service) of approximately $15.12 million or 6.06%. In June 2011, the Airport System, under its rights to optional redemption, elected to deposit cash on hand into the Series 2008G Bond Fund and into the Series 2008H Bond Fund sufficient to redeem, prior to maturity, all of the outstanding Series 2008G and Series 2008H Bonds. After taking into account the funds on hand in the respective bond funds, other available Airport funds were placed into the accounts to pay on June 22, 2011 principal in the amount of $7,425,000 on the Series 2008G Bonds and $430,000 on the Series 2008H Bonds, plus accrued interest to the redemption date. As a result, these bonds have been defeased and the liability for the bonds has been removed from long-term debt. Effective November 16, 2011, the City issued $74,385,000 Airport System Revenue Bonds, Series 2011A (NonAMT). Of this amount, $64,515,000 of the proceeds was issued to pay a portion of the costs of improvements to the Airport System, to fund deposits to the bond reserve fund and the Renewal and Replacement Fund and to pay issuance costs. The remaining $9,870,000 was used to refund a portion of the outstanding Airport System Revenue Bonds, Series 2008D in the aggregate principal amount of $9,200,000 on November 28, 2011 and to pay costs of issuing the bonds. As a result, the refunded bonds were defeased and the liability for these bonds removed from long-term debt. The City obtained an economic gain (the difference between the present values of the old and new debt service) of approximately $1.67 million as a result of the refunding. 92 Public Power System Revenue Bonds: These bonds are payable from the net revenues derived from the Public Power System and are secured by a pledge of and lien on such net revenues. Effective February 24, 2012, the City issued $15,325,000 Public Power System Revenue Refunding Bonds, Series 2012, to refund all of the outstanding $15,980,000 Public Power System Refunding Revenue Bonds, Series 2001. Net proceeds of the Series 2012 Bonds and amounts on deposit in the Series 2001 Bond Fund together totaling $16,293,627 were placed in an irrevocable trust account to pay the principal and interest on the refunded Series 2001 Bonds on March 26, 2012. As a result, the refunded bonds were defeased and the liability for these bonds has been removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $1,169,000 or an economic gain (the difference between the present values of the old and new debt service) of approximately $1,148,000 or 7.18%. These bonds were sold through a private sale to Wells Fargo Bank, National Association. Waterworks Improvement Revenue Bonds: These bonds are payable from the revenues derived from operations of the Waterworks System after the payment of all operating and maintenance expenses (net revenue) and from monies and investments on deposit in the Revenue Fund, the Debt Service Fund, the Debt Service Reserve Fund, the Contingency Fund and the Additions and Improvements Fund. Effective October 24, 2012, the City issued $44,410,000 of Senior Lien Water Revenue Bonds, Series X, 2012, and $76,710,000 of Water Revenue Bonds, Second Lien Series A, 2012. Proceeds of the Series X Bonds will be used to pay costs of improvements to the Waterworks System and to pay costs of issuing the bonds. From the proceeds of the Series A Bonds, $42,000,000 will be used to fund the final phase of the automated meter reading project while the remainder was used to refund all of the outstanding $50,000,000 Water Revenue Subordinated Notes, Series 2012, and to pay issuance costs. In conjunction with the issuance of the Water Revenue Bonds, Second Lien Series A, the City established a Subordinate Bonds indenture for the Division of Water. Bonds issued under this indenture are special obligations of the City payable solely from and secured solely by a pledge of and lien on the Subordinate Pledged Revenues and the Subordinate Pledged funds. The Subordinate Pledged Revenues generally consist of the net revenues of the Division which remain after the payment of all operating expenses and the deposit of all funds required to be made on behalf of the Senior Lien bonds. Bonds issued under this indenture are subordinate to those issued as senior lien bonds under the Division of Water's Amended and Restated Indenture. Effective October 6, 2011, the City issued $82,090,000 Water Revenue Bonds, Series W, 2011. Proceeds of these bonds were used to refund (1) the outstanding $1,940,000 Waterworks Improvement and Refunding First Mortgage Revenue Bonds, Series H, 1996, (2) the outstanding $42,865,000 Waterworks Refunding Revenue Bonds, Series J, 2001, (3) the outstanding $48,095,000 Water Revenue Bonds, Series K, 2002 and to pay issuance costs. Net proceeds of the Series W Bonds, amounts then on deposit in the Series H, J and K bond funds and an amount released from the debt service reserve fund totaling $95,349,171 were placed in an irrevocable escrow account to pay the principal and interest on the refunded bonds on January 1, 2012. As a result, the refunded bonds were defeased and the liability for these bonds removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $9,527,000 or an economic gain (the difference between the present values of the old and new debt service) of approximately $8,955,000 or 9.64%. 93 Interest Rate Swap Transactions: Series U and Series V Bonds (previously Series Q, Series R and Series S Bonds): When the Water Series R and Series S Bonds were refunded in 2010, the swap associated with these bonds was transferred to a portion of the new Series U and Series V Bonds. Terms: Simultaneously with the issuance of the City's $175,000,000 Water Revenue Bonds, Series M on August 10, 2004, the City entered into floating to fixed rate swap agreements with notional amounts equal to the total declining balance of the Series M Bonds. Bear Stearns Financial Products Inc. (Bear Stearns) (which has since been acquired by JPMorgan Chase Bank, N.A. (JPM)) was the counterparty on a two-thirds pro-rata share of the transaction and Morgan Stanley Capital Services Inc. (Morgan Stanley) is the counterparty on a one-third pro-rata share of the transaction. Under the original swap agreements for the Series M Bonds, the Water System was the fixed rate payor, paying a fixed rate of 3.533%. Each counterparty was a floating rate payor, with each paying the Water System 61.25% of one month LIBOR plus a spread of 28 basis points. Net payments were exchanged semiannually on January 1 and July 1. The obligation of the Water System to make periodic payments (but not any termination payment) was secured by a pledge of and lien on the net revenues of the Water System on a parity with the pledge and lien securing the payment of debt service on the bonds. Both the bond debt service payments on the Series M Bonds and the periodic swap payments were insured by Financial Security Assurance (FSA). As part of the refunding of the Series M Bonds, the City amended and restated the original swap agreements to (a) eliminate the swap insurance and related insurer rights, (b) modify the payment frequency, (c) transfer the original swap agreement from Bear Stearns to JPM and (d) split each original swap agreement into two separate interest rate swaps in order to hedge separate series of bonds. The original Bear Stearns swap which has been assumed by JPM hedged the entire principal amount of Series R and certain maturities of the Series Q Bonds. The original Morgan Stanley swap hedged the entire principal amount of Series S and a portion of the Series Q Bonds. The floating rate received by the City was not altered. However, the fixed rate paid by the City was adjusted to 3.553% for the JPM swap and 3.5975% for the Morgan Stanley swap. The termination date for the swaps associated with Series Q is January 1, 2021 while the termination date for the Series R and Series S swaps is January 1, 2033. Net payments are now exchanged monthly. With the refunding of the Series R and Series S Bonds, the JPM swap now hedges all but $200,000 of the Series U Bonds and the Morgan Stanley swap hedges all but $200,000 of the Series V Bonds. Objective: The City entered into the swaps in order to maximize the savings associated with the refunding of the bonds. The actual savings to be realized by Water System will depend upon the payments made on the variable rate bonds and the payments received under the swap agreement. Basis Risk: By entering into swaps based upon the 30 day LIBOR rate of interest, the City has undertaken basis risk associated with a change in tax rates and structure. While the average relationship between SIFMA (tax-exempt) and LIBOR (taxable) interest rates has been 67%, this relationship may not always apply. If the payments received from the counterparties are less than the amount paid on the variable rate bonds, the Water System must make up the difference in addition to paying the fixed rate resulting from the swap. As a result of the turmoil in the financial markets since 2008, the SIFMA/LIBOR ratio was significantly higher than 67% for periods of time. In addition, a reduction in federal income tax rates might increase the percentage relationship between SIFMA and LIBOR and may potentially increase the cost of financing. Counterparty Risk: The City selected highly rated counterparties in order to minimize this risk. However, in the wake of the sub-prime mortgage crisis, Bear Stearns was acquired by JPM. The portion of the City's swap with Bear Stearns as the counterparty has been assumed by JPM. Over the long-term it is possible that the credit strength of JPM and/or Morgan Stanley could change and this event could trigger a termination payment on part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to JPM and Morgan Stanley or by JPM and Morgan Stanley to the City, depending upon the prevailing economic circumstances at the time of the termination. Fair Value: The fair value of the swaps (including accrued amounts) at December 31, 2012 as reported by JPM and Morgan Stanley totaled $27,699,000, which would be payable by the City. Short-term Obligation: On July 24, 2012, the City issued $50,000,000 Subordinate Lien Water Revenue Notes, Series 2012. Proceeds of the notes were used to retire the $50,000,000 Subordinate Lien Water Revenue Notes issued in 2011. The Series 2012 Notes were subsequently redeemed on November 1, 2012 from the proceeds of the Second Lien Series A, 2012, Bonds. The original notes, which were issued in 2010, provided a portion of the funds needed for a new automated meter reading system for the Division of Water. At the end of 2012, the Division of Water no longer had any notes outstanding. 94 Balance January 1, 2012 Balance December 31, 2012 Increase Decrease (In thousands) Water Revenue Notes: Subordinate Lien Revenue Notes, Series 2011 $ $ 50,000 Subordinate Lien Revenue Notes, Series 2012 Total revenue notes $ (50,000) 50,000 (50,000) $ 50,000 $ 50,000 $ (100,000) $ - $ - Ohio Water Development Authority and Ohio Public Works Commission Loans: These loans are payable from net revenues derived from the Water and Water Pollution Control Systems. These obligations do not have a lien on revenues of the Divisions. In 2012, Water expended an additional $817,479 out of $8,304,000 for the Baldwin Residuals and Fairmount Reservoir and $145,916 out of an anticipated $10,954,516 for the Crown Waterworks Chemical Project. Parking Facilities Revenue Bonds: These bonds are payable from net revenues generated from certain parking facilities and other operating revenues of the Division of Parking Facilities, including parking meter revenue. In addition, the City has pledged other non-tax revenue to meet debt service requirements. The City has pledged and assigned to the trustee a first lien on pledged revenues consisting of fines and penalties collected as a result of the violation of municipal parking ordinances and fines, waivers and costs relating to citations for misdemeanor offenses and the special funds as defined within the bond indenture. Effective October 6, 2011, the City completed the sale of the City-owned Gateway North Parking Garage to Rock Ohio Caesars Gateway LLC. The garage is being used by the purchaser in conjunction with a new casino constructed in the Higbee Building adjacent to the garage. The net proceeds of the sale of the garage received by the City totaled $20,915,504. Of this amount, $19,578,288 was placed into an irrevocable escrow fund, along with $1,967,425 released from the debt service reserve fund as a result of the transaction, to be used to pay the principal and interest as it comes due on $16,145,000 Parking Facilities Refunding Revenue Bonds, Series 2006. As a result, these bonds are considered to be defeased and the liability for the bonds has been removed from long-term debt. In addition, $480,000 of the sale proceeds was used to terminate the portion of an existing basis swap which was associated with the bonds being defeased. Sale proceeds were also utilized to pay costs of the transaction. As a result of this transaction, the City expects to save approximately $600,000 annually through 2022. Effective August 15, 2006, the City issued $57,520,000 of Parking Facilities Refunding Revenue Bonds, Series 2006. The bonds were issued to currently refund $56,300,000 of the outstanding Parking Facilities Refunding Revenue Bonds, Series 1996. In addition, proceeds were also used to fund a portion of a payment owed by the City upon early termination under an interest rate swaption agreement entered into in 2003. At the time of the issuance of the Series 2006 Bonds, the City entered into a basis swap agreement with UBS which is described below. Interest Rate Swap Transaction: Terms: Simultaneously with the issuance of the City's $57,520,000 Parking Facilities Refunding Revenue Bonds, Series 2006 on August 15, 2006, the City entered into a floating-to-floating rate basis swap agreement with a notional amount equal to the total declining balance of the Series 2006 Bonds. UBS is the counterparty on the transaction. Under the swap agreement for the Series 2006 Bonds, the City is the floating rate payor, paying a floating rate based on the SIFMA index. The counterparty is also a floating rate payor, paying the City 67% of one month LIBOR. The City also received an upfront payment in the amount of $1,606,000. Net payments are exchanged semi-annually each March 15 and September 15. The obligation of the City to make periodic payments (but not any termination payment) is secured by a pledge of and lien on the parking revenues and additional pledged revenues as defined in the trust indenture securing the Parking Facilities Refunding Revenue Bonds, Series 2006, on parity with the pledge and lien securing the payment of debt service on the bonds. 95 Objective: The City entered into the swap in order to maximize the savings associated with the refunding of the bonds and to reduce the City's risk exposure. The actual overall savings to be realized by the City will depend upon the net payments received under the swap agreement. Basis Risk: By entering into a swap based upon the 30 day LIBOR rate of interest, the City has undertaken basis risk associated with a change in tax rates and structure. While the average relationship between the SIFMA (tax-exempt) and LIBOR (taxable) interest rates has been 67%, this relationship may not always apply. Since late 2008, this relationship has been significantly higher for various periods of time due to the disruptions in the financial markets. The payments received from the counterparty may be less than the amount owed to the counterparty, resulting in a net increase in debt service. In addition, a reduction in federal income tax rates might increase the percentage relationship between SIFMA and LIBOR and may potentially increase the cost of the financing. Counterparty Risk: The City selected a highly rated counterparty in order to minimize this risk. However, over the long-term it is possible that the credit strength of UBS could change and this event could trigger a termination payment on part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to UBS or by UBS to the City, depending upon the prevailing economic circumstances at the time of the termination. The City obtained insurance to mitigate much of the risk associated with termination due to the event of a downgrade of the City's bond rating. An amount due by the City to UBS upon early termination of the agreement is insured by FSA (now Assured Guaranty Municipal Corp.) up to a maximum amount of $8,000,000. Fair Value: The fair value of the swap at December 31, 2012 as reported by UBS totaled $365,000, which would be payable by the City. Debt Covenants: The Enterprise Funds' bond agreements have certain restrictive covenants and principally require that bond reserve funds be maintained and that fees charged to customers be in sufficient amounts, as defined, to satisfy the obligations under the indenture agreements. In addition, special provisions exist regarding covenant violations, redemption of principal and maintenance of properties in good condition. Defeasance of Debt The City has defeased certain debt by placing cash or the proceeds of new bonds in irrevocable trusts to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and defeased bonds are not recorded in the City's financial statements. The aggregate amount of defeased debt outstanding at December 31, 2012 is as follows: Bond Issue Waterworks Improvement Bonds: Series O, 2007 Series P, 2007 (Amounts in 000's) $ Bond Issue Unvoted Tax Supported GO: Series 2003 Series 2004 Series 2005A 2,825 6,075 96 (Amounts in 000's) $ 36,445 9,235 13,275 Airport Special Facilities Revenue Bonds Airport Special Revenue Bonds, Series 1990, totaling $76,320,000 were issued to finance the acquisition and construction of a terminal, hangar and other support facilities leased to Continental Airlines at Cleveland Hopkins International Airport. These bonds were refunded in 1999 by the issuance of Airport Special Revenue Refunding Bonds, Series 1999 totaling $71,440,000. Additional Airport Special Revenue Bonds, Series 1998, totaling $75,120,000, were issued in 1998 to finance the design and construction of certain airport facilities leased to Continental Airlines, including a new regional jet concourse. Because principal and interest on these bonds are unconditionally guaranteed by Continental Airlines and paid directly by Continental Airlines, these bonds do not constitute a debt, liability or general obligation of the City or a pledge of the City's revenues. As such, no liabilities relating to these bonds are included in the accompanying financial statements. Pledges of Future Revenues The City has pledged future airport revenues to repay $863,930,000 in various Airport System Revenue Bonds issued in various years since 2001. Proceeds from the bonds provided financing for airport operations. The bonds are payable from airport net revenues and are payable through 2033. Annual principal and interest payments on the bonds are expected to require less than 61% of net revenues. The total principal and interest remaining to be paid on the various Airport System Revenue Bonds is $1,320,472,000. Principal and interest paid for the current year and total net revenues (including other available funds) were $50,051,000 and $83,175,000, respectively. The City has pledged future power system revenues, net of specified operating expenses, to repay $245,113,000 in various Public Power System Revenue Bonds issued in various years since 1994. Proceeds from the bonds provided financing for Public Power System improvements. The bonds are payable from Public Power System net revenues and are payable through 2038. Annual principal and interest payments on the bonds are expected to require less than 70% of net revenues. The total principal and interest remaining to be paid on the various Power System Revenue Bonds is $405,846,000. Principal and interest paid for the current year and total net revenues were $19,796,000 and $28,320,000, respectively. The City has pledged future Water System revenues, net of specified operating expenses, to repay $785,535,000 in various Senior Lien Water Revenue Bonds and Subordinate Lien Bonds issued in various years since 1993. Proceeds from the bonds provided financing for Water System improvements. The bonds are payable from Water System net revenues and are payable through 2042. Annual principal and interest payments on the bonds are expected to require less than 46% of net revenues. The total principal and interest remaining to be paid on the various Senior and Subordinate Lien Water Revenue Bonds is $1,165,786,000. Principal and interest paid for the current year and total net revenues were $60,856,000 and $133,119,000, respectively. The City has pledged future revenues from certain parking facilities, net of specified operating expenses, and other operating revenues to repay $31,625,000 in Parking Facilities Refunding Revenue Bonds issued in 2006. Proceeds from the bonds initially issued provided financing for the construction of parking facilities. The bonds are payable from parking facilities net revenues and are payable through 2022. Annual principal and interest payments on the bonds are expected to require the full amount of net pledged revenues. The total principal and interest remaining to be paid on the Parking Facilities Revenue Bonds is $41,310,000. Principal and interest paid for the current year (including net swap payments) and total net revenues were $4,125,000 and $4,148,000 respectively. In 2012, no additional pledged revenue was required to meet the debt service on the Parking Facilities Refunding Revenue Bonds. The trust indenture requires, among other things, that the Division will fix parking rates and will charge and collect fees for the use of the parking facilities and will restrict operating expenses. As of December 31, 2012, the Division of Parking Facilities was in compliance with the terms and requirements of the trust indenture. Derivative Instruments Derivative instruments are contracts, the value of which depends on, or derives from, the value of an underlying asset, index or rate. The most common types of derivatives used by governments are interest rate swaps and interest rate locks. The City has entered into various derivative or hedging agreements since 1999. A detailed description of each outstanding derivative, including its terms, objectives, risks and fair value, can be found in the section discussing the bonds to which the derivative relates. 97 The table below presents the fair value balances and notional amounts of the City's derivative instruments outstanding at December 31, 2012, classified by type, and the changes in fair value of these derivatives during fiscal year 2012 as reported in the 2012 financial statements. The fair values of the interest rate swaps, which reflect the prevailing interest rate environment at December 31, 2012 and the specific terms and conditions of each swap, have been provided by the respective counterparty for each swap and confirmed by the City's financial advisor. Changes in Fair Value Classification Amount Investment Derivatives: Governmental Activities: Fixed to floating interest rate swap 2003 Subordinated Income Tax Swaption Business-Type Activities: Floating to floating interest rate swap 2006 Parking Basis Swap Hedging Derivatives: Floating to fixed interest rate swaps 2008 Q Water Swap 2010 U Water Swap 2010 V Water Swap Investment Revenue $ Investment Revenue Deferred inflow Deferred outflow Deferred outflow Fair Value at December 31, 2012 Classification Amount Notional (Amounts in 000's) 203 (a) Investment 417 (a) Investment 592 (192) (144) $ Debt Debt Debt (239) $ 47,700 (365) 31,625 (9,569) (12,096) (6,034) 76,375 54,735 26,295 (a) These were reclassified from hedging derivatives to investment derivatives in 2011 due to the City's determination that the derivatives were not effectively hedged. Therefore the revenue recognized in 2012 was $203,000 for governmental activities and $417,000 for business-type activities. The table below presents the objective and significant terms of the City's derivative instruments at December 31, 2012, along with the credit rating of each swap counterparty. $ Notional Amount 47,700,000 Effective Date 2/7/2003 Hedge of changes in cash flow on the Series Q Water System Bonds $ 50,190,000 8/10/2004 1/1/2021 Pay 3.553%, receive 61.25% of LIBOR + 28 bps Aa3/A+/A+ Pay Fixed Interest Rate Swap Hedge of changes in cash flow on the Series Q Water System Bonds $ 26,185,000 8/10/2004 1/1/2021 Pay 3.5975%, receive 61.25% of LIBOR + 28 bps Baa1/A /A Water Series U Pay Fixed Interest Rate Swap Hedge in changes in cash flow on the Series U Water System Bonds $ 54,735,000 2/12/2009 1/1/2033 Pay 3.553%, receive 61.25% of LIBOR + 28 bps Aa3/A+/A+ Water Series V Pay Fixed Interest Rate Swap Hedge in changes in cash flow on the Series V Water System Bonds $ 26,295,000 2/12/2009 1/1/2033 Pay 3.5975%, receive 61.25% of LIBOR + 28 bps Baa1/A /A Basis Swap Pay Floating/Receive Floating Exchange floating rate payments on Series 2006 Parking System Bonds $ 31,625,000 8/15/2006 Bonds Subordinated Income Tax Bonds Type Receive Fixed Interest Rate Swaption Objective Hedge of changes in fair value of Series 1994 Subordinated Income Tax Bonds Water Series Q Pay Fixed Interest Rate Swap Water Series Q 2006 Parking Bonds 98 Maturity Date Terms 5/15/2024 If option is exercised, Receive 4.88%, pay SIFMA 9/15/2022 Pay SIFMA, receive 67% of LIBOR Counterparty Credit Rating Aa3/A+/A+ A2/A/A The following table presents the aggregate debt service requirements on the City's hedged debt and net receipts/payments on the associated hedging derivative instruments as of December 31, 2012. These amounts assume that the interest rates on variable rate bonds and the reference rates in existence as of December 31, 2012 remain the same for the life of the hedging agreement. However, these rates will vary over time and the actual interest payments on the variable rate bonds and the net receipts/payments on the hedging derivative instruments will deviate from the numbers presented below. Aggregate Cash Flows on Hedging Derivative Instruments Fiscal Year Ending Hedging Principal December 31 Interest Derivatives, Net Total (Amounts in 000's) 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033 $ Total $ $ 17,000 81,415 61,730 12,085 172,230 800 800 799 801 800 3,850 1,491 274 2 9,617 $ $ $ 4,786 4,522 4,244 4,186 4,147 14,804 3,712 257 1 40,659 $ $ 5,586 5,322 5,043 4,987 4,947 35,654 86,618 62,261 12,088 222,506 NOTE 6 - DEFERRED PAYMENT OBLIGATION / I-X CENTER In January 1999, the City purchased the International Exposition (I-X) Center and the land on and around it for $66.5 million as part of its master plan to expand Cleveland Hopkins International Airport. As part of the purchase agreement, the City leased the building back to the former owner for 15 years, after which the City may demolish the building to make way for airport development. Of the $66.5 million purchase price, $36.5 million was paid in cash in 1999. The remaining $30 million, including interest at 7.75%, is being deferred by the seller and will be offset by future lease payments owed to the City over the 15 year lease period. The future lease payments are equal to the remaining purchase price plus interest at 7.75%, and as such, no cash will be exchanged between the City and the lessee over the term of the lease. The deferred payment is reported as "Deferred Payment Obligation" in the accompanying proprietary funds statement of net position. In the event that either a similar facility is developed that exceeds a specified size, or there is an expansion of an existing facility that exceeds a specified size within the municipal boundary of the City of Cleveland, the lessee has the right to terminate the lease. Such termination would require the City to pay the lessee the remaining portion of the deferred purchase price. Rental income recognized by the City under this agreement totaled $3,389,000 in 2012. Of this amount $399,000 was offset against interest expense and $2,990,000 was offset against the principal balance of the deferred obligation. 99 NOTE 7 - RISK MANAGEMENT Self Insurance: The City is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City does not carry commercial insurance for such risks, except for certain proprietary funds and the football stadium. In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported (IBNRs). Claims that meet this criteria are reported as liabilities of either governmental or business-type activities in the government-wide statement of net position. In the fund financial statements, claims liabilities that relate to proprietary funds are reported. The current portion of claims is reported as a fund liability in governmental funds; however, the long-term portion of claims liabilities is not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs) and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Changes in the estimated claims payable for all funds during the years ended December 31, 2012 and 2011 were as follows: 2012 2011 (Amounts in 000's) Estimated claims payable, January 1 Current year claims (including IBNRs) and changes in estimates Claim payments $ Estimated claims payable, December 31 $ 2,528 $ 4,713 (3,248) 3,993 4,000 986 (2,458) $ 2,528 The estimated claims liabilities are based on the estimated cost of settling claims (including incremental claim adjustment expenses) through a case-by-case review of all outstanding claims and by using historical experience. Claims payable are included as accounts payable on the modified accrual financial statements and are reclassed to long-term obligations as due with one year or due in more than one year on the Statement of Net Position. Insurance: Certain proprietary funds carry insurance to cover particular liability risks and property protection. Otherwise, the City is generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012. There was no significant decrease in any insurance coverage in 2012. In addition, there were no insurance settlements in excess of insurance coverage during the past three years. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. In January of 2003, the City exercised the option of retrospective rating as the premium rating mechanism for its workers' compensation program. The total estimated claims liability outstanding at December 31, 2012 was $21,786,771. Of this amount, $7,869,615 was recorded as a fund liability within each respective fund. The remaining $13,917,156 is due in future years and is recorded as a liability in the Workers' Compensation Reserve Internal Service Fund. This liability is funded by charging the appropriate funds their proportionate share of this liability and recording the associated due to or due from as appropriate. 100 NOTE 8 - CONTINGENCIES General Contingencies: Various claims and lawsuits are pending against the City. In accordance with GASB Statement No. 10, those claims which are considered "probable" are accrued (see Note 7 - Risk Management), while those claims that are considered "reasonably possible" are disclosed but not accrued. As of December 31, 2012, the City had $6,500,000 in claims for which an unfavorable outcome is deemed to be reasonably possible. These estimates were based on a case-by-case review of outstanding claims by the City's in-house legal department. Contingent Liabilities: In November 2009, participants in the American Municipal Power Generating Station (AMP) voted to terminate development of the 1,000 MW coal-fired generating station that was to be located on the Ohio River in Meigs County, Ohio. The City was one of 81 member participants in the project and had committed to receive an 80 MW share of the project's output. AMP has instituted litigation against the EPC contractor to recover costs incurred as a result of the project's cancellation. The City and the other members participated in the project through "take or pay" contracts with AMP and are obligated to pay for the project's sunk costs based on each member's allocation. The City's share of the incurred project costs is $13,556,845 plus interest of $79,704. AMP anticipates that any such costs that are not recovered through participation in a replacement project will be financed by AMP and recovered from the AMP participants over a period of time yet to be determined. AMP has rolled over a portion of the Meigs County facility cost into the Fremont Energy Center (Fremont), a new natural gas generating station that AMP purchased in July 2011. AMP has provided the Division a Development Cost Credit of $6,281,771. These credits cut the Division's risk of loss in half. None of these credits have been recorded in the City's financial statements through December 31, 2012. Cleveland City Council passed legislation in 2011 allowing the City to pass through 50% of any costs that are determined to be the responsibility of the customers in their monthly electricity bills over time. Through this legislation, the Division will purchase power from the Fremont project, pay about half of its allocable share in AMP costs as power costs purchased from Fremont and include the costs in bills to customers over time. The legislation directs the City to pay its remaining share of the costs due to AMP, estimated at $3,677,390, from operating funds over a period of time yet to be determined. The City has not paid any monies to AMP towards the project's sunk costs. Furthermore, the City has not reported the stranded costs in the financial statements as the City's communication received from AMP to date is that the actual amount of incurred costs that are not recoverable from the vendor is undeterminable. Contingencies Under Grant Programs: The City participates in a number of federally assisted Investment Act Grant Programs, principal of which are Community Development Block Grants, Home Weatherization Assistance, the Healthy Start Initiative, Federal HOME Program, Youth Opportunity Area Grant, Workforce Investment Act Grant, Empowerment Zone and Federal Aviation Administration Airport Improvement Grant Programs. These programs are subject to financial and compliance audits by the grantors or their representatives. In addition to the federally assisted Investment Act Grant Programs, the City received a portion of the American Recovery and Reinvestment Act (ARRA) funds. These funds were funded through existing programs. The ARRA funds are subject to financial and compliance audits by the grantor or their representative and are subject to availability. HUD Office of the Inspector General has issued three findings against the City regarding the Afford-A-Home program. The City has contested and appealed two of the findings and is in the process of reviewing the third. 101 NOTE 9 - INTERFUND TRANSACTIONS AND BALANCES Interfund Transactions: During the course of normal operations, the City records numerous transactions between funds including expenditures and transfers of resources to provide services, subsidize operations and service debt. The City has the following types of transactions among funds: (1) Reciprocal interfund services provided and used - Purchases and sales of goods and services between funds for a price approximating their external exchange value. (2) Nonreciprocal interfund transfers - Flows of assets between funds without equivalent flows of assets in return and without a requirement for repayment. This includes transfers to subsidize various funds. (3) Nonreciprocal interfund reimbursements - Repayments from the funds responsible for particular expenditures or expenses to the funds that initially paid for them. For the year ended December 31, 2012, transfers consisted of the following: Transfers In Transfers Out General Fund Total Other Governmental Funds Total Governmental Funds Enterprise Funds Internal Service Funds (Amounts in 000's) Governmental Funds: General Other Governmental Total Governmental Funds Total $ 16,941 45,204 $ 3,602 3,602 62,145 $ 62,145 $ $ 14,626 41,602 56,228 3,602 $ 56,228 102 $ $ 1,589 59,830 $ 14,626 45,204 1,589 59,830 $ 1,589 $ 726 726 $ 726 Interfund Balances: Interfund balances at December 31, 2012 represent charges for services or reimbursable expenses. These remaining balances resulted from the time lag between the dates that (1) interfund goods or services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting records and (3) payments between funds are made. All are expected to be paid within one year. Interfund receivable and payable balances as of December 31, 2012 are as follows: Due From Due To Governmental Funds: General Other Governmental Total Governmental Enterprise Funds: Division of Water Cleveland Public Power Department of Port Control Other Enterprise Total Enterprise General Fund Total $ 6,109 15,183 Other Governmental Funds $ $ Total Governmental Funds $ 1,013 12,451 2,630 4,499 11 5 18 1,412 11,584 269 92 13,464 Division Cleveland of Public Water Power Fund Fund (Amounts in 000's) $ 9 153 $ 1,317 894 Department of Port Control Fund Other Enterprise Funds Total Enterprise Funds $ $ $ 34 32 69 1,392 1,116 Internal Service Funds $ 4,717 603 $ 21,292 $ 3 29 5 3,856 1,008 269 95 10,644 205 8 1,213 3,864 1,388 630 17 71 227 1 244 10,716 899 773 6 4 10 191 546 $ 18,555 $ 20,125 Internal Service Funds 204 3 Total Due To/Due From $ 41,621 $ 1,393 3 $ 12,472 $ 13,865 $ 14,662 $ 3,313 $ 34 $ $ 9,201 NOTE 10 - INCOME TAXES During 2012, the City income tax rate remained at 2% and the credit provided to City residents for income taxes paid to other municipalities remained at 50% and the maximum credit is limited to 1%. A portion of the City income tax is restricted in its use to capital expenditures and debt service and is included in the Restricted Income Tax Special Revenue Fund. All other income tax proceeds are included in the General Fund. Employers within the City are required to withhold income taxes on employee compensation and remit withholdings to the City at least quarterly. Corporations and other individual taxpayers are required to pay their estimated tax quarterly and file a declaration annually. 103 NOTE 11 - PROPERTY TAXES Property taxes include amounts levied against all real and public utility property located in the City. The 2012 levy was based upon an assessed valuation of approximately $5.631 billion. Ohio law prohibits taxation of property from all taxing authorities in excess of 10 mills of assessed value without a vote of the people. Under current procedures, the City's share is 4.4 mills, of which 4.35 mills is dedicated to debt service and .05 mills is dedicated to the payment of fire pension obligations. A revaluation of all property is required to be completed no less than every six years, with a statistical update every third year. The last reappraisal was completed in 2012. Assessed values are established by the Cuyahoga County (County) Auditor. The County Treasurer collects property taxes on behalf of all taxing districts in the County including the City. Real property taxes, excluding public utility property, are assessed at 35% of appraised market value. Pertinent real property tax dates are: Collection Dates January 24 and July 10 of the current year Lien Date January 1 of the year preceding the collection year Levy Date October 1 of the year preceding the collection year An electric company's taxable utility production equipment is assessed at 25% of true value, while all of its other taxable property is assessed at 88% of true value. Pertinent public utility tangible personal property tax dates are: Collection Dates January 20 and June 20 of the current year Lien Date December 31 of the second year preceding the collection year Levy Date October 1 of the year preceding the collection year 104 NOTE 12 - DEFERRED AND UNEARNED REVENUE Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not all eligibility requirements have been met as unearned revenue. As of December 31, 2012, the various components of deferred revenue reported in the governmental funds on the modified accrual approach were as follows: Eligibility Requirements Unavailable Not Met (Amounts in 000's) Total Governmental Funds: General Fund: Income taxes receivable $ Property taxes receivable 15,503 $ $ 15,503 56,525 Estate tax receivable Homestead rollback 56,525 8,241 307 3,413 Local government receivable 8,241 307 3,413 146 146 Special assessments receivable Other taxes receivable 3,246 3,246 1,736 576 2,312 Total General Fund 89,117 576 89,693 Emergency medical service receivable Other Governmental Funds: Income taxes receivable 1,938 Special assessments receivable 6,817 6,817 29,447 29,447 8,147 Property taxes receivable 1,938 8,147 Advances received under grants Motor vehicle taxes receivable 1,327 1,327 Municipal gas tax receivable 1,015 1,015 State gasoline tax receivable 1,996 1,778 1,996 1,778 Homestead rollback 119 Grant receivable Other taxes receivable 121 298 298 4,767 Due from other governments 4,767 8,149 49,502 Total Other Governmental Funds Total Deferred and Unearned Revenue 2 $ 138,619 $ 8,725 57,651 $ 147,344 NOTE 13 - DEFINED BENEFIT PENSION PLANS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the MemberDirected Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 3) The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. 105 OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 432154642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The City's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $25,369,016, $25,558,982 and $25,698,844 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27, and it is effective for employer fiscal years beginning after June 15, 2014. Ohio Police and Fire Pension Fund: The City contributes to the Ohio Police and Fire Pension Fund (OP&F), a cost-sharing multiple-employer defined benefit pension plan. OP&F provides retirement and disability pension benefits, annual cost-of-living adjustments and death benefits to plan members and beneficiaries. Benefit provisions are established by the Ohio State Legislature and are codified in Chapter 742 of the Ohio Revised Code. OP&F issues a publicly available financial report that includes financial information and required supplementary information for the plan. That report may be obtained by writing to the OP&F, 140 East Town Street, Columbus, Ohio 43215-5164. Plan members are required to contribute 10.00% of their annual covered salary, while the City is required to contribute 19.50% for police officers and 24.00% for firefighters. The City's contributions to the OP&F for the years ended December 31, 2012, 2011 and 2010 were $22,183,185, $22,213,372 and $22,678,219, respectively. The required payments due in 2012, 2011 and 2010 have been made. NOTE 14 - OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a costsharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-and-service retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 432154642, or by calling (614) 222-5601 or (800) 222-7377. 106 The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The City's actual contributions to OPERS to fund postemployment benefits were $10,146,896 in 2012, $10,222,877 in 2011 and $14,648,933 in 2010. The required payments due in 2012, 2011 and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. Ohio Police and Fire Pension Fund: The City contributes to the OP&F sponsored health care program; a costsharing multiple-employer defined postemployment health care plan administered by OP&F. OP&F provides health care benefits including coverage for medical, prescription drugs, dental, vision, Medicare Part B Premium and longterm care to retirees, qualifying benefit recipients and their eligible dependents. OP&F provides access to postretirement health care coverage for any person who receives or is eligible to receive a monthly service, disability, or survivor benefit check or is a spouse or eligible dependent child of such person. The health care coverage provided by OP&F meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code allows, but does not mandate OP&F to provide OPEB benefits. Authority for the OP&F Board of Trustees to provide health care coverage to eligible participants and to establish and amend benefits are codified in Chapter 742 of the Ohio Revised Code. OP&F issues a publicly available financial report that includes financial information and required supplementary information for the Plan. That report may be obtained by writing to the OP&F, 140 East Town Street, Columbus, Ohio 43215-5164. That report is also available on OP&F's website at www.op-f.org. The Ohio Revised Code provides for contribution requirements of the participating employers and plan members to the OP&F (defined benefit pension plan). Participating employers are required to contribute to the pension plan at rates expressed as percentages of the payroll of active pension plan members, currently 19.50% of covered payroll for police and 24.00% of covered payroll for firefighters. The Ohio Revised Code states that the employer contribution may not exceed 19.50% of covered payroll for police and 24.00% of covered payroll for firefighters. Active members do not make contributions to the OPEB Plan. OP&F maintains funds for health care in two separate accounts. One for health care benefits under an IRS Code Section 115 trust and one for Medicare Part B reimbursements administrated as an Internal Revenue Code 401(h) account, both of which are within the defined benefit pension plan, under the authority granted by the Ohio Revised Code to the OP&F Board of Trustees. The Board of Trustees is authorized to allocate a portion of the total employer contributions made into the pension plan to the Section 115 trust and the Section 401(h) account as the employer contribution for retiree health care benefits. For the year ended December 31, 2012, the employer contribution allocated to the health care plan was 6.75% of covered payroll. The amount of employer contributions allocated to the health care plan each year is subject to the Trustees' primary responsibility to ensure that pension benefits are adequately funded and is limited by provisions of Sections 115 and 401(h). The OP&F Board of Trustees is authorized to establish requirements for contributions to the health care plan by retirees and their eligible dependents, or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The City's contribution to OP&F that was allocated to the health care plan was $10,424,190 for the year ending December 31, 2012, $10,399,050 for 2011 and $10,615,539 for 2010. The required payments due in 2012, 2011 and 2010 have been made. 107 NOTE 15 - CAPITAL ASSETS Capital asset activity for the year ended December 31, 2012 was as follows: Balance January 1, 2012 Balance December 31, 2012 Additions Reductions (Amount in 000's) Governmental Activities: Capital assets, not being depreciated: Land $ Construction in progress 66,188 88,129 $ 52,542 (25,291) 66,188 115,380 52,542 154,317 Total capital assets, not being depreciated $ $ (25,291) 181,568 Capital assets, being depreciated: Land improvements 147,772 9,779 157,551 Buildings, structures and improvements 618,625 4,157 622,782 Furniture, fixtures, equipment and vehicles 186,519 543,908 12,031 16,690 (7,321) (1,134) 191,229 559,464 1,496,824 42,657 (8,455) 1,531,026 Infrastructure Total capital assets, being depreciated Less accumulated depreciation for: Land improvements (95,850) (5,492) (101,342) Buildings, structures and improvements (278,670) (14,295) (292,965) Furniture, fixtures, equipment and vehicles (136,106) (224,772) (13,709) (20,692) 5,374 1,080 (144,441) (244,384) (735,398) (54,188) 6,454 (783,132) 761,426 (11,531) (2,001) 747,894 (27,292) $ 929,462 Infrastructure Total accumulated depreciation Total capital assets being depreciated, net $ 915,743 Governmental activities capital assets, net $ Balance January 1, 2012 Business-Type Activities: Capital assets, not being depreciated: Land Construction in progress $ Restatement $ 570,253 Total capital assets, not being depreciated Capital assets, being depreciated: Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Infrastructure $ Additions (Amount in 000's) $ 386 118,749 (204,397) 191,898 293,093 (204,397) 484,991 173,085 23,972 32,308 19,105 (1,489) (421) (5,419) 97,735 2,130,840 700,400 731,493 975,801 248,470 (7,329) 4,636,269 (1,811) (63,638) (14,319) (36,956) (41,059) 1,489 421 5,319 (46,304) (596,176) (383,487) (583,275) (456,312) 7,229 (2,065,554) (74,113) (74,113) (157,783) 2,315,167 164,961 90,687 2,885,420 $ 119,135 (1,840,887) $ $ 239,074 (44,493) (459,914) (369,589) (551,638) (415,253) Total accumulated depreciation Reductions 239,074 4,156,054 Total capital assets being depreciated, net Balance December 31, 2012 - 97,735 1,720,170 676,849 704,604 956,696 Total capital assets, being depreciated Less accumulated depreciation for: Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Infrastructure Business-Type activities capital assets, net 191,512 378,741 41,011 $ 164,961 $ 209,822 (100) $ (204,497) 2,570,715 $ The additions to accumulated depreciation may not match depreciation expense due to assets transferred between Business-Type Activities and Governmental Activities, if the transferred assets have been depreciated prior to this year. 108 3,055,706 Depreciation: Depreciation expense was charged to functions/programs of the City as follows: (Amounts in 000's) Governmental Activities: General Government Public Works Public Safety Building and Housing Community Development Public Health Economic Development Depreciation expense on capital assets held by the City's internal service funds that is charged to the various functions based on their usage of the assets $ 30,077 10,893 9,121 144 1,287 366 119 452 Total depreciation expense charged to governmental activities $ $ Business-Type Activities: Water Electricity Airport Facilities 52,459 67,455 16,971 50,541 Nonmajor activities 7,684 Depreciation expense on capital assets held by the City's internal service funds that is charged to the various functions based on their usage of the assets 197 Total depreciation expense charged to business-type activities Capital Commitments: following: $ 142,848 Significant commitments of the City as of December 31, 2012 are composed of the Remaining Spent-to-Date Commitment (Amounts in 000's) Project Description Governmental Activities: 3rd District Police Station Design & Construction 800 MHz Interoperability System League Park Renovations East Side Station Fleet Avenue Madison Avenue/W 65 Cedar Avenue (E55 to E89) Woodland East 55 to Buckeye Fire Station #36 Design Cedar Avenue E 89 to MLK New Financial Management System Superior Avenue Rehab Shoreway West 109 $ 225 1,485 19 125 263 270 14 268 7,272 7,391 $ 15,981 6,515 6,404 6,301 6,000 5,339 5,281 4,582 3,925 3,856 3,542 3,475 3,000 Remaining Spent-to-Date Commitment (Amounts in 000's) Project Description Business-Type Activities: Lake Road Substation Meter Automation & Replace Prg Parking Redevelopment Program Phase 1 Suburban Water Main Renewal Program Crown Water Plant Harvard Substation Watermain Renewal 2013 13.8 kV Distribution Feeders Transmission Main Renewal Program MS1/MS2 Tie-In IT Converged Communications Taxiway L Reconstruction Denison Avenue $ 8,426 30,861 12,668 386 152 1,753 2,650 1,009 $ 24,023 20,588 15,078 12,000 11,912 7,719 7,000 6,423 6,247 6,000 5,762 5,691 5,422 Capital Grant Programs: The City participates in the State Issue 2 program and the Local Transportation Improvement Program. Through these programs, the State of Ohio (State) provides financial assistance to the City for its various road and bridge improvements and storm water detention facilities. The Ohio Public Works Commission (OPWC) is the State agency which oversees the allocation of State bond proceeds and tax revenue to selected projects which have met funding requirements. Upon approval of the OPWC, the City and the State create project agreements establishing each entity's financial contribution toward each project. Through December 31, 2012, the State funded $168,862,000 of road and bridge improvement projects and $6,974,000 for storm water detention facilities. Capitalized Interest: Interest expense incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed, net of interest income earned on invested debt proceeds. For 2012, interest expense incurred for the Enterprise Funds was $86,441,000 of which $16,708,000 was capitalized net of $208,000 of interest income capitalized. Idle Facilities: In April 1977, Cleveland Public Power (CPP) closed its generation plant and since that time, CPP's revenues have been derived primarily from the distribution of purchased power. CPP continued its past practice of depreciating the plant at rates which completed the amortization of the plant in 1999. With the present availability of competitively priced purchased power, management believes the plant will remain idle. NOTE 16 - SERVICE CONCESSION ARRANGEMENTS In 2010 the City entered into an agreement with Cleveland Metropolitan Park District (Cleveland Metroparks) under which Cleveland Metroparks will operate and collect user fees from Seneca Golf Course for the next 99 years. Cleveland Metroparks has paid the City $99 for this agreement. They have agreed to complete at least $4,000,000 of capital improvements before December 31, 2015. As completed, all capital improvements performed by Cleveland Metroparks will become an asset of Seneca Golf Course and the City. Upon expiration of the agreement, all improvements will be vest in the City. Cleveland Metroparks is required to operate and maintain the golf course in accordance with the City Contract. In 2012 the City entered into an agreement with Mark A Nance Golf Ohio, LLC (MAN) under which MAN will operate and collect user fees from the Highland Park Golf Course for the next 10 years. MAN will pay the City installment payments over the course of the arrangement; the present value of these installment payments is $180,000. MAN will also pay 5% of revenues greater than $800,000 in years 2012 through 2017. In years 2018 and beyond, MAN will pay 5% on gross revenues up to $800,000; $10% of gross revenues $801,000 through 110 $1,000,000; and 15% of gross revenues greater than $1,000,000. In addition to receiving a portion of gross revenues, MAN will also make necessary capital improvements to the golf course. As completed, all capital improvements performed by MAN will become an asset of Highland Park Golf Course and the City. MAN is required to operate and maintain the golf course in accordance with the City Contract. The City reports a receivable and deferred inflow of resources in the amount of $175,500 at year-end pursuant to the service concession arrangement. The City reports the golf courses and related equipment as a capital asset with a carrying amount of $3,454,013 at year end. NOTE 17 - SEGMENT INFORMATION The City has issued revenue bonds and construction loans to finance the activities accounted for in the following Enterprise Funds: Division of Water Cleveland Public Power Department of Port Control Municipal Parking Lots Investors in the revenue bonds rely solely on the revenues generated from the specific enterprise activity to which the debt obligations pertain for repayment. Shown below is summarized financial information for the City's enterprise activity that has issued long-term obligations and is not reported as a major fund in the proprietary funds financial statements: Condensed Statement of Net Position Information Assets: Current assets Restricted assets Other noncurrent assets Capital assets, net Total assets Municipal Parking Lots (Amounts in 000's) $ $ Liabilities: Current liabilities Long-term liabilities Total liabilities $ Deferred inflows of resources: Derivative instruments-interest rate swaps 5,657 8,762 1,288 36,658 52,365 3,692 28,129 31,821 365 Total liabilities 365 Net position: Net investment in capital assets Restricted for debt service Unrestricted Total net position 9,272 5,525 5,382 20,179 Total liabilities, deferred inflows and net position 111 $ 52,365 Condensed Statement of Revenues, Expenses and Changes in Net Position Information Municipal Parking Lots (Amounts in 000's) Charges for services Depreciation (expense) Other operating (expenses) Operating income (loss) Nonoperating revenues (expenses): Investment income Interest expense Other revenue (expenses) Capital Contibutions Change in net position $ 7,735 (1,405) (3,896) 2,434 423 (1,853) (227) 490 1,267 18,912 Net position at beginning of year Net position at end of year $ Condensed Statement of Cash Flows Information 20,179 Municipal Parking Lots (Amounts in 000's) Net cash provided by (used for): Operating activities Capital and related financing activities Investing activities Net increase (decrease) in cash and cash equivalents $ 3,374 (4,125) 4,107 3,356 10,855 Beginning cash and cash equivalents Ending cash and cash equivalents $ 14,211 The balances of the restricted asset accounts in the enterprise funds are as follows: Purpose Division of Water Cleveland Public Power Department Municipal of Port Parking Control Lots (Amounts in 000's) Construction activities Debt retirement Accrued passenger facility charges Other $ 136,912 87,602 $ 52,195 3,976 $ 110,949 111,467 84 1 $ 224,598 $ 56,172 $ 295,333 112 3,237 5,525 $ $ 17,670 55,247 Total $ Cemeteries Water Pollution Control 6,579 $ 8,762 $ 6,579 508 78 $ 586 NOTE 18 - RESTATEMENT The Division of Water entered into amended Water Service Agreements with 21 member communities prior to 2012. As part of the agreements, ownership of distribution mains were transferred to the Division of Water. The City also gained tax sharing agreements with each suburb related to commercial entities relocating in or out of the City. The financial impact of the addition of these assets was not included in the financial statements in the year the agreements were finalized and ownership was officially transferred. As a result, the following restatement is necessary: Water Government-Wide Enterprise Fund Business - Type (Amounts in 000's) Net Positon, January 1, 2012 Restatement Restated Net Position, January 1, 2012 $ $ 1,032,782 164,961 1,197,743 $ 1,802,995 164,961 1,967,956 $ In 2012 a departmental reorganization occurred that merged the departments of Public Service with Parks, Recreation and Properties becoming the Department of Public Works. The Office of Capital Projects was created from the Divisions of Architecture, Engineering and Construction and Research, Planning and Development and is reported under General Government. In addition, the Division of Consumer Affairs was merged with Community Development and was moved from General Government. As a result, the following restatements to the special revenue funds are necessary: General Government Fund balance, January 1, 2012 Restatement Restated Fund balance, January 1, 2012 Parks Community Public Recreation Development Service and Properties (Amounts in 000's) $ $ $ 12,403 1,831 14,234 6,505 8 6,513 $ 113 $ 1,839 (1,839) $ - $ $ 2,833 (2,833) - Public Works $ $ Total $ 2,833 2,833 $ 23,580 23,580 NOTE 19 - FUND BALANCES / NET POSITION Fund Balance Classifications: Fund balance is classified in five categories (1) Nonspendable, (2) Restricted, (3) Committed, (4) Assigned and (5) Unassigned. Nonspendable fund balances include amounts that are not in spendable form or are legally required to remain intact. Restricted fund balances include amounts that have external restrictions by either grantors, debt covenants, laws or other governments. Committed fund balances include amounts that are committed to a specific purpose by council ordinance. Assigned fund balances include amounts that have an intended use by the Mayor and/or the Director of Finance to be used for a specific purpose. Unassigned fund balances include amounts that have not been assigned to any purpose. Fund expenditures and encumbrances are from restricted resources to the extent of the restricted fund reserve and followed by committed then assigned and unassigned resources. Below are the fund balance classifications for the governmental funds at December 31, 2012: General Fund Fund Balances Nonspendable Inventory Nonspendable Total Restricted General Government Public Works Public Safety Community Development Public Health Building and Housing Economic Development Debt Service Capital Projects Restricted Total Committed General Government Public Safety Public Works Community Development Public Health Economic Development Capital Projects Committed Total Assigned General Government Public Works Public Safety Public Health Building and Housing Other Debt Service Assigned Total Unassigned Total Fund Balances $ 632 632 Other Total Governmental Governmental (Amounts in 000's) $ 495 495 $ 1,127 1,127 - 20,607 20,123 6,482 5,847 375 206 35,830 18,059 126,303 233,832 20,607 20,123 6,482 5,847 375 206 35,830 18,059 126,303 233,832 - 7,594 204 2,232 1,358 41 91,462 10 102,901 7,594 204 2,232 1,358 41 91,462 10 102,901 4,119 2,547 1,599 339 424 211 2 2 9,239 61,879 $ 114 71,750 4,119 2,547 1,599 339 424 211 2 9,241 61,879 $ 337,230 $ 408,980 Net Position: Net position represent the difference between assets, deferred outflows, liabilities and deferred inflows. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings issued to acquire, construct or improve those assets. Net position is reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the City or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. The City applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position are available. Net position are restricted for debt service, loans and other purposes. Other purposes include street construction and maintenance, grant programs and debt or capital funding from restricted income tax. Rainy Day Reserve Fund: The City, in accordance with Section 5705.13(A), Revised Code, has established by ordinance the Rainy Day Reserve Fund (Rainy Day). Rainy Day should accumulate to at least a level equal to two percent of the General Fund expenditures and cannot exceed five percent of the General Fund expenditures. The City funds the Rainy Day through transfers from the General Fund, when funds become available. In order to use the Rainy Day, the City must pass an ordinance. The amount of the Rainy Day is reported within the unassigned fund balance classification in the City's General Fund. NOTE 20 - GATEWAY ECONOMIC DEVELOPMENT CORPORATION In accordance with an agreement with Gateway Economic Development Corporation (Gateway), Gateway is required to reimburse the City for the excess of the debt service requirements of the Parking Facilities Refunding Revenue Bonds attributed to the two Gateway garages over the net revenues generated by the two Gateway garages. In October 2011, the City sold one of the Gateway garages and defeased the applicable bonds. Going forward the amounts required to be reimbursed will be calculated based upon the net revenues of the remaining garage and remaining applicable bonds outstanding. The first garage on the Gateway site was completed in January 1994. The second garage was completed in August 1994. The third parking facility, Willard Park Garage, was completed in April 1996. In 2012, net revenues generated by the one remaining Gateway garage was less than the debt service payments attributed to that garage by $1,883,000. Cumulative debt service payments funded by the City that are due from Gateway totaled $45,239,000 at December 31, 2012. Due to the uncertainty of collecting such amounts, an allowance has been recorded to offset the amounts in full; therefore, these amounts do not appear in the accompanying financial statements. To enhance the security of the bonds issued by the County for the construction of facilities at Gateway, the City has agreed to pledge annually a percentage of admissions taxes on all events held at the arena to pay debt service if other revenue sources are not sufficient. Any exempted admissions tax not required for debt service will be reimbursed to the City. The City's current admissions tax rate is 8%. For the year ended December 31, 2012, the City pledged $2,057,811. NOTE 21 - SUBSEQUENT EVENTS On January 17, 2013, Moody's Investors Service lowered its rating on Assured Guaranty Municipal Corporation, the insurer of the Series 2006 Parking Facilities Refunding Revenue Bonds. The rating was lowered to A2 from Aa3. The Division's bonds only carry the insured rating and have no rating on its bonds based solely on its own credit. On March 21, 2013, the City completed a conversion of its $69,900,000 2010B Certificates of Participation (Cleveland Stadium Project) to a new index rate for a new index rate period. The 2010B COPS were purchased for a period of five years by Wells Fargo Municipal Capital Strategies, LLC as floating rate obligations with the interest reset weekly at a rate 50 basis points lower than the previous index rate. 115 On April 16, 2013, the City entered into a novation agreement with UBS, AG and PNC Bank, National Association (PNC) under which the basis swap associated with the Parking Facilities Refunding Revenue Bonds, Series 2006, was transferred from UBS to PNC effective March 15, 2013. All of the terms of the original basis swap remain the same. Effective April 24, 2013, the City issued $58,000,000 Airport System Revenue Bonds, Series 2013A (Taxable). These bonds refunded all of the outstanding $58,000,000 Airport System Revenue Bonds, Series 2008F in anticipation of the expiration of the existing letter of credit. The bonds were purchased by U.S. Bank National Association with the City paying an amount equal to one month LIBOR plus a spread of 105 basis points. As a result of this refunding, the City will realize aggregate net present value savings of $3.4 million or 5.87%. On May 13, 2013, City Council approved legislation authorizing the City to enter into a lease agreement for the purchase of vehicles for various City departments. The City intends to purchase $6.5 million of various police vehicles, heavy duty trucks and other apparatus. Lease payments will be made from the Restricted Income Tax Fund for a period of seven years. Effective May 30, 2013 the City issued $35,840,000 Subordinate Lien Income Tax Bonds, Series 2013A. The bonds were issued to provide funds for various public facilities, road and bridges, and parks and recreation improvements throughout the City. Effective May 30, 2013 the City issued $25,360,000 of Taxable Economic and Community Development Refunding Revenue Bonds, Series 2013 (Core City) to refund all of the outstanding $25,360,000 Taxable Economic and Community Development Refunding Revenue Bonds, Series 2008 (Core City). The bonds were purchased by Key Bank for a period of five years. On June 20, 2013, the City entered into a lease agreement with Huntington Public Capital Corporation for the purchase of $6,500,000 of vehicles and heavy equipment for various departments. The lease will be paid for over seven years out of the receipts for Restricted Income Tax. 116 SUPPLEMENTARY INFORMATION 117 CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) VarianceOriginal Final Budget Budget $ 271,105 36,903 34,673 40,472 11,785 29,994 22,737 130 5,943 18,264 472,006 $ 271,105 36,903 34,673 40,472 11,785 29,994 22,737 130 5,943 18,264 472,006 $ 290,474 36,028 34,673 46,929 12,372 33,837 21,626 250 5,464 19,365 501,018 4,862 1,665 6,527 4,862 1,665 6,527 4,789 1,529 6,318 73 136 209 Municipal court-judicial division: Personnel Other Total municipal court-judicial division 18,191 2,743 20,934 18,191 2,568 20,759 17,372 2,554 19,926 819 14 833 Municipal court-clerks division: Personnel Other Total municipal court-clerks division 8,704 5,349 14,053 8,604 5,449 14,053 8,449 5,364 13,813 155 85 240 Municipal court-housing division: Personnel Other Total municipal court-housing division 3,019 140 3,159 3,019 140 3,159 2,831 140 2,971 188 188 Office of the mayor: Personnel Other Total office of the mayor 2,305 134 2,439 2,305 134 2,439 2,139 99 2,238 166 35 201 Office of capital projects: Personnel Other Total office of capital projects 3,745 541 4,286 3,752 534 4,286 3,709 405 4,114 43 129 172 REVENUES: Income taxes Property taxes State local government funds Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Miscellaneous TOTAL REVENUES EXPENDITURES: Current: General Government: Council and clerk of council: Personnel Other Total council and clerk of council 118 Positive Actual (Negative) $ 19,369 (875) 6,457 587 3,843 (1,111) 120 (479) 1,101 29,012 (Continued) CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Landmarks commission: Personnel Other Total landmarks commission $ Board of building standards and appeals: Personnel 179 55 234 Final Budget $ 179 55 234 Actual $ 176 54 230 VariancePositive (Negative) $ 3 1 4 113 13 126 113 13 126 108 9 117 5 4 9 Board of zoning appeals: Personnel Other Total board of zoning appeals 194 15 209 194 15 209 189 13 202 5 2 7 Civil service commission: Personnel Other Total civil service commission 571 391 962 571 391 962 557 307 864 14 84 98 Community relations board: Personnel Other Total community relations board 1,127 63 1,190 1,127 73 1,200 1,101 55 1,156 26 18 44 City planning commission: Personnel Other Total city planning commission 1,425 99 1,524 1,425 99 1,524 1,331 92 1,423 94 7 101 8 8 8 8 6 6 2 2 Office of equal opportunity: Personnel Other Total office of equal opportunity 446 22 468 473 22 495 467 19 486 6 3 9 Office of budget and management: Personnel Other Total office of budget and management 879 16 895 879 29 908 650 19 669 229 10 239 Other Total board of building standards and appeals Boxing and wrestling commission: Personnel Total boxing and wrestling commission 119 (Continued) CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Department of aging: Personnel Other Total department of aging $ 746 149 895 Final Budget $ 746 149 895 Actual $ 630 139 769 VariancePositive (Negative) $ 116 10 126 Office of personnel: Personnel Other Total department of personnel 1,281 695 1,976 1,281 695 1,976 1,234 667 1,901 47 28 75 Department of law: Personnel Other Total department of law 6,335 2,878 9,213 5,835 3,578 9,413 5,741 3,302 9,043 94 276 370 818 37 855 818 37 855 791 29 820 27 8 35 Division of accounts: Personnel Other Total division of accounts 1,255 662 1,917 1,255 662 1,917 1,211 612 1,823 44 50 94 Division of assessments and licenses: Personnel Other Total division of assessments and licenses 2,241 2,291 4,532 2,241 2,381 4,622 1,986 1,844 3,830 255 537 792 Division of treasury: Personnel Other Total division of treasury 468 93 561 468 93 561 463 89 552 5 4 9 Division of purchases and supplies: Personnel Other Total division of purchases and supplies 563 39 602 563 39 602 521 33 554 42 6 48 Bureau of internal audit: Personnel Other Total bureau of internal audit 547 438 985 547 438 985 395 211 606 152 227 379 Finance administration: Personnel Other Total finance administration 120 (Continued) CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Division of financial reporting and control: Personnel Other Total division of financial reporting and control $ Division of information system services: Personnel Other Total division of information system services 1,213 27 1,240 Final Budget $ 1,213 27 1,240 Actual $ 1,055 17 1,072 VariancePositive (Negative) $ 158 10 168 1,779 1,811 3,590 1,779 1,811 3,590 1,387 1,414 2,801 392 397 789 Office of IT planning: Personnel Other Total office of IT planning 164 6 170 164 6 170 163 3 166 1 3 4 Division of harbors: Personnel Total division of harbors 105 105 105 105 26 26 79 79 83,655 83,820 78,496 5,324 582 314 896 607 314 921 576 311 887 31 3 34 1,805 1,257 3,062 1,830 1,557 3,387 1,721 1,452 3,173 109 105 214 Division of environment: Personnel Other Total division of environment 805 147 952 805 150 955 753 147 900 52 3 55 Division of air quality: Personnel Other Total division of air quality 108 281 389 109 281 390 109 277 386 - 5,299 5,653 5,346 TOTAL GENERAL GOVERNMENT Public Health: Public health administration: Personnel Other Total public health administration Division of health: Personnel Other Total division of health TOTAL PUBLIC HEALTH 4 4 307 (Continued) 121 CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Public Safety: Public safety administration: Personnel Other Total public safety administration $ Division of police: Personnel Other Total division of police 2,720 1,160 3,880 Final Budget $ 2,720 1,335 4,055 Actual $ 2,279 1,275 3,554 VariancePositive (Negative) $ 441 60 501 161,968 10,065 172,033 163,218 10,065 173,283 162,462 9,513 171,975 756 552 1,308 Division of fire: Personnel Other Total division of fire 82,307 3,357 85,664 81,307 3,357 84,664 81,069 3,220 84,289 238 137 375 Division of emergency medical services: Personnel Other Total division of emergency medical services 19,321 2,604 21,925 18,773 2,727 21,500 18,086 2,584 20,670 687 143 830 891 369 1,260 891 369 1,260 885 291 1,176 6 78 84 10,589 4,058 14,647 10,589 4,058 14,647 10,024 3,058 13,082 565 1,000 1,565 299,409 299,409 294,746 4,663 Division of animal control services: Personnel Other Total division of animal control services Division of correction: Personnel Other Total division correction TOTAL PUBLIC SAFETY (Continued) 122 CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Public Works: Division of public works administration: Personnel Other Total division of public works administration $ Division of recreation: Personnel Other Total division of recreation 2,667 151 2,818 Final Budget $ 2,612 206 2,818 Actual $ 2,458 200 2,658 VariancePositive (Negative) $ 154 6 160 8,426 3,887 12,313 8,426 4,112 12,538 7,995 3,846 11,841 431 266 697 Division of parking facilities: Personnel Other Total division of parking facilities 1,197 54 1,251 1,197 127 1,324 1,097 79 1,176 100 48 148 Division of property management: Personnel Other Total division of property management 5,482 3,112 8,594 5,482 3,112 8,594 5,049 2,889 7,938 433 223 656 Division of park maintenance and properties: Personnel Other Total division of park maintenance and properties 8,063 4,859 12,922 8,063 4,954 13,017 7,761 4,861 12,622 302 93 395 Division of waste collection and disposal: Personnel Other Total division of waste collection and disposal 13,892 11,412 25,304 13,892 11,412 25,304 12,894 11,348 24,242 998 64 1,062 2,742 822 3,564 2,742 822 3,564 2,639 732 3,371 103 90 193 66,766 67,159 63,848 3,311 Division of traffic engineering: Personnel Other Total division of traffic engineering TOTAL PUBLIC WORKS (Continued) 123 CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Original Budget Community Development: Director's office: Personnel Other Total director's office $ 252 19 271 TOTAL COMMUNITY DEVELOPMENT Final Budget $ 252 19 271 VariancePositive (Negative) Actual $ 139 9 148 $ 113 10 123 271 271 148 123 1,514 480 1,994 1,514 495 2,009 1,492 483 1,975 22 12 34 Division of code enforcement: Personnel Other Total division of code enforcement 5,747 594 6,341 5,747 594 6,341 4,539 593 5,132 1,208 1 1,209 Division of construction permitting: Personnel Other Total division of construction permitting 1,471 16 1,487 1,471 16 1,487 1,194 16 1,210 277 277 TOTAL BUILDING AND HOUSING 9,822 9,837 8,317 1,520 Economic Development: Economic development administration: Personnel Other Total economic development administration 1,504 21 1,525 1,504 21 1,525 1,396 17 1,413 108 4 112 1,525 1,525 1,413 112 Building and Housing: Director's office: Personnel Other Total director's office TOTAL ECONOMIC DEVELOPMENT Non-Departmental Expenditures: Other TOTAL NON-DEPARTMENTAL EXPENDITURES 19,436 19,541 16,229 3,312 19,436 19,541 16,229 3,312 TOTAL EXPENDITURES 486,183 487,215 468,543 18,672 (Continued) 124 CITY OF CLEVELAND, OHIO SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)GENERAL FUND-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) VariancePositive (Negative) Original Budget (15,209) 32,475 47,684 18,218 (20,873) 18,218 (19,841) 16,981 (17,941) 2 (1,237) 1,900 2 (2,655) OTHER FINANCING SOURCES (USES): Transfers in Transfers out Sale of City assets TOTAL OTHER FINANCING SOURCES (USES) Actual (14,177) EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES Final Budget (1,623) (958) DECERTIFICATION OF PRIOR YEAR ENCUMBRANCES AND PRE-ENCUMBRANCES 2,181 NET CHANGE IN FUND BALANCES 2,181 50,530 (16,832) (16,832) 33,698 16,861 16,861 16,861 29 $ 50,559 FUND BALANCES AT BEGINNING OF YEAR FUND BALANCES AT END OF YEAR 665 $ 29 $ $ 50,530 (Concluded) 125 This Page Intentionally Left Blank. 126 CITY OF CLEVELAND, OHIO NONMAJOR GOVERNMENTAL FUNDS SPECIAL REVENUE FUNDS Special Revenue Funds are used to account for specific revenues that are legally restricted or committed by the City to expenditures for particular purposes. The City's Special Revenue Funds are described below: Division of Streets To account for motor vehicle license tax and gasoline excise tax used for the repair and building of streets. Restricted Income Tax To account for one-ninth of the City's income tax collections. Monies are to be used for capital improvement purposes and repayment of debt. Cleveland Stadium Operations To account for the operating activities of Cleveland Browns Stadium. Community Development Block Grants To account for revenue from the federal government and expenditures as prescribed under the Community Development Block Grant Program. Community Development Funds To account development. Building and Housing Funds To account for revenue earmarked to administer and enforce the provisions of the Cleveland building, housing and zoning codes plus the national electrical code and state building, plumbing and elevator codes. Urban Development Action Funds To account for revenue from the federal government under the Urban Development Action Grant Program. Economic Development Funds To account for revenue earmarked to revitalize distressed cities by stimulating economic development. Home Weatherization Grants To account for revenue from the State of Ohio and expenditures as prescribed under the Home Weatherization Assistance Program. Work Force Investment Act Grants (WIA) To account for revenue and expenditures from the State of Ohio under the Work Force Investment Act. General Government Funds To account for revenue earmarked for general government activities. Public Works Funds To account for revenue earmarked for the public works activity. Public Safety Funds To account for revenue earmarked for public safety activities. 127 for revenue earmarked for City-wide SPECIAL REVENUE FUNDS (Continued) Public Health Funds To account for revenue earmarked for the improvement of public health. Cleveland Stadium Debt Service Fund To account for the accumulation of resources earmarked for the repayment of debt related to Cleveland Browns Stadium. Gateway Shared Income Tax Funds To account for municipal income tax revenue derived from persons employed at the Arena and Progressive Field with 50% of the revenues shared with the other taxing districts in the City. Neighborhood Development Investment Fund To account for revenue earmarked for the Neighborhood Development Investment Fund. Core City Program Funds To account for revenue earmarked for certain economic and community development projects. Supplemental Empowerment Zone To account for revenue from the U.S. Department of Housing and Urban Development Program designed to help rebuild specified urban communities. SPECIAL REVENUE FUNDS (for budgetary purposes only) These funds are rolled into the General Fund for Modified Accrual Financial Statements. Rainy Day Reserve Fund To account for revenue which is eligible to be used during significant periods of economic downturn. Schools Recreation and Cultural Activities Fund To account for revenue from special taxes earmarked for Cleveland Municipal Schools for recreation and cultural activities. DEBT SERVICE FUNDS Debt Service Funds are used to account for the accumulation of financial resources for, and the payment of, general longterm debt principal, interest and related costs. The City's Debt Service Funds are described below: Unvoted Tax Supported Obligations Fund To account for the accumulation of resources for the payment of General Obligation Bonds of the City. These bonds do not require a vote of the electors, other than selfsupporting obligations. They are payable from ad valorem property taxes levied within the limitations provided by law. Stadium Bond Fund To account for the accumulation of resources for the payment of the Certificates of Participation (COPS) - Stadium from pledged City taxes. Subordinated Income Tax Fund To account for the accumulation of resources for the payment of Subordinated Income Tax Variable Rate Refunding Bonds payable from pledged income taxes. 128 DEBT SERVICE FUNDS (Continued) Lower Euclid Avenue TIF To account for the accumulation of resources for the payment of Economic Development Bonds payable from tax increment financing revenues and a pledge of the non-tax revenue of the City. Core City Bonds To account for the accumulation of resources for the payment of taxable Economic and Community Development Bonds payable from non-tax and net project revenues. Subordinate Lien Income Tax Fund To account for the accumulation of resources for the payment of Subordinate Lien Income Tax Bonds payable from pledged income taxes. Urban Renewal Fund To account for the accumulation of resources for the payment of tax increment Urban Renewal Bonds payable from deposits made in lieu of taxes. Urban Renewal Reserve Fund The account is to be maintained at an amount equal to one year's maximum annual debt service on certain Urban Renewal Bonds and can be used to cover any debt insufficiency payable from certain urban renewal bonds. CAPITAL PROJECT FUNDS Capital Project Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds). The City's Capital Project Funds are described below: Capital/Urban Renewal Bond Construction To account for all bond proceeds and capital projects costs of bond-funded capital acquisitions, tax increment Urban Renewal Bond issues and construction within the City. Grant Improvement To account for capital grant revenues Capital Improvement Projects within the City. which fund Capital Improvement To account for capital projects. which fund Certificates of Participation/Capital Leases To account for Certificates of Participation (COPS) and capital lease proceeds which fund certain capital funds. Cleveland Stadium Construction To account for bond proceeds and capital projects costs of the Cleveland Browns Stadium. 129 miscellaneous revenues CITY OF CLEVELAND, OHIO COMBINING BALANCE SHEET-NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2012 (Amounts in 000's) Special Revenue Funds - Budgeted Division of Streets ASSETS Cash and cash equivalents Receivables: Taxes Grants Loans Accrued interest Assessments Receivables, net $ LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Deferred revenue Unearned revenue Due to other funds Total liabilities $ 213 - $ 5,562 21 6,314 495 4,792 $ 8,901 8,922 6,314 495 8,214 $ 14,676 $ $ 202 1,716 $ 179 $ 4,792 $ 27,682 $ 381 1,716 323 6,276 679 9,375 323 4,338 1,938 599 6,855 80 2,197 323 495 864 12,479 4,469 1,359 $ 12,479 4,469 8,214 130 $ 14,676 6,389 5,562 5,562 - $ FUND BALANCES Reserves for: Nonspendable Restricted Committed Assigned Total fund balances TOTAL LIABILITIES AND FUND BALANCES 1,384 Total Budgeted Funds 5,562 Due from other funds Due from other governments Inventory of supplies TOTAL ASSETS Cleveland Stadium Operations Restricted Income Tax $ 4,792 495 17,812 18,307 $ 27,682 Special Revenue Funds - Non-Budgeted Community Development Block Grants $ Building and Housing Funds Community Development Funds $ 1,098 Urban Development Action Funds $ $ 564 8,057 83 9,445 1,441 10,969 680 1,459 $ 22,728 779 466 9,087 16,955 Economic Development Funds $ 3 2,067 43,273 45,051 475 Home Weatherization Grants 45,051 $ 2 45,340 General Government Funds WIA Grants $ 211 211 2 143 28 171 2,881 114 770 4,230 $ 9,562 $ 12,067 $ 4,340 $ 62,006 $ 72,298 $ $ 22 447 134 5,386 $ 69 63 1,772 1,431 1,527 $ 502 $ 102 $ 73 $ 3,573 9,562 24 $ 9,562 $ 61,877 206 18,220 12,067 $ 4,340 $ 17,855 21 62 $ 587 140 430 316 534 126 2,133 10,229 7,991 206 7,205 $ 5 61,877 5,847 1,358 211 5 54,078 $ $ 3 129 2,952 4,134 4,862 - 5 49,089 4,069 847 680 62,006 $ 72,298 16,800 128 211 8,128 7,594 $ 5 $ 211 15,722 $ 17,855 (Continued) 131 CITY OF CLEVELAND, OHIO COMBINING BALANCE SHEET-NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2012 (Amounts in 000's) Special Revenue Funds - Non-Budgeted Public Works Funds ASSETS Cash and cash equivalents Receivables: Taxes Grants Loans Accrued interest Assessments Receivables, net $ 3,544 LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Deferred revenue Unearned revenue Due to other funds Total liabilities 8,461 Cleveland Stadium Debt Service Fund Public Health Funds $ 2,492 2,460 $ 14,101 215 1 111 2,492 215 4 1 76 $ 3,659 $ 10,953 $ $ 43 674 275 $ $ 277 419 2,751 $ 55 437 27 14,102 $ 739 1,804 12 2,335 6,482 204 375 41 14,102 2,920 $ 2,124 1,194 4,267 688 2,232 FUND BALANCE Reserves for: Nonspendable Restricted Committed Assigned Total fund balances TOTAL LIABILITIES AND FUND BALANCES $ 66 45 Due from other funds Due from other governments Inventory of supplies TOTAL ASSETS Public Safety Funds 6,686 416 14,102 3,659 $ 132 10,953 $ 2,751 $ - 14,102 Special Revenue Funds - Non-Budgeted Gateway Shared Income Tax Funds $ 1,229 Neighborhood Development Investment Fund $ 4,586 Core City Program Funds $ Supplemental Empowerment Zone 2,045 $ 1,509 Total Special Revenue Funds Total Non-Budgeted Funds $ 95,519 $ 101,908 17,008 44,425 17,008 23,556 44,425 200,098 205,660 3,550 5,398 - - 23,556 6,622 190,860 1 2,615 12,472 11,712 495 304,565 $ 332,247 398 $ 1,627 21,594 $ 25,601 $ 45,934 $ $ $ $ $ $ $ 813 45,047 887 814 1,627 - - $ 1,627 $ 25,601 21,594 $ 25,601 $ 2,529 3,140 97,936 18,158 8,147 9,481 130,016 139,391 - 71,658 102,891 174,549 495 89,470 102,891 192,856 304,565 $ 332,247 21,594 21,594 $ 45,934 25,601 - 2,148 1,424 97,613 11,882 8,147 8,802 5,562 6,622 190,860 1 2,615 45,934 $ (Continued) 133 CITY OF CLEVELAND, OHIO COMBINING BALANCE SHEET-NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2012 (Amounts in 000's) Debt Service Funds - Budgeted Unvoted Tax Supported Obligations Fund ASSETS Cash and cash equivalents Investments Receivables: Taxes Grants Loans Accrued interest Assessments Receivables, net $ LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Deferred revenue Unearned revenue Due to other funds Total liabilities 29,447 2,511 $ 361 - - - 1,778 $ 37,441 $ 2 $ 2,511 $ $ $ $ $ 361 31,225 31,225 FUND BALANCE Reserves for: Nonspendable Restricted Committed Assigned Total fund balances TOTAL LIABILITIES AND FUND BALANCES 2 $ 29,447 Due from other funds Due from other governments Inventory of supplies TOTAL ASSETS 2,555 $ 3,661 Lower Euclid Avenue TIF Subordinated Income Tax Fund Stadium Bond Fund - - 6,216 6,216 $ 37,441 $ 134 - 2,511 361 2 2 2,511 361 2 $ 2,511 $ 361 Debt Service Funds Non-Budgeted Subordinate Lien Income Tax Fund Core City Bonds $ 3,713 $ - Total Budgeted Funds 2,296 $ 11,438 3,661 $ 29,447 29,447 - Urban Renewal Reserve Fund Urban Renewal Fund 424 $ 416 Total NonBudgeted Funds 2 $ 2,199 $ 3,713 $ 80 1 - 1 1 1 80 $ 840 $ 2,202 $ $ 80 31,225 31,305 $ $ $ - 3,633 2,296 3,633 $ - 46,324 2,296 15,017 2 15,019 3,713 $ 2,296 $ 46,324 - - $ 49,366 80 31,225 31,305 2,202 3,042 3,042 18,059 2 18,061 2,202 $ 3,042 $ 49,366 840 2,202 840 $ 1,778 - 3,042 $ - 11,864 6,276 29,447 1 29,448 - 2,296 $ $ 426 $ 2,615 - 1,778 $ Total Debt Service Funds 840 $ (Continued) 135 CITY OF CLEVELAND, OHIO COMBINING BALANCE SHEET-NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2012 (Amounts in 000's) Capital Projects Funds Non-Budgeted Capital/ Urban Renewal Bond Construction ASSETS Cash and cash equivalents Investments Receivables: Taxes Grants Loans Accrued interest Assessments Receivables, net $ 115,825 Grant Improvement $ Capital Improvement $ 7,111 5,836 2 2 5,836 - Due from other funds Due from other governments Inventory of supplies TOTAL ASSETS LIABILITIES Accounts payable Accrued wages and benefits Due to other governments Deferred revenue Unearned revenue Due to other funds Total liabilities $ 115,827 $ 5,836 $ 7,111 $ 1,814 $ 15 $ 4,184 550 119 2 2,364 FUND BALANCE Reserve for: Nonspendable Restricted Committed Assigned Total fund balances TOTAL LIABILITIES AND FUND BALANCES 5,702 5,836 113,463 113,463 $ 136 115,827 $ 4,186 2,915 10 5,836 $ 2,925 7,111 Certificates of Participation/ Capital Leases $ Total Capital Projects Funds Cleveland Stadium Construction 3,135 $ 3,246 $ $ - 6,381 $ 138 5,836 2 5,838 129,753 3,246 12,472 13,490 495 138,837 $ 520,450 $ 6,151 550 119 2 5,702 12,524 $ 8,760 3,140 98,486 49,502 8,149 15,183 183,220 - 6,243 3,682 6,243 $ $ 3,682 $ $ 138 243,525 9,522 0 35,009 12,458 190,860 4 2,615 240,946 - - 3,682 $ Total Nonmajor Governmental Funds 3,682 126,303 10 126,313 6,381 $ 3,682 $ 138,837 495 233,832 102,901 2 337,230 $ 520,450 (Concluded) 137 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Special Revenue Funds - Budgeted Division of Streets REVENUES: Income taxes Property taxes Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total revenues $ $ 36,470 Total Budgeted Funds $ 12,970 1,263 22 $ 13,571 250 1 16 6 14,256 EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Capital outlay Debt service: Principal retirement Interest General Government Other Total expenditures 36,486 13,827 19,910 448 4,000 3,729 1,077 36,470 26,541 1,263 272 23 64,569 20,358 4,000 19,910 1,150 9,956 448 3,729 1,077 1,150 30,314 (5,654) 26,530 13,379 34,255 (25,926) (8,814) 5,327 (25,926) (8,814) 5,327 (34,740) (29,413) (327) 604 4,565 4,842 1,686 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 11,875 (96) 13,465 1,359 $ 12,479 $ 4,469 $ 18,307 OTHER FINANCING SOURCES (USES): Transfers in Transfers out Issuance of debt Premium on bonds Discount on bonds Payment to refund bonds Sale of City assets Proceeds from capital lease Total other financing sources (uses) 5,327 NET CHANGE IN FUND BALANCES FUND BALANCES AT BEGINNING OF YEAR (as restated) FUND BALANCES AT END OF YEAR Cleveland Stadium Operations Restricted Income Tax $ 138 Special Revenue Funds - Non-Budgeted Community Development Block Grants $ Building and Housing Funds Community Development Funds $ Urban Development Action Funds $ $ Economic Development Funds $ Home Weatherization Grants $ General Government Funds WIA Grants $ $ 3,082 4,775 517 22,798 1 33,748 6,706 1,044 28,617 34,266 206 6,912 901 1,642 3,247 21 1,424 19 1,952 172 9,075 147 147 6,890 6,890 1,952 7,254 1,952 28,617 10 5,811 6,108 33,574 6,890 6,706 1,570 26 28,617 8,833 952 33,574 1,596 9,785 692 206 (1,449) (710) (1,276) - 6,706 25 6,890 1,952 6,133 - - 1,121 (2,718) 367 85 - - - (1,276) (2,633) - - 367 - 692 206 (2,725) (3,343) - - 1,488 64,602 21,563 61,877 $ 18,220 $ 6,513 $ - $ 7,205 $ 206 $ 14,234 - $ - $ 15,722 (Continued) 139 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Special Revenue Funds - Non-Budgeted Cleveland Public Public Stadium Safety Health Debt Service Funds Funds Fund Public Works Funds REVENUES: Income taxes Property taxes Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total revenues $ $ $ 73 3 1,721 63 1,860 EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Capital outlay Debt service: Principal retirement Interest General Government Other Total expenditures $ 1,420 2,132 13 8,069 15 20 10,249 1 10,321 5 11,747 22 22 1,773 8,812 11,660 5,942 6,410 1,773 8,812 11,660 12,352 87 1,437 87 (12,330) EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Issuance of debt Premium on bonds Discount on bonds Payment to refund bonds Sale of City assets Proceeds from capital lease Total other financing sources (uses) - NET CHANGE IN FUND BALANCES 87 1,437 87 (8,516) 2,833 5,249 329 22,618 2,920 $ 6,686 $ 416 $ 14,102 3,814 FUND BALANCES AT BEGINNING OF YEAR (as restated) FUND BALANCES AT END OF YEAR $ 140 - - 3,814 Gateway Shared Income Tax Funds $ Special Revenue Funds - Non-Budgeted Neighborhood Development Core City Supplemental Investment Program Empowerment Fund Funds Zone $ $ $ Total NonBudgeted Funds $ 86 7 3 45 797 804 86 4,330 4,333 45 86 751 86 8,146 22,131 8,812 69,081 6,706 11,660 11,387 5,003 5,942 6,410 130,920 9,671 7,487 1,150 161,234 - (6,661) 27,594 (1,317) - 4,181 (5,548) 322 (1,045) 9,508 (40,288) 322 (30,458) - (7,706) (2,864) 188 188 53 4,145 45 45 (1,554) 237 - - - 53 2,828 21,541 $ 22,773 21,594 $ 25,601 $ - $ 36,470 30,610 2,756 7,206 5,379 104 99,485 34 6,784 188,828 8,146 1,773 8,812 69,081 6,706 11,660 11,387 1,003 751 - $ 4,069 1,493 6,934 5,379 81 99,485 34 6,784 124,259 Total Special Revenue Funds 182,255 - $ 195,720 174,549 $ 192,856 (Continued) 141 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Debt Service Funds - Budgeted Unvoted Tax Supported Obligations Fund REVENUES: Income taxes Property taxes Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total revenues $ Stadium Bond Fund Lower Euclid Avenue TIF Subordinated Income Tax Fund $ $ Core City Bonds $ $ 19,284 4,985 13 1 3 24,282 1 3 28,815 15,155 1,090 541 2,955 2,647 167 118 1,440 790 360 43,970 1,631 5,602 285 2,590 (19,688) (1,630) (5,599) (285) (2,589) 24,416 1,631 5,677 391 2,329 24,416 1,631 5,677 391 2,329 NET CHANGE IN FUND BALANCES 4,728 1 78 106 (260) FUND BALANCES AT BEGINNING OF YEAR (as restated) 1,488 1 2,433 255 3,893 6,216 $ 2 $ 2,511 $ 361 $ 3,633 EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Capital outlay Debt service: Principal retirement Interest General Government Other Total expenditures EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Issuance of debt Premium on bonds Discount on bonds Payment to refund bonds Sale of City assets Proceeds from capital lease Total other financing sources (uses) FUND BALANCES AT END OF YEAR $ 142 1 - 1 Debt Service Funds Non-Budgeted Subordinate Lien Income Tax Fund $ Total Budgeted Funds $ 3 546 549 19,284 4,985 21 546 24,836 Urban Renewal Reserve Fund Urban Renewal Fund $ NonBudgeted Funds $ $ 1 2 983 984 2 3,305 3,676 Total Debt Service Funds - $ 3 983 986 - 19,284 4,985 24 1,529 25,822 - (6,432) (36,223) 27 6,426 6,426 40,870 40,870 (6) 4,647 27 2 29 4,676 2,302 $ 565 307 85 6,981 37,772 22,927 360 61,059 10,372 813 2,200 3,013 13,385 2,296 $ 15,019 840 $ 2,202 $ 3,042 $ 18,061 957 - $ 565 307 85 957 - 38,337 23,234 445 62,016 29 (36,194) 2 - - 40,870 40,870 (Continued) 143 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Capital Projects Funds Non-Budgeted Capital/ Urban Renewal Bond Construction REVENUES: Income taxes Property taxes Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total revenues Grant Improvement $ Capital Improvement $ $ 46 4 24,515 24,515 1,330 383 1,717 24,515 1,070 34,456 24,515 1,070 (34,410) - 647 57,744 - - NET CHANGE IN FUND BALANCES 23,334 - 647 FUND BALANCES AT BEGINNING OF YEAR (as restated) 90,129 46 EXPENDITURES: Current: General Government Public Works Public Safety Community Development Building and Housing Public Health Economic Development Capital outlay Inception of capital lease Debt service: Principal retirement Interest General Government Other Total expenditures 13 30,604 3,020 819 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Issuance of debt Premium on bonds Discount on bonds Payment to refund bonds Sale of City assets Proceeds from capital lease Total other financing sources (uses) FUND BALANCES AT END OF YEAR (4,916) 82,945 8,770 (145) (28,910) $ 144 113,463 $ 2,278 - $ 2,925 Certificates of Participation/ Capital Leases Total Capital Projects Funds Cleveland Stadium Construction $ $ $ 5 8 5 8 130 5,648 6,321 107 Total Nonmajor Governmental Funds - $ 63 24,515 1,330 383 26,291 36,470 19,284 35,595 2,756 7,206 5,379 191 124,000 1,364 8,696 240,941 13 62,640 5,648 8,159 22,131 8,812 69,081 6,706 11,660 11,387 67,643 5,648 48,115 33,741 1,264 1,168 295,515 18 5,903 6,321 107 3,020 819 18 72,265 (5,898) (6,313) (45,974) (54,574) 5,850 56,228 (45,204) 82,945 8,770 (145) (28,910) 322 6,507 80,513 6,507 6,507 5,850 5,850 (4,916) 82,945 8,770 (145) (28,910) 6,507 70,101 609 (463) 24,127 25,939 311,291 5,634 $ 4,145 102,186 6,243 $ 3,682 $ 126,313 $ 337,230 (Concluded) 145 CITY OF CLEVELAND, OHIO COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)BUDGETED SPECIAL REVENUE FUNDS-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Division of Streets Original Budget REVENUES: Income taxes Other taxes and shared revenues Licenses and permits Charges for services Investment earnings Miscellaneous Total revenues Revised Budget $ VariancePositive (Negative) Actual $ $ $ 12,845 1,398 5,816 12,845 1,398 5,816 20,059 20,059 13,043 1,242 4,100 1 4 18,390 198 (156) (1,716) 1 4 (1,669) EXPENDITURES: Public Works: Personnel Other Capital outlay Principal retirement Interest Total expenditures 15,207 12,110 15,207 12,110 14,014 9,127 27,317 27,317 23,141 1,193 2,983 4,176 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (7,258) (7,258) (4,751) 2,507 7,140 5,908 5,327 7,140 5,908 5,327 OTHER FINANCING SOURCES (USES): Transfers in Transfers out Total other financing sources (uses) EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER FINANCING USES (118) (1,350) 576 1,926 133 133 118 118 - (1,232) $ 827 DECERTIFICATION OF PRIOR YEAR ENCUMBRANCES AND PRE-ENCUMBRANCES FUND BALANCES AT BEGINNING OF YEAR FUND BALANCES AT END OF YEAR (581) (581) 118 $ - $ 146 $ 2,059 Restricted Income Tax Original Budget $ Revised Budget 33,888 $ Rainy Day Reserve Fund VariancePositive (Negative) Actual 33,888 $ 36,309 15 15 16 33,903 33,903 $ 36,325 Original Budget 2,421 1 2,422 3,797 4,799 1,077 9,673 3,908 4,799 1,077 9,784 24,230 24,230 26,541 (25,926) (25,926) (25,926) (25,926) (1,696) - 1,696 $ - $ - 25 2,356 - - - - - 25 25 - - - - 25 2,356 25 - - $ 25 25 - 45 1,696 $ $ 2,311 45 1,696 615 Actual $ - - (1,696) VariancePositive (Negative) 25 2,311 (25,926) (25,926) $ $ (111) (111) 3,797 4,799 1,077 9,673 Revised Budget 13,551 $ 13,551 13,551 $ 13,551 13,551 $ 13,576 - $ 25 (Continued) 147 CITY OF CLEVELAND, OHIO COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS)BUDGETED SPECIAL REVENUE FUNDS-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Schools Recreation and Cultural Activities Original Budget REVENUES: Income taxes Other taxes and shared revenues Licenses and permits Charges for services Investment earnings Miscellaneous Total revenues Revised Budget $ VariancePositive (Negative) Actual $ $ $ - - 1,000 1,000 - (1,000) (1,000) - 1,000 1,000 1,000 1,000 Total other financing sources (uses) 1,000 (1,000) OTHER FINANCING SOURCES (USES): Transfers in Transfers out 1,000 1,000 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES - 1,000 EXPENDITURES: Public Works: Personnel Other Capital outlay Principal retirement Interest Total expenditures - 1,000 1,000 - EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER FINANCING USES - DECERTIFICATION OF PRIOR YEAR ENCUMBRANCES AND PRE-ENCUMBRANCES - FUND BALANCES AT BEGINNING OF YEAR - FUND BALANCES AT END OF YEAR $ - $ - 148 $ - $ - Cleveland Stadium Operations Original Budget Revised Budget $ Totals VariancePositive (Negative) Actual $ $ $ VariancePositive (Negative) Actual 33,888 $ 26,345 1,398 6,066 15 67,712 67,712 36,309 $ 26,613 1,242 4,350 48 4 68,566 577 25 25 15,207 13,712 3,797 4,799 1,077 38,592 15,207 13,712 3,797 4,799 1,077 38,592 14,014 10,704 3,908 4,799 1,077 34,502 1,193 3,008 (111) 4,090 13,148 13,249 101 29,120 29,120 34,064 4,944 85 (13,500) (13,415) 85 (13,500) (13,415) (8,814) (8,814) (85) 4,686 4,601 8,225 (39,426) (31,201) 6,993 (39,426) (32,433) 6,327 (34,740) (28,413) (666) 4,686 4,020 (267) (267) 4,435 4,702 (2,081) (3,313) 5,651 8,964 178 178 13,500 13,570 250 250 250 6 13,750 13,750 13,826 602 602 577 602 602 13,148 $ Revised Budget 33,888 $ 26,345 1,398 6,066 15 13,500 70 6 76 Original Budget - 267 267 $ - $ - 267 $ 4,702 - $ 4,702 15,632 $ 13,551 15,632 $ 12,319 15,632 $ 21,461 2,421 268 (156) (1,716) 33 4 854 - $ 9,142 (Concluded) 149 CITY OF CLEVELAND, OHIO COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS) BUDGETED DEBT SERVICE FUNDS-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Unvoted Tax Supported Obligations Fund Original Budget REVENUES: Property taxes Other taxes and shared revenues Investment earnings Miscellaneous Total revenues $ 19,700 5,009 12 $ VariancePositive (Negative) Actual 19,700 5,009 12 $ 19,284 4,985 13 $ (416) (24) 1 (439) 24,721 43,970 (19,262) (19,688) (426) 19,500 19,500 4,916 19,500 24,416 4,916 4,916 238 4,728 4,490 1,488 $ 43,983 (135) 148 13 238 FUND BALANCES AT BEGINNING OF YEAR 28,815 15,155 19,500 19,500 EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER FINANCING USES 28,680 15,303 (19,262) OTHER FINANCING SOURCES (USES): Transfers in: From other subfunds Restricted income tax fund Total other financing sources (uses) 24,282 43,983 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 24,721 28,680 15,303 EXPENDITURES: Principal retirement Interest General Government Total expenditures FUND BALANCES AT END OF YEAR Revised Budget 1,488 1,488 - 1,726 $ 1,726 150 $ 6,216 $ 4,490 Stadium Bond Fund Original Budget Revised Budget $ Subordinated Income Tax Fund VariancePositive (Negative) Actual $ $ $ 1 1 1 1 1 1 1,090 541 1,090 541 1,090 541 1,631 1,631 (1,630) - Original Budget Revised Budget $ VariancePositive (Negative) Actual $ $ $ 3 3 3 3 3 3 - 2,955 2,647 2,955 2,647 5,602 5,602 5,602 - (1,630) (1,630) - (5,599) (5,599) (5,599) - 1,631 1,631 1,631 5,677 5,677 1,631 1,631 - 5,677 1,631 5,677 5,677 5,677 - 1 1 1 - 78 78 78 - 1 $ 2,955 2,647 1,631 - 1 1 - 2,433 2,433 2,433 - 2 $ 2 $ 2 $ - $ 2,511 $ 2,511 $ 2,511 $ (Continued) 151 CITY OF CLEVELAND, OHIO COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASIS) BUDGETED DEBT SERVICE FUNDS-LEGAL APPROPRIATION LEVEL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Lower Euclid Avenue TIF Original Budget REVENUES: Property taxes Other taxes and shared revenues Investment earnings Miscellaneous Total revenues $ $ Actual $ $ - $ Actual $ 2 VariancePositive (Negative) $ 2 $ - 1 (1) - 2 2 1 285 - 1,440 1,001 368 2,809 1,440 1,001 368 2,809 1,440 790 362 2,592 211 6 217 (285) (285) - (2,807) (2,807) (2,591) 216 295 391 1,859 1,859 2,329 295 391 96 96 1,859 1,859 2,329 470 470 10 10 106 96 255 $ 285 Revised Budget 295 FUND BALANCES AT BEGINNING OF YEAR 167 118 - Original Budget 295 EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER (UNDER) EXPENDITURES AND OTHER FINANCING USES 167 118 (285) OTHER FINANCING SOURCES (USES): Transfers in: From other subfunds Restricted income tax fund Total other financing sources (uses) - 285 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES - 167 118 EXPENDITURES: Principal retirement Interest General Government Total expenditures FUND BALANCES AT END OF YEAR Revised Budget Core City Bonds VariancePositive (Negative) 255 255 265 $ 265 $ 152 361 (948) $ 96 (948) 3,975 $ 3,027 (262) 3,975 $ 3,027 (1) 686 3,975 $ 3,713 $ 686 Subordinate Lien Income Tax Bonds Original Budget Revised Budget $ Actual $ $ $ 5 546 551 5 546 551 3 546 549 3,305 3,676 3,305 3,676 3,305 3,676 6,981 6,981 6,981 (6,430) (6,430) 6,426 6,426 6,426 6,426 (4) (4) 2,298 $ 2,298 (2) (2) - 2,296 19,700 5,009 23 546 25,278 $ 19,700 5,009 23 546 25,278 VariancePositive (Negative) Actual $ 19,284 4,985 21 546 24,836 $ (416) (24) (2) (442) 37,637 23,286 368 61,291 37,772 22,927 362 61,061 (135) 359 6 230 (36,013) (36,013) (36,225) (212) 9,462 25,926 35,388 - 9,462 25,926 35,388 14,944 25,926 40,870 5,482 5,482 4,645 5,270 10,454 - (2) (625) $ Revised Budget 37,637 23,286 368 61,291 (2) 2,302 $ $ - (6) 2,302 2,302 Original Budget - (6,432) 6,426 6,426 $ Totals VariancePositive (Negative) (625) 10,454 (2) $ 9,829 10,454 $ 9,829 $ 15,099 $ 5,270 (Concluded) 153 This Page Intentionally Left Blank. 154 CITY OF CLEVELAND, OHIO NONMAJOR ENTERPRISE FUNDS Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private sector businesses where the intent of the governing body is that the expense (including depreciation) of providing goods or services primarily or solely to the general public be financed or recovered primarily through user charges. The City's nonmajor Enterprise Funds are as follows: Water Pollution Control The Division of Water Pollution Control is a segment of the Department of Public Utilities of the City. The Division of Water Pollution Control was created for the purpose of providing sewage services to customers and to maintain the local sewer system of the City. Public Auditorium The Public Auditorium is a multi-purpose performing arts, entertainment and conference center. It was constructed in the grand opera tradition and features a spacious 21,780 square foot registration lobby, a 10,000 seat auditorium, the 3,000 seat Cleveland Music Hall and 600 seat Little Theater. West Side Market The West Side Market provides a public market where Cleveland area residents can purchase a variety of quality foods in a centralized location. East Side Market The East Side Market provides a public market where Cleveland area residents can purchase a variety of quality foods in a centralized location. Municipal Parking Lots The Division of Parking was established to provide municipal parking within the City's limits. Cemeteries The Division of Cemeteries was established to provide interment and cremation services for the City and its neighboring communities. Golf Courses The Golf Course Division was established to provide the City and neighboring communities with recreational facilities for golfing and cross country skiing. Currently, both City golf courses are being leased out. Seneca is being leased by Cleveland Metroparks and Highland is leased by Mark A Nance Golf Ohio. 155 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF NET POSITION - NONMAJOR ENTERPRISE FUNDS DECEMBER 31, 2012 (Amounts in 000's) Water Pollution Control ASSETS Current assets: Cash and cash equivalents Receivables: Accounts Unbilled revenue Less: Allowance for doubtful accounts Receivables, net $ Public Auditorium 48,630 $ 89,141 2,831 (3,007) 88,965 Due from other funds Inventory of supplies Total current assets 86 $ 1,232 210 (44) 166 - 252 495 362 138,452 Noncurrent assets: Restricted assets: Cash and cash equivalents Total restricted assets West Side Market 1,232 586 586 - 297 4,261 - Unamortized bond issuance costs Capital assets: Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Less: Accumulated depreciation Total capital assets, net 198 137,728 8,963 13,046 6,143 (97,468) 68,709 $ TOTAL ASSETS 156 13,002 1,707 174 (7,193) 7,888 69,295 Total noncurrent assets 20,166 1,112 5,040 (21,208) 9,371 9,371 7,888 207,747 $ 9,623 $ 9,120 Municipal Parking Lots East Side Market $ 68 $ Golf Courses Cemeteries 5,449 $ 107 $ 18 - - 51 139 5,657 $ 6,579 6,579 55,679 89,549 2,831 (3,051) 89,329 180 1 108 8,762 8,762 - 107 180 18 68 Total Nonmajor Enterprise Funds 546 502 146,056 287 15,927 15,927 - 1,288 1,288 5,478 1,256 1,259 955 1,822 4,033 6,148 799 4,535 (3,438) 10,258 1,815 499 (2,404) 1,344 53,719 1,290 440 (25,525) 36,658 (4,715) 3,454 13,729 6,728 137,728 106,213 18,903 16,332 (161,951) 137,682 1,344 46,708 16,837 3,454 154,897 414 484 2,400 450 $ 1,412 $ 52,365 $ 16,945 $ 3,741 $ 300,953 (Continued) 157 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF NET POSITION - NONMAJOR ENTERPRISE FUNDS DECEMBER 31, 2012 (Amounts in 000's) Water Pollution Control LIABILITIES Current liabilities: Accounts payable Accrued wages and benefits Due to other funds Due to other governments Accrued interest payable Current portion of long-term obligations Total current liabilities $ Public Auditorium 2,409 1,557 11,399 90,704 $ 525 106,594 West Side Market 88 111 35 $ 151 39 17 - - 9,371 7,888 1 1,021 99,204 158 211 32,655 $ 251 66,371 178 Total net position TOTAL LIABILITIES, DEFERRED INFLOWS AND NET POSITION 4 - NET POSITION Net investment in capital assets Restricted for capital projects Restricted for debt service Unrestricted 17 108,543 DEFERRED INFLOWS OF RESOURCES Derivative instruments-interest rate swaps Service concession agreements Total deferred inflows of resources 207 136 1,813 Long-term liabilities: Accrued wages and benefits Construction loans payable Revenue bonds payable Total liabilities 234 9,372 8,909 207,747 $ 9,623 $ 9,120 Municipal Parking Lots East Side Market $ $ - Golf Courses Cemeteries 214 150 117 221 470 2,520 3,692 $ 8 147 10 $ 35 2,870 2,033 11,584 90,925 470 3,045 110,927 35 206 1,813 28,103 141,049 176 176 365 176 541 23 28,103 31,821 $ 29 6 165 26 - Total Nonmajor Enterprise Funds 188 365 - 365 - 1,344 10,258 3,454 68 5,525 5,382 6,499 76 107,958 178 5,525 45,702 1,412 $ 9,272 20,179 16,757 3,530 159,363 1,412 $ 52,365 $ 16,945 $ 3,741 $ 300,953 (Concluded) 159 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION-NONMAJOR ENTERPRISE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Water Pollution West Side Control OPERATING REVENUES: Charges for services Total operating revenue Public Auditorium Market $ 22,876 22,876 $ 1,226 1,226 OPERATING EXPENSES: Operations Maintenance Depreciation Total operating expenses 10,194 9,075 5,108 24,377 2,408 13 14 2,435 OPERATING INCOME (LOSS) (1,501) $ (1,209) NON-OPERATING REVENUE (EXPENSES): Investment income Interest expense Loss on disposal of capital assets Other revenues (expenses) Total non-operating revenues (expenses) 1,040 13 685 1,738 (436) 59 (102) 2 21 (1) (22) INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS - (1,523) Capital contributions Transfers in $ 99,204 160 210 3,733 100,384 (435) 3,645 1,297 (1,180) NET POSITION AT BEGINNING OF YEAR 1 (1,209) 343 CHANGE IN NET POSITION NET POSITION AT END OF YEAR 1,302 1,302 (225) 5,639 $ 9,372 9,134 $ 8,909 East Side Market Golf Lots $ $ - 32 Cemeteries 7,735 7,735 60 92 3,797 99 1,405 5,301 (92) $ 2,434 1,495 1,495 $ Total Nonmajor Enterprise Courses Municipal Parking Funds 536 536 $ 35,170 35,170 789 16 159 964 (326) 19,827 9,217 7,684 36,728 (428) 1,567 1 253 1,821 (1,558) (227) 64 (8) 66 484 (1,955) (8) (77) (1,657) 64 58 (1,556) 777 (262) (370) (3,114) 490 928 60 232 5,616 1,589 1,267 726 (138) 4,091 18,912 16,031 423 (1,853) - (92) (92) 1,504 $ 1,412 $ 20,179 $ 16,757 161 155,272 3,668 $ 3,530 $ 159,363 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF CASH FLOWS NONMAJOR ENTERPRISE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Water Pollution Control CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services Agency activity on behalf of other sewer authorities Net cash provided by (used for) operating activities $ CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Cash received through transfers from other funds Miscellaneous non-operating revenue (expense) Net cash provided by (used for) noncapital financing activities Public Auditorium 22,996 $ (5,484) (9,947) 6,265 13,830 West Side Market 1,146 $ (1,186) (1,258) (1,298) 1,302 (632) (391) 279 1,297 - CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition and construction of capital assets Principal paid on long-term debt Interest paid on long-term debt Capital grant proceeds Net cash provided by (used for) capital and related financing activities 1,297 - - - (3,996) (505) (102) 289 (4,314) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments Net cash provided by (used for) investing activities 59 59 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2 2 - 9,575 $ CASH AND CASH EQUIVALENTS AT END OF YEAR 162 281 39,641 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (1) 87 951 49,216 $ 86 $ 1,232 Total Municipal Parking Lots East Side Market $ $ Golf Courses Cemeteries (41) (61) - - (303) 232 70 1,589 145 135 3,374 35,426 (11,655) (14,256) 6,265 15,780 60 75 (41) 7,939 $ (3,474) (1,091) Nonmajor Enterprise Funds 1,511 $ (422) (1,150) 532 $ (416) (419) 302 1,734 (3,996) (2,925) (1,807) 289 (2,420) (1,705) - (4,125) - - - 4,095 12 4,107 38 6,060 (41) 3,356 6,134 109 10,855 552 (8,439) - 6,022 4,095 111 10,228 6,022 $ 68 $ 14,211 $ 6,686 (1) 19,303 108 $ 163 107 52,303 $ 71,606 (Continued) CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF CASH FLOWS NONMAJOR ENTERPRISE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Water Pollution Control RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided by (used for) operating activities: Depreciation Write-off of bad debt expense Changes in assets and liabilities: Receivables, net Due from other funds Inventory of supplies Accounts payable Accrued wages and benefits Due to other funds Due to other governments Total adjustments $ Public Auditorium SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES: Contributions of capital assets (436) 14 685 3,259 (79) (43) 253 (13) 1,979 (15,133) 15,331 $ (1,209) $ 5,108 20,000 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,501) $ West Side Market (80) 13,830 (11) (4) (8) (89) $ $ 164 19 715 (1,298) $ 279 3,645 11 $ 210 Municipal Parking Lots East Side Market $ (92) $ 60 (326) $ 253 (11) (3) (3) (539) 5 50 36 940 51 $ $ 1,405 (9) Golf Courses Cemeteries 2,434 Total Nonmajor Enterprise Funds (428) $ 7,684 20,000 3,180 (82) (40) (284) (46) 2,023 (15,097) 17,338 159 16 (4) 4 6 (14) 6 (1) (40) 5 265 125 (41) $ 3,374 $ (61) $ $ 490 $ 928 (1,558) (303) $ 15,780 $ 5,273 (Concluded) 165 This Page Intentionally Left Blank. 166 INTERNAL SERVICE FUNDS Internal Service Funds are used to account for the financing of goods or services provided by one department of the City to other departments of the City on a cost-reimbursement basis. The City's Internal Service Funds are described below: Motor Vehicle Maintenance The Division of Motor Vehicle Maintenance was established to provide centralized maintenance, repairs and fueling of certain City vehicles. Printing and Reproduction The Division of Printing and Reproduction was established to provide printing and reproduction services for all City divisions. City Storeroom and Warehouse The City's Storeroom and Warehouse Division provides centralized mailroom service. Utilities Administration The Division of Utilities Administration was established to provide administrative assistance to the Department of Public Utilities. Sinking Fund Administration The Sinking Fund Administration Fund was established to account for personnel and other operating expenditures related to the administration of the Debt Service Fund. Municipal Income Tax Administration The Municipal Income Tax Administration Fund was established to account for operating expenditures related to the collection of municipal income tax for Cleveland and other municipalities. Telephone Exchange The Division of Telephone Exchange was established to operate the communications system for the City at minimal cost. Radio Communications The Office of Radio Communications was established to operate the 800MHZ radio communication system. Workers' Compensation Reserve The Workers' Compensation Reserve was established to account for liabilities related to workers' compensation claims under the retrospective rating policy. 167 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF NET POSITION - ALL INTERNAL SERVICE FUNDS DECEMBER 31, 2012 (Amounts in 000's) Motor Vehicle Maintenance ASSETS Current assets: Cash and cash equivalents Due from other funds Inventory of supplies Total current assets $ 4,756 1,690 1,079 7,525 Capital assets: Land Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Less: Accumulated depreciation Total capital assets, net TOTAL ASSETS $ 663 146 2,673 6,967 488 (8,004) 2,933 $ 10,458 168 598 244 142 984 $ 44 37 Utilities Administration $ 81 1,186 (1,113) 924 - 1,908 $ (746) 440 - 924 $ 770 770 884 1,153 2,933 Total noncurrent assets City Storeroom and Warehouse Printing and Reproduction 440 81 $ 1,210 Sinking Fund Administration $ 43 150 Municipal Income Tax Administration $ 193 1,783 Telephone Exchange $ 1,783 542 871 Workers' Compensation Reserve Radio Communications $ 1,413 1,747 162 $ 7,870 6,047 Total 13,917 1,909 $ 18,153 9,201 1,221 28,575 65 25 - (14) 51 (117) - (18) 7 - $ 117 663 146 3,557 9,513 488 (10,012) 4,355 51 7 - 4,355 193 $ 1,834 $ 1,413 $ 1,916 $ 13,917 $ 32,930 (Continued) 169 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF NET POSITION - ALL INTERNAL SERVICE FUNDS DECEMBER 31, 2012 (Amounts in 000's) Motor Vehicle Maintenance LIABILITIES Current liabilities: Accounts payable Accrued wages and benefits Due to other funds Due to other governments Total current liabilities $ 867 732 57 $ 1,656 Long-term liabilities: Accrued wages and benefits City Storeroom and Warehouse Printing and Reproduction 187 101 26 $ 314 Utilities Administration 1 37 $ 38 24 710 6 740 170 20 2 130 Total liabilities 1,826 334 40 870 NET POSITION Net investment in capital assets Unrestricted 2,933 5,699 924 650 41 440 (100) 8,632 1,574 41 340 Total net position TOTAL LIABILITIES AND NET POSITION $ 170 10,458 $ 1,908 $ 81 $ 1,210 Sinking Fund Administration $ 17 19 Municipal Income Tax Administration $ 36 7 162 718 113 736 1,729 Telephone Exchange $ 651 132 $ 783 337 50 2 19 408 Total $ - 36 22 13,917 430 13,917 150 51 (51) 594 - 594 1,486 193 $ 1,834 $ 1,413 $ 1,916 2,246 2,499 204 755 5,704 14,409 20,113 7 1,479 150 $ $ 819 105 1,834 43 Workers' Compensation Reserve Radio Communications 4,355 8,462 $ 13,917 12,817 $ 32,930 (Concluded) 171 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION - ALL INTERNAL SERVICE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Motor Vehicle Maintenance OPERATING REVENUES: Charges for services $ Total operating revenue 19,779 City Storeroom and Warehouse Printing and Reproduction $ 2,102 $ Utilities Administration 501 $ 19,779 OPERATING INCOME (LOSS) 2,102 501 5,880 17,680 952 311 18,943 OPERATING EXPENSES: Operations Maintenance Depreciation Total operating expenses 2,035 76 127 2,238 555 5,692 96 197 5,985 836 555 (136) NON-OPERATING REVENUES (EXPENSES): Investment income Loss on disposal of capital assets Total non-operating revenues (expenses) 8 (68) (60) 1 INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS 776 (54) (105) 1 Capital contributions Transfers in 1 - 1 (135) (54) (104) (135) (54) (104) 95 444 882 CHANGE IN NET POSITION 1,658 NET POSITION AT BEGINNING OF YEAR 6,974 NET POSITION AT END OF YEAR 5,880 $ 172 8,632 1,709 $ 1,574 $ 41 $ 340 Sinking Fund Administration $ 216 Municipal Income Tax Administration $ 8,184 Telephone Exchange $ Workers' Compensation Reserve Radio Communications 6,361 $ 2,505 $ 1,441 Total $ 46,969 216 8,184 6,361 2,505 1,441 46,969 823 8,083 97 11 8,191 5,262 70 1,441 5,332 929 804 3 1,736 1,441 42,500 2,095 649 45,244 1,029 769 - 1,725 7 1 3 7 1 3 - 1,030 772 - 823 (607) (7) - (607) - 21 (68) (47) 1,678 882 726 726 119 - 1,030 (436) 31 $ 150 772 $ - $ 594 - 3,286 714 $ 1,486 173 9,531 $ - $ 12,817 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF CASH FLOWS-ALL INTERNAL SERVICE FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Motor Vehicle Maintenance CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services Net cash provided by (used for) operating activities $ CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Cash received through transfers from other funds Net cash provided by (used for) noncapital financing activities 19,795 (13,440) (5,066) 1,289 $ - CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition and construction of capital assets Net cash provided by (used for) capital and related financing activities City Storeroom and Warehouse Printing and Reproduction 2,188 (1,196) (805) 187 $ - 494 (504) (57) (67) - (91) (91) - 8 8 1 1 - NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,297 97 (67) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,459 501 111 - CASH FLOWS FROM INVESTING ACTIVITIES: Interest received on investments Net cash provided by investing activities CASH AND CASH EQUIVALENTS AT END OF YEAR $ $ 598 $ 44 $ RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided by (used for) operating activities: Depreciation Change in assets and liabilities: Due from other funds Inventory of supplies Accounts payable Accrued wages and benefits Due to other funds Due to other governments Total adjustments 4,756 836 $ (136) $ (54) 311 15 57 32 38 174 $ 86 3 108 (3) 2 (2) 24 (29) 453 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 127 323 (13) 1,289 $ 187 (6) $ (67) Utilities Administration Sinking Fund Administration Municipal Income Tax Administration $ $ $ 5,880 (906) (4,872) 102 158 (661) (183) (686) 726 726 - 8,604 (2,932) (5,168) 504 Telephone Exchange $ - 5,865 (4,499) (1,141) 225 Radio Communications $ 2,594 (1,411) (441) 742 - Workers' Compensation Reserve $ Total $ - - 726 726 - (40) (131) (40) - 1 1 - - - - - 1 1 3 3 - 21 21 - 2,912 7,870 15,241 40 511 226 745 707 3 1,272 316 1,002 $ 770 $ 43 $ $ (105) $ (607) $ 197 1,783 (7) $ 542 $ 1,747 $ $ 1,029 $ 769 $ 11 102 $ (686) $ 504 18,153 1,725 649 1,441 (125) (13) (1,441) (804) $ 89 (271) (38) 22 70 (11) 419 511 (79) $ $ (495) 12 (33) 207 7,870 3 (58) (1) 10 1 (131) 7 7 63 $ 45,578 (25,549) (17,733) 2,296 19 (27) - 225 $ 742 175 $ - 1,072 3 (200) (1,392) 1 438 571 $ 2,296 This Page Intentionally Left Blank. 176 CITY OF CLEVELAND, OHIO AGENCY FUNDS Agency Funds are used to account for assets received and held by the City acting in the capacity of an agent or custodian. The City's Agency Funds are described below: Municipal Courts To account for assets received and disbursed by the Municipal Courts as agent or custodian related to Civil and Criminal Court matters. Central Collection Agency To account for the collection of the Municipal Income Tax for the City of Cleveland and any other municipalities that employ the Central Collection Agency as their agency. Other Agencies To account for miscellaneous assets held by the City for governmental units or individuals. 177 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES ALL AGENCY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Balance at Beginning Deductions Balance at End of Year of Year Additions $ 4,784 $ 17,984 $ 19,046 $ 3,722 Total assets $ 4,784 $ 17,984 $ 19,046 $ 3,722 LIABILITIES Due to others $ 4,784 $ 15,213 $ 16,275 $ 3,722 $ 4,784 $ 15,213 $ 16,275 $ 3,722 $ 6,371 19,361 721 $ $ $ 5,622 19,699 1,171 MUNICIPAL COURTS ASSETS Cash and cash equivalents Total liabilities CENTRAL COLLECTION AGENCY ASSETS Cash and cash equivalents Taxes receivable Due from other governments Total assets LIABILITIES Due to other governments Total liabilities 5,622 19,699 1,171 6,371 19,361 721 $ 26,453 $ 26,492 $ 26,453 $ 26,492 $ 26,453 $ 26,492 $ 26,453 $ 26,492 $ 26,453 $ 26,492 $ 26,453 $ 26,492 (Continued) 178 CITY OF CLEVELAND, OHIO COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES ALL AGENCY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Balance at Beginning of Year Additions Deductions Balance at End of Year OTHER AGENCIES ASSETS Cash and cash equivalents $ 19,541 $ 311,924 $ 317,695 $ 13,770 Total assets $ 19,541 $ 311,924 $ 317,695 $ 13,770 LIABILITIES Due to others $ 19,541 $ 311,924 $ 317,695 $ 13,770 $ 19,541 $ 311,924 $ 317,695 $ 13,770 $ 30,696 19,361 721 $ 335,530 19,699 1,171 $ 343,112 19,361 721 $ 23,114 19,699 1,171 $ 50,778 $ 356,400 $ 363,194 $ 43,984 $ 26,453 24,325 $ 26,492 327,137 $ 26,453 333,970 $ 26,492 17,492 $ 50,778 $ 353,629 $ 360,423 $ 43,984 Total liabilities TOTALS-ALL AGENCY FUNDS ASSETS Cash and cash equivalents Taxes receivable Due from other governments Total assets LIABILITIES Due to other governments Due to others Total liabilities (Concluded) 179 This Page Intentionally Left Blank. 180 CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS 181 CITY OF CLEVELAND, OHIO CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS SCHEDULE BY TYPE* DECEMBER 31, 2012 (Amounts in 000's) Governmental Funds Capital Assets: Land Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Infrastructure Construction in progress $ TOTAL GOVERNMENTAL FUNDS CAPITAL ASSETS * This schedule presents only the capital asset balances related to governmental funds, excluding accumulated depreciation. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of internal service funds are included as governmental activities in the statement of net assets. 182 65,525 157,405 619,225 182,902 559,464 114,892 $ 1,699,413 CITY OF CLEVELAND, OHIO CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS SCHEDULE BY FUNCTION AND ACTIVITY* DECEMBER 31, 2012 (Amounts in 000's) Total General Government: General government City Hall Engineering and construction Justice Center Research, planning and development Charles V. Carr Municipal Center Total general government $ 340,178 27,360 506,442 29,768 49,025 647 953,420 Land $ 208 877 Land Improvements $ 1,484 Buildings, Structures and Improvements $ 305,566 22,510 Furniture, Fixtures, Equipment and Vehicles $ 24,654 426,818 28,922 3,815 632 361,445 1,849 846 62 4,376 3,973 51,128 2,997 1,462 27,411 433,705 60,939 8,269 14,393 813 18,679 65,068 32,631 139,853 20,004 19,444 2,178 16,470 2,440 929 61,465 1,460 96,229 2,200 271 502 5,793 17 2,946 7,121 13,503 29,882 47,958 32,737 8,930 731 265 90,621 5,776 12,401 1,478 44 23 3 13,949 26,647 903 1,988 39,786 15 67,932 499 1,540 Infrastructure 11,602 $ 3,890 Construction In Progress $ Public Works: Waste collection Streets Traffic engineering Park maintenance and properties Recreation Other Total public works 30,734 149,001 5,208 98,606 121,656 49,732 454,937 Public Safety: Police Fire Emergency medical service Correction Dog pound Total public safety 125,086 65,118 15,678 7,588 1,136 214,606 4,805 1,663 6,732 573 59,187 29,240 1,090 6,570 868 96,955 Public Health: Health and environment Total public health 13,530 13,530 1,112 1,112 208 208 10,528 10,528 1,585 1,585 56 56 41 41 Community Development: Community development Total community development 45,841 45,841 7,130 7,130 7,376 7,376 9,384 9,384 1,382 1,382 15,807 15,807 4,762 4,762 Economic Development: Economic development Total economic development 12,740 12,740 6,027 6,027 275 275 740 740 - 379 379 5,319 5,319 - 320 320 438 438 Building and Housing: Building and housing Total building and housing TOTAL GOVERNMENTAL FUNDS CAPITAL ASSETS 36,852 976 2,669 42,536 81,041 573 264 4,339 4,339 $ 1,699,413 23,388 46,051 - $ 65,525 $ 157,405 $ 619,225 $ 182,902 * This schedule presents only the capital asset balances related to governmental funds, excluding accumulated depreciation. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of internal service funds are included as governmental activities in the statement of net assets. 183 100,160 162 5,614 3,581 3,581 $ 559,464 - $ 114,892 CITY OF CLEVELAND, OHIO CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS SCHEDULE OF CHANGES BY FUNCTION AND ACTIVITY* FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in 000's) Balance January 1, 2012 General Government: General government City Hall Engineering and construction Justice Center Research, planning and development Charles V. Carr Municipal Center Total general government $ 339,976 26,058 474,048 29,768 53,606 647 924,103 Additions $ 219 1,302 27,553 Deductions $ (41) Transfers $ 24 (16) 4,857 2,010 (11) (6,580) 31,084 (68) (1,699) (218) 1,056 (59) (273) 852 Public Works: Waste collection Streets Traffic engineering Park maintenance and properties Recreation Other Total public works 28,747 139,293 5,267 97,339 111,286 49,705 431,637 3,348 10,271 (1,143) (1,619) 1,825 9,518 47 25,009 (285) Public Safety: Police Fire Emergency medical service Correction Dog pound Total public safety 121,981 62,891 15,703 7,613 1,154 209,342 4,407 2,303 519 19 (904) 7,248 (1,517) Public Health: Health and environment Total public health 13,277 13,277 209 209 (18) (18) Community Development: Community development Total community development 45,785 45,785 65 65 (9) (9) Economic Development: Economic development Total economic development 10,590 10,590 2,150 2,150 4,339 4,339 - Building and Housing: Building and housing Total building and housing TOTAL GOVERNMENTAL FUNDS CAPITAL ASSETS $ 1,639,073 $ 65,765 (20) (3,067) 1,358 $ 340,178 27,360 506,442 29,768 49,025 647 953,420 30,734 149,001 5,208 98,606 121,656 49,732 454,937 (398) (76) 41 (16) (18) (467) 62 62 (585) (28) 125,086 65,118 15,678 7,588 1,136 214,606 13,530 13,530 45,841 45,841 - - 12,740 12,740 - $ - - 4,339 4,339 (4,679) $ (746) * This schedule presents only the capital asset balances related to governmental funds, excluding accumulated depreciation. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of internal service funds are included as governmental activities in the statement of net assets. 184 Balance December 31, 2012 $ 1,699,413 STATISTICAL SECTION 185 This Page Intentionally Left Blank CITY OF CLEVELAND, OHIO Statistical Section This part of the City's comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures and required supplementary information says about the City's overall financial health. Contents Page Financial Trends These schedules contain trend information to help the reader understand how the City's financial performance and well-being have changed over time. Revenue Capacity These schedules contain information to help the reader assess the City's most significant local revenue source, the municipal income tax. Debt Capacity These schedules present information to help the reader assess the affordability of the City's current levels of outstanding debt and the City's ability to issue additional debt in the future. Economic and Demographic Information These schedules offer economic and demographic indicators to help the reader understand the environment within which the City's financial activities take place. Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the City's financial report relates to the services the City provides and the activities it performs. Schedule of Statistics - General Fund S3-S6 S7-S11 S12-S18 S19-S21 S22-S23 S24 Sources: Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports for the relevant year. - S2 - City of Cleveland, Ohio Net Position By Component Last Ten Years (Accrual Basis of Accounting) (Amounts in 000's) 2012 2011 (Restated) 2010 2009 Governmental Activities Net investment in capital assets Restricted Unrestricted $572,213 122,488 (12,383) $543,460 117,765 (19,771) $557,804 159,942 (90,565) $561,586 166,280 (134,033) Total Governmental Activities Net Position $682,318 $641,454 $627,181 $593,833 Business-Type Activities Net investment in capital assets Restricted Unrestricted $1,303,584 227,826 492,956 $1,295,139 234,050 438,767 $1,080,332 243,511 462,397 $1,016,182 275,907 469,010 Total Business-Type Activities Net Position $2,024,366 $1,967,956 $1,786,240 $1,761,099 Primary Government Net investment in capital assets Restricted Unrestricted $1,875,797 350,314 480,573 $1,838,599 351,815 418,996 $1,638,136 403,453 371,832 $1,577,768 442,187 334,977 Total Primary Government Net Position $2,706,684 $2,609,410 $2,413,421 $2,354,932 - S3 - 2008 2007 2006 2005 2004 2003 $555,076 179,318 (95,968) $484,758 214,811 (59,630) $412,430 211,361 (56,318) $395,600 193,529 (52,676) $371,601 199,038 (53,281) $365,946 193,872 (50,673) $638,426 $639,939 $567,473 $536,453 $517,358 $509,145 $985,556 272,613 512,876 $957,587 252,514 506,745 $886,978 247,802 496,624 $838,164 287,039 474,875 $780,436 285,256 478,229 $706,207 298,663 489,211 $1,771,045 $1,716,846 $1,631,404 $1,600,078 $1,543,921 $1,494,081 $1,540,632 451,931 416,908 $1,442,345 467,325 447,115 $1,299,408 459,163 440,306 $1,233,764 480,568 422,199 $1,152,037 484,294 424,948 $1,072,153 492,535 438,538 $2,409,471 $2,356,785 $2,198,877 $2,136,531 $2,061,279 $2,003,226 Net Position (Accrual Basis) (Amounts in 000's) $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Total Primary Government Net Positon Total Governmental Activities Net Position - S3 - Total Business-Type Activities Net Position City of Cleveland, Ohio Changes in Net Position Last Ten Years (Accrual Basis of Accounting) (Amounts in 000's) 2012 Program Revenues Governmental Activities: Charges for Services: General Government (1) Public Works (1) Public Service (1) Public Safety Community Development (1) Building and Housing Public Health Parks, Recreation and Properties (1) Economic Development Subtotal - Charges for Services Operating Grants and Contributions: General Government (1) Public Works (1) Public Service (1) Public Safety Community Development Building and Housing Public Health Parks, Recreation and Properties (1) Economic Development Subtotal - Operating Grants and Contributions Capital Grants and Contributions: General Government Public Works (1) Public Service (1) Public Safety Community Development Parks, Recreation and Properties (1) Subtotal - Capital Grants and Contributions Total Governmental Activities Program Revenues Business-Type Activities: Charges for Services: Water Electricity Airport facilities Nonmajor activities Subtotal - Charges for Services Operating Grants and Contributions: Water Electricity Airport facilities Nonmajor activities Subtotal - Operating Grants and Contributions Capital Grants and Contributions: Water Electricity Airport facilities Nonmajor activities Subtotal - Capital Grants and Contributions Total Business-Type Activities Program Revenues Total Primary Government Program Revenues 2011 $30,696 18,369 $32,336 16,271 15,049 15,034 5,757 2,967 18,072 2,931 100 72,938 37 84,681 4,345 28,342 3,673 27,364 13,805 69,004 6,679 10,321 12,497 68,887 5,698 13,228 11,387 143,883 4,008 135,355 1,330 24,515 23 13,982 2010 2009 $31,570 $34,937 12,024 13,839 5,517 18,296 7,327 3,033 8,047 1,469 77,309 13,402 3,187 1,129 759 77,227 1,348 1,121 13,821 8,647 73,563 9,064 12,693 13,830 8,156 141,122 13,469 13,192 41,490 11,857 15,048 14,404 23,984 134,565 41 11,179 11,680 25,845 14,005 11,220 11,680 242,666 234,041 229,651 223,472 280,323 165,227 116,694 35,188 597,432 236,626 168,448 114,967 34,600 554,641 237,270 166,665 106,696 39,358 549,989 228,235 155,865 98,143 43,110 525,353 4,567 97 177 478 5,319 3,305 883 278 4,466 3,553 566 619 4,051 8,789 4,917 169 1,232 3,857 10,175 21,800 964 25,025 5,773 53,562 2,284 206 56,385 5,716 64,591 7,645 1,035 57,089 19,765 85,534 1,677 44,219 5,429 51,325 656,313 623,698 644,312 586,853 $898,979 $857,739 $873,963 $810,325 - S4 - 2008 2007 2006 2005 2004 2003 $36,824 $30,470 $32,311 $22,174 $22,143 $32,878 5,517 21,709 5,440 12,323 2,893 1,351 1,057 87,114 4,490 21,087 1,203 10,528 2,979 1,160 471 72,388 5,158 12,773 2 10,701 2,898 746 4,496 69,085 6,208 15,953 5,030 16,046 4,802 18,822 10,871 2,918 913 46 59,083 11,948 2,262 692 118 58,239 9,673 2,861 1,228 2,269 72,533 1,789 1,994 1,508 1,876 1,865 2,588 14,317 7,448 42,129 1,106 12,786 16,417 33,121 129,113 14,459 5,789 50,344 3,353 14,079 16,123 21,077 127,218 14,230 9,364 56,882 3,407 13,838 16,232 40,397 155,858 14,234 9,153 51,848 13,798 7,561 59,734 12,873 9,677 63,295 10,963 354 42,164 130,592 8,778 2,427 30,704 124,867 7,357 343 30,551 126,684 3,057 5,380 23,839 26,899 14,745 13,203 13,094 75,871 1,315 16,151 82,566 23,839 89 26,988 125 14,870 66 13,269 232,378 282,172 248,782 216,663 197,976 212,486 242,872 158,237 111,402 41,950 554,461 242,014 155,559 105,887 40,614 544,074 209,694 146,293 105,711 33,821 495,519 222,635 150,263 111,087 33,843 517,828 209,622 141,143 110,882 35,079 496,726 203,748 139,660 89,958 33,628 466,994 8,384 2,118 3,809 5,557 19,868 11,033 2,589 3,718 6,399 23,739 8,242 1,796 2,944 1,616 14,598 7,726 100 7,826 48 48 790 790 3,460 2,803 54,646 3,155 64,064 7,906 1,485 73,358 2,591 85,340 6,817 1,135 53,280 6,201 67,433 12,408 2,285 40,975 5,505 61,173 5,448 1,079 50,377 4,698 61,602 6,687 1,585 51,211 7,317 66,800 638,393 653,153 577,550 586,827 558,376 534,584 $870,771 $935,325 $826,332 $803,490 $756,352 $747,070 (Continued) - S4 - City of Cleveland, Ohio Changes in Net Position Last Ten Years (Amounts in 000's) 2012 Expenses Governmental Activities: General Government (1) Public Works (1) Public Service (1) Public Safety Human Resources Community Development (1) Building and Housing Public Health Parks, Recreation and Properties (1) Economic Development Interest on debt 2011 2010 $106,141 128,276 $95,833 139,577 310,745 308,051 70,705 14,729 17,385 75,778 14,098 19,596 13,845 26,153 Total Governmental Activities Expenses 2009 $81,898 $90,311 93,425 315,900 85,947 329,765 22,323 27,686 70,589 17,445 19,740 46,963 24,729 47,531 59,204 20,925 22,999 58,799 38,083 30,448 687,979 702,942 718,220 736,481 Business-Type Activities Water Electricity Airport facilities Nonmajor activities 244,647 163,547 153,627 39,671 232,497 167,799 167,531 46,302 232,862 165,330 158,262 43,443 224,269 158,100 168,734 46,546 Total Business-Type Activities Expenses 601,492 614,129 599,897 597,649 1,289,471 1,317,071 1,318,117 1,334,130 Total Primary Government Program Expenses Net (Expense)/Revenue Governmental Activities Business-Type Activities (445,313) 54,821 (468,901) 9,569 (488,569) 44,415 (513,009) (10,796) Total Primary Government Net Expense (390,492) (459,332) (444,154) (523,805) 330,863 56,086 28,680 27,338 311,492 63,839 27,312 19,558 298,209 88,087 28,450 23,869 296,507 63,573 25,053 28,741 General Revenues and Other Changes in Net Position Governmental Activities Taxes: Income taxes Property taxes Other taxes Shared revenues Grants and contributions not restricted to specific programs State and local government funds Unrestricted investment earnings Other Transfers Total Governmental Activities 25,966 692 18,141 (1,589) 486,177 43,821 97 19,086 (2,031) 49,266 654 14,104 19,278 43,420 1,740 10,207 (825) 483,174 521,917 468,416 30 4 25 Business-Type Activities Unrestricted investment earnings Other Special items - gain on sale of captial assets Transfers 1,589 5,125 2,031 (19,278) 825 Total Business-Type Activities Expenses 1,589 7,186 (19,274) 850 487,766 490,360 502,643 469,266 40,864 56,410 14,273 16,755 33,348 25,141 (44,593) (9,946) $97,274 $31,028 $58,489 ($54,539) Total Primary Government General Revenues and Other Changes in Net Position Change in Net Position Governmental Activities Business-Type Activities Total Primary Government Change in Net Position Note: Program revenues and expenses previously reported as "Other" program revenues and expenses in Governmental activities on the Statement of Activities are now classified as General Government program revenues and expenses as appropriate. Business-type activities on the Government-wide Statement of Activities summarizes other Enterprise Funds as Nonmajor activities. These include Sewer, Public Auditorium, West Side Market, East Side Market, Municipal Parking Lots, Cemeteries and Golf Courses. (1) In 2012 a departmental reorganization occurred that merged the departments of Public Service with Parks, Recreation and Properties becoming the Department of Public Works. The Office of Capital Projects was created from the Divisions of Architecture, Engineering and Construction and Research, Planning and Development and is reported under General Government. In addition, the Division of Consumer Affairs was merged with Community Development and was moved from General Government. - S4 - 2008 2007 2006 2005 2004 2003 $101,878 $99,311 $99,187 $97,544 $88,587 $96,757 87,154 329,922 86,435 322,840 81,248 301,208 80,888 293,242 78,634 281,140 80,698 315,811 44,550 15,831 20,351 61,628 53,944 32,896 54,425 13,999 21,412 54,332 39,168 27,763 62,701 13,832 27,674 45,546 44,739 32,162 56,413 10,650 24,950 44,840 41,030 27,557 65,603 10,703 22,537 42,734 49,372 30,815 62,543 12,932 22,750 47,725 38,850 29,065 748,154 719,685 708,297 677,114 670,125 707,131 213,335 154,426 172,274 44,507 205,470 148,832 167,967 45,762 204,994 141,546 157,976 42,112 192,187 153,676 146,807 41,526 188,118 136,927 145,749 41,333 173,179 134,120 143,147 42,606 584,542 568,031 546,628 534,196 512,127 493,052 1,332,696 1,287,716 1,254,925 1,211,310 1,182,252 1,200,183 (515,776) 53,851 (437,513) 85,122 (459,515) 30,922 (460,451) 52,631 (472,149) 46,249 (494,645) 41,532 (461,925) (352,391) (428,593) (407,820) (425,900) (453,113) 329,316 65,398 25,918 28,587 317,268 69,313 28,567 23,805 302,084 66,762 26,492 16,949 288,191 64,390 25,051 22,468 1 55,696 2,989 21,135 (375) 293,387 69,483 22,011 20,470 94 57,072 1,273 18,855 (2,283) 277,086 63,498 23,266 20,799 101 56,792 1,443 8,855 3,733 52,450 3,344 9,556 (306) 51,164 5,670 14,482 (290) 55,905 4,273 18,460 (390) 514,263 509,979 490,535 479,546 480,362 455,573 42 30 14 2,205 946 1,215 93 717 4,212 306 290 390 375 2,283 (3,733) 348 320 404 3,526 3,591 1,196 514,611 510,299 490,939 483,072 483,953 456,769 72,466 85,442 31,020 31,326 19,095 56,157 8,213 49,840 (39,072) 42,728 $157,908 $62,346 $75,252 $58,053 $3,656 (1,513) 54,199 $52,686 (Concluded) - S4 - City of Cleveland, Ohio Fund Balances, Governmental Funds Last Ten Years (1) (Modified Accrual Basis of Accounting) (Amounts in 000's) 2012 General Fund Reserved Unreserved Nonspendable Assigned Unassigned Total General Fund All Other Governmental Funds Reserved Unreserved reported in: Special Revenue funds Capital Projects funds Nonspendable Restricted Committed Assigned Unassigned Total All Other Governmental Funds Total Governmental Funds $ 2011 $ 2010 $15,070 (2,529) 632 9,239 61,879 51,594 $15,513 (9,648) 576 12,027 38,991 71,750 2009 12,541 5,865 257,696 263,059 64,432 37,753 45,781 49,556 495 233,832 102,901 2 1,172 204,590 105,624 1 (96) 337,230 311,291 359,881 358,396 $408,980 $362,885 $372,422 $364,261 (1) Fund balance classifications changed in 2011 with the implementation of GASB No.54. - S5 - 2008 2007 2006 2005 2004 2003 $14,689 16,856 $14,455 17,399 $13,029 22,502 $11,520 24,693 $13,258 21,376 $9,719 14,932 31,545 31,854 35,531 36,213 34,634 24,651 272,039 277,669 278,984 280,042 272,122 276,518 72,421 43,438 77,223 31,136 77,287 24,458 65,786 49,750 89,325 45,522 88,251 60,462 387,898 386,028 380,729 395,578 406,969 425,231 $419,443 $417,882 $416,260 $431,791 $441,603 $449,882 Fund Balances - Governmental Funds (Amounts in 000's) $500,000 $400,000 $300,000 $200,000 $100,000 $0 2012 2011 2010 2009 2008 - S5 - 2007 2006 2005 2004 2003 City of Cleveland, Ohio Changes in Fund Balances, Governmental Funds Last Ten Years (Modified Accrual Basis of Accounting) (Amounts in 000's) 2012 Revenues Income taxes Property taxes State and local government funds Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Investment earnings Grants Contributions Miscellaneous Total Revenues Expenditures Current: General Government (1) Public Works (1) Public Service (1) Public Safety Community Development (1) Building and Housing Public Health Parks, Recreation and Properties (1) Economic Development Other Capital outlay Inception of capital lease Debt issuance cost Interest expense Debt service: Principal retirement Interest General Government Other Total Expenditures Excess (Deficiency) of Revenues Over (Under) Expenditures Other Financing Sources (Uses) Transfers in Transfers out Issuance of debt Issuance of refunding bonds Proceeds from sale of debt Premium on bonds and notes Discount on bonds and notes Payment to refund bonds and notes Proceeds from sale of general obligation bonds and notes Sale of development bonds Loan proceeds Sale of City assets Proceeds from capital lease Inception of capital lease Premium on interest rate swap agreement Total Other Financing Sources (Uses) Net Change in Fund Balances Debt Service as a Percentage of Noncapital Expenditures 2011 2010 2009 $331,118 55,312 31,821 86,084 15,070 41,436 26,830 468 129,724 1,364 18,770 $312,508 55,949 45,640 77,636 16,877 39,433 28,376 518 120,119 52 15,356 $300,427 58,660 47,972 79,620 13,529 33,779 28,643 621 116,920 72 16,490 $298,546 63,754 45,590 81,440 17,061 22,136 32,321 2,691 112,024 659 25,811 737,997 712,464 696,733 702,033 85,125 85,753 77,792 91,926 80,865 90,074 303,767 69,238 14,542 16,986 302,009 73,682 14,031 19,160 12,794 10,992 69,945 5,648 19,348 11,171 66,575 4,566 53,567 308,321 70,437 17,401 19,229 37,822 24,635 11,490 56,227 3,201 58,229 319,334 58,101 20,841 22,460 39,598 36,849 10,446 66,720 48,115 33,741 1,264 1,168 47,481 30,628 438 315 48,223 28,682 18,722 795 53,048 32,942 477 475 759,078 759,122 779,617 809,594 (21,081) (46,658) (82,884) (107,561) 59,830 (62,145) 82,945 68,643 (71,514) 31,260 106,617 (88,152) 171,505 53,414 (54,525) 44,580 13,820 8,770 (145) (28,910) 1,105 (217) 1,885 (237) (108,390) 2,289 324 6,507 1,229 6,615 1,127 6,690 6,568 67,176 37,121 91,045 52,379 $46,095 ($9,537) $8,161 ($55,182) 11.8% 11.1% 10.4% (13,767) 11.5% (1) In 2012 a departmental reorganization occurred that merged the departments of Public Service with Parks, Recreation and Properties becoming the Department of Public Works. The Office of Capital Projects was created from the Divisions of Architecture, Engineering and Construction and Research, Planning and Development and is reported under General Government. In addition, the Division of Consumer Affairs was merged with Community Development and was moved from General Government. Data for years prior to 2011 are unavailable. - S6 - 2008 2007 2006 2005 2004 2003 $326,464 65,258 52,269 81,200 15,047 26,000 34,763 8,871 94,769 549 27,649 $311,784 69,254 53,506 80,789 13,802 24,388 31,246 16,875 167,125 549 18,581 $303,446 66,787 55,908 73,810 14,520 20,973 27,877 13,809 137,278 3,113 18,683 $292,193 66,055 55,899 59,576 14,806 23,182 19,985 8,774 126,139 3,650 14,394 $294,200 67,999 55,808 57,213 16,033 18,707 19,611 3,758 118,228 6,131 21,462 $278,719 63,353 55,462 55,030 13,727 21,345 25,689 3,634 120,379 101 17,013 732,839 787,899 736,204 684,653 679,150 654,452 91,664 84,578 74,905 71,107 71,291 74,128 60,105 318,339 43,677 15,691 19,724 42,593 51,921 10,627 60,513 60,700 311,606 53,668 13,892 21,014 40,494 33,787 9,206 120,680 3,933 58,739 293,093 62,031 13,668 26,903 37,817 44,632 9,256 65,216 3,302 60,049 282,684 55,688 10,472 24,121 35,503 40,446 11,212 84,438 4,130 56,044 272,752 65,034 10,497 21,862 32,934 46,966 11,510 82,780 9,271 56,761 302,707 61,227 11,935 21,870 37,829 33,728 14,197 64,738 818 228 51,566 34,318 5,394 1,868 44,258 30,075 37,648 31,462 39,384 29,822 40,865 32,002 32,949 27,400 2,438 662 2,338 1,778 719 808,000 830,329 759,334 751,394 755,586 741,234 (75,161) (42,430) (23,130) (66,741) (76,436) (86,782) 57,550 (58,243) 61,064 (61,894) 41,853 (42,665) 43,245 (43,697) 47,256 (50,271) 59,368 (59,773) 266,160 4,042 (386) (192,675) 3,730 (18) (140,457) 121,395 13,306 (54) (94,145) 35,115 1,504 (200) 7,585 3,156 181,420 16,760 64,100 32,315 11,365 274 207 76,722 44,052 $1,561 $1,622 11.3% 10.3% 8,411 8,454 8,425 6,628 56,929 68,157 6,254 (419) 5,100 117,686 ($15,531) ($9,812) ($8,279) $30,904 9.8% 10.3% 10.7% 7,599 - S6 - 8.7% City of Cleveland, Ohio Assessed Valuation and Estimated Actual Values of Taxable Property Last Ten Years (Amounts in 000's) Real Property Collection Year Tangible Personal Property Assessed Value Residential/ Commercial Agricultural Industrial/PU Estimated Actual Value Public Utility Estimated Assessed Actual Value Value 2012 $2,641,867 $2,743,313 $15,386,229 $246,081 $279,638 2011 2,675,681 2,722,417 15,423,137 242,172 275,195 2010 2,693,686 2,585,663 15,083,857 233,870 265,761 2009 3,062,170 2,434,549 15,704,911 220,820 250,932 2008 3,041,791 2,438,801 15,658,834 210,970 239,739 2007 3,056,587 2,532,466 15,968,723 316,899 360,113 2006 2,662,461 2,285,525 14,137,103 314,385 357,256 2005 2,665,935 2,319,194 14,243,226 350,690 398,511 2004 2,666,178 2,232,575 13,996,437 355,889 404,419 2003 2,348,384 2,244,238 13,121,777 358,143 406,981 The assessed valuation level for real property in Cuyahoga County is 35% of appraised market value, except for certain agricultural land and public utility property. Beginning in 2003, the assessed valuation of personal property constituting "inventory" was reduced from 25% of true value to 23%, in 2006 it was further reduced to 18.75%, in 2007 to 12.50%, and in 2008 to 6.25%. The percentage decreased to 0% in 2009 and remains at 0% in 2012. Electric deregulation took place January 1, 2001. Under prior law, an electric company's taxable production equipment was assessed at 100% of true value, while all of its other taxable property was assessed at 88% of true value. Effective in 2002, the valuation on electric utility production equipment was reduced from 100% to 25% of true value, with makeup payments in varying amounts to be made through 2016 to taxing subdivisions by the State of Ohio from State resources. All taxable property remained at 88% true value. The total direct rate is shown per $1,000 of assessed value. Source: Cuyahoga County Auditor's Office. - S7 - Tangible Personal Property General Business Estimated Assessed Actual Value Value Assessed Value Total Estimated Actual Value Total Direct Tax Rate Ratio $0 $0 $5,631,261 $15,665,867 121.86 35.9 % 0 0 5,640,270 15,698,332 121.80 35.9 0 0 5,513,219 15,349,618 121.42 35.9 219,920 3,518,720 5,937,459 19,474,563 120.70 30.5 422,770 6,764,320 6,114,332 22,662,893 121.15 27.0 551,296 4,410,368 6,457,248 20,739,204 119.58 31.1 677,333 3,612,443 5,939,704 18,106,802 115.00 32.8 671,795 2,920,848 6,007,614 17,562,585 115.05 34.2 722,499 3,141,300 5,977,141 17,542,156 115.18 34.1 853,282 3,709,922 5,804,047 17,238,680 115.67 33.7 Assessed Value of Taxable Property (Amounts in 000's) $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 2003 2004 Real 2005 2006 2007 Public Utility Personal - S7 - 2008 2009 2010 2011 General Business Personal 2012 City of Cleveland, Ohio Property Tax Rates - Direct and Overlapping Governments (Per $1,000 of Assessed Valuation) Last Ten Years 2012 2011 Unvoted Millage Debt Fire Pension 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 Total Unvoted Millage 4.400000 4.400000 4.400000 4.400000 Charter Millage Operating Fire Pension Police Pension 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 Total Charter Millage 8.300000 8.300000 8.300000 8.300000 12.700000 12.700000 12.700000 12.700000 City School District Residential/Agricultural Real Commercial/Industrial and Public Utility Real General Business and Public Utility Personal 52.116544 60.128798 79.800000 31.674164 44.235815 64.800000 31.506887 44.362102 64.800000 31.460074 44.661412 64.800000 County Residential/Agricultural Real Commercial/Industrial and Public Utility Real General Business and Public Utility Personal 13.220000 12.996761 13.220000 13.118223 12.784540 13.220000 13.186617 12.841251 13.320000 13.178886 12.845700 13.320000 Special Taxing Districts (1) Residential/Agricultural Real Commercial/Industrial and Public Utility Real General Business and Public Utility Personal 11.391842 11.418198 11.880000 11.225159 11.232744 11.880000 11.207637 11.236434 11.880000 10.723710 10.859248 11.580000 Total Millage 2010 2009 Overlapping Rates by Taxing District Note: The rates presented for a particular calendar year are the rates that, when applied to the assessed values presented in the Assessed Value Table, generated the property tax revenue billed in that year. The City's basic property tax rate may be increased only by a majority vote of the City's residents. Charter millage is consistently applied to all types of property. The real property tax rates for the voted levies of the overlapping taxing districts are reduced so that inflationary increases in value do not generate additional revenue. Overlapping rates are those of local and county governments that apply to property owners within the City. (1) Cleveland Metropolitan Parks District, Cleveland-Cuyahoga County Port Authority, Cleveland Public Library and Cuyahoga Community College. Prior to 2003, Cleveland Metropolitan Parks District and Cleveland Public Library only. Source: Cuyahoga County Auditor's Office. - S8 - 2008 2007 2006 2005 2004 2003 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 4.350000 0.050000 4.400000 4.400000 4.400000 4.400000 4.400000 4.400000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 7.750000 0.250000 0.300000 8.300000 8.300000 8.300000 8.300000 8.300000 8.300000 12.700000 12.700000 12.700000 12.700000 12.700000 12.700000 29.076676 44.661009 64.800000 29.050497 44.592555 64.800000 29.002818 44.858685 64.800000 31.588821 48.826505 64.800000 31.586780 48.636211 64.800000 31.559197 48.764909 64.800000 12.660733 12.815297 13.320000 11.868868 12.453559 13.420000 11.865485 12.494099 13.420000 11.722742 12.588063 13.520000 10.975355 11.984633 13.520000 10.989859 12.043316 13.520000 10.330071 10.838537 11.580000 9.059500 10.191700 11.580000 9.045800 10.252900 11.580000 9.853500 11.084900 11.580000 9.851200 11.011300 11.580000 9.168300 10.525300 11.280000 - S8 - City of Cleveland, Ohio Property Tax Levies and Collections Last Ten Years Percent of Current Current Tax Collections Delinquent Tax To Current Tax Collections (1) Tax Levy Collections Year Current Tax Levy 2012 $76,327,893 $58,664,824 2011 74,312,975 59,301,577 2010 73,818,689 2009 76.86 % Total Tax Collections $6,972,134 $65,636,958 79.80 5,104,558 $64,406,135 59,078,863 80.03 5,259,959 $64,338,822 76,071,934 63,707,028 83.75 5,351,909 $69,058,937 2008 77,142,266 66,210,703 85.83 6,416,603 $72,627,306 2007 79,578,480 68,823,516 86.49 5,675,616 $74,499,132 2006 74,560,517 65,617,123 88.01 5,523,803 $71,140,926 2005 77,325,122 67,759,024 87.63 5,428,007 $73,187,031 2004 76,856,612 67,571,431 87.92 7,055,068 $74,626,499 2003 73,483,514 65,058,362 88.53 5,052,595 $70,110,957 Note: The County does not identify delinquent collections by the year for which the tax was levied. (1) State reimbursement of rollback and homestead exemptions are included. Source: Cuyahoga County Auditor's Office. - S9 - Total Tax Levy $122,143,372 Percent of Total Tax Collections To Total Tax Levy Accumulated Outstanding Delinquent Taxes 53.74 % $47,654,232 Percentage of Delinquent Taxes to Total Tax Levy 39.01 % 109,926,575 58.59 44,679,192 40.64 107,119,066 60.06 39,704,298 37.07 107,873,764 64.02 36,999,445 34.30 107,071,494 67.83 31,984,896 29.87 108,161,761 68.88 22,770,570 21.05 100,452,563 70.82 21,063,311 20.97 100,842,631 72.58 26,330,702 26.11 102,396,067 72.88 24,928,208 24.34 95,920,068 73.09 25,151,032 26.22 - S9 - City of Cleveland, Ohio Principal Taxpayers - Real Estate Tax 2012 and 2003 2012 Taxpayer Real Property Assessed Valuation (1) Percentage of Real Assessed Valuation Cleveland Clinic Foundation Cleveland Electric Illuminating Co. City of Cleveland, Ohio Key Center Properties LLC East Ohio Gas Co. Cleveland Financial Associates, LLC City of Cleveland Executive Hub North Point Properties LLC National City Bank Optima 1375, LLC $198,799,720 188,580,610 86,018,410 80,559,150 55,008,190 51,485,990 35,139,800 35,123,770 34,413,150 23,054,650 3.69 % 3.50 1.60 1.50 1.02 0.96 0.65 0.65 0.64 0.43 Total $788,183,440 14.64 % Total Real Property Assessed Valuation $5,385,180,000 2003 Taxpayer Real Property Assessed Valuation (1) Percentage of Real Assessed Valuation City of Cleveland, Ohio ZML-Cleve Public Sq LLC NPW LTD Partnership ISG Cleveland Inc. Cleveland Clinic Foundation Ohio Bell Telephone National City Center LLC Bishop James Hickey 600 Superior Place Partnership CG Erieview $138,004,710 47,232,500 35,560,000 34,267,430 29,700,590 28,464,420 28,000,000 22,366,800 16,275,000 10,500,010 3.00 % 1.03 0.77 0.75 0.65 0.62 0.61 0.49 0.35 0.23 Total $390,371,460 8.50 % Total Real Property Assessed Valuation $4,592,622,990 (1) The amounts presented represent the assessed values upon which 2012 and 2003 collections were based. Source: Cuyahoga County Auditor's Office. -S10- City of Cleveland, Ohio Income Tax Revenue Base and Collections Last Ten Years Total Tax Collected (1) Taxes from Withholding Percentage of Taxes from Withholding $338,046,790 $285,450,129 84.44% 2.00 322,072,689 272,209,650 84.52 32,693,730 10.15 17,169,309 5.33 2010 2.00 310,339,588 261,801,977 84.36 32,095,566 10.34 16,442,045 5.30 2009 2.00 312,129,641 261,878,357 83.90 33,065,140 10.59 17,186,144 5.51 2008 2.00 335,310,894 277,203,932 82.67 38,709,596 11.54 19,397,366 5.78 2007 2.00 328,167,945 274,733,506 83.72 34,314,408 10.46 19,120,031 5.83 2006 2.00 311,254,815 260,697,679 83.76 32,469,591 10.43 18,087,545 5.81 2005 2.00 300,836,796 253,082,844 84.13 29,796,387 9.90 17,957,565 5.97 2004 2.00 300,041,379 255,039,437 85.00 25,919,958 8.64 19,081,984 6.36 2003 2.00 285,904,337 242,321,319 84.76 24,334,618 8.51 19,248,400 6.73 Tax Year Tax Rate 2012 2.00% 2011 Taxes From Net Profits Percentage of Taxes from Net Profits $35,946,656 10.63% Taxes From Individuals $16,650,005 Income Tax Collections for the Last 10 Years (Amounts in millions) $400 $350 $300 $250 $200 $150 $100 $50 $0 2003 2004 2005 2006 Withholding 2007 2008 Net Profits 2009 Individuals Note: The City is prohibited by statute from presenting information regarding individual taxpayers. (1) Gross collections. Source: Central Collection Agency. - S11 - 2010 2011 2012 Percentage of Taxes from Individuals 4.93% City of Cleveland, Ohio Ratio of Outstanding Debt to Total Personal Income and Debt Per Capita Last Ten Years Governmental Activities Capital Leases Subordinated Income Tax Refunding Bonds Certificates of Participation Subordinate Lien Income Tax Bonds $55,894,000 $16,236,000 $50,020,000 $123,605,000 $92,380,000 4,835,000 58,591,000 12,908,000 52,975,000 129,547,000 80,505,000 297,115,000 5,365,000 61,795,000 8,937,000 55,785,000 135,537,000 83,025,000 2009 326,230,000 5,860,000 64,956,000 5,320,000 58,460,000 119,016,000 57,630,000 2008 313,630,000 6,325,000 67,617,000 8,604,000 59,960,000 129,949,000 59,560,000 2007 336,990,000 6,760,000 68,091,000 11,786,000 58,900,000 140,714,000 2006 323,795,000 7,170,000 69,353,000 15,057,000 60,700,000 143,950,000 2005 353,325,000 7,555,000 70,085,000 18,083,000 62,400,000 146,225,000 2004 346,700,000 12,215,000 70,715,000 11,750,000 64,000,000 148,485,000 2003 356,900,000 12,555,000 45,600,000 6,254,000 65,500,000 150,550,000 Year General Obligation Bonds Urban Renewal Bonds/Notes Non-Tax Revenue Bonds/Notes 2012 $308,700,000 $4,270,000 2011 298,660,000 2010 Note: Population and Personal Income data are presented on page S20. - S12 - Business-Type Activities Annual Appropriation Bonds Revenue Bonds / Notes OWDA/ OPWC Loans Total Debt Percentage of Personal Income $10,765,000 $1,926,203,000 $109,742,000 $2,697,815,000 11,000,000 1,930,163,000 115,523,000 2,694,707,000 41.66 6,791 11,000,000 1,974,828,000 121,335,000 2,754,722,000 48.58 6,942 2,032,178,000 107,654,000 2,777,304,000 40.62 5,805 2,100,768,000 112,275,000 2,858,688,000 41.81 5,975 2,075,755,000 110,070,000 2,809,066,000 41.09 5,872 1,995,045,000 103,415,000 2,718,485,000 39.76 5,682 2,049,820,000 78,498,000 2,785,991,000 40.75 5,824 2,102,986,000 52,616,000 2,809,467,000 41.09 5,873 2,160,842,000 33,045,000 2,831,246,000 41.41 5,918 Per Capita 41.70% $6,799 Total Debt Per Capita Last 10 Years $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 YEAR - S12 - City of Cleveland, Ohio Ratio of General Obligation Bonded Debt to Assessed Value and Bonded Debt Per Capita Last Ten Years Year Population (1) Estimated Actual Value of Taxable Property (2) (Amount in 000's) Net Bonded Debt Ratio of Net Bonded Debt to Estimated Actual Value of Taxable Property 5.37 % Net Bonded Debt Per Capita 2012 396,815 (a) $5,631,261 $302,484,000 2011 396,815 (a) 5,640,270 297,172,000 5.27 748.89 2010 396,815 (a) 5,513,219 294,923,000 5.35 743.23 2009 478,403 (b) 5,937,459 323,631,000 5.45 676.48 2008 478,403 (b) 6,114,332 311,134,000 5.09 650.36 2007 478,403 (b) 6,457,248 333,823,000 5.17 697.79 2006 478,403 (b) 5,939,704 320,265,000 5.39 669.45 2005 478,403 (b) 6,007,614 348,004,000 5.79 727.43 2004 478,403 (b) 5,977,141 339,209,000 5.68 709.04 2003 478,403 (b) 5,804,047 352,569,000 6.07 736.97 Note: Net Bonded Debt includes all general obligation bonded debt less balance in debt service fund. Sources: (1) U. S. Bureau of Census, Census of Population: (a) 2010 Federal Census (b) 2000 Federal Census (2) Cuyahoga County Fiscal Officer's Office. - S13 - $762.28 City of Cleveland, Ohio Computation of Direct and Overlapping Governmental Activities Debt December 31, 2012 Jurisdiction Direct - City of Cleveland General Obligation Bonds Capital Leases Urban Renewal Bonds Subordinated Income Tax Refunding Bonds Subordinate Lien Income Tax Bonds Non-tax Revenue Bonds Annual Appropriation Bonds Total Direct Debt Governmental Activities Debt Outstanding $308,700,000 16,236,000 4,270,000 50,020,000 92,380,000 55,894,000 10,765,000 Percentage Applicable to City (1) 100.00 % 100.00 100.00 100.00 100.00 100.00 100.00 538,265,000 Amount Applicable to City $308,700,000 16,236,000 4,270,000 50,020,000 92,380,000 55,894,000 10,765,000 538,265,000 Overlapping Cleveland Municipal School District General Obligation Bonds (1) Cuyahoga County General Obligation Bonds (1) Regional Transit Authority (1) Total Overlapping Debt 630,314,763 243,889,646 $1,168,579,763 $782,154,646 Total 159,744,118 97.00 154,951,794 341,075,645 18.90 64,463,297 129,495,000 18.90 24,474,555 (1) Percentages were determined by dividing each overlapping subdivision's assessed valuation within the City by its total assessed valuation. Source: Cuyahoga County Fiscal Officer's Office. - S14 - City of Cleveland, Ohio Legal Debt Margin Last Ten Years 2012 Total Assessed Property Value Overall Legal Debt Limit (10 1/2 % of Assessed Valuation) Debt Outstanding: General Obligation Bonds Revenue Notes/Bonds Urban Renewal Bonds/Notes Subordinated Income Tax Refunding Bonds Subordinate Lien Income Tax Bonds OWDA/OPWC Loans Non-tax Revenue Bonds Annual Appropriation Bonds Total Gross Indebtedness Less: General Obligation Bonds Revenue Notes/Bonds Urban Renewal Bonds/Notes Subordinated Income Tax Refunding Bonds Subordinate Lien Income Tax Bonds OWDA/OPWC Loans Non-tax Revenue Bonds Annual Appropriation Bonds General Obligation Bond Retirement Fund Balance 2011 2010 2009 $5,631,261,380 $5,640,270,380 $5,513,219,400 $5,937,458,591 591,282,445 592,228,390 578,888,037 623,433,152 308,700,000 1,926,203,000 4,270,000 50,020,000 92,380,000 109,742,000 55,894,000 10,765,000 298,660,000 1,930,163,000 4,835,000 52,975,000 80,505,000 115,523,000 58,591,000 11,000,000 297,115,000 1,974,828,000 5,365,000 55,785,000 83,025,000 121,335,000 61,795,000 11,000,000 326,230,000 2,032,178,000 5,860,000 58,460,000 57,630,000 107,654,000 64,956,000 2,557,974,000 2,552,252,000 2,610,248,000 2,652,968,000 308,700,000 1,926,203,000 4,270,000 50,020,000 92,380,000 109,742,000 55,894,000 10,765,000 6,216,000 298,660,000 1,930,163,000 4,835,000 52,975,000 80,505,000 115,523,000 58,591,000 11,000,000 1,488,000 297,115,000 1,974,828,000 5,365,000 55,785,000 83,025,000 121,335,000 61,795,000 11,000,000 2,192,000 326,230,000 2,032,178,000 5,860,000 58,460,000 57,630,000 107,654,000 64,950,000 - Total Net Debt Applicable to Debt Limit* Legal Debt Margin Within 10 1/2 % Limitations Legal Debt Margin as a Percentage of the Debt Limit $591,282,445 100.00% $592,228,390 100.00% $578,888,037 100.00% 2,599,000 $623,433,152 100.00% Unvoted Debt Limitation (5 1/2 % of Assessed Valuation) $309,719,376 $310,214,871 $303,227,067 $326,560,223 Total Gross Indebtedness Less: General Obligation Bonds Revenue Notes/Bonds Urban Renewal Bonds/Notes Subordinated Income Tax Refunding Bonds Subordinate Lien Income Tax Bonds OWDA/OPWC Loans Non-tax Revenue Bonds Annual Appropriation Bonds General Obligation Bond Retirement Fund Balance 2,557,974,000 2,552,252,000 2,610,248,000 2,652,968,000 308,700,000 1,926,203,000 4,270,000 50,020,000 92,380,000 109,742,000 55,894,000 10,765,000 6,216,000 298,660,000 1,930,163,000 4,835,000 52,975,000 80,505,000 115,523,000 58,591,000 11,000,000 1,488,000 297,115,000 1,974,828,000 5,365,000 55,785,000 83,025,000 121,335,000 61,795,000 11,000,000 2,192,000 326,230,000 2,032,178,000 5,860,000 58,460,000 57,630,000 107,654,000 64,950,000 Net Debt Within 5 1/2 % Limitations* Unvoted Legal Debt Margin Within 5 1/2 % Limitations Unvoted legal Debt Margin as a Percentage of the Unvoted Debt Limitation $309,719,376 100.00% $310,214,871 100.00% $303,227,067 100.00% * The City does not report net debt limits below zero, therefore if the net debt limit is negative it is considered to be equal to zero. The types of Debt issued by the City are exempt from the limitations defined in the Ohio Revised Code. Source: City Financial Records. - S15 - 2,599,000 $326,560,223 100.00% 2008 2007 2006 2005 2004 2003 $6,114,332,281 $6,457,247,750 $5,939,704,867 $6,007,616,318 $5,977,142,243 $5,804,048,750 642,004,890 678,011,014 623,669,011 630,799,713 627,599,936 609,425,119 313,630,000 2,100,768,000 6,325,000 59,960,000 59,560,000 112,275,000 67,617,000 336,990,000 2,075,755,000 6,760,000 58,900,000 323,795,000 1,995,045,000 7,170,000 60,700,000 353,325,000 2,049,820,000 7,555,000 62,400,000 346,700,000 2,102,986,000 12,215,000 64,000,000 356,900,000 2,160,842,000 12,555,000 65,500,000 110,070,000 68,091,000 103,415,000 69,353,000 78,498,000 70,085,000 52,616,000 70,715,000 33,045,000 45,600,000 2,720,135,000 2,656,566,000 2,559,478,000 2,621,683,000 2,649,232,000 2,674,442,000 313,630,000 2,100,768,000 6,325,000 59,960,000 59,560,000 112,275,000 67,617,000 336,990,000 2,075,755,000 6,760,000 58,900,000 323,795,000 1,995,045,000 7,170,000 60,700,000 353,325,000 2,049,820,000 7,555,000 62,400,000 346,700,000 2,102,986,000 12,215,000 64,000,000 356,900,000 2,160,842,000 12,555,000 65,500,000 110,070,000 68,091,000 103,415,000 69,353,000 78,498,000 70,085,000 52,616,000 70,715,000 33,045,000 45,600,000 2,496,000 3,167,000 3,530,000 5,321,000 7,491,000 4,331,000 $642,004,890 100.00% $678,011,014 100.00% $623,669,011 100.00% $630,799,713 100.00% $627,599,936 100.00% $609,425,119 100.00% $336,288,276 $355,148,626 $326,683,768 $330,418,898 $328,742,823 $319,222,681 2,720,135,000 2,656,566,000 2,559,478,000 2,621,683,000 2,649,232,000 2,674,442,000 313,630,000 2,100,768,000 6,325,000 59,960,000 59,560,000 112,275,000 67,617,000 336,990,000 2,075,755,000 6,760,000 58,900,000 323,795,000 1,995,045,000 7,170,000 60,700,000 353,325,000 2,049,820,000 7,555,000 62,400,000 346,700,000 2,102,986,000 12,215,000 64,000,000 356,900,000 2,160,842,000 12,555,000 65,500,000 110,070,000 68,091,000 103,415,000 69,353,000 78,498,000 70,085,000 52,616,000 70,715,000 33,045,000 45,600,000 2,496,000 3,167,000 3,530,000 5,321,000 7,491,000 4,331,000 $336,288,276 100.00% $355,148,626 100.00% $326,683,768 100.00% - S15 - $330,418,898 100.00% $328,742,823 100.00% $319,222,681 100.00% City of Cleveland, Ohio Pledged Revenue Coverage Airport Revenue Bonds Last Ten Years Year Gross Revenues (1) Direct Operating Expenses (2) Net Revenues Available for Debt Service Debt Service Principal Interest Coverage 2012 $152,030,000 $68,855,000 $83,175,000 $16,285,000 $33,765,871 1.66 2011 150,112,000 73,310,000 76,802,000 13,660,000 34,940,285 1.58 2010 152,053,000 70,152,000 81,901,000 14,705,000 36,386,915 1.60 2009 167,358,000 68,432,000 98,926,000 22,450,000 37,622,000 1.65 2008 160,455,000 74,885,000 85,570,000 16,830,000 40,497,264 1.49 2007 151,430,000 69,358,000 82,072,000 20,160,000 34,968,361 1.49 2006 135,883,000 62,426,000 73,457,000 17,775,000 39,565,000 1.28 2005 140,157,000 66,957,000 73,200,000 10,895,000 43,026,000 1.36 2004 135,117,000 58,647,000 76,470,000 9,373,000 35,817,000 1.69 2003 107,758,000 57,845,000 49,913,000 11,104,000 25,128,000 1.38 (1) Gross revenues include operating revenues plus interest income. Beginning in 2001, a minimum of 40% of passenger facility charges, as well as grant funds from the FAA for the new runway, are dedicated to the payment of debt service charges and are included in gross revenues. Beginning in 2007, the Coverage Account was included in the calculation of debt service coverage. (2) Direct operating expenses are calculated in accordance with the bond indenture. - S16 - City of Cleveland, Ohio Pledged Revenue Coverage Power System Revenue Bonds Last Ten Years Year Gross Revenues (1) Direct Operating Expenses (2) Net Revenues Available for Debt Service Debt Service Principal Interest Coverage 2012 $165,307,000 $136,987,000 $28,320,000 $10,050,000 $9,746,181 (3) 1.43 2011 168,599,000 139,952,000 28,647,000 10,495,000 9,987,500 (3) 1.40 2010 166,761,000 138,030,000 28,731,000 8,045,000 9,871,011 1.60 2009 156,034,000 128,436,000 27,598,000 8,530,000 9,009,810 1.57 2008 160,224,000 124,161,000 36,063,000 8,335,000 9,054,492 2.07 2007 159,232,000 120,415,000 38,817,000 8,045,000 9,368,159 2.23 2006 149,276,000 114,942,000 34,334,000 11,025,000 8,144,118 1.79 2005 152,146,000 125,924,000 26,222,000 4,920,000 9,813,126 1.78 2004 142,148,000 109,275,000 32,873,000 9,410,000 10,447,476 1.66 2003 141,190,000 104,940,000 36,250,000 7,865,000 10,886,836 1.93 (1) Gross revenues include operating revenues plus interest income. (2) Direct operating expenses are calculated in accordance with the bond indenture. (3) Net of capitalized interest per indenture. - S17 - City of Cleveland, Ohio Pledged Revenue Coverage Water System Revenue Bonds Last Ten Years Year Gross Revenues (1) Direct Operating Expenses (2) Net Revenues Available for Debt Service Principal 2012 $282,288,000 $149,169,000 $133,119,000 $31,100,000 $26,639,529 2.31 2011 238,975,000 146,232,000 92,743,000 34,000,000 30,275,641 1.44 2010 241,277,000 149,513,000 91,764,000 37,150,000 32,447,214 1.32 2009 232,357,000 147,716,000 84,641,000 31,945,000 33,200,509 1.30 2008 252,660,000 143,833,000 108,827,000 27,285,000 38,139,614 1.66 2007 257,992,000 140,210,000 117,782,000 19,660,000 30,660,206 2.34 2006 223,903,000 132,879,000 91,024,000 17,695,000 35,300,322 1.72 2005 230,354,000 123,931,000 106,423,000 15,485,000 36,763,888 2.04 2004 215,012,000 127,021,000 87,991,000 20,748,333 30,184,582 1.73 2003 210,352,000 123,640,000 86,712,000 25,160,000 33,188,434 1.49 Debt Service (1) Gross revenues include operating revenues plus interest income. (2) Direct operating expenses are calculated in accordance with the bond indenture. (3) Per indenture, interest expense is reduced by amount released from reserve fund at the start of year. - S18 - Interest (3) Coverage City of Cleveland, Ohio Principal Employers 2012 and 2003 2012 Employees Employer Percentage of Total City Employment Cleveland Clinic University Hospitals of Cleveland Cuyahoga County United States Postal Service City of Cleveland Cleveland Metropolitan School District KeyCorp The MetroHealth System Case Western Reserve University UPS 33,000 15,123 7,709 7,565 7,061 6,246 5,983 5,238 4,636 3,168 22.40% 10.27 5.23 5.14 4.79 4.24 4.06 3.56 3.15 2.15 Total 95,729 64.99% Total Employment within the City 147,300 2003 Employees Employer Percentage of Total City Employment Cleveland Clinic Health Systems University Hospitals Health System Cleveland City School District Cuyahoga County City of Cleveland KeyCorp United States Postal Service The MetroHealth System National City Corp. Case Western Reserve University 23,567 14,270 10,510 9,376 8,658 7,381 5,548 5,411 5,400 5,249 13.10% 7.93 5.84 5.21 4.81 4.10 3.09 3.01 3.00 2.92 Total 95,370 53.01% Total Employment within the City 179,900 Note: Largest employers headquartered in the City ranked by FTE employees. Source: Number of employees from Crain's Cleveland: Book of Lists 2013, Largest Northeast Ohio Employers; FTEs as of 6/30/2012 Book of Lists 2004, Largest Cuyahoga County Employers; FTEs as of 01/01/2003 - S19 - City of Cleveland, Ohio Demographic and Economic Statistics Last Ten Years Personal Income Per Capita Total Personal Income (6) Median Household Income Median Age Year Population 2012 396,815 (1) 6,468,878,130 $16,302 (1) $27,349 (1) 35.7 (1) 2011 396,815 (1) 6,468,878,130 16,302 (1) 27,349 (1) 35.7 (1) 2010 396,815 (1) 6,468,878,130 16,302 (1) 27,349 (1) 35.7 (1) 2009 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2008 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2007 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2006 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2005 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2004 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) 2003 478,403 (2) 6,836,857,273 14,291 (2) 25,928 (2) 33 (2) Total Assessed Property Value (Amounts in billions) $8 $7 $6 $5 $4 $3 $2 $1 $0 (1) Source: U. S. Census Bureau. 2010 Census (2) Source: U. S. Census Bureau. 2000 Census (3) Source: Ohio Department of Education Website: "http://www.ode.state.oh.us/". (4) Source: Ohio Labor Market Info, Website: "http://lmi.state.oh.us/laus/LAUS.html". (5) Source: Cuyahoga County Auditor's Office. (6) Computation of per capita personal income multiplied by population. - S20 - Educational Attainment: Bachelor's Degree or Higher School Enrollment (3) City Unemployment Rate (4) 13.1% (1) 42,883 8.5% 13.1 (1) 45,060 13.1 (1) 11.4 Average Sales Price of Residential Property (5) Total Assessed Property Value (5) (Amount in 000's) $55,774 $5,631,261 10.0 54,638 5,640,270 47,615 11.5 60,398 5,513,219 (2) 74,615 10.6 57,075 5,937,459 11.4 (2) 50,078 8.8 50,515 6,114,332 11.4 (2) 52,769 7.6 57,230 6,457,248 11.4 (2) 59,586 7.1 83,237 5,939,704 11.4 (2) 65,079 7.7 86,142 6,007,614 11.4 (2) 69,655 8.3 81,185 5,977,141 11.4 (2) 71,616 8.3 83,216 5,804,047 Average Sales Price of Residential Property (Amounts in 000's) $120 $100 $80 $60 $40 $20 $0 - S20 - City of Cleveland, Ohio Full-Time Equivalent City Government Employees by Function/Program Last Nine Years (1) Function/Program 2012 General Government Council Mayor's Office Office of Capital Projects Landmarks Commission Building Standards and Appeals Board of Zoning Appeals Civil Service Commission Community Relations Board City Planning Commission Equal Employment Opportunity Court Office of Budget Administration Aging Personnel and Human Resources Consumer Affairs Law Finance Security of Persons and Property Administration Police Fire EMS Dog Pound House of Corrections Public Health Services Leisure Time Activities Parks, Recreation and Property Administration Research, Planning and Development Recreation Convention Center, Westside Market and Cleveland Stadium Parking Facilities Property Management Parks Maintenance Community Development Building and Housing Economic Development Public Works Public Works Administration Architecture Waste Collection and Disposal Engineering and Construction Motor Vehicle Maintenance Streets Traffic Engineering Port Control Basic Utility Services Water Cleveland Public Power Water Pollution Control Totals: 61.50 25.50 46.00 (4) 5.00 6.00 4.50 10.00 24.00 20.50 8.00 461.00 7.00 22.00 18.00 0.00 (4) 72.50 232.00 2011 2010 63.00 24.50 62.00 25.50 5.00 6.00 4.50 9.50 28.00 21.50 8.00 479.50 7.00 25.00 16.00 4.00 76.00 234.00 5.50 5.50 4.00 11.00 30.50 24.00 10.00 531.00 7.00 24.50 16.50 3.00 87.00 241.50 36.50 1,869.50 803.00 214.00 15.00 153.00 140.50 40.00 1,983.50 875.00 218.00 16.00 170.00 159.50 0.00 (4) 0.00 (4) 190.50 42.50 39.50 70.50 119.00 78.50 113.00 26.00 8.00 5.00 189.00 29.50 42.50 73.50 126.00 76.50 120.00 28.00 7.00 6.00 230.00 27.50 42.50 81.50 140.00 87.00 134.50 34.00 34.00 0.00 (4) 206.50 0.00 (4) 68.00 260.00 29.00 404.50 5.50 5.00 212.50 31.50 75.00 285.00 36.00 418.00 4.50 6.00 238.50 59.50 81.00 257.50 38.00 446.50 1,093.00 335.00 136.00 1,157.00 358.00 148.50 1,164.50 345.00 158.00 7,412.50 7,673.00 8,139.50 36.50 1,873.00 729.00 232.00 14.50 133.00 125.50 Method: Using 1.0 for each full-time employee and 0.50 for each part-time and seasonal employee at year end. (1) Information prior to 2004 is not available. (2) Building and Housing was moved from Community Development to its own department in 2005. (3) House of Corrections was moved from Public Health to Public Safety in 2007. (4) In 2012 a departmental reorganization occurred that merged the departments of Public Service with Parks, Recreation and Properties becoming the Department of Public Works. The Office of Capital Projects was created from the Divisions of Architecture, Engineering and Construction and Research, Planning and Development and is reported under General Government. In addition, the Division of Consumer Affairs was merged with Community Development and was moved from General Government. N/A - Information not available. Source: City Payroll Department. - S21 - 2009 2008 2007 2006 2005 2004 65.50 25.50 64.50 27.50 62.50 26.00 63.50 25.00 65.00 29.50 66.00 27.00 5.50 5.50 4.50 10.50 29.00 24.00 10.00 542.50 5.50 21.50 15.00 5.00 88.50 248.50 5.50 5.50 4.50 10.00 27.50 23.00 11.00 541.50 7.00 21.00 17.00 6.00 86.50 250.50 5.50 5.50 4.50 11.50 27.00 26.00 13.00 551.00 8.00 22.50 20.00 5.00 89.50 255.00 5.00 5.00 4.50 10.00 28.50 23.00 13.00 544.00 7.00 20.50 19.00 5.00 88.50 255.00 4.50 6.00 5.50 10.50 23.50 26.00 14.00 541.50 7.00 18.00 18.00 3.00 89.00 255.50 4.50 6.00 5.50 12.50 24.50 27.00 12.00 534.50 8.00 18.00 91.50 4.00 93.00 245.50 39.00 2,079.00 894.00 236.00 15.00 188.00 168.50 39.00 2,095.50 883.00 252.00 14.50 176.50 169.50 39.50 2,176.50 915.00 292.00 14.50 N/A 260.00 39.00 2,179.00 916.00 297.00 13.00 N/A 253.00 41.50 2,145.50 913.00 298.00 13.00 N/A 261.50 7.00 8.00 238.00 31.00 41.00 84.50 141.00 86.00 142.00 68.00 7.00 9.00 233.50 54.50 44.50 87.50 151.00 77.50 147.00 73.00 8.00 9.00 238.00 59.50 49.00 89.50 164.00 78.50 161.00 88.00 8.00 9.00 165.00 49.50 46.50 93.00 161.00 81.00 165.00 94.00 7.00 10.00 170.50 54.00 47.50 100.00 170.00 87.50 (2) 170.00 (2) 98.00 9.00 10.00 176.00 49.50 56.00 99.50 167.00 271.50 0.00 29.00 4.50 6.00 253.50 61.50 85.00 271.50 39.00 447.50 5.00 7.00 225.50 60.50 86.00 283.50 40.00 406.50 5.00 8.00 252.50 65.50 95.00 306.00 41.00 386.00 5.00 9.00 244.50 65.50 102.00 288.50 44.00 369.50 5.00 9.00 225.50 69.50 100.00 303.00 44.00 377.50 6.00 9.00 223.50 70.00 102.00 287.00 3.00 402.00 1,179.50 343.00 157.00 1,215.50 340.00 150.00 1,194.00 341.00 157.00 1,207.00 337.00 144.00 1,216.00 341.00 147.00 1,263.50 347.00 147.00 8,420.50 8,442.50 8,632.00 8,502.00 8,565.50 8,579.50 42.50 2,105.00 902.00 288.00 14.50 183.50 (3) 168.50 (3) - S21 - City of Cleveland, Ohio Operating Indicators by Function/Program Last Ten Years Function/Program 2012 General Government Council and Clerk Number of ordinances passed Number of resolutions passed Number of planning commission docket items (4) Zoning board of appeals docket items Finance Department Number of payments issued Total amount of payments Interest earnings for fiscal year (cash basis) Number of receiving warrants (8) Number of journal entries issued (8) Number of budget adjustments issued Agency ratings - Standard & Poor's (1) Agency ratings - Moody's Financial Services (1) Health insurance costs vs. General Fund expenditures % General Fund receipts (cash basis in thousands) General Fund expenditures (cash basis in thousands) General Fund cash balances (in thousands) 2011 2010 2009 631 739 359 237 723 647 262 241 621 747 298 274 772 776 309 267 38,010 $1,236,189,641 $3,283,638 32,087 190,554 4 AA A1 15% $501,018 $468,543 $84,869 38,501 $1,311,830,974 $4,061,090 30,433 179,546 6 AA A1 18% $496,086 $472,883 $54,888 37,944 $1,276,014,604 $7,507,827 31,497 192,281 2 AA A1 17% $480,724 $482,227 $16,400 44,289 $1,307,460,874 $13,219,445 16,369 41,238 2 AA A2 15% $487,678 $501,758 $12,327 Income Tax Department Number of individual returns Number of business returns Number of business withholding accounts Amount of penalties and interest collected Annual number of corporate withholding forms processed Annual number of balance due statements forms processed Annual number of estimated payment forms processed Annual number of reconciliations of withholdings processed 192,362 25,140 14,414 $1,771,088 147,175 37,642 41,813 11,416 196,457 26,240 14,338 $2,059,203 149,537 38,152 41,636 11,376 202,232 26,881 13,835 $1,754,501 149,584 36,188 42,767 11,357 211,241 26,326 14,542 $1,884,453 144,493 38,610 47,841 12,213 Engineer Contracted Services Dollar amount of construction overseen by engineer (2) $25,400,000 $30,760,000 $34,000,000 $32,000,000 Municipal Court Number of civil cases (10) Number of criminal cases (10) 9,451 110,754 Vital Statistics Certificates filed (3) Number of births Number of deaths Number of fetal deaths Certificates issued (3) Number of births Number of deaths 11,513 107,711 19,280 167,563 16,375 120,131 17,264 13,016 384 15,528 12,296 454 16,403 12,101 401 57,297 60,173 Civil Service Number of police entry tests administered Number of fire entry tests administered Number of police promotional tests administered Number of fire promotional tests administered Number of hires of police officers from certified lists Number of hires of fire/medics from certified lists Number of promotions from police certified lists Number of promotions from fire certified lists 16,616 12,958 459 57,542 61,147 62,507 59,689 69,785 60,465 0 0 0 0 50 0 33 42 - S22 - 0 0 1 1 42 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 56 22 20 0 2008 2007 2006 2005 2004 2003 771 304 444 242 784 363 441 263 846 361 768 265 899 306 725 394 891 292 669 337 1,028 349 538 349 47,670 $1,251,719,916 $45,366,880 16,141 41,217 5 AA A2 14% $517,796 $501,124 $40,685 47,985 $1,287,268,015 $63,335,510 15,300 43,619 2 A A2 14% $509,616 $485,410 $41,885 49,533 $1,284,108,296 $53,988,258 14,799 43,186 3 A A2 14% $490,927 $465,162 $30,957 50,541 $1,266,586,217 $42,035,213 14,485 39,839 5 A A2 14% $471,755 $451,323 $29,738 48,808 $1,211,743,500 $38,154,383 14,344 41,543 4 A A2 12% $455,775 $484,856 $24,058 51,922 $1,211,440,564 $39,688,080 58,967 54,095 4 A A2 12% $459,365 $437,964 $17,676 232,210 29,014 14,653 $2,357,490 151,256 44,637 51,527 12,198 238,319 28,335 14,469 $1,912,554 152,334 39,767 57,092 12,488 248,108 30,567 16,200 $1,999,859 169,933 45,909 56,163 18,929 267,712 25,763 14,942 $1,990,879 136,931 47,252 55,036 9,075 287,904 30,584 15,503 $2,471,464 148,779 53,458 62,115 14,723 299,081 29,825 15,520 $2,233,996 147,478 58,689 64,780 13,000 $159,540,000 $251,305,000 $141,733,000 $52,741,000 $78,562,000 $49,716,000 19,890 120,077 18,569 113,661 22,909 121,676 21,567 121,791 22,418 113,822 23,133 151,395 16,942 12,354 447 17,235 12,086 399 17,645 11,992 312 17,638 12,343 361 18,191 12,296 294 18,542 11,825 477 77,967 65,149 102,140 64,436 98,545 84,615 101,284 66,268 58,452 38,684 N/A N/A 0 0 3 0 106 0 40 10 1 0 0 0 73 0 0 49 0 0 0 0 0 0 0 0 0 0 0 0 0 0 39 0 0 0 0 0 0 0 19 0 0 0 0 0 0 0 23 0 (Continued) - S22 - City of Cleveland, Ohio Operating Indicators by Function/Program Last Ten Years Function/Program Building Department Indicators Construction permits issued Estimated value of construction Number of other permits issued Amount of revenue generated from permits Number of contract registrations issued Annual apartment/rooming house license fees 2012 2011 16,245 $1,033,330,550 4,854 $7,867,168 2,802 $1,305,182 15,082 $1,556,000,000 4,164 $8,306,423 2,822 $1,343,457 Security of Persons and Property Police Number of traffic citations issued Number of parking citations issued Number of criminal arrests Number of accident reports completed Part 1 offenses (major offenses) DUI arrests Prisoners Motor vehicle accidents Fatalities from motor vehicle accidents Community diversion program youths 2010 2009 6,829 $729,883,689 8,629 $6,078,922 2,895 $1,571,317 8,334 $919,923,776 8,290 $7,332,522 2,847 $1,281,530 121,474 42,404 35,730 14,549 39,028 790 35,251 14,549 31 152 119,371 42,763 37,531 15,444 40,554 679 37,235 15,412 29 188 75,362 48,691 39,657 14,761 38,003 729 39,156 14,761 49 196 77,037 59,598 38,613 14,804 38,586 738 37,864 14,804 38 139 Fire Fire calls - incoming for services (6) Fires Fires with loss Fires with losses exceeding $10K Fire losses $ Fire safety inspections Number of times mutual aid given to fire 65,040 2,846 1,372 259 $13,128,848 13,380 30 65,132 2,714 1,398 256 $14,747,291 10,898 21 60,076 2,869 1,266 219 $12,035,650 13,631 29 60,306 2,794 843 237 $12,312,407 13,982 17 EMS EMS calls - incoming for service Ambulance billing collections (net) 96,359 $12,051,964 94,307 $11,594,178 92,230 $10,832,204 89,632 $9,649,887 333 7,674 38 0 5 62 21,118 161 419 161 0 5 0 196 400 7,369 42 11 12 87 19,136 204 480 229 4 6 0 177 238 7,624 36 11 5 69 24,130 120 390 223 4 6 0 169 219 8,684 34 11 5 58 27,544 142 349 209 4 6 3 155 Public Health and Welfare Number of health inspections Barber shops Food Hotels/motels Marinas Mobile home parks Laundries Nuisance Pools Schools Day care inspections Maternity inspections Abortion inspections Cemetery burials Cemetery cremations - S22 - 2008 2007 2006 2005 2004 2003 10,631 $814,646,916 9,710 $7,364,794 2,783 $1,331,940 8,397 $648,592,297 8,971 $7,112,426 2,887 $1,427,208 9,163 $743,566,106 9,157 $7,399,513 3,077 $1,290,830 9,699 $652,537,749 9,272 $7,504,979 3,700 $1,367,157 10,020 $558,278,403 9,489 $8,661,198 2,200 $1,433,689 9,471 $487,768,588 9,767 $6,353,990 5,492 $1,399,415 79,089 49,012 39,596 15,525 39,237 695 38,629 15,525 52 169 62,652 49,669 39,087 16,239 41,400 847 38,142 16,239 34 229 77,003 59,311 40,678 17,374 44,018 577 39,851 17,374 39 177 82,642 51,947 39,002 18,878 42,352 705 38,259 18,878 38 155 77,424 54,268 38,090 20,655 39,933 660 37,426 20,655 49 273 106,970 173,185 45,205 21,898 32,198 1,075 43,765 21,898 42 263 60,263 2,790 1,095 362 $11,242,477 8,110 11 63,403 3,343 1,807 479 $19,115,824 9,764 5 61,702 3,296 1,708 362 $21,567,578 5,901 0 65,825 3,195 1,904 379 $18,292,877 6,027 87 56,236 3,202 1,641 316 $18,140,355 6,198 39 3,703 N/A 1,777 261 $12,179,966 6,989 92 88,934 $12,091,087 88,506 $11,394,837 86,010 $10,698,730 91,161 $10,075,142 87,009 $8,830,211 89,380 $7,243,765 227 9,611 37 11 5 62 17,205 127 195 98 4 6 17 149 263 7,914 31 11 5 81 23,402 131 274 109 4 5 54 144 251 8,143 31 11 5 68 20,057 129 235 104 3 5 27 83 237 8,140 27 11 5 59 18,317 146 376 95 4 5 49 45 230 8,175 29 11 5 46 18,299 129 225 101 4 5 73 32 199 8,207 24 11 5 46 17,539 129 225 113 4 5 77 19 (Continued) - S22 - City of Cleveland, Ohio Operating Indicators by Function/Program Last Ten Years Function/Program 2012 2011 2010 2009 Leisure Time Activities Recreation men and women leagues receipts $9,862 $5,280 $5,145 $5,070 Economic Development Grant amounts received (Amounts in 000's) (13) $5,856 $2,154 $4,564 $12,958 212,032 0 117,239 100 224,361 3,263 83,212 40 0 679,450 76,000 2,500 101,000 200,640 80,000 2,500 661 4,952 4,273 2,176 19,271 87,369 18,912 0 500 4,196 40,236 $1,834,359 212,367 $5,723,227 22,318 10.06% 651 5,260 4,706 3,840 31,345 128,000 23,117 0 0 5,000 74,679 $3,348,606 240,603 $6,556,260 9,197 3.68% 855 5,172 4,210 46,000 22,000 128,000 21,139 18,300 0 5,076 53,322 $2,321,118 232,241 $6,079,532 7,227 3.13% 936 6,950 3,716 55,000 24,000 128,000 14,400 18,000 0 2,663 67,000 $2,700,000 236,225 $6,928,858 6,039 4.12% 5,732,148 180,944 9,010,077 4,495,353 5,912,394 188,286 9,203,740 4,597,697 5,907,546 192,683 9,492,455 4,745,308 6,265,656 200,268 9,715,604 4,855,129 72,916 184,427 92,160 65,664 176,096 87,695 64,358 174,598 87,012 68,456 166,965 83,438 $12.58 138,002 $211,302,881 $19,101,723 $12.58 133,626 $210,264,218 $20,660,824 $11.59 135,675 $221,967,799 $18,093,912 5,489 204 7,272 185 8,021 103 Public Works Street improvements - asphalt overlay (linear feet) (9) Crackseal coating program (linear feet) (9) Street repair (curbs, aprons, berms, asphalt) (hours) Guardrail repair (hours) (11) Paint striping Lane line (miles) Crosswalks (each) Arrows (each) Street sweeper (hours) (11) Cold patch (hours) Snow and ice removal regular hours Snow and ice removal overtime hours Leaf collection (hours) (12) Holiday lights setup (hours) (7) Equipment repair/body shop (hours) Tons of snow melting salt purchased November-March Cost of salt purchased Refuse disposal per year (in tons) August through July Refuse disposal costs per year August through July Annual recycling tonnage (excluding leaf, and compost items) Percentage of waste recycled Port Control Cleveland Hopkins Airport Landed weight (in thousands of pounds) Total operations Total passengers Total enplaned passengers Burke Lakefront Airport Total operations Total passengers Total enplaned passengers Water Department Water rates per 1st 600 cubic feet of water used (5) Average number of water accounts billed monthly (cubic feet) Total water collections annually (including P&I) Payments to Cleveland for bulk water purchases $13.76 139,023 $246,046,531 $21,271,504 Wastewater Department Sewer and sanitary calls for service After hours sewer calls (hours) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) N/A 4,035 167 General obligation bond rating. Amounts are new construction starts. The majority of engineering and construction projects are multi-year projects. Includes entire area serviced by the Division of Vital Statistics (i.e., Cleveland + suburbs). Beginning 2007, administratively approved cases no longer included. This is the rate for the City of Cleveland residents only. In 2012 rates changed from per 1000 cubic feet to per 600 cublic feet. Fire Calls was changed to "Fire calls-Incoming for service" and all years adjusted beginning 2004 to reflect all calls for service received. Holiday light setup was contracted to an outside agency in 2009, 2010 and 2011 The City went "live" on a new financial system in January 2010. The new system creates journal entries at the transaction level instead of at the summary level like the prior financial system. No program was available for asphalt overlay in 2010 and a new program was implemented for crackseal coating. In 2011 this program ended due to state budget cuts and the asphalt overlay program was again funded. 2010 data has been changed. Figures included cases from prior years. Street sweeping was limited in 2011 and 2012 due to state imposed budget cuts. Beginning in 2011, the City no longer provides an orgainized leaf collection program. Economic Development grants received were restated in 2011 for all years shown. They Include Neighborhood Development Investment Fund, Supplemental Impowerment Zone, Economic Development Funds, Urban Development Action Funds, WIA Grants and Core City Program Funds. Beginning in 2011 WIA Grants were moved to General Government. Information not available. - S22 - 2008 2007 2006 2005 2004 2003 $6,825 $6,375 $5,730 $7,140 $10,455 $20,720 $16,837 $16,294 $36,005 $31,625 $29,936 $30,067 113,772 158,400 95,000 3,000 65,000 126,720 95,000 1,100 40,000 79,200 95,000 1,600 162,800 316,800 95,000 1,000 101,000 211,200 95,000 800 135,100 264,000 95,000 800 630 5,700 2,800 49,000 31,000 132,000 15,000 20,000 4 1,010 85,000 $3,330,000 266,035 $7,790,729 9,000 3.39% 650 6,000 3,000 36,000 31,000 132,000 18,000 17,000 5 809 82,000 $2,640,000 293,801 $7,944,516 8,584 2.93% 650 6,000 3,000 30,000 31,000 132,000 8,000 17,000 5 1,066 64,500 $2,128,363 303,196 $8,662,913 16,435 5.42% 650 6,000 3,000 30,000 31,000 132,000 30,000 17,000 5 1,179 83,000 $2,750,034 333,497 $7,761,318 16,088 4.82% 633 5,900 2,800 15,000 31,000 132,000 23,000 17,000 5 1,664 40,000 $1,321,066 316,083 $7,461,798 12,825 4.06% 630 5,800 2,500 12,000 31,000 132,000 17,000 17,000 5 1,811 95,000 $2,819,235 296,139 $7,135,942 14,500 4.90% 7,256,242 235,975 11,106,194 5,545,205 7,380,384 244,719 11,458,898 5,722,338 7,467,746 249,967 11,321,050 5,646,470 7,910,706 258,926 11,463,391 5,724,440 8,074,843 263,561 11,264,937 5,613,255 7,827,776 258,460 10,555,387 5,257,224 69,231 188,171 93,772 68,137 204,582 102,039 77,593 214,947 107,786 73,064 188,381 93,941 84,101 199,194 99,563 94,626 215,601 107,931 $10.63 137,528 $218,285,825 $18,399,096 $9.62 138,727 $214,378,311 $20,353,610 $8.71 139,129 $192,386,791 $19,632,453 $8.71 140,166 $202,615,763 $21,102,439 $8.41 138,338 $190,316,017 $19,422,375 $8.13 138,441 $187,482,239 $19,041,420 8,275 147 7,585 384 6,515 448 6,188 526 5,481 437 7,802 N/A (Concluded) - S22 - City of Cleveland, Ohio Capital Assets Statistics by Function/Program Last Ten Years Function/Program 2012 2011 2010 3,690,000 37 3,690,000 36 3,700,000 26 3,700,000 28 5 553,100 825 5 553,100 796 5 553,100 808 5 553,100 830 Stations Square footage of buildings Vehicles 26 313,224 104 26 313,224 104 26 313,224 120 26 313,224 127 EMS Stations (headquarters) Square footage of buildings Vehicles 1 33,000 45 1 33,000 45 1 33,000 44 1 33,000 49 3 3 3 3 General Government Square footage occupied (4) Administrative vehicles Police Stations Square footage of buildings (1) Vehicles 2009 Fire Port Control (Hopkins) Runways Terminal area (approximate square footage) Gates Parking spaces (approximately) Long term Short term Surface Total parking spaces Vehicles Other Public Works Streets (miles) Service vehicles (5) 935,000 96 935,000 96 935,000 96 935,000 96 2,600 3,900 640 7,140 335 2,600 3,900 640 7,500 353 2,576 3,895 615 7,086 324 2,647 4,088 390 7,125 325 1,300 1,906 - S23 - 1,290 868 1,319 754 1,319 773 2008 2007 2006 2005 2004 2003 3,700,000 27 3,700,000 26 2,310,732 28 2,310,732 26 2,187,420 25 2,187,420 23 6 769,536 764 6 769,536 921 6 769,536 958 6 769,536 979 6 769,536 905 6 769,536 872 26 313,224 132 26 313,224 155 26 313,224 153 26 313,224 152 26 313,224 147 26 313,224 154 1 33,000 46 1 33,000 49 1 33,000 57 1 33,000 53 N/A N/A 47 N/A N/A 46 3 3 4 4 4 4 935,000 96 935,000 96 935,000 96 935,000 96 935,000 96 935,000 96 2,500 4,200 500 7,200 325 2,500 4,200 500 7,200 326 2,500 4,200 500 7,200 362 2,500 4,200 0 6,700 345 2,500 4,200 0 6,700 321 2,500 4,200 0 6,700 314 1,319 741 1,319 760 1,280 828 - S23 - 1,280 842 1,240 859 1,210 857 City of Cleveland, Ohio Capital Assets Statistics by Function/Program Last Ten Years Function/Program Recreation Number of parks Number of playgrounds Number of baseball diamonds Number of tennis courts Number of basketball courts Full Half Number of soccer fields Number of recreation centers Number of pools Indoor Outdoor Number of aquatic playgrounds Number of golf courses (3) Number of ice rinks Number of roller rinks Number of fine arts centers Number of greenhouses Number of camps Total park acreage Vehicles Wastewater Sanitary sewers (miles) Storm sewers (miles) Combined sewers (miles) Vehicles 2012 2010 2009 154 110 138 119 154 109 132 111 154 109 133 111 154 109 134 114 103 10 3 21 110 10 9 20 108 10 7 19 110 10 7 19 19 20 10 2 1 1 1 1 1 1,489 97 19 23 10 2 1 1 1 1 1 1,495 99 18 23 9 2 1 1 1 1 1 1,492 156 18 23 9 2 1 1 1 1 1 1,487 160 170 199 1,065 116 170 199 1,065 115 170 199 1,065 108 170 199 1,065 111 284 266 252 272 2,839 736 2,709 708 2,704 744 2,493 745 Electric Power Vehicles Water Department Water lines (miles) (2) Vehicles 2011 (1) Includes Dog Kennels, Inspection Garage and House of Corrections. (2) These are calculated totals of all trunk mains [20" diameter and larger] (439 miles), distribution mains [16" and smaller] within the City of Cleveland (1,266 miles) plus distribution mains within certain suburbs with updated service agreements (1,134 miles) which transferred ownership of the distribution mains within those suburban boundaries to the City of Cleveland. Not included in these totals are the distribution mains in all master meter communities and any direct service suburban community who has not entered into a new service agreement. (3) In 2011 the City leased Seneca golf course. In 2012 the City leased both golf courses. (4) Closed Platt Station and Luke Easter Station in 2011. (5) In 2012 a departmental reorganization occurred that merged the departments of Public Service with Parks, Recreation and Properties becoming the Department of Public Works. The Office of Capital Projects was created from the Divisions of Architecture, Engineering and Construction and Research, Planning and Development and is reported under General Government. In addition, the Division of Consumer Affairs was merged with Community Development and was moved from General Government. N/A Information not available. - S23 - 2008 2007 2006 2005 2004 2003 155 110 134 114 154 110 138 120 150 111 140 120 150 112 140 120 146 111 141 131 146 109 141 134 110 10 7 19 111 10 7 19 118 12 12 19 120 16 12 19 123 18 12 19 121 18 11 18 18 23 8 2 1 1 1 1 1 1,491 157 18 23 8 2 1 1 1 1 1 1,490 161 18 22 7 2 1 1 1 1 1 1,477 163 18 22 6 2 1 1 1 1 1 1,477 154 18 22 6 2 1 1 1 1 1 1,440 145 17 22 4 2 1 1 1 1 1 1,444 143 156 164 920 114 156 164 920 128 171 199 1,065 83 171 199 1,065 82 171 199 1,065 81 171 199 1,065 81 291 308 306 287 269 276 2,321 759 2,321 811 2,172 832 2,168 827 2,042 814 2,040 801 (Concluded) - S23 - CITY OF CLEVELAND, OHIO SCHEDULE OF STATISTICS-GENERAL FUND FOR THE YEAR ENDED DECEMBER 31, 2012 OPERATING RATIOS: GENERAL FUND-BUDGET BASIS REVENUE DOLLAR BY SOURCE Where the money came from a. b. c. d. e. f. g. h. i. j. Income taxes Property taxes State local government funds Other taxes and shared revenues Licenses and permits Charges for services Fines, forfeits and settlements Grant revenue Miscellaneous Transfers in a. b. c. d. e. f. g. h. i. j. $0.56 0.07 0.07 0.09 0.02 0.07 0.04 0.01 0.04 0.03 $1.00 g. h. f. e. General Government Public Health Public Safety PublicWorks Building and Housing Economic and Community Development and other Transfers out a. b. c. d. e. f. g. j. d. c. b. a. EXPENDITURE DOLLAR BY FUNCTION Where the money was spent a. b. c. d. e. f. g. i. e. f. d. $0.16 0.01 0.60 0.13 0.02 0.04 0.04 $1.00 g. a. b. c. EXPENDITURE DOLLAR BY OBJECT What the money was spent on a. b. c. d. e. f. g. Salaries, wages and related benefits Interdepartmental charges Utilities Contractual services Materials and supplies Maintenance Transfers out a. b. c. d. e. f. g. $0.79 0.04 0.04 0.07 0.01 0.01 0.04 $1.00 - S24 - d. e. f. g. c. b. a. SPECIAL THANKS TO: The Division of Financial Reporting and Control Accounting and Administrative Poljona Basho Lesly Camargo Donnetta Carter Shelfie Carter Kay Cebron Leigh Ebner Michael Klein Monete Morris Va'Kedia Stiggers Sharon Teter Pandora Ward Sylvia Ware Kathleen Woidke Photography City of Cleveland Bureau of Photographic Services Cover color separations and printing City of Cleveland Division of Printing and Reproduction James E. Gentile, CPA City Controller Department of Finance Room 18 - City Hall Cleveland, Ohio 44114 (216) 664-3881 This page intentionally left blank. CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 This page intentionally left blank. CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION TABLE OF CONTENTS Page Independent Auditors' Report.................................................................................................... 1-2 Management's Discussion and Analysis ................................................................................... 3-8 Statements of Net Position - All Fund Types ............................................................................ 11-12 Statements of Revenues, Expenses and Changes in Net Position - Internal Service Fund ....... 13 Statements of Cash Flows - Internal Service Fund.................................................................... 14 Notes to Financial Statements.................................................................................................... 15-25 Schedules of Changes in Assets and Liabilities - Agency Fund ............................................... 26 Schedule of Cash Receipts and Distribution of Funds............................................................... 27 Schedule of Allocation of Net Operating Expenses .................................................................. 28 Schedules of Income Taxes Receivable..................................................................................... 29 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Central Collection Agency Division of Taxation City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Central Collection Agency's Internal Service and Agency Funds, Division of Taxation, City of Cleveland, Ohio (the "Agency") as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Central Collection Agency's Internal Service and Agency Funds, Division of Taxation, City of Cleveland, Ohio as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof, where applicable, for the years then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Agency and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The schedules on pages 26 through 29 are presented for purpose of additional analysis and are not a required part of the Agency's basic financial statements. The schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the Agency's basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly presented in all material respects in relation to the Agency's basic financial statements taken as a whole. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Finance, Division of Taxation, Central Collection Agency (the Agency), we offer readers of the Agency's financial statements this narrative overview and analysis of the financial activities of the Agency for the years ended December 31, 2012 and December 31, 2011. Please read this information in conjunction with the Agency's financial statements and footnotes that begin on page 11. The Division of Taxation was created in 1966 by the enactment of the City of Cleveland's Income Tax Ordinance providing the City's Income Tax Administrator with the authority to enter into agreements with any other municipal corporation to administer income tax laws and to provide for a central income tax collection facility. The Agency began with 14 member communities and during 2012 provided a full range of tax collection services for 54 member communities throughout 19 Ohio counties. The Agency employs more than 100 individuals to process approximately one million returns, estimated payments and tax assessments. COMPARISON OF CURRENT YEAR'S AND PRIOR YEARS' DATA FINANCIAL HIGHLIGHTS o The assets and the liabilities of the Agency equal $85,515,911, $80,568,081 and $81,201,634, at December 31, 2012, 2011 and 2010, respectively. The Agency's total assets increased by $4,947,830 in 2012. The Agency's total assets decreased by $633,553 in 2011. Its total assets increased by $4,536,150 in 2010. The increase in 2012 was primarily due to increases in cash and cash equivalents and taxes receivable. o The agency fund total cash receipts were approximately $430 million, $410 million and $404 million in 2012, 2011 and 2010, respectively. In 2012, cash receipts consisted of $349 million of employer withholding, $43 million of business profits, $34 million of individual payments and $4 million of other payments. o The Agency's total operational cost was $8,191,396, $7,929,898 and $7,738,182 in 2012, 2011 and 2010, respectively. In 2012, operational costs consisted of $5,241,763 of employee's wages and benefits, $1,214,372 of allocated charges and $1,735,261 of other miscellaneous expenses. o The Agency provides a mechanism for member municipalities to maximize efficiencies, minimize costs and capitalize from economies of scale. Pooling tax collections and investing at current market rates allows the operational costs of the Agency to be reduced by interest income. The Agency's member municipalities also benefit by printing and mailing large volumes of income tax forms to their taxpayers. 3 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Agency's financial statements. The accompanying financial statements present financial information for the City of Cleveland's Division of Taxation Fund, in which the City of Cleveland accounts for the operations of the Department of Finance, Division of Taxation. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Agency operates two funds. The operating fund is considered an internal service proprietary fund because the operations of this fund are similar to a private-sector business enterprise. Accordingly, in accounting for the operating activities within this fund, the economic resources measurement focus and the accrual basis of accounting is used. The second fund is an agency fund, which is used to account for the collection and remittance of income taxes for the member municipalities. For accounting measurement purposes, the agency fund is custodial in nature (assets equal liabilities) and does not involve the measurement of operations. The financial statements of the Agency can be found on pages 11-14 of this report. The notes to the financial statements and accompanying schedules provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the financial statements and accompanying schedules can be found on pages 15-29 of this report. 4 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION Provided below is condensed statement of net position information for the internal service and agency funds of the Agency as of December 31, 2012, 2011 and 2010: 2012 Liabilities: Accounts payable Due to CCA agency fund Due to the City of Cleveland Due to member municipalities Accrued wages and benefits - current Accrued wages and benefits - long-term Total liabilities $ 13,993,219 51,264 70,300,395 736,482 434,551 $ 11,253,433 62,149 68,531,863 317,108 403,528 $ 11,474,868 $ 80,568,081 $ 81,201,634 $ Total assets 2010 $ 85,515,911 Assets: Cash and cash equivalents Capital assets, net of accumulated depreciation Taxes receivable Due from CCA internal service fund Due from member municipalities 2011 $ $ 161,621 736,482 57,407,784 26,387,134 717,938 104,952 $ 85,515,911 139,472 317,108 54,309,391 25,049,168 653,504 99,438 $ 80,568,081 68,776,540 536,515 413,711 130,198 536,515 52,361,519 27,349,724 713,714 109,964 $ 81,201,634 Assets: The Agency collects and disburses income tax receipts monthly, except for the City of Cleveland which receives collections of tax receipts in advance of the regular monthly distribution date. Assets primarily consist of cash on hand and anticipated income tax receivable. Total assets increased $4,947,830 during 2012, and decreased $633,553 during 2011. In 2012, the increase in assets is primarily attributable to an increase in cash and cash equivalents due to timing differences in the receipt of cash and distribution to member communities and increase in taxes receivable. In 2011, the minimal decrease in assets is attributable to decreases in cash and cash equivalents, taxes receivable and due from CCA internal service fund. 5 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Capital assets: The Agency's investment in capital assets as of December 31, 2012 amounted to $51,264 (net of accumulated depreciation). The investment in capital assets include: furniture, fixtures, equipment and vehicles. A summary of the Agency's capital assets during the year ended December 31, 2012 is as follows: Balance January 1, 2012 Furniture, fixtures, equipment and vehicles 65,310 $ $ Total Less: Accumulated depreciation Total capital assets, net Additions $ $ 65,310 (10,885) - 65,310 (14,046) 62,149 $ $ (10,885) $ - $ 51,264 Additions $ $ Total Less: Accumulated depreciation Total capital assets, net Reductions 65,310 (3,161) Balance January 1, 2011 Furniture, fixtures, equipment and vehicles Balance December 31, 2012 Balance December 31, 2011 Reductions 65,310 $ $ 65,310 - - 65,310 (3,161) - $ $ 65,310 (3,161) 62,149 $ - $ 62,149 Liabilities: Liabilities primarily consist of amounts owed to member municipalities (including the City of Cleveland). During 2012, the increase in liabilities was primarily due to an increase in Due to the City of Cleveland, which reflects the timing differences in the receipt of cash and distribution to the City. During 2011, the decrease in liabilities was primarily due to a net effect decrease in Due to CCA agency fund, Due to the City of Cleveland and Due to member municipalities. 6 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Provided below is statement of revenue, expenses and changes in net position for the internal service fund of the Agency for the years ended December 31, 2012, 2011 and 2010: Internal Service Fund 2012 2011 2010 $ 8,183,986 $ 7,923,161 $ 7,725,279 8,183,986 7,923,161 7,725,279 3,904,075 1,337,688 316,428 1,214,372 1,388,237 19,711 10,885 3,652,130 1,200,388 314,709 1,263,593 1,495,917 3,572,148 1,348,976 256,730 1,115,576 1,444,752 8,191,396 7,929,898 7,738,182 (7,410) (6,737) (12,903) 7,410 6,737 12,903 Change in net position - - - Net position at beginning of year - - - Operating Revenues Charges for services Total operating revenues Operating Expenses Salaries and wages Employee benefits Postage and office supplies Allocation of City of Cleveland costs Other administrative expenses Property rental Depreciation Total operating expense Operating loss Non-operating Revenue Interest income $ Net position at end of year 7 - 3,161 $ - $ - CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION (Continued) 2012: There was an increase in the combined costs for salaries and wages and employee benefits of $389,245 in 2012. This was due to an employee pay increase of 3% and an increase in the cost of benefits. Other administrative expenses decreased $107,680 in 2012. This was due to a decrease of approximately $100,000 in the professional services account. 2011: The increase in total operating expenses of $191,716 is primarily a result of the increase in printing and telephone expenses. Due to economic factors and declining interest rates, interest income decreased $6,166 in 2011. This is a decrease of approximately 48%. FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATION The Agency continues to face the challenges of an economic recession. The Agency's most significant task is dealing with the complications of rising basic operating costs. However, the Agency is attempting to reduce the impact of these increasing expenses by continuing to aggressively collect income taxes due, thereby spreading the incremental cost over a larger base. The Agency's collections for the first quarter of 2013 are approximately the same as the collections in the same period in 2012. The Agency will continue to strive for increased delinquency collections, while trying to maintain operational expenses at their current level. The operating budget for the Agency, as approved by the Cleveland City Council for 2013, provides for an overall increase in budgeted expenditures of approximately 2.5%. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Agency's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 8 FINANCIAL STATEMENTS This page intentionally left blank. 10 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION STATEMENTS OF NET POSITION - ALL FUND TYPES December 31, 2012 and 2011 Proprietary Fund Type Internal Service ASSETS CURRENT ASSETS: Cash and cash equivalents Taxes receivable Due from CCA internal service fund Due from member municipalities $ TOTAL CURRENT ASSETS CAPITAL ASSETS: Furniture, fixtures, equipment and vehicles Less: Accumulated depreciation CAPITAL ASSETS, NET 2012 Fiduciary Fund Type 1,782,729 Agency $ 1,782,729 12,210,490 70,300,395 736,482 434,551 $ 83,681,918 1,833,993 1,271,669 2011 Fiduciary Fund Type Agency $ 1,271,669 65,310 (14,046) 9,981,764 68,531,863 317,108 403,528 79,234,263 65,310 (3,161) 51,264 TOTAL ASSETS $ Proprietary Fund Type Internal Service $ 83,681,918 62,149 $ 1,333,818 $ 79,234,263 (Continued) The notes to the financial statements are an integral part of this statement. 11 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION STATEMENTS OF NET POSITION - ALL FUND TYPES December 31, 2012 and 2011 Proprietary Fund Type Internal Service 2012 Fiduciary Fund Type Agency Proprietary Fund Type Internal Service 2011 Fiduciary Fund Type Agency LIABILITIES CURRENT LIABILITIES Accounts payable Due to CCA agency fund Due to the City of Cleveland Due to member municipalities Accrued wages and benefits - current $ TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES Accrued wages and benefits 161,621 736,482 113,000 $ $ 57,294,784 26,387,134 717,938 139,472 317,108 124,296 $ 54,185,095 25,049,168 653,504 1,729,041 83,681,918 1,234,380 104,952 79,234,263 99,438 TOTAL LONG-TERM LIABILITIES 104,952 - 99,438 - TOTAL LIABILITIES 1,833,993 83,681,918 1,333,818 79,234,263 NET POSITION Net investment in capital assets Unrestricted 51,264 (51,264) - - TOTAL NET POSITION TOTAL LIABILITIES AND NET POSITION $ 62,149 (62,149) 1,833,993 $ 83,681,918 - $ 1,333,818 - $ 79,234,263 (Concluded) The notes to the financial statements are an integral part of this statement. 12 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INTERNAL SERVICE FUND For the Years Ended December 31, 2012 and 2011 2012 2011 $ 8,183,986 $ 7,923,161 TOTAL OPERATING REVENUES 8,183,986 7,923,161 OPERATING EXPENSES Salaries and wages Employee benefits Postage and office supplies Allocation of City of Cleveland costs Other administrative expenses Property rental Depreciation TOTAL OPERATING EXPENSES 3,904,075 1,337,688 316,428 1,214,372 1,388,237 19,711 10,885 8,191,396 3,652,130 1,200,388 314,709 1,263,593 1,495,917 OPERATING LOSS (7,410) (6,737) 7,410 6,737 - - OPERATING REVENUES Charges for services NON-OPERATING REVENUE Interest income CHANGE IN NET POSITION 3,161 7,929,898 NET POSITION AT BEGINNING OF YEAR NET POSITION AT END OF YEAR $ The notes to the financial statements are an integral part of this statement. 13 - $ - CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION STATEMENTS OF CASH FLOWS - INTERNAL SERVICE FUND For the Years Ended December 31, 2012 and 2011 2012 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from member municipalities Cash payments to suppliers of goods and services Cash payments for employee services and benefits 2011 $ 8,603,360 (2,932,038) (5,167,672) NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 503,650 7,703,754 (3,032,164) (4,973,167) (301,577) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets (65,310) NET CASH USED FOR CAPITAL AND RELATED ACTIVITIES - CASH FLOWS FROM INVESTING ACTIVITIES Interest earned on investments (65,310) 7,410 6,737 NET CASH PROVIDED BY INVESTING ACTIVITIES 7,410 6,737 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 511,060 Cash and cash equivalents at beginning of year (360,150) 1,631,819 1,271,669 $ 1,782,729 Cash and cash equivalents at end of year RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY (USED FOR) OPERATIONS Operating loss Adjustments to reconcile operating loss to net cash provided by (used for) operating activities: Depreciation Changes in assets and liabilities: Increase in accounts payable Increase (decrease) in due to CCA agency fund Decrease in due to City of Cleveland Increase (decrease) in accrued wages and benefits $ $ $ (7,410) 10,885 1,271,669 (6,737) 3,161 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ The notes to the financial statements are an integral part of this statement. 14 9,274 (219,407) (17,132) (70,736) 511,060 Total adjustments 22,149 419,374 (11,296) 69,948 (294,840) 503,650 $ (301,577) CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A--DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION The Central Collection Agency, Division of Taxation, City of Cleveland, Ohio (the Agency) is reported as part of the City of Cleveland's primary government and was created for the purpose of collecting city income taxes and disbursing those funds to the respective member municipalities (members) after payment of related expenses. Allocations of tax collections to members are based upon information provided by the taxpayers on the returns and supporting data. Such allocations are subject to adjustments in the subsequent year, dependent upon final returns filed by taxpayers and final review by the Agency. Refunds for overpayments are offset against allocated collections as amounts are determined. Basis of Presentation: The financial statements are presented in accordance with Governmental Accounting Standards Board's (GASB) Codification of Governmental Accounting and Financial Reporting Standards (GASB Codification) which requires financial statements by fund type. These financial statements present a columnar total for all fund types included in the statement of assets and liabilities. The following fund types are used by the Agency: Proprietary Fund Type--Internal Service Fund: This fund is used to account for the services provided to members on a cost-reimbursement basis. Fiduciary Fund Type--Agency Fund: This fund is used to account for assets held by the Agency as an agent for others. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies and financial reporting practices of the Agency comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of publicprivate or public-public partnership. The Agency has determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Agency has implemented GASB Statement No. 62 effective for the 2012 fiscal year. 15 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Agency has implemented GASB Statement No. 63 effective for the 2012 fiscal year. The Agency has determined that GASB Statement No. 63 has no impact on its financial statements as of December 31, 2012. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. The Agency has determined that GASB Statement No. 64 has no impact on its financial statements as of December 31, 2012. The Agency's net position is accounted for in the accompanying statements of net position and is divided into amounts in net investment in capital assets and unrestricted. The negative unrestricted amount will be eliminated as depreciation expense is passed along to members of the Agency. Basis of Accounting: All financial transactions of the Agency are reported on the accrual basis of accounting. Under this accounting method, assets and the related liabilities at the end of the year primarily consist of individual income taxes receivable arising from payroll tax withholdings in December and a receivable for quarterly and annual payments of income taxes pertaining to net profits, self-employment and residents' taxes earned in the prior years. For accounting purposes, the agency fund is custodial in nature (assets equal liabilities) and does not involve the measurement of operations. Financial transactions for the internal service fund are reported on the accrual basis of accounting; revenues are recognized when earned and measurable and expenses are recognized as incurred. For accounting purposes, the operations of the internal service fund are similar to a private-sector business enterprise. Accordingly, in accounting for the operating activities, the economic resources measurement focus is used. Supplies: Supplies are expensed when purchased. Statement of Cash Flows: The Agency utilizes the direct method of reporting for the statement of cash flows as defined by GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, for its internal service fund. In a statement of cash flows, cash receipts and cash payments are classified according to operating, non-capital financing, capital and related financing and investing activities. For purposes of this statement, cash and cash equivalents include highly liquid investments with a maturity of three months or less when purchased and all of the Agency's share of the City of Cleveland's pooled cash accounts. Allocation of Expenses: The Agency allocates all operating expenses, net of interest income, to members based upon the arithmetic mean of the percentage of each municipality's transactions to total transactions and the percentage of each municipality's revenue to total revenue. 16 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allocation of Interest Income: Excess funds are invested on a daily basis and interest income earned on such investments is allocated to members based on the percentage of each municipality's revenue to total revenue. The City of Cleveland receives collections of tax receipts in advance of the regular monthly distribution date, and accordingly, interest income is allocated exclusively to the other members. Investments: The Division follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair value is based on quoted market rates. The City has invested funds in STAROhio during years 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost, or if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as an item with a useful life in excess of one year and an individual cost of more than $5,000 for land, furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Furniture, fixtures, equipment and vehicles 3 to 60 years Compensated Absences: The Agency accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statement of net position. Normally, all vacation time is to be taken in the year available. The Agency allows employees to carryover vacation time from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three-year average base salary rate, with the balance being forfeited. 17 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C--POOLED AND SEGREGATED CASH AND INVESTMENTS Deposits: The carrying amount of the Agency's deposits at December 31, 2012 and December 31, 2011 totaled $2,967,406 and $2,905,987, respectively, and the Agency's bank balances were $2,166,208 and $2,595,620, respectively. The differences represent outstanding warrants payable, positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $2,166,208 and $2,595,620 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Agency will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Agency's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by state statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Generally, investments are recorded in segregated accounts by way of book entry through the banks' commercial or trust department and are kept at the Federal Reserve Bank in the depository institutions' separate custodial account for the Agency, apart from the assets of the depository institution. Ohio statute prohibits the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value. Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Agency invests primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Agency will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The Agency does not have an investment policy dealing with investment custodial credit risk beyond the requirement in the state statute. 18 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C--POOLED AND SEGREGATED CASH AND INVESTMENTS (Continued) Credit Risk: The Division's investments as of December 31, 2012 and 2011 include STAROhio and mutual funds. Investments in STAROhio and Federated Government Obligation Mutual Fund carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. Concentration of Credit Risk: The Agency places a limitation on the amount it may invest in any one issuer to help minimize the concentration of credit risk. The Agency had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the Statements of Net Position in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: 2012 Fair Value Type of Investment STAROhio Investment in Mutual Funds 2012 Cost 2011 Fair Value 2011 Cost Investment Maturities Less Than One Year $ 10,052,926 $ 10,052,926 $ 1,683,888 $ 1,683,888 $ 10,052,926 972,887 6,663,558 6,663,558 972,887 972,887 Total Investments Total Deposits 11,025,813 2,967,406 Total Deposits and Investments 11,025,813 2,967,406 8,347,446 2,905,987 8,347,446 2,905,987 11,025,813 2,967,406 $ 13,993,219 $ 13,993,219 $ 11,253,433 $ 11,253,433 $ 13,993,219 . These amounts are monies invested by the City Treasurer on behalf of the Agency and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. Monies due to member agencies are disbursed from these funds on a monthly basis. As of December 31, 2012, the investments in STAROhio and mutual funds are approximately 91% and 9%, respectively, of the Agency's total investments. As of December 31, 2011, the investments in STAROhio and mutual funds are approximately 20% and 80%, respectively, of the Agency's total investments. 19 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D--CAPITAL ASSETS Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2012 was as follows: Balance January 1, 2012 Capital assets, being depreciated: Furniture, fixtures, equipment and vehicles $ Additions Balance December 31, 2012 Reductions 65,310 $ $ $ 65,310 Total capital assets, being depreciated Less: Total accumulated depreciation 65,310 (3,161) (10,885) - 65,310 (14,046) Total capital assets, being depreciated, net 62,149 (10,885) - 51,264 62,149 $ (10,885) $ - $ 51,264 Capital assets, net $ Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2011 was as follows: Balance January 1, 2011 Capital assets, being depreciated Furniture, fixtures, equipment and vehicles Additions $ $ 65,310 Balance December 31, 2011 Reductions $ $ 65,310 Total capital assets, being depreciated Less: Total accumulated depreciation - 65,310 (3,161) - 65,310 (3,161) Total capital assets, being depreciated, net - 62,149 - 62,149 - $ 62,149 $ - $ 62,149 Capital assets, net $ 20 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E--DUE TO AND DUE FROM TRANSACTIONS During the course of normal operations, the Agency has numerous transactions between its own funds and the municipalities which it serves, including transfers of resources to provide services. Such transactions are generally reflected as due to or due from account balances in the accompanying financial statements. Individual fund due to and due from and certain payables balances as of December 31, 2012 are as follows: Internal Service Fund Due from CCA internal service fund Due from member municipalities Agency Fund Total $ $ 736,482 434,551 $ 736,482 434,551 Total Due From $ - $ 1,171,033 $ 1,171,033 $ 57,294,784 26,387,134 736,482 57,407,784 26,387,134 83,681,918 $ 84,531,400 Due to the CCA agency fund Due to the City of Cleveland Due to member municipalities $ Total Due To $ 736,482 113,000 $ 849,482 $ Individual fund due to and due from and certain payables balances as of December 31, 2011 are as follows: Internal Service Fund Due from CCA internal service fund Due from member municipalities Agency Fund Total $ $ 317,108 $ 403,528 317,108 403,528 Total Due From $ - $ 720,636 $ 720,636 317,108 $ 124,296 $ 317,108 54,309,391 25,049,168 Due to the CCA agency fund Due to the City of Cleveland Due to member municipalities $ Total Due To $ 441,404 $ 21 54,185,095 25,049,168 79,234,263 $ 79,675,667 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F--DEFINED BENEFIT PENSION PLAN Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) 2) 3) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Agency's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $381,000, $363,000 and $364,000 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27 and it is effective for employer fiscal years beginning after June 15, 2014. 22 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE G-- OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multipleemployer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-andservice retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a standalone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Agency's actual contributions to OPERS to fund postemployment benefits were $152,000 in 2012, $145,000 in 2011 and $207,000 in 2010. The required payments due in 2012, 2011 and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. 23 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE H--RELATED PARTY TRANSACTIONS The Agency is provided various services by the City of Cleveland. Charges are based on actual use or on a reasonable pro rata basis. These costs, as reported in the statement of revenues and expenses of the internal service fund for the years ended December 31, 2012 and 2011 were as follows: 2012 City administration Office rent Telephone Cleveland Public Power Parking Facilities Printing services Motor Vehicle Maintenance Total $414,261 425,000 84,184 24,743 2,652 247,724 15,808 $1,214,372 2011 $401,050 393,948 79,230 23,258 2,903 351,281 11,923 $1,263,593 NOTE I--DUE FROM MEMBER CITIES The Agency has recorded certain liabilities in the internal service fund related to compensated absences totaling $434,551 at December 31, 2012 and $403,528 at December 31, 2011 as accrued wages and benefits. These amounts are recorded as due from member municipalities in the agency fund. NOTE J--CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Agency for personal injuries, property damage and other matters. The City is responsible for the lawsuits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Agency's financial position, results of operations or cash flows. Risk Management: The Agency is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Agency is generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio workers' compensation retrospective rating program. 24 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE J--CONTINGENT LIABILITIES AND RISK MANAGEMENT (Continued) In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs), and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims liability for the Agency is immaterial. 25 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DEPARTMENT OF FINANCE DIVISION OF TAXATION SCHEDULES OF CHANGES IN ASSETS AND LIABILITIES - AGENCY FUND For the Years Ended December 31, 2012 and 2011 Balance 1/1/2012 ASSETS Cash and cash equivalents Taxes receivable Due from the CCA internal service fund Due from member municipalities Additions Deductions Balance 12/31/2012 $ 9,981,764 68,531,863 317,108 403,528 $ 430,398,251 70,300,395 736,482 434,551 $ (428,169,525) $ 12,210,490 (68,531,863) 70,300,395 (317,108) 736,482 (403,528) 434,551 TOTAL ASSETS $ 79,234,263 $ 501,869,679 $ (497,422,024) $ 83,681,918 $ 54,185,095 25,049,168 $ 394,567,927 107,301,752 $ (391,458,238) $ 57,294,784 (105,963,786) 26,387,134 TOTAL LIABILITIES $ 79,234,263 $ 501,869,679 $ (497,422,024) $ 83,681,918 LIABILITIES Due to the City of Cleveland Due to member municipalities Balance 1/1/2011 ASSETS Cash and cash equivalents Taxes receivable Due from the CCA internal service fund Due from member municipalities Additions Deductions Balance 12/31/2011 $ 9,843,049 68,776,540 536,515 413,711 $ 410,127,906 68,531,863 317,108 403,528 $ (409,989,191) $ 9,981,764 (68,776,540) 68,531,863 (536,515) 317,108 (413,711) 403,528 TOTAL ASSETS $ 79,569,815 $ 479,380,405 $ (479,715,957) $ 79,234,263 $ 52,220,091 27,349,724 $ 376,688,080 102,692,325 $ (374,723,076) $ 54,185,095 (104,992,881) 25,049,168 TOTAL LIABILITIES $ 79,569,815 $ 479,380,405 $ (479,715,957) $ 79,234,263 LIABILITIES Due to the City of Cleveland Due to member municipalities 26 27 Members Ada Alger Athens Barberton Bedford Bradner Bratenahl Burton Cleveland Cridersville Cuyahoga Falls Dayton Eastlake Elida Englewood Gates Mills Geneva-on-the-Lake Grand Rapids Grand River Hamilton Highland Hills Huntsville Lakewood Lancaster Liberty Center Lima Linndale Lorain Madison Medina Mentor-on-the-Lake Munroe Falls Northfield North Baltimore North Perry North Randall Norton Village of Oakwood Painesville Parma Heights Paulding Peninsula Rocky River Russells Point Seville South Russell Stow Timberlake Trotwood Troy Wadsworth Warren Warrensville Heights Waynesfield Totals $ $ 7,356.03 16,231.16 594,737.05 9,742.96 61,483.37 97,898.68 2,368.46 264.16 6,482.14 (2,207.12) 506,452.09 (1,916.59) 968,474.76 2,348.79 11,277,938.62 $ 2,689.67 (781.10) 5,832.04 (2,349.49) 56,621.21 897,634.91 55,225.44 75,498.95 64,014.50 50,155.46 73,610.17 90,702.47 310,478.39 3,950.14 561,544.70 228,135.92 284.05 20.69 203,419.65 (1,079.30) (479.76) 29,325.21 16,196.10 22,754.21 823,230.28 (428.82) 4,144.06 262,105.83 37,292.36 5,014,287.51 10,450.18 Balance Collected and Due Members January 1,2012 114,947.07 $ (1,210.02) Cash Receipts Net 1,565,922.50 55,538.09 665.00 10,241,810.10 12,379.18 128,284.32 1,466,240.43 467,608.71 334,664,097.67 304,476.78 67,404.68 228,982.94 33,659.14 425,905.04 18,545.87 1,638,569.38 167,005.84 258,554.01 268,667.34 203,052.70 3,227,048.28 63,143.17 12,963.40 99,510.32 183,242.41 16,085.91 77,717.87 31,579.66 863,610.36 13,712,781.05 848,545.59 1,091,824.82 1,062,126.75 686,597.86 1,002,641.95 1,007,884.67 4,816,401.81 85,473.41 8,066,350.08 1,204.77 434,657.80 292,242.09 8,868,954.44 230,051.47 1,026,007.19 1,334,853.13 24,211.05 84,115.64 36,884.34 42,877.54 7,596,514.98 80,335.99 13,522,492.73 129,571.15 422,877,873.40 $ $ Total Cash Receipts 1,680,869.57 $ 54,328.07 665.00 11,065,040.38 11,950.36 132,428.38 1,728,346.26 504,901.07 339,678,385.18 314,926.96 67,404.68 251,737.15 33,659.14 442,101.14 18,545.87 1,841,989.03 165,926.54 258,074.25 297,992.55 203,052.70 3,455,184.20 63,427.22 12,984.09 99,510.32 185,932.08 15,304.81 83,549.91 29,230.17 920,231.57 14,610,415.96 903,771.03 1,167,323.77 1,126,141.25 736,753.32 1,076,252.12 1,098,587.14 5,126,880.20 89,423.55 8,627,894.78 1,204.77 442,013.83 308,473.25 9,463,691.49 239,794.43 1,087,490.56 1,432,751.81 26,579.51 84,379.80 43,366.48 40,670.42 8,102,967.07 78,419.40 14,490,967.49 131,919.94 434,155,812.02 $ Cash Disbursed 1,493,755.01 48,958.60 625.00 9,898,035.30 11,395.36 116,879.85 1,520,962.81 450,903.31 327,762,699.03 279,413.04 60,933.70 228,417.40 31,708.07 396,223.94 17,522.20 1,592,823.08 145,646.71 225,962.29 266,091.45 178,949.90 3,195,515.57 55,081.43 11,404.48 86,728.54 167,595.76 13,831.44 76,209.97 25,370.54 812,486.66 13,048,995.24 803,719.55 1,026,156.62 980,732.95 632,309.52 979,633.97 991,311.51 4,578,014.77 77,598.57 7,694,763.93 1,144.77 388,120.01 273,126.90 8,395,345.53 211,437.49 972,100.67 1,271,160.55 22,561.01 73,948.70 36,139.03 24,167.78 7,143,137.89 67,840.19 13,118,549.75 118,666.76 412,102,814.10 $ $ Allocation of Net Operating Expenses 48,258.84 $ 6,404.78 49.28 275,078.73 869.52 10,464.95 37,001.11 26,027.13 5,222,006.46 22,306.48 6,727.76 23,550.34 2,113.99 27,852.53 2,172.79 54,983.26 16,209.69 19,817.45 8,744.24 16,485.78 47,982.71 5,920.02 1,792.11 5,968.59 13,281.97 2,342.23 2,804.76 2,142.30 52,745.53 471,676.10 44,385.56 50,585.71 45,592.48 33,946.24 18,793.54 27,783.23 172,931.17 8,016.50 192,670.00 60.00 38,490.03 16,595.95 353,560.78 17,157.68 47,814.66 62,499.95 2,334.38 8,384.21 2,568.57 6,320.87 318,166.73 6,186.84 266,872.17 8,487.78 8,183,986.46 $ SCHEDULE OF CASH RECEIPTS AND DISTRIBUTION OF FUNDS FOR THE YEAR ENDED DECEMBER 31, 2012 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DIVISION OF TAXATION Total Disbursements and Expenses 1,542,013.85 55,363.38 674.28 10,173,114.03 12,264.88 127,344.80 1,557,963.92 476,930.44 332,984,705.49 301,719.52 67,661.46 251,967.74 33,822.06 424,076.47 19,694.99 1,647,806.34 161,856.40 245,779.74 274,835.69 195,435.68 3,243,498.28 61,001.45 13,196.59 92,697.13 180,877.73 16,173.67 79,014.73 27,512.84 865,232.19 13,520,671.34 848,105.11 1,076,742.33 1,026,325.43 666,255.76 998,427.51 1,019,094.74 4,750,945.94 85,615.07 7,887,433.93 1,204.77 426,610.04 289,722.85 8,748,906.31 228,595.17 1,019,915.33 1,333,660.50 24,895.39 82,332.91 38,707.60 30,488.65 7,461,304.62 74,027.03 13,385,421.92 127,154.54 420,286,800.56 $ $ Balance Collected And Due Members December 31,2012 138,855.72 (1,035.31) (9.28) 891,926.35 (314.52) 5,083.58 170,382.34 27,970.63 6,693,679.69 13,207.44 (256.78) (230.59) (162.92) 18,024.67 (1,149.12) 194,182.69 4,070.14 12,294.51 23,156.86 7,617.02 211,685.92 2,425.77 (212.50) 6,813.19 5,054.35 (868.86) 4,535.18 1,717.33 54,999.38 1,089,744.62 55,665.92 90,581.44 99,815.82 70,497.56 77,824.61 79,492.40 375,934.26 3,808.48 740,460.85 15,403.79 18,750.40 714,785.18 11,199.26 67,575.23 99,091.31 1,684.12 2,046.89 4,658.88 10,181.77 641,662.45 4,392.37 1,105,545.57 4,765.40 13,869,011.46 28 0.201486% 0.589412% 0.072343% 0.021893% 0.072976% 0.162352% 0.028612% 0.034328% 0.026189% 0.644888% 5.773667% 0.542814% 0.618779% 0.557789% 0.415188% 0.230562% 0.340313% 2.116568% 0.097961% 2.589867% 0.003939% 0.470374% 0.202932% 4.326256% 0.209719% 0.584876% 0.764502% 0.028525% 0.102449% 0.031399% 0.077213% 3.892731% 0.075619% 3.273220% 0.103765% 100.000000% Hamilton Highland Hills Huntsville Lakewood Lancaster Liberty Center Lima Linndale Lorain Madison Medina Mentor-on-the-Lake Munroe Falls Northfield North Baltimore North Perry North Randall Norton Village of Oakwood Painesville Parma Heights Paulding Peninsula Rocky River Russells Point Seville South Russell Stow Timberlake Trotwood Troy Wadsworth Warren Warrensville Heights Waynesfield Totals 0.198075% 0.242222% 0.107052% Geneva-on-the-Lake Grand Rapids Grand River Members Ada Alger Athens Barberton Bedford Bradner Bratenahl Burton Cleveland Cridersville Cuyahoga Falls Dayton Eastlake Elida Englewood Gates Mills Cost Allocation Percent 0.590908% 0.078252% 0.000602% 3.369702% 0.010629% 0.127900% 0.453362% 0.318265% 63.508923% 0.272660% 0.082208% 0.287759% 0.025845% 0.340503% 0.026546% 0.673081% . 4.026451% 0.078785% 0.016175% 0.124161% 0.228635% 0.020071% 0.096970% 0.039403% 1.077543% 17.109704% 1.058747% 1.362291% 1.325236% 0.856682% 1.251016% 1.257557% 6.009518% 0.106647% 0.000000% 0.000000% 0.542331% 0.364636% 11.065967% 0.287040% 1.280169% 1.665522% 0.030209% 0.104953% 0.046021% 0.053499% 9.478320% 0.100237% 16.872277% 0.161668% 100.000000% 0.253353% 0.208376% 0.322603% 0.335221% Interest Allocation Percent 1.953832% 0.069296% 0.000830% 12.778906% 0.015446% 0.160063% 1.829457% 0.583444% 0.000000% 0.379902% 0.084102% 0.285706% 0.041997% 0.531410% 0.023140% 2.044475% $ 48,281.07 5,925.86 1,793.31 5,977.79 13,298.91 2,343.72 2,811.95 2,145.22 52,825.37 472,943.91 44,464.01 50,686.65 45,690.68 34,009.72 18,886.24 27,876.41 173,376.47 8,024.40 192,670.00 60.00 38,530.22 16,622.97 354,380.75 17,178.95 47,909.52 62,623.36 2,336.62 8,391.99 2,571.98 6,324.83 318,869.06 6,194.27 268,122.39 8,499.76 8,191,396.32 16,504.55 16,225.13 19,841.35 8,769.08 Cost Allocation Before Interest Income $ 48,403.62 6,409.91 49.34 276,025.63 870.66 10,476.81 37,136.67 26,070.36 5,222,006.46 22,334.63 6,733.99 23,571.51 2,117.10 27,891.91 2,174.50 55,134.75 SCHEDULE OF ALLOCATION OF NET OPERATING EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2012 CITY OF CLEVELAND, OHIO CENTRAL COLLECTION AGENCY DIVISION OF TAXATION $ 40.19 27.02 819.97 21.27 94.86 123.41 2.24 7.78 3.41 3.96 702.33 7.43 1,250.22 11.98 7,409.86 298.36 5.84 1.20 9.20 16.94 1.49 7.19 2.92 79.84 1,267.81 78.45 100.94 98.20 63.48 92.70 93.18 445.30 7.90 18.77 15.44 23.90 24.84 28.15 6.23 21.17 3.11 39.38 1.71 151.49 Interest Income of Municipalities Other Than Cleveland $ 144.78 5.13 0.06 946.90 1.14 11.86 135.56 43.23 $ $ 47,982.71 5,920.02 1,792.11 5,968.59 13,281.97 2,342.23 2,804.76 2,142.30 52,745.53 471,676.10 44,385.56 50,585.71 45,592.48 33,946.24 18,793.54 27,783.23 172,931.17 8,016.50 192,670.00 60.00 38,490.03 16,595.95 353,560.78 17,157.68 47,814.66 62,499.95 2,334.38 8,384.21 2,568.57 6,320.87 318,166.73 6,186.84 266,872.17 8,487.78 8,183,986.46 16,485.78 16,209.69 19,817.45 8,744.24 Allocation of Net Operating Expenses 48,258.84 6,404.78 49.28 275,078.73 869.52 10,464.95 37,001.11 26,027.13 5,222,006.46 22,306.48 6,727.76 23,550.34 2,113.99 27,852.53 2,172.79 54,983.26 CITY OF CLEVELAND, OHIO CENTRAL COLLECTIONS AGENCY DIVISION OF TAXATION SCHEDULES OF INCOME TAXES RECEIVABLE FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Ada Alger Athens Barberton Bedford Bradner Bratenahl Burton Cleveland Cridersville Cuyahoga Falls Dayton Eastlake Elida Englewood Gates Mills Geneva-on-the-Lake Grand Rapids Grand River Hamilton Highland Hills Huntsville Lakewood Lancaster Liberty Center Lima Linndale Lorain Madison Medina Mentor-on-the-Lake Munroe Falls Northfield North Baltimore North Perry North Randall Norton Village of Oakwood Painesville Paulding Peninsula Rocky River Russells Point Seville South Russell Stow Timberlake Trotwood Troy Wadsworth Warren Warrensville Heights Waynesfield Income Taxes Receivable Dec. 31, 2012 $ 287,695.99 29,310.91 53,599.17 1,831,823.64 2,360.56 45,933.97 504,917.23 130,734.19 50,601,104.01 104,407.84 1,888.27 34,425.93 1,727.33 169,972.19 1,077.67 674,927.21 57,603.53 99,563.72 57,513.97 41,375.15 452,776.23 20,482.71 6,716.89 8,944.21 46,360.77 3,034.51 10,711.15 9,708.68 301,217.06 3,507,821.88 221,636.88 249,824.08 267,887.35 136,744.80 104,171.19 165,821.85 1,199,095.38 21,827.00 503,872.84 105,130.53 72,324.25 2,558,965.40 76,113.73 317,959.58 506,003.88 5,560.19 34,109.34 2,919.33 9,096.47 2,003,237.57 18,819.48 2,582,004.35 37,532.82 $ 70,300,394.86 29 Income Taxes Receivable Dec. 31, 2011 $ 217,305.95 21,022.10 1,938,784.65 2,982.42 45,508.92 542,783.42 139,101.15 49,170,807.30 111,722.14 50,548.67 169,552.09 631,825.04 48,416.86 77,145.84 51,552.69 438,438.55 16,079.62 1,957.47 $ 44,530.43 2,759.83 11,017.73 13,497.11 310,531.44 3,253,925.84 233,512.32 240,165.75 260,876.72 135,053.14 125,602.11 148,095.83 1,181,535.00 28,907.45 1,198,473.22 102,009.38 66,031.55 2,412,346.28 77,413.16 305,018.85 424,839.48 4,327.99 33,621.74 11,156.74 4,265.06 1,750,699.83 20,889.22 2,420,485.06 34,739.51 68,531,862.65 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES TABLE OF CONTENTS Page Independent Auditors' Report ................................................................................................................. 1-2 Management's Discussion and Analysis................................................................................................. 3-10 Statements of Net Position...................................................................................................................... 13-14 Statements of Revenues, Expenses and Changes in Net Position........................................................... 16 Statements of Cash Flows ....................................................................................................................... 17-18 Notes to Financial Statements................................................................................................................. 20-36 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Division of Parking Facilities Department of Public Works City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Division of Parking Facilities, Department of Public Works, City of Cleveland, Ohio (the "Division") as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Division of Parking Facilities, Department of Public Works, City of Cleveland, Ohio as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note A, the Division adopted the provisions of Governmental Accounting Standards Board Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Division and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Public Works, Division of Parking Facilities (the Division), we offer readers of the Division's financial statements this narrative overview and analysis of the financial activities of the Division for the years ended December 31, 2012 and 2011. Please read this information in conjunction with the Division's financial statements and footnotes which begin on page 13. The Division was created for the purpose of providing moderately priced off-street parking facilities and onstreet metered parking to citizens, visitors and those who work in the City. The Division's operating revenues are derived primarily from charges for parking at its facilities and from parking meter collections. In 2012 the Division facilities included two parking garages and four surface lots. In 2011 the Division facilities included three parking garages and four surface lots until the sale of one garage in October. COMPARISON OF CURRENT YEAR'S AND PRIOR YEARS' DATA FINANCIAL HIGHLIGHTS o The assets of the Division exceeded its liabilities (net position) by $20,179,000, $18,912,000 and $21,302,000 at December 31, 2012, 2011 and 2010, respectively. Of these amounts, $5,382,000, $5,391,000 and $7,741,000 (unrestricted net position) at December 31, 2012, 2011 and 2010, respectively, may be used to meet the Division's ongoing obligations to customers and creditors. o The Division's total net position increased by $1,267,000 during 2012, decreased by $2,390,000 during 2011 and decreased by $10,000 during 2010. In 2012, operating income decreased by $541,000 and net non-operating expenses and special items decreased by $3,708,000. In 2011, operating income decreased by $410,000 and net non-operating expenses increased by $7,095,000. o The Division's total bonded debt decreased by $2,420,000 (7.1%), $19,570,000 (36.5%) and $3,300,000 (5.8%) during 2012, 2011 and 2010, respectively. These amounts represent the principal payments made in 2012, 2011 and 2010. In addition, in 2011 the Division defeased $16,145,000 as a result of the sale of the Gateway North Garage. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Division's basic financial statements. The accompanying financial statements present financial information for the City of Cleveland's Division of Parking Facilities Fund, in which the City accounts for the activities of off-street parking operations and meter revenue collections. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. 3 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) OVERVIEW OF THE FINANCIAL STATEMENTS (Continued) The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Division of Parking Facilities Fund is considered an Enterprise Fund because the operations of the Division are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Division, the economic resources measurement focus and the accrual basis of accounting is used. The basic financial statements of the Division can be found on pages 13 - 18 of this report. The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages 20 - 36 of this report. CONDENSED STATEMENT OF NET POSITION INFORMATION Provided below is condensed statement of net position information for the Division as of December 31, 2012, 2011 and 2010: 2012 A ssets and D eferred O utflow s: A ssets: C urrent assets R estricted assets U nam ortized bond issuance costs C apital assets, net T otal assets D eferred O utflow s of R esources: D erivative instrum ents-interest rate sw aps T otal deferred outflow s of resources $ 5,657 8,762 1,288 36,658 52,365 $ 1,959 13,188 1,515 37,573 54,235 $ 2010 2,164 16,002 2,583 53,748 74,497 - 1,829 1,829 54,235 76,326 3,692 28,129 31,821 4,066 30,475 34,541 4,983 50,041 55,024 365 365 782 782 - 9,272 5,525 5,382 20,179 $ - 52,365 T otal assets and deferred outflow s L iabilities, D eferred Inflow s and N et Position: L iabilities: C urrent liabilities L ong-term liabilities T otal liabilities D eferred Inflow s of R esources: D erivative instrum ents-interest rate sw aps T otal deferred inflow s of resources N et Positon: N et investm ent in capital assets R estricted for debt service U nrestricted T otal net position T otal liabilities, deferred inflow s and net position 2011 (A m ounts in 000's) 7,943 5,578 5,391 18,912 5,423 8,138 7,741 21,302 52,365 4 $ 54,235 $ 76,326 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Assets: Current, restricted and other non-capital assets: The Division's current, restricted and other non-capital assets have decreased a total of approximately 5.7% from 2011 to 2012. This was primarily due to the decrease in restricted assets. The primary reason for the decrease in 2011 was a $3.9 million reduction in restricted assets and unamortized bond issuance costs which was caused by the defeasance of $16.1 million in revenue bonds. Capital assets: The Division's capital assets (net of accumulated depreciation) as of December 31, 2012 and 2011 amounted to $36,658,000 and $37,573,000, respectively. The total decrease in the Division's investment in capital assets was $915,000 (2.4%) and $16,175,000 (30.1%) in 2012 and 2011, respectively. The decrease in 2012 was due to depreciation expense exceeding asset additions. The decrease in 2011 is primarily due to the sale of the Gateway North Garage. A summary of the activity in the Division's capital assets during the year ended December 31, 2012 is as follows: Balance Balance January 1, December 31, 2012 Additions Deletions 2012 (Amounts in 000's) Land Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Total Less: Accumulated depreciation Capital assets, net $ 5,478 $ 1,256 53,719 1,250 61,703 50 440 490 (10) 5,478 1,256 53,719 1,290 440 62,183 (24,130) (1,405) 10 (25,525) $ 37,573 $ 5 $ (915) $ $ (10) - $ 36,658 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) A summary of the activity in the Division's capital assets during the year ended December 31, 2011 is as follows: Balance January 1, 2011 Additions Deletions (Amounts in 000's) Land Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total Less: Accumulated depreciation Capital assets, net $ 13,095 $ 1,256 65,757 1,309 81,417 (27,669) $ (1,722) Balance December 31, 2011 (7,617) $ (12,038) (59) (19,714) 5,478 1,256 53,719 1,250 61,703 5,261 (24,130) $ 53,748 $ (1,722) $ (14,453) $ 37,573 The City sold the Gateway North Parking Garage during 2011 for $21,000,000. The gain on the sale of the garage is recorded as a special item on the financial statements. Additional information on the Division's capital assets can be found in Note A - Summary of Significant Accounting Policies and Note E - Capital Assets. Liabilities: Long-term debt: At the end of 2012 and 2011, the Division had total bonded debt outstanding of $31,625,000 and $34,045,000 respectively. This is a reduction of approximately 7.1%. This reduction is primarily the result of annual principal payments on the Division's outstanding bonds. This current debt was incurred to refund debt previously issued to construct two new parking garages around the Gateway site and a new Willard Park Garage behind City Hall. The City's first garage on the Gateway site was completed in January 1994. The second garage was completed in August 1994 and was subsequently sold in 2011. The Willard Park Garage construction was completed in April 1996. The bonds are backed by the net revenues from these facilities. In addition, the City has pledged additional revenues, which consist of various non-tax revenues, to meet debt service requirements, if necessary. In 2012 and 2011, no additional pledged revenue was required to meet the debt service requirements on the parking bonds. 6 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The activity in the Division's debt obligations outstanding during the year ended December 31, 2012 is summarized below: Balance January 1, 2012 Balance Debt December 31, Retired 2012 (Amounts in 000's) Parking Facilities Improvement $ Revenue Bonds 34,045 $ (2,420) $ 31,625 The activity in the Division's debt obligations outstanding during the year ended December 31, 2011 is summarized below: Balance January 1, 2011 Balance Debt December 31, Retired 2011 (Amounts in 000's) Parking Facilities Improvement Revenue Bonds $ 53,615 $ (19,570) $ 34,045 The bond ratings at December 31, 2012 for the Division's revenue bonds are as follows: Moody's Investors Service Series 2006 Bonds Standard & Poor's Aa3 AA- The bond ratings indicated above are insured ratings only, reflecting the ratings of Assured Guaranty Municipal Corp. (formerly Financial Security Assurance, Inc.). The Division has no ratings on its bonds based solely on its own credit. In addition, the Division entered into a derivative or hedging agreement in 2003. Derivative instruments are contracts, the value of which depends on, or derives from, the value of an underlying asset, index or rate. The most common types of derivatives used by governments are interest rate swaps and interest rate locks. A detailed description of the outstanding derivative, including its terms, objectives, risks and fair value, can be found in Note B - Long-Term Debt and Other Obligations. 7 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) In accordance with the implementation of GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, the Division has reported an asset and/or a liability as appropriate in the amount of the fair value of the interest rate swap, which reflects the prevailing interest rate environment at December 31, 2012 and December 31, 2011. The fair value of the swap has been provided by the counterparty and confirmed by the City's financial advisor. Additional information on the Division's long-term debt can be found in Note B - Long-Term Debt and Other Obligations. Net Position: Net position serves as a useful indicator of a government's financial position. In the case of the Division, assets exceeded liabilities by $20,179,000, $18,912,000 and $21,302,000 at December 31, 2012, 2011 and 2010, respectively. Of the Division's net position at December 31, 2012, $5,525,000 represents resources that are classified as restricted since their use is limited by the bond indentures. In addition, the Division has a net balance of $9,272,000 that reflects its investment in capital assets (e.g., land, buildings, furniture) net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The $5,382,000 balance of unrestricted net position may be used to meet the Division's ongoing obligations to customers and creditors. Of the Division's net position at December 31, 2011, $5,578,000 represents resources that are classified as restricted since their use is limited by the bond indentures. In addition, the Division has a net balance of $7,943,000 that reflects its investment in capital assets (e.g., land, buildings, furniture) net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The $5,391,000 balance of unrestricted net position may be used to meet the Division's ongoing obligations to customers and creditors. 8 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION The Division's operations during 2012 increased net position by $1,267,000 and during 2011 decreased net position by $2,390,000. Provided below are key elements of the Division's results of operations as of and for the years ended December 31, 2012, 2011 and 2010: 2012 Operating revenues Operating expenses $ 2011 (Amounts in 000's) 2010 3,385 (773) (8,649) (1,068) 5 (3,044) 11 3 (370) (1,657) Income (Loss) before capital contributions and special item 2,975 (227) Total non-operating revenue (expense), net 9,227 5,842 423 (1,853) Non-operating revenue (expense): Investment income (loss) Interest expense Other non-operating revenue (expense) Sale of scrap Amortization of bond issuance costs 8,453 $ 5,478 2,434 Operating income 7,735 $ 5,301 (10,490) (3,395) (7,515) (10) 777 Capital contributions Special items - gain on sale of capital assets 490 5,125 Increase (Decrease) in net position 1,267 18,912 Net position, beginning of year Net position, end of year $ (2,390) (10) 21,302 21,312 20,179 $ 18,912 $ 21,302 Operating revenues: From 2011 to 2012, operating revenues decreased $718,000, or 8.5%. From 2010 to 2011, operating revenues decreased $774,000, or 8.4%. These reductions were primarily due to the sale of the Gateway North Garage. The Gateway North Garage was owned by the Division for all of 2010 and was sold in October of 2011. Operating expenses: In 2012, operating expenses decreased $177,000, or 3.2%. This reduction was primarily due to the decrease in professional service fees associated with the operators of the Gateway North Garage. 9 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) Non-operating revenues and expenses: From 2011 to 2012, net non-operating expenses decreased $8,833,000. This decrease was primarily due to the reduction of interest expense, due to the defeasance of revenue bonds associated with the Gateway North Garage. From 2010 to 2011, net non-operating expenses increased $7,095,000. This increase was primarily due to the defeasance of $16.1 million of revenue bonds. FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS Operating revenues are derived primarily from fees charged to users of City-owned parking garages and facilities operated by the Division including the net income from the Gateway garage and on-street parking meter revenue. The Division continues to assess their operations to improve efficiencies, identify additional revenue sources and improve existing revenue sources in this time of economic recession. City Council has the authority to further increase parking fees when deemed necessary to assist the Division in meeting operational and debt commitments as economic circumstances dictate. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Division's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 10 BASIC FINANCIAL STATEMENTS This page intentionally left blank. 12 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES STATEMENTS OF NET POSITION December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 ASSETS CURRENT ASSETS Cash and cash equivalents $ Accounts receivable - net of allowance Accrued Interest Due from other City of Cleveland departments, divisions or funds Inventory of supplies, at cost TOTAL CURRENT ASSETS RESTRICTED ASSETS Cash and cash equivalents Investments 5,449 $ 18 51 139 5,657 8,762 1,762 7 6 48 136 1,959 CAPITAL ASSETS Land Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Less: Accumulated depreciation CAPITAL ASSETS, NET TOTAL ASSETS $ 1,515 5,478 1,256 53,719 1,290 440 62,183 (25,525) UNAMORTIZED BOND ISSUANCE COSTS 8,762 1,288 TOTAL RESTRICTED ASSETS 9,093 4,095 13,188 5,478 1,256 53,719 1,250 61,703 (24,130) 36,658 37,573 52,365 $ 54,235 (Continued) 13 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES STATEMENTS OF NET POSITION December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 LIABILITIES, DEFERRED INFLOWS AND NET POSITON LIABILITIES CURRENT LIABILITIES Current portion of long-term debt, due within one year $ Accounts payable Due to other governments Due to other City of Cleveland departments, divisions or funds Accrued interest payable Accrued wages and benefits TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES Revenue bonds - excluding amount due within one year Accrued wages and benefits 2,520 $ 214 221 117 470 150 3,692 2,420 753 185 67 499 142 4,066 28,103 26 30,447 28 TOTAL LONG-TERM LIABILITIES 28,129 30,475 TOTAL LIABILITIES 31,821 34,541 DEFERRED INFLOWS OF RESOURCES Derivative instruments - interest rate swaps TOTAL DEFERRED INFLOWS 365 365 782 782 9,272 5,525 5,382 20,179 7,943 5,578 5,391 18,912 52,365 $ 54,235 NET POSITION Net investment in capital assets Restricted for debt service Unrestricted TOTAL NET POSITION TOTAL LIABILITIES, DEFERRED INFLOWS AND NET POSITON $ (Concluded) See notes to financial statements. 14 This page intentionally left blank. 15 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 OPERATING REVENUES Charges for services $ TOTAL OPERATING REVENUES 7,735 $ 8,453 7,735 8,453 3,797 99 1,405 3,729 27 1,722 TOTAL OPERATING EXPENSES 5,301 5,478 OPERATING INCOME 2,434 2,975 423 (1,853) (773) (8,649) (227) (1,068) (1,657) (10,490) OPERATING EXPENSES Operations Maintenance Depreciation NON-OPERATING REVENUE (EXPENSE) Investment income (loss) Interest expense Amortization of bond issuance costs TOTAL NON-OPERATING REVENUE (EXPENSE) - NET INCOME (LOSS) BEFORE CAPITAL CONTRIBUTIONS AND SPECIAL ITEM (7,515) 777 Capital contributions 490 5,125 Special items - gain on sale of capital assets INCREASE (DECREASE) IN NET POSITION 1,267 18,912 NET POSITION, beginning of year $ NET POSITION, end of year See notes to financial statements. 16 (2,390) 21,302 20,179 $ 18,912 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services $ 8,984 (3,495) (1,055) 3,374 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (21,545) 20,162 (3,425) (2,695) (4,125) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Cash paid to escrow agent for refunding Proceeds from sale of capital assets Principal paid on long-term debt Interest paid on long-term debt NET CASH USED FOR CAPITAL AND RELATED FINANCING ACTIVITIES 4,434 (2,420) (1,705) NET CASH PROVIDED BY OPERATING ACTIVITIES (7,503) (4,095) 4,095 12 3 4,107 $ (7,161) 10,855 CASH AND CASH EQUIVALENTS, beginning of year (4,092) 3,356 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, end of year 7,939 $ (3,474) (1,091) 18,016 14,211 $ 10,855 (Continued) 17 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Income $ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in assets and liabilities: Accounts receivable, net Due from other City of Cleveland departments, divisions or funds Inventory of supplies Accounts payable Due to other governments Due to other City of Cleveland departments, divisions or funds Accrued wages and benefits TOTAL ADJUSTMENTS NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,434 $ 2,975 1,405 1,722 (11) (3) (3) (539) 36 50 5 940 13 51 (105) (145) (76) (1) 1,459 3,374 $ 4,434 SCHEDULE OF NON-CASH CAPITAL AND RELATED FINANCING ACTIVITIES Contributions of capital assets $ 490 (Concluded) See notes to financial statements. 18 This page intentionally left blank. 19 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Division of Parking Facilities (the Division) is reported as an Enterprise Fund of the City of Cleveland's (the City) Department of Public Works and is a part of the City's primary government. The Division was created for the purpose of providing moderately priced off-street parking facilities and on-street metered parking to citizens, visitors and those who work in the City. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Division comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of publicprivate or public-public partnership. The Division has determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Division has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Division has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. As required, the Division has implemented GASB Statement No. 64 effective for the 2012 fiscal year. 20 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 Continued) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Division's net position is accounted for in the accompanying statements of net position and the net position is divided into the following categories: o Net investment in capital assets o Amount restricted for debt service o Remaining unrestricted amount In addition, certain additional financial information regarding the Division is included in these footnotes. The implementation of the new GASB statements did not result in a change in the Division's beginning net position balance as previously reported. Basis of Accounting: The Division's financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized as incurred. Revenues: Revenues are derived primarily from fees charged to users of City-owned parking garages and facilities operated by the Division including the Gateway garages and on-street parking meter revenue. Parking rates are authorized by City Council. Parking fees are collected on a daily or monthly basis. Statement of Cash Flows: The Division utilizes the direct method of reporting for the statement of cash flows as defined by the GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In the statement of cash flows, cash receipts and cash payments are classified according to operating, capital and related financing and investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Division. Cash equivalents are defined as highly liquid investments with a maturity of three months or less when purchased. Investments: The Division follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value in the balance sheet and recognize the corresponding change in the fair value of investments in the year in which the change occurred. Fair values of investments at year end are based on market quotes, where available. The City has invested funds in the State Treasury Asset Reserve of Ohio (STAROhio) during 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. 21 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Assets: Proceeds from debt and amounts set aside in various fund accounts for payment of debt are classified as restricted assets since their use is limited by the underlying bond indenture. Inventory of Supplies: Inventory is valued at cost using the first in/first out method. Inventory costs are charged to operations when consumed. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost or, if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as an item with a useful life in excess of one year and an individual cost of more than $5,000 for land, furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed of, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Land improvements 15 to 100 years Buildings, structures and improvements 5 to 60 years Furniture, fixtures, equipment and vehicles 3 to 60 years Compensated Absences: The Division accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statements of net position. The portion of the compensated absence liability that is not expected to be paid or utilized within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Division allows employees to carryover vacation time from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three-year average base salary rate, with the balance being forfeited. Deferred Inflows of Resources: In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition on net position that applies to the future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. 22 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Bond Issuance Costs, Discounts and Unamortized Loss on Debt Refunding: Bond issuance costs are initially recorded as deferred expenses and unamortized original issuance discounts are netted against longterm debt. Both are amortized over the lives of the related bonds. Unamortized loss on debt refunding is netted against long-term debt and is amortized over the shorter of the remaining life of the defeased bond or the newly issued bond. NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS Long-term debt outstanding at December 31 is as follows: Interest Rate Parking Facilities Refunding Revenue Bonds Series 2006, due through 2022 Original Issuance 4.00%-5.25% $ 57,520 2012 (Amounts in 000's) $ 31,625 2011 $ 34,045 Unamortized loss on debt refunding Unamortized discount and premium (2,261) 1,259 (2,660) 1,482 Current portion (2,520) (2,420) Total Long-Term Debt $ 28,103 $ 30,447 Summary: Changes in long-term obligations for the year ended December 31, 2012 are as follows: Balance January 1, 2012 Increase Decrease Balance December 31, 2012 Due Within One Year (Amounts in 000's) Parking Facilities Refunding Revenue Bonds Series 2006, due through 2022 Accrued wages and benefits Total $ 34,045 $ 170 34,215 $ $ 23 $ 148 148 (2,420) $ 31,625 $ (142) (2,562) $ 176 31,801 $ 2,520 $ 150 2,670 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2011 are as follows: Balance January 1, 2011 Increase Decrease Balance December 31, 2011 Due Within One Year (Amounts in 000's) Parking Facilities Refunding Revenue Bonds Accrued wages and benefits Total $ 53,615 $ Series 2006, due through 2022 171 53,786 $ $ $ 139 139 34,045 $ 2,420 (140) $ (19,570) $ 170 34,215 $ 142 2,562 (19,710) $ Minimum principal and interest payments on outstanding long-term debt are as follows: Principal 2013 2014 2015 2016 2017 2018-2022 Interest (Amounts in 000's) Total $ $ 1,613 1,487 1,354 1,244 1,093 2,894 $ 4,133 4,132 4,124 4,124 4,133 20,664 $ Total 2,520 2,645 2,770 2,880 3,040 17,770 31,625 $ 9,685 $ 41,310 . The Parking Facilities Refunding Revenue Bonds are payable from net revenues generated from certain parking facilities and other operating revenues of the Division of Parking Facilities, including parking meter revenue. In addition, the City has pledged other non-tax revenue to meet debt service requirements. The City has pledged and assigned to the trustee a first lien on pledged revenues consisting of fines and penalties collected as a result of the violation of municipal parking ordinances and fines, waivers and costs relating to citations for misdemeanor offenses and the special funds as defined within the bond indenture. 24 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Effective October 6, 2011, the City completed the sale of the City-owned Gateway North Parking Garage to Rock Ohio Caesars Gateway LLC. The garage is being used by the purchaser in conjunction with a new casino constructed in the Higbee Building adjacent to the garage. The net proceeds of the sale of the garage received by the City totaled $20,915,504. Of this amount, $19,578,288 was placed into an irrevocable escrow fund, along with $1,967,425 released from the debt service reserve fund as a result of the transaction, to be used to pay the principal and interest as it comes due on $16,145,000 Parking Facilities Refunding Revenue Bonds, Series 2006. As a result, these bonds are considered to be defeased and the liability for the bonds has been removed from long-term debt. In addition, $480,000 of the sale proceeds was used to terminate the portion of an existing basis swap which was associated with the bonds being defeased. Sale proceeds were also utilized to pay costs of the transaction. As a result of this transaction, the city expects to save approximately $600,000 annually through 2022. Effective August 15, 2006, the City issued $57,520,000 of Parking Facilities Refunding Revenue Bonds, Series 2006. The bonds were issued to currently refund $56,300,000 of the outstanding Parking Facilities Refunding Revenue Bonds, Series 1996. In addition, proceeds were also used to fund a portion of a payment owed by the City upon early termination under an interest rate swaption agreement entered into in 2003. Net proceeds of $58,709,855 were placed in an irrevocable escrow account which was used to pay the principal, interest and premium on the refunded bonds. As a result, the refunded bonds are considered to be defeased and the liability for these bonds has been removed from long-term debt. The City completed the refunding to reduce its total debt service payments by $1,340,000 and to obtain an economic gain (the difference between the present values of the old and new debt service payments) of approximately $970,000. At the time of the issuance of the Series 2006 Bonds, the City entered into a basis swap agreement with UBS, which is described below. Interest Rate Swap Transaction Terms: Simultaneously with the issuance of the City's $57,520,000 Parking Facilities Refunding Revenue Bonds, Series 2006 on August 15, 2006, the City entered into a floating-to-floating rate basis swap agreement with a notional amount equal to the total declining balance of the Series 2006 Bonds. UBS is the counterparty on the transaction. Under the swap agreement for the Series 2006 Bonds, the City is a floating rate payor, paying a floating rate based on the Securities Industry Financial Markets Association (SIFMA) index. The counterparty is also a floating rate payor, paying the City 67% of one month LIBOR. The City also received an upfront payment in the amount of $1,606,000. Net payments are exchanged semi-annually each March 15 and September 15. The obligation of the City to make periodic payments (but not any termination payment) is secured by a pledge of and lien on the parking revenues and additional pledged revenue as defined in the trust indenture securing the Parking Facilities Refunding Revenue Bonds, Series 2006, on parity with the pledge and lien securing the payment of debt service on the bonds. Objective: The City entered into the swap in order to maximize the savings associated with the refunding of the bonds and to reduce the City's risk exposure. The actual overall savings to be realized by the City will depend upon the net payments received under the swap agreement. 25 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Basis Risk: By entering into the swap based upon the 30 day LIBOR rate of interest, the City has undertaken basis risk associated with a change in tax rates and structure. While the average relationship between the SIFMA (tax-exempt) and LIBOR (taxable) interest rates has historically been 67%, this relationship may not always apply. Since late 2008, this relationship has been significantly higher for various periods of time due to disruptions in the financial markets. The payments received from the counterparty may be less than the amount owed to the counterparty, resulting in a net increase in debt service. However there have also been periods recently when the SIFMA/LIBOR relationship has been lower than 67%. In this case payments received from the counterparty may be greater than the amount owed to the counterparty which results in a net decrease in debt service. In addition, a reduction in federal income tax rates might increase the percentage relationship between SIFMA and LIBOR and may potentially increase the cost of the financing. Counterparty Risk: The City selected a highly rated counterparty in order to minimize this risk. However, over the long-term, it is possible that the credit strength of UBS could change and this event could trigger a termination payment on the part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to UBS, or by UBS to the City, depending upon the prevailing economic circumstances at the time of the termination. The City obtained insurance to mitigate much of the risk associated with termination due to the event of a downgrade of the City's bond rating. An amount due by the City to UBS upon early termination of the agreement is insured by FSA (now Assured Guaranty Municipal Corp.) up to a maximum amount of $8,000,000. Fair Value: The fair value of the swap at December 31, 2012 and 2011 reported by UBS was $365,000 and $782,000, respectively, which would be payable by the City. The City has pledged future revenues from certain parking facilities, net of specified operating expenses, and other operating revenues to repay $31,625,000 of Parking Facilities Refunding Revenue Bonds issued in 2006. Proceeds from the bonds initially issued provided financing for the construction of parking facilities. The bonds are payable from parking facilities net revenues and are payable through 2022. Annual principal and interest payments on the bonds are expected to require the full amount of net operating revenues. The total principal and interest remaining to be paid on the Parking Facilities Refunding Revenue Bonds is $41,310,000. Principal and interest paid for the current year (including net swap payments) and total net revenues were $4,125,000 and $4,148,000, respectively. In 2012 and 2011, no additional pledged revenue was required to meet the debt service on the Parking Facilities Refunding Revenue Bonds. The trust indenture requires, among other things, that the Division will fix parking rates and will charge and collect fees for the use of the parking facilities and will restrict operating expenses. As of December 31, 2012 and 2011, the Division was in compliance with the terms and requirements of the trust indenture. 26 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Derivative Instruments Derivative instruments are contracts, the value of which depends on, or derives from, the value of an underlying asset, index or rate. The most common types of derivatives used by governments are interest rate swaps and interest rate locks. The Division entered into a derivative or hedging agreement in 2003. A detailed description of the outstanding derivative, including its terms, objectives, risks and fair value, can be found in the preceding section. The Division has reported an asset and/or a liability as appropriate in the amount of the fair value of the interest rate swap, which reflects the prevailing interest rate environment at December 31, 2012 and December 31, 2011. The fair value of the swap has been provided by the counterparty and confirmed by the City's financial advisor. The Division recognized a $417,000 investment income pursuant to this swap in 2012. The tables below present the fair value balances and notional amounts of the Division's derivative instrument outstanding at December 31, 2012 and December 31, 2011, classified by type and the change in fair value of this derivative during fiscal years 2012 and 2011 as reported in the respective financial statements. The fair values of the interest rate swap, which reflect the prevailing interest rate environment at December 31, 2012 and December 31, 2011 and the specific terms and conditions of the swap, have been provided by the counterparty and confirmed by the City's financial advisor. Fair Value at December 31, Changes in Fair Value 2012 Classification Amount Classification Amount (Amounts in 000's) Notional Floating to floating interest rate swap 2006 Parking Basis Swap Investment Revenue $ 417 Investment $ (365) Fair Value at December 31, Changes in Fair Value 2011 Classification Amount Classification Amount (Amounts in 000's) Floating to floating interest rate swap 2006 Parking Basis Swap Investment Loss $ 1,047 (a) Investment $ (782) $ 31,625 Notional $ 34,045 (a) This was reclassified from a hedging derivative to an investment derivative in 2011 due to the Division's determination that the derivative was not effectively hedged; therefore the loss recognized in 2011 was $782,000. 27 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) The table below presents the objective and significant terms of the Division's derivative instrument at December 31, 2012, along with the credit rating of the swap counterparty. Bonds Type Objective Amount Date Date Terms Credit Rating (Amounts in 000's) 2006 Parking Bonds $ Basis Swap - Pay Exchange Floating/ Receive floating rate payments on Floating Series 2006 Parking System Bonds 31,625 8/15/2006 9/15/2022 Pay SIFMA, receive 67% of LIBOR A2/A/A NOTE C - RECEIVABLE FROM GATEWAY ECONOMIC DEVELOPMENT CORPORATION In accordance with an agreement with Gateway Economic Development Corporation (Gateway), Gateway is required to reimburse the City for the excess of the debt service requirements of the Parking Facilities Refunding Revenue Bonds attributed to the two Gateway garages over the net revenues generated by the two Gateway garages. In October 2011, the City sold one of the Gateway garages and defeased the applicable bonds. Going forward the amounts required to be reimbursed will be calculated based upon the net revenues of the remaining garage and remaining applicable bonds outstanding. The first garage on the Gateway site was completed in January 1994. The second garage was completed in August 1994. In 2012, net revenues generated by the remaining Gateway garage were less than the debt service payments attributed to that garage by $1,883,000. Cumulative debt service payments funded by the City that are due from Gateway totaled $45,239,000 at December 31, 2012. Due to the uncertainty of collecting such amounts, an allowance has been recorded to offset the amounts in full; therefore, these amounts do not appear in the accompanying financial statements. NOTE D - DEPOSITS AND INVESTMENTS Deposits: The carrying amount of the Division's deposits at December 31, 2012 and 2011 totaled $778,000 and $901,000, respectively, and the Division's bank balances were $787,000 and $906,000, respectively. The differences represent positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $787,000 and $906,000 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. 28 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE D - DEPOSITS AND INVESTMENTS (Continued) Custodial credit risk for deposits is the risk that in the event of bank failure, the Division will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Division's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by state statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Under City policy, investments are limited to repurchase agreements, U.S. Government securities, certificates of deposit, investments in certain money market mutual funds and STAROhio. Generally, investments are recorded in segregated accounts by way of book entry through the banks' commercial or trust department and are kept at the Federal Reserve Bank in the depository institutions' separate custodial account for the City, apart from the assets of the depository institution. Ohio statutes prohibit the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; therefore, significant changes in market conditions could materially affect portfolio value. Interest rate risk: In accordance with its investment policy, the Division limits its exposure to fair value losses caused by rising interest rates, the Division invests primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the table on the following page. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Division will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The Division does not have an investment policy dealing with investment custodial credit risk beyond the requirement in the state statute. Credit Risk: The Division's investments as of December 31, 2012 and 2011 include US Agency Obligations, STAROhio and investments in mutual funds. The Division maintains the highest ratings for their investments. Investments in Victory Money Market Fund and STAROhio carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. 29 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE D - DEPOSITS AND INVESTMENTS (Continued) Concentration of Credit Risk: The Division places a limitation on the amount it may invest in any one issuer to help minimize the concentration of credit risk. The Division had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the balance sheet in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: 2012 Fair Value Type of Investment US Agency Obligations STAROhio Investment in Mutual Funds Total Investments Total Deposits Total Deposits and Investments 2011 2012 Fair Cost Value (Amounts in 000's) 969 12,464 13,433 778 969 12,464 13,433 778 4,095 849 9,105 14,049 901 $ 14,211 $ 14,211 $ 14,950 $ $ $ 2011 Cost $ 4,095 849 9,105 14,049 901 $ 14,950 Investment Maturities Less than One Year $ 969 12,464 13,433 778 $ 14,211 These amounts are monies invested by the City Treasurer on behalf of the Division and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. As of December 31, 2012, the investments in STAROhio and mutual funds are approximately 7% and 93%, respectively, of the Division's total investments. As of December 31, 2011, the investments in US Agency Obligations, STAROhio and in mutual funds are approximately 29%, 6% and 65%, respectively, of the Division's total investments. 30 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE E - CAPITAL ASSETS Capital Asset Activity: Capital asset activity for the year ended December 31, 2012 was as follows: Balance Balance December 31, January 1, 2012 Additions Deletions 2012 (Amounts in 000's) Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated Capital assets, being depreciated: Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated Less: Accumulated depreciation Total capital assets being depreciated, net Capital assets, net 5,478 $ $ 5,478 440 $ 440 $ 5,478 440 - 5,918 1,256 53,719 1,250 56,225 (24,130) 50 50 (1,405) (10) (10) 10 1,256 53,719 1,290 56,265 (25,525) 32,095 (1,355) - 30,740 $ 37,573 $ (915) $ 31 - $ 36,658 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE E - CAPITAL ASSETS (Continued) Capital Asset Activity: Capital asset activity for the year ended December 31, 2011 was as follows: Balance Balance December 31, January 1, 2011 Additions Deletions 2011 (Amounts in 000's) Capital assets, not being depreciated: Land $ 13,095 $ Total capital assets, not being depreciated 13,095 Capital assets, being depreciated: Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles $ (7,617) $ 5,478 1,256 65,757 1,309 Total capital assets, being depreciated Less: Accumulated depreciation Total capital assets being depreciated, net Capital assets, net - (7,617) 5,478 (12,038) (59) 1,256 53,719 1,250 68,322 (27,669) (1,722) (12,097) 5,261 56,225 (24,130) 40,653 (1,722) (6,836) 32,095 $ 53,748 $ (1,722) $ (14,453) $ 37,573 On October 6, 2011, the City completed the sale of the City-owned Gateway North Parking Garage to Rock Ohio Caesars Gateway LLC. The garage will be used in conjunction with the opening of a new casino being constructed in the Higbee Building adjacent to the garage. The Gateway North Parking Garage sold for $21,000,000 with a gain on the sale of capital assets of $5,125,000. 32 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE F - DEFINED BENEFIT PENSION PLANS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 3) The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Division's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $81,000, $77,000 and $77,000 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27 and it is effective for employer fiscal years beginning after June 15, 2014. 33 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE G - OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multipleemployer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-andservice retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a standalone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 432154642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Division's actual contributions to OPERS to fund postemployment benefits were $32,000 in 2012, $31,000 in 2011 and $44,000 in 2010. The required payments due in 2012, 2011 and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. 34 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE H - RELATED PARTY TRANSACTIONS Revenues and Accounts Receivable: The Division provides parking facilities at usual and customary rates to various departments and divisions of the City. The Division operates certain garages and parking lots on behalf of other City divisions. The professional management fees recorded by the Division to operate the garages and parking lots are as follows: 2012 2011 (Amounts in 000's) Department of Community Development $ 41 $ 36 . Operating Expenses: The Division is provided various services by other City divisions. Charges are based on actual usage or on a reasonable pro-rata basis. The more significant expenses included in the statements of operations for the years ended December 31, 2012 and 2011 are as follows: 2012 2011 (Amounts in 000's) Parks Maintenance Motor Vehicle Maintenance Cleveland Public Power Maintenance Telephone $ 74 9 178 17 $ 73 187 4 14 NOTE I - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Division for personal injuries, property damage and other matters. The City is responsible for the lawsuits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Division's financial position, results of operations or cash flows. Risk Management: The Division is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Division is generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio workers' compensation retrospective rating program. 35 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC WORKS DIVISION OF PARKING FACILITIES NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 (Continued) NOTE I - CONTINGENT LIABILITIES AND RISK MANAGEMENT (Continued) In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs) and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims liability for the Division is immaterial. NOTE J - LEASES The Division leases the land for various parking facilities to management companies under non-cancelable lease agreements, which expire at various times through the year 2056. Revenues generated from such leases totaled $180,000 in 2012 and 2011. Future minimum rentals on non-cancelable leases are as follows: (Amounts in 000's) 2013 $ 2014 2015 2016 2017 Thereafter 180 180 180 180 180 4,740 $ 5,640 NOTE K - SUBSEQUENT EVENTS On January 17, 2013, Moody's Investors Service lowered its rating on Assured Guaranty Municipal Corporation, the insurer of the Series 2006 Parking Facilities Refunding Revenue Bonds. The rating was lowered to A2 from Aa3. The Division's bonds only carry the insured rating and have no ratings on its bonds based solely on its own credit. On April 16, 2013, the City entered into a novation agreement with UBS, AG and PNC Bank, National Association (PNC) under which the basis swap associated with the Parking Facilities Refunding Revenue Bonds, Series 2006, was transferred from UBS to PNC effective March 15, 2013. All of the terms of the original basis swap remain the same. 36 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS TABLE OF CONTENTS Page Independent Auditors' Report.................................................................................................... 1-2 Management's Discussion and Analysis ................................................................................... 3-15 Statements of Net Position ......................................................................................................... 18-19 Statements of Revenues, Expenses and Changes in Net Position ............................................. 21 Statements of Cash Flows .......................................................................................................... 22-23 Notes to Financial Statements .................................................................................................... 25-45 Schedule of Airport Revenues and Operating Expenses as Defined in the Airline Use Agreements ................................................................................ 46 Report on Compliance with Requirements Applicable to the Passenger Facility Charge Program and on Internal Control Over Compliance in Accordance with 14 CFR Part 158 .................................................................... 47-48 Schedule of Expenditures of Passenger Facility Charges .......................................................... 49 Notes to Schedule of Expenditures of Passenger Facility Charges ........................................... 50 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Divisions of Cleveland Hopkins International and Burke Lakefront Airports Department of Port Control City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Ohio (the "Divisions") as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Ohio as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Effect of Adopting New Accounting Standards As discussed in Note A, the Divisions adopted the provisions of Governmental Accounting Standards Board Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Divisions and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 15 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The schedule of airport revenues and operating expenses as defined in the airline use agreement for the year ended December 31, 2012 is presented for purpose of additional analysis and is not a required part of the Divisions' basic financial statements. The schedule of airport revenues and operating expenses is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the Divisions' basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly presented in all material respects in relation to the Divisions' basic financial statements taken as a whole. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Port Control, Divisions of Cleveland Hopkins International (CLE) and Burke Lakefront (BKL) Airports (the Divisions), we offer readers of the Divisions' financial statements this narrative overview and analysis of the financial activities of the Divisions for the years ended December 31, 2012 and December 31, 2011. Please read this information in conjunction with the Divisions' basic financial statements and notes that begin on page 18. The Divisions are charged with the administration and control of, among other facilities, the municipally owned airports of the City. The Divisions operate a major public airport and a reliever airport serving not only the City of Cleveland, but also suburban municipalities in Cuyahoga, Medina, Summit and Geauga counties. In 2012, the Divisions were served by 26 scheduled airlines and four cargo airlines. There were 83,000 scheduled landings with landed weight amounting to 5,732,148,000 pounds. There were 4,495,000 passengers enplaned at Cleveland Hopkins International Airport and 92,000 passengers enplaned at Burke Lakefront Airport during 2012. In 2011, the Divisions were served by 27 scheduled airlines and four cargo airlines. There were 87,000 scheduled landings with landed weight amounting to 5,912,394,000 pounds. There were 4,598,000 passengers enplaned at Cleveland Hopkins International Airport, and 88,000 passengers enplaned at Burke Lakefront Airport during 2011. COMPARISON OF CURRENT YEAR AND PREVIOUS YEAR DATA FINANCIAL HIGHLIGHTS The assets of the Divisions exceeded its liabilities (net position) by $394,000,000, $405,900,000 and $401,879,000 at December 31, 2012, 2011 and 2010, respectively. Of these amounts, $137,306,000, $128,908,000 and $148,100,000 (unrestricted net position) at December 31, 2012, 2011 and 2010, respectively, may be used to meet the Divisions' ongoing obligations to customers and creditors. The Divisions' total net position decreased by $11,900,000 in 2012. This is due to a significant decrease in net investment in capital assets relating to principal payment on bond debt, a decrease in bond proceeds related to the use of bond funds to finance capital projects and an increase in accumulated depreciation resulting from capital assets placed into operation after completion. Additions to construction in progress totaled $19,434,000, $19,431,000 and $25,497,000 in 2012, 2011 and 2010, respectively. The major capital expenditures during 2012 were for the Power Distribution Enhancement Project, the Terminal Terrazzo Flooring project, the BKL Runway 6L-24R Safety Area Improvement project, the Regional Transit Authority (RTA) Level Art Gallery project and the Converged Communications project. 3 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FINANCIAL HIGHLIGHTS (Continued) The Divisions' total bonded debt decreased by $27,955,000 in 2012, increased $42,625,000 in 2011 and decreased $52,480,000 during 2010. In 2012, the City issued $235,150,000 of Airport System Revenue Bonds, Series 2012A, to refund all of the outstanding Airport System Revenue Bonds, Series 2000A. In 2011, the City issued $74,385,000 of Airport System Revenue Bonds Series 2011A which provided funds to pay the costs of improvements to the Airport Systems and refunded a part of the Series 2008D Bonds. The key factors for the decrease in 2012 were the scheduled principal payments on the Divisions' outstanding Bonds and the refunding of the Series 2000A Bonds. The reason for the increase in 2011 was the issuance of the Series 2011A Bonds. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Divisions' basic financial statements. The accompanying financial statements present financial information for the City of Cleveland's Divisions of Cleveland Hopkins International and Burke Lakefront Airports Fund, in which the City accounts for the operations of the Department of Port Control. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Divisions are considered an Enterprise Fund because the operations of the Divisions are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Divisions, the economic resources measurement focus and the accrual basis of accounting is used. This is similar to businesses in the private sector. The basic financial statements of the Divisions can be found on pages 18-23 of this report. The notes to the financial statements provide additional information that is essential to gain a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages 25-45 of this report. 4 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSTION INFORMATION Provided below is condensed statement of net position information for the Divisions as of December 31, 2012, 2011 and 2010: 2012 2011 2010 (Amounts in 000's) Assets and Deferred Outflows: Assets: Current assets Restricted assets Unamortized bond issuance costs Capital assets, net Total assets Deferred outflows of resources: Derivative instruments-interest rate swaps Total deferred outflows of resources Total assets and deferred outflows $ $ Liabilities and net position: Liabilities: Current liabilities Long-term obligations Total liabilities $ Net position: Net investment in capital assets Restricted for debt service Restricted for passenger facility charges Unrestricted Total net position Total liabilities and net position $ 5 110,955 $ 288,296 16,497 895,018 1,310,766 106,763 $ 295,994 17,172 921,777 1,341,706 106,802 262,691 17,453 900,508 1,287,454 1,310,766 $ 1,341,706 $ 7,715 7,715 1,295,169 59,189 $ 857,577 916,766 57,178 $ 878,628 935,806 53,558 839,732 893,290 127,557 111,467 17,670 137,306 394,000 1,310,766 $ 147,324 109,292 20,376 128,908 405,900 1,341,706 $ 124,506 103,701 25,572 148,100 401,879 1,295,169 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Assets: Total assets decreased $30,940,000 in 2012 and increased $46,537,000 during 2011. The decrease in capital assets, net of accumulated depreciation, accounted for $26,759,000 or 86.5% of this change. This decrease was primarily due to the increase in accumulated depreciation. In 2011 the increase in total assets is primarily due to an increase in restricted assets. Restricted assets increased due to the proceeds from the issuance of construction bonds in 2011. Capital assets: The Divisions' investment in capital assets as of December 31, 2012 amounted to $895,018,000 (net of accumulated depreciation), which is a decrease of 2.9%. The Divisions' investment in capital assets as of December 31, 2011 amounted to $921,777,000 (net of accumulated depreciation), which was an increase of 2.4%. These investments in capital assets include: land; land improvements; buildings, structures and improvements; furniture, fixtures and equipment; infrastructure; vehicles; and construction in progress. A summary of the activity in the Divisions' capital assets during the year ended December 31, 2012 is as follows: Balance January 1, 2012 Land Land improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure Vehicles $ Total 36,246 Construction in progress Capital assets, net Additions Reductions (Amounts in 000's) 167,457 $ $ $ 74,153 5,339 (421) 329,324 23,305 6,470 (607) 19,105 956,696 14,993 162 (504) 1,565,928 (680,397) 885,531 Less: Accumulated depreciation Total $ Balance December 31, 2012 921,777 $ 6 31,076 (50,541) (19,465) (1,532) 1,473 (59) 19,434 (26,669) (31) $ (26,728) $ 167,457 74,153 334,242 29,168 975,801 14,651 1,595,472 (729,465) 866,007 29,011 895,018 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) A summary of the activity in the Divisions' capital assets during the year ended December 31, 2011 is as follows: Balance January 1, 2011 Land Land improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure Vehicles Total Less: Accumulated depreciation Total $ Additions Reductions (Amounts in 000's) $ $ $ 1,585 586 490 45,789 1,163 49,613 (47,775) 1,838 - 16,815 Construction in progress Capital assets, net 167,457 72,568 328,738 22,815 910,907 13,830 1,516,315 (632,622) 883,693 $ Balance December 31, 2011 900,508 $ 19,431 21,269 $ 167,457 74,153 329,324 23,305 956,696 14,993 1,565,928 (680,397) 885,531 36,246 - $ 921,777 Major events during 2012 and 2011 affecting the Divisions' capital assets included the following: The Power Distribution Enhancement Project was initiated to permit the airport to function effectively and to provide an adequate level of operations, safety and security in the event of a power outage. Phase I involved the purchase and installation of four generators in 2011. Phase II calls for a redundant feeder system between MS1 and MS2 that will allow power to be supplied to the terminal uninterrupted from either substation. The project design began in late 2012 and construction is expected to be completed in 2013. 7 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The first phase of the CLE terrazzo floor and artwork installation project began in January 2011 and continued throughout 2012. The project consisted of removing old flooring and carpet to replace them with terrazzo starting at security checkpoint C, continuing up Concourse C, then proceeding to Concourses A and B. The entire project is expected to be complete in January 2014. As part of the terrazzo flooring project, artwork selected from an airport art competition will be installed into select floor locations. Five of the seven selected art pieces have been installed. The BKL Runway 6L-24R Safety Area Improvement project includes the installation of an Engineered Materials Arresting System (EMAS) bed in the extended safety area of Runway 6L, a runway extension on 24R, a displacement of the Runway 6L threshold, new entrance taxiways, vehicle service road modifications, and navigation aid (NAVAID) modifications and improvements. In 2012, an Environmental Assessment (EA) was completed as well as the final project design. Construction is scheduled to commence in Spring 2013. Construction for the RTA Level Art Gallery commenced at the end of 2011 and involved the transformation of the CLE RTA level interior from a standard passageway into a formal art gallery. The effort included replacement of all flooring, walls, stair treads and columns to allow wall and floor artwork to be shown. The space will also hold cultural exhibits and performances as required. The project was substantially completed in April 2012. The Converged Communications project which commenced in September 2012, integrates six disparate communications systems and functions to deliver critical information for Cleveland Airport System personnel and travelers at CLE. The project supports the informational needs of CLE travelers with a new flight and baggage information system to more easily track and monitor travel itineraries and personal belongings; integrated audio and visual messaging providing synchronized public address messaging for all travelers, which has been helpful to the hearing-impaired; and an expanded, free Wi-Fi system that extends and improves public access to the Internet. The project also supports the information needs of the Airport System with a new, private WiFi system that covers the entire CLE campus and a unified communications infrastructure that provides access to email, voice mail, fax, instant messaging, online presence and videoconferencing all through a unified interface. These improvements not only provide new functionality to Airport System personnel, but also enable mobile access to missioncritical systems and functions. 8 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Additional information on the Divisions' capital assets, including commitments made for future capital expenses can be found in Note A - Summary of Significant Accounting Policies and Note F - Capital Assets to the basic financial statements. Liabilities: In 2012 total liabilities decreased $19,040,000. In 2012, the decrease in long-term obligations was $21,051,000 or 2.4%. Current liabilities increased $2,011,000 or 3.5% as a result of increases in the current portion of long-term debt, due to other funds and interest payable offset by a decrease in accounts payable and accrued property taxes. In 2011 the increase in total liabilities was $42,516,000. The increase in long term obligations in 2011 was $38,896,000 or 4.6%. In 2011, current liabilities increased $3,620,000 or 6.8% as the construction fund payable from restricted assets increased $4,112,000, which resulted from an increase in retainage withheld on construction project Runway 10/28 Safety Area Improvement payments. Long-term debt: At December 31, 2012 and 2011, the Divisions' had $863,930,000 and $891,885,000, respectively, in total bonded debt outstanding. The Airport System Revenue Bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. The activity in the Divisions' debt obligations outstanding during the year ended December 31, 2012 is summarized below: Balance January 1, 2012 Airport System Revenue Bonds: Series 2000 Series 2006 Series 2007 $ Debt Debt Issued Retired (Amounts in 000's) 398,445 $ 116,270 10,175 Balance December 31, 2012 $ (249,445) $ (1,245) (530) 149,000 115,025 9,645 Series 2008 64,925 (950) 63,975 Series 2009 227,685 (10,935) 216,750 Series 2011 Series 2012 74,385 Total 235,150 $ 891,885 $ 9 74,385 235,150 235,150 $ (263,105) $ 863,930 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The activity in the Divisions' debt obligations outstanding during the year ended December 31, 2011 is summarized below: Balance January 1, 2011 Airport System Revenue Bonds: Series 2000 Series 2006 Series 2007 Series 2008 Series 2009 Series 2011 Total $ Debt Debt Issued Retired (Amounts in 000's) 849,260 $ $ 74,385 $ 398,445 $ 117,450 10,680 84,160 238,525 $ Balance December 31, 2011 398,445 116,270 10,175 64,925 227,685 74,385 74,385 $ (31,760) $ 891,885 (1,180) (505) (19,235) (10,840) The bond ratings from Moody's Investors Service, Standard & Poor's Rating Service, and Fitch Ratings are as follows: Moody's Investors Service Standard & Poor's Rating Service Fitch Ratings Baa1 A- A- On April 25, 2011, Fitch Ratings lowered its rating on the Airport System Revenue Bonds from A (negative outlook) to A- (stable outlook). These ratings were reaffirmed in 2012. The ratio of net revenue available for debt service to debt service requirements (revenue bond coverage) is a useful indicator of the Divisions' debt position to management, customers and creditors. The Divisions' revenue bond coverage for 2012, 2011 and 2010, was 166%, 158% and 160%, respectively. 10 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Additional information on the Divisions' long-term debt can be found in Note B - Long-Term Debt and Other Obligations to the basic financial statements. Net Position: Net position serves as a useful indicator of an entity's financial position. In the case of the Divisions, assets exceed liabilities by $394,000,000, $405,900,000 and $401,879,000 at December 31, 2012, 2011 and 2010, respectively. Of the Divisions' net position at December 31, 2012 and 2011, $127,557,000 and $147,324,000, respectively, reflects its investment in capital assets (e.g., construction in progress; land; land improvements; buildings, structures, and improvements; furniture, fixtures and equipment; vehicles; and infrastructure), net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The Divisions use these capital assets to provide services to their customers. Consequently, these assets are not available for future spending. Although the Divisions' investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the Divisions' net position represents resources that are subject to external restrictions. At December 31, 2012 and 2011 the restricted net position amounted to $129,137,000 and $129,668,000, respectively. The restricted net position include amounts set aside in various fund accounts for payment of revenue bonds, which are limited by the bond indentures, and passenger facility charges imposed and collected at Cleveland Hopkins International Airport based on an approved Federal Aviation Administration application. Passenger facility charges are restricted for designated capital projects and approved debt service. The remaining balance of unrestricted net position, $137,306,000 and $128,908,000 for December 31, 2012 and 2011, respectively, may be used to meet the Divisions' ongoing obligations to customers and creditors. 11 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION The Divisions' operations during 2012 decreased its net position by $11,900,000 and increased by $4,021,000 in 2011. Provided below are key elements of the Divisions' results of operations as of and for the years ended December 31, 2012, 2011 and 2010: 2012 Operating revenues: Landing fees Terminal and concourse rentals Concessions Utility sales and other Total operating revenues $ Operating expenses 2011 (Amounts in 000's) 36,676 52,133 21,960 5,925 116,694 $ $ 121,085 119,396 Operating income (loss) 37,288 50,131 22,638 4,910 114,967 2010 26,356 52,670 21,496 6,174 106,696 120,151 (2,702) (9,634) (35,389) 1,088 (30,442) (2,948) (2,754) (28,372) (18,132) 9,149 38,511 37,800 (11,900) Net position, beginning of year 18,820 (2,299) (2,545) (18,347) Increase (decrease) in net position 17,874 2,414 (689) (756) Capital and other contributions (13,455) 15,781 (3,437) (577) (59) 272 (29,571) Non-operating revenue (expense): Passenger facility charges revenue Non-operating expense Sound insulation program Loss on disposal of capital asset Investment income (loss) Interest expense Amortization of bond issuance expense, bond discounts and loss on debt refundings Total non-operating revenue (expense), net (6,118) 4,021 6,213 401,879 395,666 405,900 $ Net position, end of year 12 394,000 $ 405,900 $ 401,879 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) Operating revenues: Of the 2012 operating revenues of $116,694,000, $34,923,000 or 29.9% represented landing fees received from signatory airlines. This is a decrease in landing fees of 2.8% from the prior year due to a decrease in the both the number of landings and landed weights. Signatory terminal rentals accounted for $36,280,000, or 31.1% of total operating revenues. The increase in signatory terminal rent of 5.7% is a result of an increase in square footage rates for terminal and concourse leased areas. Parking revenues increased 5.2% over the prior year due to an increase in the demand for services such as valet airport parking and economy parking usage. Parking revenues amounted to $13,649,000 or 11.7% of total operating revenues for 2012. The fourth largest airport revenue source, rental cars, accounted for 7.9% of total operating revenues. Of the 2011 operating revenues of $114,967,000, $35,911,000 or 31.2% represented landing fees received from signatory airlines. This is an increase of 43.4% from the prior year. Signatory terminal rentals accounted for $34,312,000, or 29.8% of total operating revenues. The decrease in signatory terminal rent of 5.7% is a result of a decrease in terminal rates and charges attributed to the signatory airlines enplaned passenger credit. Parking revenues increased 2.9% over the prior year due to an increase in the demand for services such as valet airport parking and economy parking usage. Parking revenues amounted to $12,969,000 or 11.3% of total operating revenues for 2011. The fourth largest airport revenue source, rental cars, accounted for 8.0% of total operating revenues, which is a decrease of 1.0% from 2010. Operating expenses: Total operating expenses for 2012 decreased $1,689,000 or 1.4%. The decrease is primarily due to a milder winter season which resulted in a decreased usage of deicing chemicals and related waste disposal. These decreases were partially offset by modest increases in costs associated with property taxes and professional fees. Employee salaries, wages and benefits increased $609,000 or 2.1% due to increases in employee wages. Total operating expenses for 2011 increased $934,000 or 0.8%. The increase is primarily due to a 40.5% increase in maintenance expenses which was the result of the Divisions' increase in the costs related to maintaining aging equipment and the increase in the price of de-icing chemicals and their disposal. These increases were partially offset by modest decreases in costs associated with utility, property taxes and professional fees. Employee salaries, wages and benefits increased $1,216,000 or 4.4% due to increases in employee benefits. Non-operating revenue and expense: Expenses related to the Sound Insulation Program were $577,000, $689,000, and $2,545,000 in 2012, 2011 and 2010, respectively. Passenger facility charge revenues decreased 11.7%, from $17,874,000 in 2011 to $15,781,000 in 2012 resulting from a decrease in the scheduled airline enplanements. 13 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) Capital and other contributions: In 2012, 2011 and 2010, the Divisions' received $9,149,000, $38,511,000 and $37,800,000, respectively, in Federal Airport Improvement Grants. Airport Improvement Program Grants received from the Federal Aviation Administration were primarily for the Burke RSA project, airfield safety improvements, Residential Sound Insulation Program and the acquisition of snow-melters. FACTORS EXPECTED TO IMPACT THE DIVISIONS' FINANCIAL POSITION OR RESULTS OF OPERATIONS Continental Airlines and United Airlines (collectively Continental) entered into a Settlement Agreement (Agreement) with the Office of the Attorney General of the State of Ohio (AG) effective October 31, 2010 (Merger Closing Date) to resolve the AG's investigation of the antitrust implications of their proposed merger. Pursuant to the terms of the Agreement Continental agreed to maintain, for a period of 24-months from the Merger Closing Date, average daily departures from the Airport at no less then ninety (90%) percent of average daily departures in the year prior to the Merger Closing Date (Base Departure Commitment). In addition the Agreement contains an additional three year commitment for average daily departures at the Base Departure Commitment level subject to certain metrics based on Airport segment profitability as more fully outlined in the Agreement. The Agreement gives the AG's office the right to audit Airport segment profitability at Continental's expense up to $80,000 per annum. Continental also agreed to maintain its current Airport aircraft maintenance facility at a level of operations commensurate with the 12-month period immediately preceding the merger. Any reduction in the Base Departure Commitment may result in a reduction in aircraft maintenance facility operations. Other commitments include continuation of the Cleveland Air Service Working Group during the effective period of the Agreement and a penalty based on an amount equal to the percentage by which Continental is found to have breached its minimum departure commitments of $20 million. Pursuant to the terms of a separate Memorandum of Understanding between the City and the AG's office any monies collected from Continental pursuant to this penalty will be forwarded to the City. The AG's office has also agreed to inform the City whether, as a result of its audits any of the metrics outlined in the Agreement have been triggered or are likely to be triggered. On February 13, 2013, American Airlines and US Airways announced a proposed merger agreement with the "new" American Airlines remaining as the largest airline in the world. Although this business combination is not expected to occur before the end of 2013, looking towards the future, there will likely be an impact on the Divisions' operations. Both airlines expect that the regional carriers they own - AMR Corporation's American Eagle and US Airways' Piedmont and PSA - will continue to operate as distinct entities, providing seamless service to the combined airline. American Airlines and US Airways enplaned 5.6% and 4.3% of total passengers at the Airport, respectively, in 2012. It is not known at this time whether the impact will have a negative or positive effect on CLE. 14 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FACTORS EXPECTED TO IMPACT THE DIVISIONS' FINANCIAL POSITION OR RESULTS OF OPERATIONS (Continued) Federal Sequestration has had a direct impact on Cleveland Airport System (CAS) federallyfunded projects such as the CLE Airport Surface Surveillance Capability (ASSC) Project currently placed on hold. In addition, CAS has been advised by the Federal Aviation Administration (FAA) Airport District Office that there is no funding for an Environmental Assessment (EA) of the CLE airfield due to Sequestration. The EA would have focused on specific areas of the airfield that require either rehabilitation (due to age and deterioration) and/or are planned for development. Long-term, not being able to implement the aforementioned projects due to Sequestration may compromise airfield system preservation (i.e., ability to improve existing infrastructure), airfield capacity, safety and funding for future Airport Improvement Program (AIP)-eligible projects. Effective April 24, 2013, the City issued $58,000,000 Airport System Revenue Bonds, Series 2013A (Taxable). These bonds refunded all of the outstanding $58,000,000 Airport System Revenue Bonds, Series 2008F in anticipation of the expiration of the existing letter of credit. The bonds were purchased by U.S. Bank National Association with the City paying an amount equal to one month LIBOR plus a spread of 105 basis points. As a result of this refunding, the City will realize aggregate net present value savings of $3.4 million or 5.87%. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Divisions' finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 15 This page intentionally left blank. 16 BASIC FINANCIAL STATEMENTS CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF NET POSITION December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 ASSETS CURRENT ASSETS Cash and cash equivalents Restricted cash and cash equivalents Investments Receivables: Accounts-net of allowance for doubtful accounts of $2,000,000 in 2012 and $2,006,000 in 2011 Unbilled revenue Landing fees - due from airlines Accrued interest receivable Total receivables Prepaid expenses Due from other funds Due from other governments Materials and supplies-at cost TOTAL CURRENT ASSETS RESTRICTED ASSETS Cash and cash equivalents Investments Accrued interest receivable Accrued passenger facility charges $ 87,196 7,037 7,732 3,314 11,046 323 34 2,976 2,343 110,955 286,051 $ 64,252 7,664 10,117 14,066 3,599 3,850 94 21,609 330 673 2,118 106,763 224,144 69,570 UNAMORTIZED BOND ISSUANCE COSTS CAPITAL ASSETS Land Land improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure Vehicles 2,280 295,994 16,497 TOTAL RESTRICTED ASSETS 1 2,244 288,296 17,172 167,457 74,153 334,242 29,168 975,801 14,651 1,595,472 (729,465) 167,457 74,153 329,324 23,305 956,696 14,993 1,565,928 (680,397) 866,007 29,011 885,531 36,246 895,018 921,777 TOTAL ASSETS $ 1,310,766 $ 1,341,706 Less: Accumulated depreciation Construction in progress CAPITAL ASSETS, NET (Continued) 18 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF NET POSITION December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 LIABILITIES AND NET POSITION LIABILITIES CURRENT LIABILITIES Current portion of long-term debt, due within one year $ 16,285 $ 13,660 Current portion of long-term deferred payment obligation, due within one year 3,230 2,989 Accounts payable 3,246 4,457 Landing fee settlement payable to airlines 300 Due to other funds 1,412 969 Current portion of accrued wages and benefits 4,079 3,972 Accrued interest payable 17,632 16,980 Accrued property taxes 5,968 6,487 Construction fund payable from restricted assets 1,913 6,010 5,124 1,654 Other construction accounts payable from restricted assets 59,189 57,178 TOTAL CURRENT LIABILITIES LONG-TERM OBLIGATIONS - excluding amounts due within one year Revenue bonds Deferred payment obligation Accrued wages and benefits 856,702 280 595 874,540 3,510 578 TOTAL LONG-TERM OBLIGATIONS 857,577 878,628 TOTAL LIABILITIES 916,766 935,806 127,557 111,467 17,670 137,306 147,324 109,292 20,376 128,908 394,000 405,900 TOTAL LIABILITIES AND NET POSITION $ 1,310,766 $ 1,341,706 NET POSITION Net investment in capital assets Restricted for debt service Restricted for passenger facility charges Unrestricted TOTAL NET POSITION (Concluded) See notes to financial statements. 19 This page intentionally left blank. 20 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 OPERATING REVENUES Landing fees: Scheduled airlines $ 34,923 $ 35,911 1,377 Other 1,753 36,676 TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS) NON-OPERATING REVENUE (EXPENSE) Passenger facility charges revenue Non-operating revenue (expense) Sound insulation program Loss on disposal of capital asset Rebate arbitrage expense Investment income (loss) Interest expense Amortization of bond issuance expense, bond discounts and loss on debt refundings 22,638 4,910 116,694 114,967 64,454 4,401 50,541 OPERATING EXPENSES Operations Maintenance Depreciation 50,131 21,960 5,925 TOTAL OPERATING REVENUES 34,312 15,819 52,133 Concessions Utility sales and other 37,288 36,280 15,853 Terminal and concourse rentals: Scheduled airlines Other 68,094 5,216 47,775 119,396 121,085 (2,702) (6,118) 15,781 (3,437) (577) (59) 17,874 2,414 (689) 272 (29,571) (9,634) (35,389) TOTAL NON-OPERATING REVENUE (EXPENSE) - NET (756) (18,347) (2,948) (28,372) INCOME (LOSS) BEFORE CAPITAL AND OTHER CONTRIBUTIONS (21,049) (34,490) 9,149 38,511 Capital and other contributions INCREASE (DECREASE) IN NET POSITION NET POSITION, BEGINNING OF YEAR NET POSITION, END OF YEAR $ See notes to financial statements. 21 (11,900) 405,900 394,000 4,021 401,879 $ 405,900 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods and services Cash payments to employees for services NET CASH PROVIDED BY OPERATING ACTIVITIES $ 122,327 $ 104,916 (38,839) (41,575) (28,826) (28,850) 54,638 34,515 (641) (3,827) (603) (5,163) (4,468) (5,766) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Cash receipts for passenger facility charges Proceeds from revenue bonds Transfer to escrow agent for bond refunding Principal paid on long-term debt Interest paid on long-term debt Capital grant proceeds (22,452) 15,816 252,946 (252,379) (13,903) (32,871) 6,846 (68,589) 18,064 79,221 (9,236) (22,560) (36,071) 38,560 NET CASH USED FOR CAPITAL AND RELATED FINANCING ACTIVITIES (45,997) (611) (105,981) 185,583 449 (79,602) 1,999 764 NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITES 80,051 (76,839) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 84,224 (48,701) 296,060 344,761 CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Cash payments for sound insulation of homes Cash payments for other non-operating costs NET CASH USED FOR NON-CAPITAL FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments Cash and cash equivalents, beginning of year $ 380,284 $ 296,060 Cash and cash equivalents, end of year (Continued) 22 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (Amounts in 000's) 2012 2011 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES OPERATING INCOME (LOSS) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation and amortization Noncash rental income Changes in assets and liabilities: Accounts receivable, net Unbilled revenue Landing fees - due from airlines Prepaid expenses Due from other funds Materials and supplies, at cost Accounts payable Due to other funds Accrued wages and benefits Landing fees - due to airlines Accrued property taxes TOTAL ADJUSTMENTS $ (2,702) $ (6,118) 50,541 (3,389) 47,775 (3,389) 6,334 285 3,850 7 (34) (225) (377) 443 124 300 (519) (5,646) 816 262 2 96 (62) 1,114 (100) (230) (5) 57,340 40,633 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 54,638 $ 34,515 Noncash operating activities: Rental Income $3,389 $3,389 (Concluded) See notes to financial statements. 23 This page intentionally left blank. 24 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Divisions of Cleveland Hopkins International and Burke Lakefront Airports (the Divisions) are reported as an Enterprise Fund of the City of Cleveland, Department of Port Control and are part of the City of Cleveland's (the City) primary government. The Divisions were created for the purpose of operating the airports within the Cleveland Metropolitan Area. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Divisions comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or public-public partnership. The Divisions have determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Divisions have implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Divisions have implemented GASB Statement No. 63 effective for the 2012 fiscal year. 25 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. The Divisions have determined that GASB Statement No. 64 has no impact on its financial statements as of December 31, 2012. The Divisions' net position is accounted for in the accompanying statement of net position and the net position is divided into the following categories: Net investment in capital assets Amount restricted for debt service Amount restricted for passenger facility charges Remaining unrestricted amount In addition, certain additional financial information regarding the Divisions is included in these notes. The implementation of the new GASB statements did not result in a change in the Divisions' beginning net position as previously reported. Basis of Accounting: The Divisions' financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized when incurred. Statement of Cash Flows: The Divisions utilize the direct method of reporting for the statement of cash flows as defined by the GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In the statement of cash flows, cash receipts and cash payments are classified according to operating, non-capital financing, capital and related financing and all investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Divisions. Cash equivalents are defined as highly liquid investments with a maturity of three months or less when purchased. 26 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments: The Divisions follow the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value in the balance sheet and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair market value is based on quoted market values. The Divisions have invested funds in the State Treasury Asset Reserve of Ohio (STAROhio) during 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. Restricted Assets: Proceeds from debt and amounts set aside in various fund accounts for payment of revenue bonds are classified as restricted assets since their use is limited by the bond indentures. Restricted for Passenger Facility Charges: These assets are for passenger facility charges imposed and collected at Cleveland Hopkins International Airport based on an approved Federal Aviation Administration application. These are restricted for designated capital projects or debt service. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost or, if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as a tangible item with a useful life in excess of one year and an individual cost of more than $5,000 for furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Land Improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure Vehicles 27 15 to 100 years 5 to 60 years 3 to 35 years 3 to 50 years 3 to 35 years CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Divisions' policy is to capitalize interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest is included in the cost of the assets and is depreciated on the straight-line basis over the estimated useful lives of such assets. The Divisions apply Governmental Accounting Standards Board guidance pertaining to capitalization of interest cost in situations involving certain tax-exempt borrowings and certain gifts and grants, for its revenue bonds. This guidance requires capitalization of interest cost of eligible borrowings less interest earned on investment of the related bond proceeds from the date of borrowing until the assets constructed from the bond proceeds are ready for their intended use. For 2012 and 2011, total interest costs incurred amounted to $34,165,000 and $42,375,000, respectively, of which $4,594,000 and $6,981,000 respectively, was capitalized, net of interest income of $0 in 2012 and $5,000 in 2011. Bond Issuance Costs, Discounts and Unamortized Losses on Debt Refundings: Bond issuance expense is carried on the Divisions' books as a deferred expense and deferred bond discounts/premiums are netted against long-term debt. Both are amortized over the lives of the applicable bonds. Unamortized loss on debt refundings is netted against long-term debt and is amortized over the shorter of the defeased bond or the newly issued bond. Compensated Absences: The Divisions' accrue for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statements of net position. The portion of the compensated absence liability that is not expected to be paid or utilized within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Divisions allow employees to carryover vacation time from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three-year average base salary rate, with the balance being forfeited. Environmental Expenses: Environmental expenses consist of costs incurred for remediation efforts to airport property. Environmental expenses that relate to current operations are expensed or capitalized, as appropriate. Environmental expenses that relate to existing conditions caused by past operations and which do not contribute to future revenues are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. Non-operating Expenses: Non-operating expenses relate to expenses of the Divisions' incurred for purposes other than the operations of the airports and consist primarily of interest costs incurred on the Divisions' long-term debt. The funding for non-operating expenses is nonoperating revenue (passenger facility charges, revenue bonds and federal grants). 28 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interfund Transactions: During the course of normal operations, the Divisions have numerous transactions between other City divisions and departments. Unpaid amounts at year end are generally reflected as due to or due from in the accompanying financial statements. Interfund receivables and payables balances at December 31, 2012 and 2011 are as follows: 2012 Due From City of Cleveland General Fund Division of Water Pollution Control Division of Cleveland Public Power Workers' Compensation Refund Reserve Division of Radio Communication Division of Printing Division of Motor Vehicle Maintenance Sinking Fund Administration Division of Telephone Exchange $ 34 $ 34 . 29 2012 2011 Due To Due From (Amounts in 000's) $ 269 $ 227 17 674 4 5 86 34 96 $ 1,412 $ - 2011 Due To $ 228 81 18 461 6 6 95 30 44 $ 969 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS Long-term debt outstanding at December 31 is as follows: Interest Rate Original Issuance 2012 2011 (Amounts in 000's) Airport System Revenue Bonds: Series 2000, due through 2031 Series 2006, due through 2024 Series 2007, due through 2027 Series 2008, due through 2033 Series 2009, due through 2027 Series 2011, due through 2024 Series 2012, due through 2031 4.00%-5.00% 5.00%-5.25% 4.00%-5.00% Variable Rate .11%-5.00% 3.00%-5.00% 5.00% $ 509,880 118,760 11,255 76,700 248,280 74,385 235,150 $ 149,000 115,025 9,645 63,975 216,750 74,385 235,150 $ 398,445 116,270 10,175 64,925 227,685 74,385 $ 1,274,410 Unamortized (discount) premium Unamortized loss on debt refunding 863,930 36,033 (26,976) 891,885 17,569 (21,254) Current portion (due within one year) (16,285) (13,660) Total Long-Term Debt excluding the deferred payment obligation $ 856,702 30 $ 874,540 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2012 are as follows: Balance January 1, 2012 Airport System Revenue Bonds: Series 2000 Series 2006 Series 2007 Series 2008 Series 2009 Series 2011 Series 2012 Total revenue bonds Accrued wages and benefits Total Balance Due December 31, Within Increase Decrease 2012 One Year (Amounts in 000's) $ 398,445 $ 116,270 10,175 64,925 227,685 74,385 $ (249,445) $ (1,245) (530) (950) (10,935) 149,000 115,025 9,645 63,975 216,750 74,385 235,150 (263,105) (3,972) 863,930 4,674 16,285 4,079 $ (267,077) $ 868,604 $ 20,364 235,150 891,885 4,550 235,150 4,096 $ 896,435 $ 239,246 31 $ 1,310 550 11,545 2,880 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2011 are as follows: Balance January 1, 2011 Airport System Revenue Bonds: Series 2000 Series 2006 Series 2007 Series 2008 Series 2009 Series 2011 $ $ $ (1,180) (505) (19,235) (10,840) $ 398,445 116,270 10,175 64,925 227,685 74,385 74,385 Total revenue bonds $ 1,245 530 950 10,935 849,260 $ 74,385 (31,760) 891,885 13,660 4,780 Accrued wages and benefits Total 398,445 117,450 10,680 84,160 238,525 Due Balance Within December 31, One Year 2011 Increase Decrease (Amounts in 000's) 3,899 (4,129) 4,550 3,972 896,435 $ 17,632 854,040 $ 78,284 $ (35,889) $ Minimum principal and interest payments on long-term debt are as follows: Principal 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033 Interest (Amounts in 000's) Total $ $ 41,258 40,228 38,807 37,265 35,466 146,398 90,420 26,564 136 $ 57,543 72,348 71,962 71,680 75,231 374,943 326,285 264,899 5,581 $ Total 16,285 32,120 33,155 34,415 39,765 228,545 235,865 238,335 5,445 863,930 $ 456,542 $ 1,320,472 . 32 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) The Airport System Revenue Bonds are secured by the pledge of all airport revenues, as defined in the revenue bond indenture. Further, the City has assigned to the trustee all its interest in and rights to the airline use agreements under the revenue bond indenture. Amounts held in trust may be invested by the City Treasurer or the trustee in permitted investments. However, the use of funds is limited by the bond indenture and, accordingly, is classified as restricted assets in these financial statements. As of December 31, 2012 and 2011, the Divisions were in compliance with the terms and requirements of the bond indenture. The indenture, as amended, requires, among other things, that the Divisions (1) make equal monthly deposits to the Bond Service Fund to have sufficient assets available to meet debt service requirements on the next payment date; (2) maintain the Bond Service Reserve Fund equal in amount to the maximum annual debt service to be paid in any year; and (3) as long as any revenue bonds are outstanding, charge such rates, fees and charges for use of the airport system to produce in each year, together with other available funds, net revenues (as defined) at least equal to the greater of (a) 116% of the annual debt service due in such year on all outstanding revenue bonds and general obligation debt or (b) 125% of the annual debt service due in such year on all outstanding bonds. From time to time, the Divisions have defeased certain Revenue Bonds by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payments on old bonds. However, at December 31, 2012 and 2011 there was no defeased debt outstanding. The City has pledged future airport revenues to repay $863,930,000 in Airport System Revenue Bonds issued in various years since 2001. Proceeds from the bonds provided financing for airport facilities. The bonds are payable from airport revenues and are payable through 2033. Annual principal and interest payments on the bonds are expected to require less than 61% of net revenues. The total principal and interest remaining to be paid on the various airport system revenue bonds is $1,320,472,000. Principal and interest paid for the current year and total net revenues (including other available funds) were $50,051,000 and $83,175,000, respectively. Effective February 23, 2012, the City issued $235,150,000 Airport System Revenue Bonds, Series 2012A. Proceeds of the bonds were used to refund the outstanding $249,445,000 Airport System Revenue Bonds, Series 2000A and to pay the costs of issuing the bonds. Net proceeds of the Series 2012A Bonds, amounts on hand in the Series 2000 interest account and an amount released from the debt service reserve fund totaling $252,378,809 were placed in an irrevocable escrow account to pay the principal and interest on the refunded bonds on March 26, 2012. As a result, the refunded bonds were defeased and the liability for the 2000A Bonds has been removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $25.1 million or an economic gain (the difference between the present values of the old and new debt service payments) of approximately $15.12 million or 6.06%. 33 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM DEBT AND OTHER OBLIGATIONS (Continued) In June 2011, the Airport System, under its rights to optional redemption, elected to deposit cash on hand into the Series 2008G Bond Fund and into the Series H Bond Fund sufficient to redeem, prior to maturity, all of the outstanding Series 2008G and Series 2008H Bonds. A notice of full redemption of the bonds was issued by the trustee on June 15, 2011. After taking into account the funds on hand in the respective bond funds, other available Airport funds were placed into the accounts to pay on June 22, 2011 principal in the amount of $7,425,000 on the Series 2008G Bonds and $430,000 on the Series 2008H Bonds, plus accrued interest to the redemption date. As a result, these bonds have been defeased and the liability for the bonds has been removed from long-term debt. Effective November 16, 2011, the City issued $74,385,000 Airport System Revenue Bonds, Series 2011A (Non-AMT). Of this amount, $64,515,000 of the proceeds was issued to pay a portion of the costs of improvements to the Airport System, to fund deposits to the bond reserve fund and the Renewal and Replacement Fund and to pay issuance costs. The remaining $9,870,000 was used to currently refund a portion of the outstanding Airport System Revenue Bonds, Series 2008D in the aggregate principal amount of $9,200,000 on November 28, 2011 and to pay costs of issuing the bonds. As a result, the refunded bonds have been defeased and the liability for these bonds has been removed from long-term debt. The City obtained an economic gain (the difference between the present values of the old and new debt service payments) of approximately $1.67 million as a result of the refunding. Interest Rate Swap Transactions: On November 2, 2011, the City, at its option, terminated the four interest rate exchange agreements originally entered into in 2003 and most recently identified as hedges for the Series 2008D Bonds and the Series 2009D Bonds. The City owed a payment to the counterparty, JP Morgan Chase Bank, National Association, under each hedge agreement in connection with the early terminations. Those termination payments totaled $10,515,000 and were paid on November 16, 2011 from available Airport funds. The City has no remaining interest rate swap agreements in place with respect to any Airport System Revenue Bonds. NOTE C - SPECIAL FACILITY REVENUE BONDS Airport Special Revenue Bonds, Series 1990, totaling $76,320,000 were issued to finance the acquisition and construction of a terminal, hangar and other support facilities of Continental Airlines at Cleveland Hopkins International Airport. These bonds were refunded in 1999 by the issuance of Airport Special Revenue Refunding Bonds, Series 1999, totaling $71,440,000. Airport Special Revenue Bonds, Series 1998, totaling $75,120,000 were issued in 1998 to finance the design and construction of certain airport facilities leased to Continental Airlines, including a new regional jet concourse. Because all principal and interest on these bonds is unconditionally 34 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - SPECIAL FACILITY REVENUE BONDS (Continued) guaranteed by Continental Airlines and paid directly by Continental Airlines, these bonds do not constitute a debt, liability or general obligation of the City or a pledge of the City's revenues. As such, no liabilities relating to these bonds are included in the accompanying financial statements. NOTE D - DEFERRED PAYMENT OBLIGATION / I-X CENTER In January 1999, the City purchased the International Exposition (I-X) Center and the land on and around it for $66.5 million as part of its master plan to expand Cleveland Hopkins International Airport. As part of the purchase agreement, the City leased the building back to the former owner for 15 years, after which the City may demolish the building to make way for airport development. Of the $66.5 million purchase price, $36.5 million was paid in cash in 1999. The remaining $30.0 million, including interest at 7.75%, is being deferred by the seller and will be offset by future lease payments owed to the City over the 15 year lease period. The future lease payments are equal to the remaining purchase price plus interest at 7.75%, and as such, no cash will be exchanged between the City and the lessee over the term of the lease. The deferred payment is reported as "Deferred Payment Obligation" in the accompanying statement of net position. In the event that either a similar facility is developed that exceeds a specified size, or there is an expansion of an existing facility that exceeds specified size within the municipal boundary of the City of Cleveland, the lessee has the right to terminate the lease. Such termination would require the City to pay the lessee the remaining portion of the deferred purchase price. Minimum principal and interest payments due by the City on the deferred payment obligation and future minimum lease rentals due to the City under this lease for the next two years are as follows: Deferred Payment Obligation Principal 2013 $ 2014 3,230 280 Interest Total (Amounts in 000's) $ 159 $ 3,389 2 282 $ 3,510 $ 161 $ 3,671 Future Minimum Rentals $ 3,389 282 $ 3,671 Rental income recognized by the Divisions under this agreement totaled $3,389,000 in 2012 and 2011. Of these amounts in 2012, $399,000 was offset against interest expense and $2,990,000 was offset against the principal balance of the deferred obligation. Of these amounts in 2011, 35 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - DEFERRED PAYMENT OBLIGATION / I-X CENTER (Continued) $621,000 was offset against interest expense and $2,768,000 was offset against the principal balance of the deferred obligation. NOTE E - DEPOSITS AND INVESTMENTS Deposits: The Divisions' carrying amount of deposits at December 31, 2012 and 2011 totaled approximately $50,562,000 and $52,284,000, respectively, and the Divisions' bank balance was approximately $53,754,000 and $60,243,000, respectively. The differences represent positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $53,754,000 and $60,243,000 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Divisions will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Divisions' deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by state statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Generally, investments are recorded and are kept at the Federal Reserve Bank in the depository institutions' separate custodial account for the City, apart from the assets of the depository institution. Ohio statutes prohibit the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit risk. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value. 36 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E - DEPOSITS AND INVESTMENTS (Continued) Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Divisions invest primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the table below. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Divisions will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. Credit Risk: The Divisions' investments as of December 31, 2012 and 2011 include U.S. Agencies, STAROhio and mutual funds. The Divisions maintain the highest ratings for their investments. Investments in STAROhio, Federated Government Obligations and Dreyfus Government Cash Management Mutual Funds carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. Concentration of Credit Risk: The Divisions place a limitation on the amount that may be invested in any one issuer to help minimize the concentration of credit risk. The Divisions had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the statement of net position in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: 2012 Fair Value Type of Investment U.S. Agency Obligations STAROhio Investment in Mutual Funds Total Investments Total Deposits Total Deposits and Investments $ 2011 2012 Fair Cost Value (Amount in 000's) $ 2011 Cost Investment Maturities Less than One Year 84,113 245,609 $ 79,687 $ 79,602 $ 84,113 66,444 66,444 245,609 177,332 177,332 84,113 245,609 329,722 329,722 323,463 323,378 329,722 50,562 50,562 52,284 52,284 50,562 $ 380,284 $ 380,284 $ 375,747 $ 375,662 $ 380,284 These amounts are monies invested by the City Treasurer on behalf of the Division and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. 37 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E - DEPOSITS AND INVESTMENTS (Continued) As of December 31, 2012, the investments in STAROhio and mutual funds are approximately 26% and 74%, respectively, of the Divisions' total investments. As of December 31, 2011, the investments in U.S. Agency Obligations, STAROhio and mutual funds are approximately 25%, 20% and 55%, respectively, of the Divisions' total investments. NOTE F - CAPITAL ASSETS Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2012 was as follows: January 1, 2012 Capital Assets, not being depreciated: Land Construction in progress $ 167,457 36,246 Additions Reductions (Amounts in 000's) $ $ December 31, 2012 19,434 (26,669) $ 167,457 29,011 Total capital assets, not being depreciated 203,703 19,434 (26,669) 196,468 Capital assets, being depreciated: Land improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure 74,153 329,324 23,305 956,696 5,339 6,470 19,105 (421) (607) 74,153 334,242 29,168 975,801 14,993 162 (504) 14,651 Vehicles Total capital assets, being depreciated Less: Total accumulated depreciation 1,398,471 (680,397) Capital assets, net $ (1,532) 1,473 718,074 Total capital assets being depreciated, net 31,076 (50,541) (19,465) (59) 921,777 38 $ (31) $ (26,728) $ 1,428,015 (729,465) 698,550 895,018 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F - CAPITAL ASSETS (Continued) Capital Asset Activity: Capital Asset Activity for the year ended December 31, 2011 was as follows: January 1, 2011 Capital Assets, not being depreciated: Land Construction in progress $ 167,457 16,815 Additions Reductions (Amounts in 000's) $ $ December 31, 2011 $ 19,431 Total capital assets, not being depreciated 184,272 19,431 Capital assets, being depreciated: Land improvements Buildings, structures and improvements Furniture, fixtures and equipment Infrastructure Vehicles 72,568 328,738 22,815 910,907 13,830 1,585 586 490 45,789 1,163 1,348,858 (632,622) 49,613 (47,775) - 1,398,471 (680,397) 716,236 1,838 - 718,074 Total capital assets, being depreciated Less: Total accumulated depreciation Total capital assets being depreciated, net Capital assets, net $ 900,508 $ 21,269 - 167,457 36,246 203,703 74,153 329,324 23,305 956,696 14,993 $ - $ 921,777 Commitments: As of December 31, 2012 and 2011, the Divisions had capital expenditure purchase commitments outstanding of approximately $59,877,000 and $37,136,000, respectively. NOTE G - LEASES AND CONCESSIONS The Divisions lease specific terminal and concourse areas to the various airlines under terms and conditions of the airline use agreements. These agreements remain in effect until December 31, 2015 and under the terms of the agreements, rental payments and landing fees paid by the airlines are adjusted annually to provide airport revenues sufficient to meet the financial requirements of the airport system. Other areas are leased to various occupants under separate agreements. 39 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE G - LEASES AND CONCESSIONS (Continued) The Divisions have various concession agreements that permit the concessionaires and certain others to operate on airport property. These agreements usually provide for payments based on a percentage of the revenues, with an annual minimum payment guarantee and in certain circumstances for the offset of percentage rents to the extent of certain improvements made to the leased property. Portions of the building costs in the statement of net position are held by the Divisions for the purpose of rental use. The net book value of property held for operating leases as of December 31, 2012 and 2011 is approximately $183,059,000 and $190,348,000, respectively. Minimum future rental on non-cancelable operating leases to be received is as follows: (Amounts in 000's) 2013 $ 13,781 2014 12,834 2015 7,256 2016 6,809 2017 5,823 Thereafter 14,232 $ 60,735 Under the Master Lease and Use Agreement, which leases space in the terminal building and other areas, the Divisions are subject to fluctuating rates. Contingent operating revenues aggregated approximately $15,711,000 and $14,464,000, respectively, in 2012 and 2011. NOTE H - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Divisions for personal injuries, property damage and other matters. The City is responsible for the suits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Divisions' financial position, results of operations or cash flows. Risk Management: The Divisions are exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Divisions carry insurance to cover particular liabilities and property protection. Otherwise, the Divisions are generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. There was no significant decrease in any insurance coverage in 2012 or 2011. In addition, there were no material insurance settlements in excess of insurance coverage during the past three years. 40 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE H - CONTINGENT LIABILITIES AND RISK MANAGEMENT (Continued) The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio workers' compensation retrospective rating program. In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines and damage awards. Accordingly, claims are reevaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs), and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims payable has been included with accounts payable and is considered to be immaterial for the Divisions. NOTE I - DEFINED BENEFIT PENSION PLAN Ohio Public Employees Retirement System: All full-time employees, other than nonadministrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 3) The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. 41 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE I - DEFINED BENEFIT PENSION PLAN (Continued) OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Divisions' required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $2,095,000, $2,048,000 and $1,918,000 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27, and it is effective for employer fiscal years beginning after June 15, 2014. NOTE J - OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than nonadministrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan; the MemberDirected Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multipleemployer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-and-service retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand42 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE J - OTHER POSTEMPLOYMENT BENEFITS (Continued) alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund postretirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Divisions' actual contributions to OPERS to fund postemployment benefits were $838,000 in 2012, $819,000 in 2011 and $1,093,000 in 2010. The required payments due in 2012, 2011 and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. 43 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE K - RELATED PARTY TRANSACTIONS The Divisions are provided various intra-city services. Charges are based on actual use or on a reasonable pro-rata basis. The more significant costs for the years ended December 31, 2012 and 2011 were as follows: City Central Services, including police Electricity purchased Motor vehicle maintenance 2012 2011 (Amounts in 000's) $ 8,306 $ 8,218 239 243 577 654 NOTE L - LANDING FEE ADJUSTMENT AND INCENTIVE COMPENSATION Under the terms of the airline use agreements, if the annual statement for the preceding term demonstrates that airport revenues over expenses (both as defined) is greater or less than that used in calculating the landing fee for the then current term, such difference shall be charged or credited to the airlines over the remaining billing periods in the current term. The landing fee adjustment for 2012 was payable to the Airlines from the City in the amount of $300,000. The landing fee adjustment for 2011 was payable to the City from the Airlines in the amount of $3,850,000. The airline use agreements also provide an incentive for the City to provide the highest quality management for the airport system. There was no incentive compensation expense in 2012 and 2011. NOTE M - PASSENGER FACILITY CHARGES On November 1, 1992, Cleveland Hopkins International Airport began collecting Passenger Facility Charges (PFC's) subject to title 14, Code of Federal Regulations, Part 158. PFC's are fees imposed on passengers enplaned by public agencies controlling commercial service airports for the strict purpose of supporting airport planning and development projects. The charge is collected by the airlines and remitted to the airport operator net of an administrative fee to be retained by the airline and refunds to passengers. As of December 31, 2012, Cleveland Hopkins International Airport had the authority from the Federal Aviation Administration to collect approximately $556 million, of which an estimated 15.1% will be spent on noise abatement for the residents of communities surrounding the airport, 56.3% on runway expansion and 28.6% on airport development. PFC revenues and related interest earnings are recorded as non-operating revenues and non-capitalized expenses funded by PFC revenues are recorded as non-operating expenses. 44 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE N - MAJOR CUSTOMER In 2012 and 2011, operating revenues from one airline group for landing fees, rental and other charges amounted to approximately 45% and 45% respectively, of total operating revenue. NOTE O - SUBSEQUENT EVENTS On February 13, 2013, American Airlines and US Airways announced a proposed merger agreement with the "new" American Airlines remaining as the largest airline in the world. Although this business combination is not expected to occur before the end of 2013, looking towards the future, there will likely be an impact on the Divisions' operations. Both airlines expect that the regional carriers they own - AMR Corporation's American Eagle and US Airways' Piedmont and PSA - will continue to operate as distinct entities, providing seamless service to the combined airline. American Airlines and US Airways enplaned 5.6% and 4.3% of total passengers at the Airport, respectively, in 2012. It is not known at this time whether the impact will have a negative or positive effect on CLE. Federal Sequestration has had a direct impact on Cleveland Airport System (CAS) federallyfunded projects such as the CLE Airport Surface Surveillance Capability (ASSC) Project currently placed on hold. In addition, CAS has been advised by the FAA Airport District Office that there is no funding for an Environmental Assessment (EA) of the CLE airfield due to Sequestration. The EA would have focused on specific areas of the airfield that require either rehabilitation (due to age and deterioration) and/or are planned for development. Long-term, not being able to implement the aforementioned projects due to Sequestration may compromise airfield system preservation (i.e., ability to improve existing infrastructure), airfield capacity, safety and funding for future AIP-eligible projects. Effective April 24, 2013, the City issued $58,000,000 Airport System Revenue Bonds, Series 2013A (Taxable). These bonds refunded all of the outstanding $58,000,000 Airport System Revenue Bonds, Series 2008F in anticipation of the expiration of the existing letter of credit. The bonds were purchased by U.S. Bank National Association with the City paying an amount equal to one month LIBOR plus a spread of 105 basis points. As a result of this refunding, the City will realize aggregate net present value savings of $3.4 million or 5.87%. 45 CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS SCHEDULE OF AIRPORT REVENUES AND OPERATING EXPENSES AS DEFINED IN THE AIRLINE USE AGREEMENTS For the Year Ended December 31, 2012 Cleveland Hopkins International REVENUE Airline revenue: Landing fees Terminal rental Other $ Operating revenues from other sources: Concessions Rentals Landing fees Other 34,923 36,280 3,663 74,866 OPERATING EXPENSES Salaries and wages Employee benefits City Central Services, including police Materials and supplies Contractual services TOTAL OPERATING EXPENSES $ 21,582 10,247 1,646 4,062 37,537 $ Non-operating revenue: Interest income TOTAL REVENUE Burke Lakefront (Amounts in 000's) $ Total $ 34,923 36,280 3,663 74,866 $ 21,960 10,555 1,753 4,171 38,439 - 378 308 107 109 902 90 90 $ 112,493 $ 902 $ 113,395 $ 20,211 7,535 8,606 7,855 22,397 $ 1,038 423 265 343 182 $ 21,249 7,958 8,871 8,198 22,579 $ 66,604 $ 2,251 $ 68,855 46 REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON THE PASSENGER FACILITY CHARGE PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON SCHEDULE OF EXPENDITURES OF PASSENGER FACILITY CHARGES IN ACCORDANCE WITH 14 CFR PART 158 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Divisions of Cleveland Hopkins International and Burke Lakefront Airports Department of Port Control City of Cleveland, Ohio: Report on Compliance for the Passenger Facility Charge Program We have audited the Divisions' of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Ohio (the "Divisions") compliance with the types of compliance requirements described in the Passenger Facility Charge Audit Guide for Public Agencies, issued by the Federal Aviation Administration (the "Guide"), for its passenger facility charge program for the year ended December 31, 2012. Management's Responsibility Management is responsible for compliance with the compliance requirements applicable to the passenger facility charge program. Auditors' Responsibility Our responsibility is to express an opinion on compliance with the passenger facility charge program based on our audit of the compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and the Guide. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on the passenger facility charge program occurred. An audit includes examining, on a test basis, evidence about the Divisions' compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the passenger facility charge program. However, our audit does not provide a legal determination of the Divisions' compliance. Opinion on the Passenger Facility Charge Program In our opinion, the Divisions of Cleveland Hopkins International and Burke Lakefront Airports, Department of Port Control, City of Cleveland, Ohio complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its passenger facility charge program for the year ended December 31, 2012. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | columbus | dayton | middletown | springfield 47 Report on Internal Control Over Compliance Management of the Divisions is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws and regulations applicable to the passenger facility charge program. In planning and performing our audit of compliance, we considered the Divisions' internal control over compliance with the requirements that could have a direct and material effect on the passenger facility charge program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance and to test and report on internal control over compliance in accordance with the Guide, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Divisions' internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of the passenger facility charge program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of the passenger facility charge program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of the passenger facility charge program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Guide. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Passenger Facility Charges We have audited the financial statements of the Divisions as of and for the year ended December 31, 2012, and have issued our report thereon dated June 25, 2013, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the Divisions' basic financial statements. The accompanying schedule of expenditures of passenger facility charges is presented for purposes of additional analysis as required by the Guide and is not a required part of the basic financial statements as a whole. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of passenger facility charges is fairly stated in all material respects in relation to the Divisions' basic financial statements taken as a whole. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 48 49 Total Projects Insulate Residences - Full Program Phase I Extension of Taxiway "Q" Land Acquisition-Resident Relocation Asbestos Removal in Terminal CHIA Acquisition of Analex Office Bldg & Vacant Land Waste Water - Glycol Collection System Construction NASA Feasibility & Pre-Engineering Study Sewers for Confined Disposal Facility-BKL (app 1) Sound Insulation Land Acquisition - Midvale, Brysdale, Forestwood, Rocky River Environmental Assessment / Impact Studies Part 150 Noise Compatibility Program Update Brook Park Land Transfer Analex Demolition Sound Insulation Baggage Claim/Expansion Tug Road Replacement Interim Commuter Ramp Concourse D Ramp/Site Utilities Burke Runway Overlay 6L/24R Burke ILS Runway 6L/23R Runway 6R/24L Uncoupling Runway 28 Safety Improvements Midfield Deicing Pad Taxiway M Improvements Doan Brook Restoration Deicing Environmental Upgrades Main Terminal Roof Replacement Main Terminal Boiler Replacement Roadway Expansion Joint Repair/Replacement Airport-wide Flight Information Display System (FIDS)/Baggage Information Display System (BIDS) Airport-wide In-line Baggage System Design Airport Master Plan Update Runway 10/28- Runway Safety Area Imporvements South Cargo Ramp Rehabilitation Taxiway N Rehabilitation SIDA Security System Enhancements Interactive Part 139 Airport Operations Training Program Main Substation (MS1 & MS2) Redundant Electrical Power Feed & Emergency Generators $ $ 556,116,449 Approved Project Budget 16,960,400 2,155,743 14,689,459 729,842 13,025,000 5,835,921 355,000 5,500,000 8,595,641 25,282,298 1,725,000 584,570 8,750,000 1,229,000 20,000,000 9,526,087 1,019,000 5,560,338 51,305,804 530,286 2,181,400 270,550,360 2,148,000 2,200,000 39,100,000 10,000,000 870,000 1,410,000 500,000 1,510,000 1,000,000 3,868,000 850,000 2,100,000 11,659,300 3,000,000 4,400,000 1,000,000 250,000 4,160,000 $ 364,504,402 6,794,420 Cumulative Expenditures 2011 $ 16,960,400 2,155,743 14,689,459 729,842 13,025,000 5,835,921 355,000 5,500,000 8,595,641 25,282,298 1,725,000 584,570 8,750,000 890,914 20,000,000 9,526,087 668,553 5,022,518 46,346,413 530,286 1,725,262 115,973,561 2,148,000 2,010,454 39,100,000 9,579,060 $ $ 79,049 79,049 2012 1st Quarter Expenditures City of Cleveland - Department of Port Control Cleveland Hopkins International Airport Schedule of Expenditures of Passenger Facility Charges For the Period Ending December 31, 2012 $ $ 120,877 120,877 2012 2nd Quarter Expenditures $ - 2012 3rd Quarter Expenditures $ $ $ 18,404,361 95,362 51,914 17,592,948 61,211 564,447 38,479 2012 4th Quarter Expenditures $ 18,604,287 38,479 61,211 564,447 51,914 17,592,948 295,288 - 2012 YTD Expenditures $ - $ 383,108,689 Cumulative Expenditures through 2012 $ 16,960,400 2,155,743 14,689,459 729,842 13,025,000 5,835,921 355,000 5,500,000 8,595,641 25,282,298 1,725,000 584,570 8,750,000 929,393 20,000,000 9,526,087 668,553 5,083,729 46,910,860 530,286 1,777,176 133,566,509 2,148,000 2,010,454 39,100,000 9,579,060 7,089,708 - CITY OF CLEVELAND, OHIO DEPARTMENT OF PORT CONTROL DIVISIONS OF CLEVELAND HOPKINS INTERNATIONAL AND BURKE LAKEFRONT AIRPORTS NOTES TO SCHEDULE OF EXPENDITURES OF PASSENGER FACILITY CHARGES For the Year Ended December 31, 2012 GENERAL The accompanying schedule presents all activity of the Airport's Passenger Facility Charge (PFC) program. The Airport's reporting entity is defined in Note A - Summary of Significant Accounting Policies to the Airports' financial statement. BASIS OF PRESENTATION The accompanying schedule is presented on the cash basis of accounting. 50 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER TABLE OF CONTENTS Page Independent Auditors' Report .................................................................................................... 1-2 Management's Discussion and Analysis ................................................................................... 3-12 Statements of Net Position......................................................................................................... 14-15 Statements of Revenues, Expenses and Changes in Net Position ............................................. 17 Statements of Cash Flows.......................................................................................................... 18-19 Notes to Financial Statements.................................................................................................... 20-36 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Division of Cleveland Public Power Department of Public Utilities City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Division of Cleveland Public Power, Department of Public Utilities, City of Cleveland, Ohio (the "Division") as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Division of Cleveland Public Power, Department of Public Utilities, City of Cleveland, Ohio as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note A, the Division adopted the provisions of Governmental Accounting Standards Board Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Division and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 12 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Public Utilities, Division of Cleveland Public Power (the Division), we offer readers of the Division's financial statements this narrative overview and analysis of the financial activities of the Division for the years ended December 31, 2012 and 2011. Please read this information in conjunction with the Division's financial statements and footnotes that begin on page 14. The Division was created in 1906 and charged with the responsibility of the distribution of electricity and related electric service to customers within its service areas. The Division operates a municipal electric system that is the largest in the State of Ohio and the thirty-ninth largest in the United States. The Division serves an area that is bound by the City limits and presently serves approximately 74,000 customers. The Division is one of the very few municipal electric companies in the United States that competes with an investor-owned utility, in this case First Energy Corporation's Cleveland Electric Illuminating Company (CEI). According to the 2010 census reports, the City's population is 397,000 people. There are approximately 208,000 residential dwelling units and 11,000 commercial units. The Division has distribution facilities in about 60% of the geographical area of the City, primarily on the east side. The Division obtains substantially all of its power and energy requirements through agreements with various regional utilities and other power suppliers for power delivered through CEI interconnections. The balance of the Division's power and energy requirements are satisfied with production from the Division's three combustion turbine generating units and various arrangements for the exchange of short-term power and energy. To reduce its reliance on the wholesale market, the Division's long-term base load supply will include a mix of power provided by participation in American Municipal Power (AMP) Inc. hydroelectric projects, the Prairie State Energy Campus project and new/emerging alternative energy technologies. COMPARISON OF CURRENT YEAR'S AND PRIOR YEARS' DATA FINANCIAL HIGHLIGHTS o The assets of the Division exceeded its liabilities (net position) by $211,191,000, $208,597,000 and $206,758,000 at December 31, 2012, 2011 and 2010, respectively. Of these amounts, $52,470,000, $58,236,000 and $58,291,000 are unrestricted net position at December 31, 2012, 2011 and 2010, respectively, that may be used to meet the Division's ongoing obligations to customers and creditors. o The Division's total net position increased by $2,594,000 and $1,839,000 in 2012 and 2011, respectively. Operating revenue decreased by $3,221,000 or 1.9%. Purchased power increased by $5,274,000 or 5.8% and total operating expenses decreased by $2,570,000 or 1.6% for 2012. In addition, investment income decreased by $71,000 or 47.0%, interest expense decreased by $1,493,000 or 13.4% and amortization of bond issuance costs, premiums and discounts increased by $50,000 or 22.1%. 3 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FINANCIAL HIGHLIGHTS (Continued) o During 2012, the Division had an increase in capital assets, net of accumulated depreciation of $3,575,000 or 1.1%. The principal capital expenditures in 2012 were for the Holton Substation (Fourth Interconnect), Pole Replacement, New Vehicles, Transformers, Building Betterments and Flats East Bank Distribution. These additions were offset by current year depreciation. o The Division's total long-term bonded debt decreased by $10,705,000 and $10,495,000 for the years ended December 31, 2012 and 2011, respectively. The decrease in both years is attributed mainly to scheduled debt service payments made to bondholders. Also, in 2012, the Division refinanced the 2001 bonds for a net decrease of $655,000 in long-term debt. o In 2005, the Division was impacted by the introduction of Seams Elimination Cost Adjustment (SECA), which was mandated by the Federal Energy Regulatory Commission (FERC). For additional information see Note L. The Division paid SECA charges totaling $10,800,000 to Midwest Independent System Operator from December 2004 to March 2006 and has been refunded $5,655,000 as of December 31, 2012. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Division's basic financial statements. The accompanying financial statements present financial information for the City's Division of Cleveland Public Power Fund, in which the City accounts for the operations of the Department of Public Utilities, Division of Cleveland Public Power. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. The Division of Cleveland Public Power Fund is considered an enterprise fund because the operations of the Division are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Division, the economic resources measurement focus and accrual basis of accounting are used. This is similar to businesses in the private sector. The basic financial statements of the Division can be found on pages 14 - 19 of this report. The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the financial statements can be found on pages 20 36 of this report. 4 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION Provided below is condensed statement of net position information for the Division as of December 31, 2012, 2011 and 2010. 2012 Assets: Capital assets, net of accumulated depreciation Restricted assets Unamortized bond issuance costs Current assets $ 335,627 54,862 2,646 80,470 $ 332,052 59,031 2,947 85,253 2010 $ 334,495 63,448 3,293 83,389 473,605 144,257 208,597 206,758 237,151 33,535 240,565 37,302 262,414 $ 145,158 1,309 3,894 58,236 228,469 33,945 Total liabilities 484,625 211,191 Net Position and Liabilities: Net Position: Net investment in capital assets Restricted for capital projects Restricted for debt service Unrestricted Total net position Liabilities: Long-term obligations Current liabilities 479,283 153,436 1,309 3,976 52,470 Total assets Total net position and liabilities 2011 (In thousands) 270,686 277,867 473,605 $ 479,283 4,210 58,291 $ 484,625 Restricted assets: The Division's restricted assets decreased by $4,169,000 and $4,417,000 in 2012 and 2011 respectively. The decreases for both years are primarily related to use of revenue bond funds for capital project expenditures. Current assets: The Division's current assets decreased by $4,783,000 in 2012, compared to an increase of $1,864,000 in 2011. The decrease in 2012 is mainly due to a decrease in net accounts receivable of $3,155,000 as a result of decreased billings. There was also a net decrease of $1,348,000 in cash and cash equivalents and investments as well as a decrease of restricted cash and cash equivalents of $620,000. These items were offset by a $755,000 increase in due from other City of Cleveland departments, divisions and funds. 5 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Capital assets: The Division's capital assets as of December 31, 2012 amounted to $335,627,000 (net of accumulated depreciation). The total increase in the Division's net capital assets for the current year was $3,575,000. A summary of the activity in the Division's capital assets during the year ended December 31, 2012 is as follows: Balance January 1, 2012 Land $ Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Total Capital assets, net Additions Reductions (In thousands) 4,863 $ 305 473,921 20,080 79,996 52,049 631,214 386 21,313 1,333 2,980 18,246 44,258 332,052 $ $ (1,940) (23,712) (25,652) 5,249 305 495,234 21,413 81,036 46,583 649,820 (16,971) (299,162) Less: Accumulated depreciation Balance December 31, 2012 $ $ 1,940 (314,193) 27,287 $ (23,712) $ 335,627 A summary of the activity in the Division's capital assets during the year ended December 31, 2011 is as follows: Balance January 1, 2011 Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Total $ $ $ 334,495 6 $ 1,743 1,381 1,602 14,132 18,858 $ 2,282 $ (108) (4,725) (4,833) (16,576) (282,694) Less: Accumulated depreciation Capital assets, net 4,863 305 472,178 18,699 78,502 42,642 617,189 Additions Reductions (In thousands) Balance December 31, 2011 4,863 305 473,921 20,080 79,996 52,049 631,214 108 $ (299,162) (4,725) $ 332,052 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The principal capital expenditures during 2012 included the following: o o o o o o o o o Holton Substation (4th Interconnect) - $8,838,000 Engineering and Overhead expense - $5,637,000 Pole Replacement - $1,399,000 New Vehicles - $1,615,000 Transformers - $913,000 Building Betterments - garage at W 41st - $768,000 Flats East Bank - $633,000 Retaining Wall W 41st - $594,000 800 MGHz Radio System - $420,000 Additional information on the Division's capital assets, including commitments made for future capital expenditures, can be found in Note D to the basic financial statements. Current liabilities: The increase in current liabilities of $410,000 in 2012 is mainly due to the increase of $1,070,000 in the current portion of long-term debt due in one year according to predetermined schedules, offset by a $620,000 decrease in current payable from restricted assets. Long-term obligations: The long-term obligation decrease of $8,682,000 in 2012 is mainly attributed to scheduled debt service payments. At December 31, 2012, the Division had total debt outstanding of $245,113,000. All bonds are backed by the revenues generated by the Division. The Division issued revenue bonds in the public capital markets in the late 1980's and early 1990's to finance a substantial expansion to its service territory. The Division also issued bonds in April 2008 for system expansion. In 2006, 2010 and 2012, the Division issued bonds to refinance a portion of its long-term debt. This outstanding debt is being retired in accordance with repayment schedules through 2038. Accreted interest payable will increase every year until 2025, mainly due to interest accruing on the Division's 2008B Capital Appreciation Bonds (CABs). Payments of the accreted amount will begin in 2025. 7 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The activity in the Division's debt obligations outstanding during the year ended December 31, 2012 is summarized in the following table (excluding unamortized discounts, premiums and losses on debt refundings): Balance January 1, 2012 Debt Issued Debt Refunded (In thousands) Debt Retired Balance December 31, 2012 Revenue Bonds: Mortgage Revenue Bonds 1994 A $ 14,650 $ $ $ (7,325) $ (15,980) 7,325 Revenue Bonds 2001 15,980 Revenue Bonds 2006 A-1 95,265 95,265 Revenue Bonds 2006 A-2 12,295 12,295 Revenue Bonds 2008 A 21,105 21,105 Revenue Bonds 2008 B-1 Revenue Bonds 2008 B-2 Revenue Bonds 2010 44,705 27,903 23,915 (910) 15,325 Revenue Bonds 2012 Total - $ 255,818 $ 43,795 27,903 23,915 13,510 (1,815) 15,325 $ (15,980) $ (10,050) $ 245,113 The activity in the Division's debt obligations outstanding during the year ended December 31, 2011 is summarized in the following table (excluding unamortized discounts, premiums and losses on debt refundings): Balance January 1, 2011 Debt Issued Debt Refunded (In thousands) Debt Retired Balance December 31, 2011 Revenue Bonds: Mortgage Revenue Bonds 1994 A $ Mortgage Revenue Bonds 1996 21,185 $ $ $ (6,535) $ 14,650 1,050 (1,050) - (2,910) 15,980 Revenue Bonds 2001 18,890 Revenue Bonds 2006 A-1 95,265 95,265 Revenue Bonds 2006 A-2 12,295 12,295 Revenue Bonds 2008 A 21,105 21,105 Revenue Bonds 2008 B-1 44,705 44,705 Revenue Bonds 2008 B-2 27,903 23,915 27,903 23,915 Revenue Bonds 2010 Total $ 266,313 8 $ - $ - $ (10,495) $ 255,818 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The bond ratings for the Division's outstanding revenue bonds are as follows: Moody's Investors Service Standard & Poor's A2 A- The ratio of net revenue available for debt service to debt service requirements (revenue bond coverage) is a useful indicator of the Division's debt position to management, customers and creditors. The Division's revenue bond coverage for 2012, 2011 and 2010 was 143%, 140% and 160%, respectively. Additional information on the Division's long-term debt can be found in Note B to the basic financial statements on pages 23 - 27. Net Position: Net position serves as a useful indicator of a government's financial position. In the case of the Division, assets exceeded liabilities by $211,191,000, $208,597,000 and $206,758,000 at December 31, 2012, 2011 and 2010, respectively. Of the Division's net position at December 31, 2012, $153,436,000 reflects the Division's investment in capital assets (e.g., land, buildings, utility plant, furniture, fixtures, vehicles and equipment), net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. In addition, $1,309,000 denotes funds restricted for use in capital projects and $3,976,000 represents resources subject to debt service restrictions. The remaining $52,470,000 reflects unrestricted funds available to meet the Division's ongoing obligations to customers and creditors. Of the Division's net position at December 31, 2011, $145,158,000 reflects the Division's investment in capital assets (e.g., land, buildings, utility plant, furniture, fixtures, vehicles and equipment), net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. In addition, $1,309,000 denotes funds restricted for use in capital projects and $3,894,000 represents resources subject to debt service restrictions. The remaining $58,236,000 reflects unrestricted funds available to meet the Division's ongoing obligations to customers and creditors. 9 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION The Division increased its net position by $2,594,000 in 2012, while the 2011 increase in net position amounted to $1,839,000. Provided below are key elements of the Division's results of operations as of and for the years ended December 31, 2012, 2011 and 2010: 2012 Operating revenues Operating expenses $ 2011 (In thousands) 165,227 153,958 $ 168,448 156,528 2010 $ 166,665 154,221 11,269 Net position, beginning of year $ Net position, end of year 1,681 2,058 158 1,021 1,839 3,079 208,597 Increase (decrease) in net position 96 (10,966) (739) 1,223 (10,386) 2,594 Capital and other contributions 151 (11,170) (226) 1,006 (10,239) 981 Income (loss) before capital and other contributions 12,444 1,613 Non-operating revenue (expense): Investment income Interest expense Amortization of bond issuance costs and discount Other Total non-operating revenue (expense), net 11,920 80 (9,677) (276) 217 (9,656) Operating income (loss) 206,758 203,679 211,191 $ 208,597 $ 206,758 o In 2012, operating revenues decreased by $3,221,000. This decrease is related to cooler summer weather. The summer of 2011 was the second warmest summer on record. The weather normalized in 2012. o In 2011, operating revenues increased by $1,783,000. The increase was related to warmer than normal summer weather, as the City experienced its second warmest July on record. As a result, the Division recorded its highest system peak along with increased seasonal electric sales. o In 2012, operating expenses decreased by $2,570,000. This decrease is mainly related to street light upgrades and higher raw materials costs that occurred in 2011. 10 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) o In 2012, the cost of purchased power increased $5,274,000 due to the increase price of purchased power on the market. This increase in the cost of purchased power is passed through to customers via an Energy Adjustment Charge. o In 2011, operating expenses increased by $2,307,000. The increase was mainly related to the rise in operations and maintenance expenses offset by a decrease in cost of purchased power. FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS As a municipally-owned utility, the Division's mission is to improve the quality of life in the City of Cleveland by providing reliable, affordable energy and energy services to the residents and businesses of the City. The Division has concluded its 5-year Strategic Business Plan (SBP) for the period of 2007 - 2012 and is currently in the process of finalizing a new 5-year SBP that will identify and address competitive factors likely to impact the division over the period of 2013-2018. The Capacity Expansion Program has been an ongoing project for the Division. Two major components remain and are expected to be completed in the future. The Capacity Expansion Program is designed to support and improve the Division's electric system reliability and provide for future load growth opportunities. Southern Project: This component of the Capacity Expansion Program includes the extension of the southern 138kV transmission system and the addition of a 138/13.8kV substation (the Southern Project). The proposed extension will complete a continuous transmission ring around the Division's system. The Southern Project also includes the construction of a new distribution substation. It will allow the Division to extend its electric service to serve potential customers in parts of the southern and western areas of the City that are outside the Division's current footprint as well as areas that are within the Division's current footprint but presently lack sufficient capacity. The substation and transmission line are currently in final design phase with an anticipated in-service date of the 4th quarter of 2014. Lake Road Project: This component of the Capacity Expansion Program is the expansion of the Lake Road 11.5kV Substation and the 11.5kV system downtown (the Lake Road Project). The proposed expansion will allow the Division to serve new customers throughout the downtown areas including the Quadrangle, Flats and Warehouse districts. Construction on the Lake Road Project is 50% complete with an anticipated in-service date of 1st quarter 2014. The Division is focusing its marketing efforts on those sections of the City that were part of its earlier system expansion to increase the density of customers served. As the Division competes with CEI in these areas, density is measured as the number of the Division's customers on a given street versus the total customers available on that street. New customers can be added with little additional expense. 11 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS (Continued) The Division purchases most of its power requirements via contracts in the power markets. The Division intends to reduce its dependence on the purchased power market by acquiring interests in certain generating facilities. The Division's long-term base load supply will include a mix of power provided by participation in AMP Inc. hydroelectric projects, the Prairie State Energy Campus project, and new/emerging alternative energy technologies. The Division is currently scheduled to purchase a total of approximately 50 MW from the AMP Inc.'s hydroelectric projects, which are expected to be in operation by 2014. The Division will also purchase up to 25 MW from AMP Inc.'s share of the Prairie State Energy Campus project, an Illinois coalfired generating plant that came on-line in November 2012, and has also contracted to receive 60 MW of the Fremont Energy Center, a 707 MW natural gas-fired generating plant, which came on-line in January 2012. The Division's payments for the Prairie State and Fremont project power will be an operating expense for CPP, the cost of which will be passed through to its customers via an Energy Adjustment Charge on its bills. As power costs rise, sales revenue will also increase commensurately through the Energy Adjustment Charge. The Division owns and operates approximately 67,000 street lights, including 18,000 that were purchased in 2008 from CEI for $4,000,000. The Division provides street lighting service to its customer, the City of Cleveland, under a published rate schedule. CEI will continue to provide the power to street lights where the Division lacks distribution facilities but will charge an energy-based rate under CEI's tariff for municipallyowned street lights. The Division intends to continue to charge the City the current CEI rate for the newly acquired lights for a transition period, after which the lights will be billed at the Division's then-current standard rate. In addition to adding a new revenue stream, the transfer will enable the City to avoid CEI's proposed new street lighting tariff charges, potentially affecting the General Fund and will allow for improved maintenance of the new lights by increasing responsiveness. In early 2001, Ohio Electric Choice legislation created a new kilowatt-hour excise tax on electric power distributed to end users of electricity in the State by both investor-owned and municipal utilities. For municipal utilities, the state law requires the utility to remit the tax receipts to the municipality's General Fund. In accordance to Ordinance No. 1560-10 passed in November 2010, the General Fund retained 100% of the tax remittance in 2011 and also retained 100% during the calendar year 2012. Under Ordinance No. 193-13 passed in March 2013, the General Fund will retain 100% of the tax remittance in 2013 and will also retain 50% during the calendar year 2014. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Division's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 12 BASIC FINANCIAL STATEMENTS CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) 2012 2011 ASSETS CAPITAL ASSETS Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles $ Less: Accumulated depreciation 5,249 305 495,234 21,413 81,036 603,237 (314,193) 289,044 $ 4,863 305 473,921 20,080 79,996 579,165 (299,162) 280,003 CAPITAL ASSETS, NET 46,583 335,627 52,049 332,052 59,031 TOTAL RESTRICTED ASSETS 51,122 3,739 1 54,862 2,646 2,947 58,097 1,310 54,386 1,930 5,059 6,903 1,931 3,313 8,826 90 80,470 10,058 2,080 2,558 9,089 93 85,253 TOTAL ASSETS $ 473,605 $ 479,283 Construction in progress RESTRICTED ASSETS Cash and cash equivalents Investments Accrued interest receivable UNAMORTIZED BOND ISSUANCE COSTS CURRENT ASSETS Cash and cash equivalents Restricted cash and cash equivalents Investments Receivables: Accounts receivable - net of allowance for doubtful accounts of $9,407,000 in 2012 and $6,889,000 in 2011 Unbilled revenue Due from other City of Cleveland departments, divisions or funds Materials and supplies - at average cost Prepaid expenses TOTAL CURRENT ASSETS 59,031 (Continued) 14 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) 2012 2011 NET POSITION AND LIABILITIES NET POSITION Net investment in capital assets Restricted for capital projects Restricted for debt service Unrestricted $ TOTAL NET POSITION 153,436 1,309 3,976 52,470 211,191 $ 145,158 1,309 3,894 58,236 208,597 LONG-TERM OBLIGATIONS-excluding amounts due within one year Revenue bonds Accreted interest payable Accrued wages and benefits TOTAL LONG-TERM OBLIGATIONS 220,202 7,768 499 228,469 230,690 5,948 513 237,151 CURRENT LIABILITIES Current portion of long-term debt, due within one year Accounts payable Current payable from restricted assets Due to other City of Cleveland departments, divisions or funds Accrued interest payable Current portion of accrued wages and benefits Other accrued expenses Customer deposits and other liabilities TOTAL CURRENT LIABILITIES 12,710 8,732 1,310 4,499 1,221 3,855 507 1,111 33,945 11,640 8,598 1,930 4,922 1,298 3,635 420 1,092 33,535 TOTAL LIABILITIES 262,414 270,686 LIABILITIES TOTAL NET POSITION AND LIABILITIES $ See notes to financial statements. 473,605 $ 479,283 (Concluded) 15 This page intentionally left blank. 16 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 OPERATING REVENUES Charges for services 2011 $ 165,227 TOTAL OPERATING REVENUES 165,227 $ 168,448 168,448 TOTAL OPERATING EXPENSES 95,788 21,379 19,820 16,971 153,958 90,514 29,542 19,896 16,576 156,528 OPERATING INCOME (LOSS) 11,269 11,920 NON-OPERATING REVENUE (EXPENSE) Investment income Interest expense Amortization of bond issuance costs and discounts Other TOTAL NON-OPERATING REVENUE (EXPENSE), NET 80 (9,677) (276) 217 (9,656) 151 (11,170) (226) 1,006 (10,239) INCOME (LOSS) BEFORE CAPITAL AND OTHER CONTRIBUTIONS 1,613 1,681 Capital and other contributions INCREASE (DECREASE) IN NET POSITION 981 2,594 158 1,839 208,597 206,758 $ 211,191 $ 208,597 OPERATING EXPENSES Purchased power Operations Maintenance Depreciation NET POSITION, BEGINNING OF YEAR NET POSITION, END OF YEAR See notes to financial statements. 17 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services Cash payments for purchased power Electric excise tax payments to agency fund and other $ 168,740 (15,640) (22,056) (95,152) (4,813) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Grants Other NET CASH PROVIDED BY (USED FOR) NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from sale of revenue bonds Acquisition and construction of capital assets Principal paid on long-term debt Interest paid on long-term debt Cash paid to escrow agent for refunding NET CASH PROVIDED BY (USED FOR) CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR 31,079 31,151 89 158 689 89 847 15,325 (16,620) (10,050) (9,746) (16,294) (9,618) (10,495) (10,573) (37,385) (30,686) (28,731) 30,010 120 (5,019) 3,572 123 1,399 (1,324) (4,818) (12) 115,347 115,359 $ 110,529 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 172,078 (20,615) (24,018) (90,960) (5,334) $ 115,347 (Continued) 18 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,269 $ 11,920 16,971 16,576 3,155 3,600 Unbilled revenue 149 412 Due from other City of Cleveland departments, divisions or funds (755) (53) 263 46 Prepaid expenses 3 23 Accounts payable 135 (946) Due to other City of Cleveland departments, divisions or funds (423) (242) Accrued wages and benefits 206 (193) 87 19 (32) 40 19,810 19,231 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 31,079 $ 31,151 OPERATING INCOME Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in assets and liabilities: Accounts receivable, net Materials and supplies, net Other accrued expenses Customer deposits and other liabilities TOTAL ADJUSTMENTS See notes to financial statements. (Concluded) 19 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Division of Cleveland Public Power (the Division) is reported as an Enterprise Fund of the City of Cleveland's (the City) Department of Public Utilities and is a part of the City's primary government. The Division was created for the purpose of supplying electrical services to customers within the City. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Division comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of publicprivate or public-public partnership. The Division has determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Division has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Division has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. The Division has determined that GASB Statement No. 64 has no impact on its financial statements as of December 31, 2012. In addition, certain additional financial information regarding the Division is included in these footnotes. The implementation of the new GASB statements did not result in a change in the Division's beginning net position/equity balance as previously reported. 20 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Division's net assets are accounted for in the accompanying statements of net position and the net assets are divided into the following categories: o Net investment in capital assets o Amount restricted for capital projects o Amount restricted for debt service o Remaining unrestricted amount Basis of Accounting: The Division's financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized as incurred. Revenues: Revenues are derived primarily from sales of electricity to residential, commercial and industrial customers based upon actual consumption. Electricity rates are authorized by City Council and billings are made on a cyclical basis. Estimates for services between the end of the various cycles and the end of the year are recorded as unbilled revenue. Statement of Cash Flows: The Division utilizes the direct method of reporting for the statement of cash flows as defined by the GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In a statement of cash flows, cash receipts and cash payments are classified according to operating, non-capital financing, capital and related financing and investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Division. Cash equivalents are defined as highly liquid investments with maturity of three months or less when purchased and include certificates of deposit, U.S. Treasury Bills, State Treasury Asset Reserve Fund of Ohio (STAROhio), commercial paper, mutual funds and repurchase agreements. The City's policy is to enter into repurchase agreements with local commercial banks and to obtain confirmation of securities pledged. Investments: The Division follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value in the balance sheet and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair value is based on quoted market prices. The City has invested funds in STAROhio during fiscal year 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. 21 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Assets: Proceeds from debt and amounts set aside in various fund accounts for payment of revenue bonds are classified as restricted assets since their use is limited by the bond indentures. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost, or, if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as an item with a useful life in excess of one year and an individual cost of more than $5,000 for land, furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Utility plant Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles 5 to 100 years 15 to 100 years 5 to 60 years 3 to 60 years The Division's policy is to capitalize interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest is included in the cost of the assets and is depreciated on the straight-line basis over the estimated useful lives of such assets. The Division applies FASB guidance pertaining to capitalization of interest cost for its revenue bonds. This guidance requires capitalization of interest cost of eligible borrowings less interest earned on investment of the related bond proceeds from the date of borrowing until the assets constructed from the bond proceeds are ready for their intended use. For 2012 and 2011 total interest costs incurred amounted to $13,227,000 and $14,715,000 respectively, of which $3,533,000 and $3,533,000, respectively, was capitalized, net of interest income of $17,000 in 2012 and $12,000 in 2011. Bond Issuance Costs, Discounts and Unamortized Losses on Debt Refundings: Bond issuance costs are initially recorded as deferred expenses and unamortized original issuance discounts are netted against longterm debt. Both are amortized over the lives of the related bonds. Unamortized losses on debt refundings are netted against long-term debt and are amortized over the shorter of the remaining life of the defeased bond or the newly issued bond. Compensated Absences: The Division accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statement of net position. The portion of the compensated absence liability that is not expected to be paid out within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Division allows employees to carryover vacation from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three year base salary rate, with the balance being forfeited. 22 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS Long-term debt outstanding at December 31, 2012 and 2011 is as follows: Original Issuance Interest Rate 2012 (In thousands) 2011 Revenue Bonds: Series 1994 A, due through 2013 Series 2001, refunded in 2012 Series 2006 A-1, due through 2024 Series 2006 A-2, due through 2017 Series 2008 A, due through 2024 Series 2008 B-1, due through 2038 Series 2008 B-2, due through 2038 Series 2010 , due through 2017 Series 2012 , due through 2016 Zero Coupon 5.00%-5.50% 4.25%-5.00% 5.00% 4.00%-4.50% 3.00%-5.00% 5.13%-5.40% 3.00%-5.00% $ 219,105 41,925 95,265 12,295 21,105 44,705 27,903 23,915 $ 7,325 95,265 12,295 21,105 43,795 27,903 23,915 $ 14,650 15,980 95,265 12,295 21,105 44,705 27,903 23,915 15,325 Less: Unamortized discount-zero coupon bonds Unamortized premium (discount)-current interest bonds (net) Unamortized loss on debt refunding Current portion Total Long-Term Debt 23 501,543 245,113 255,818 (2,612) 4,764 (15,640) (11,640) $ 220,202 $ 13,510 (1,690) 3,678 (14,189) (12,710) 2.00% $ 230,690 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2012 are as follows: Balance January 1, 2012 Increase Decrease (In thousands) Balance December 31, 2012 Due Within One Year $ $ Revenue Bonds: Series 1994 A, due through 2013 $ 14,650 $ $ (7,325) 7,325 Series 2001, refunded in 2012 15,980 Series 2006 A-1, due through 2024 95,265 95,265 Series 2006 A-2, due through 2017 12,295 12,295 Series 2008 A, due through 2024 21,105 21,105 Series 2008 B-1, due through 2038 44,705 Series 2008 B-2, due through 2038 27,903 27,903 Series 2010, due through 2017 Series 2012, due through 2016 23,915 445 4,000 Total revenue bonds Accrued wages and benefits Total (15,980) 7,325 (910) - 43,795 940 15,325 (1,815) 23,915 13,510 255,818 4,148 15,325 3,841 (26,030) (3,635) 245,113 4,354 12,710 3,855 $ 259,966 $ 19,166 $ (29,665) $ 249,467 $ 16,565 24 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2011 are as follows: Balance January 1, 2011 Increase Decrease (In thousands) Balance December 31, 2011 Due Within One Year $ $ Revenue Bonds: Series 1994 A, due through 2013 $ 21,185 $ $ (6,535) 14,650 Series 1996, due through 2011 1,050 (1,050) - Series 2001, due through 2016 18,890 (2,910) 15,980 Series 2006 A-1, due through 2024 95,265 95,265 Series 2006 A-2, due through 2017 12,295 12,295 Series 2008 A, due through 2024 21,105 21,105 Series 2008 B-1, due through 2038 44,705 44,705 Series 2008 B-2, due through 2038 27,903 23,915 7,325 27,903 23,915 Series 2010, due through 2017 Total revenue bonds Accrued wages and benefits Total 266,313 4,341 $ 270,654 $ 25 3,588 3,588 (10,495) (3,781) $ (14,276) 255,818 4,148 $ 259,966 3,405 910 11,640 3,635 $ 15,275 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Minimum principal and interest payments on long-term debt are as follows: P rin cip a l 2013 2014 2015 2016 2017 2018 - 2022 2023 - 2027 2028 - 2032 2033 - 2037 $ 1 2 ,7 1 0 1 3 ,1 9 5 1 3 ,1 0 5 1 3 ,7 1 0 1 4 ,3 2 5 8 2 ,2 3 5 5 1 ,0 3 2 2 0 ,2 4 9 2 0 ,3 4 4 In terest (In th o u sa n d s) $ 9 ,7 6 7 9 ,6 3 8 9 ,1 1 1 8 ,5 9 1 7 ,9 7 4 2 8 ,9 5 2 2 2 ,6 7 1 2 9 ,2 1 4 2 9 ,1 3 0 $ T o ta l 2 2 ,4 7 7 2 2 ,8 3 3 2 2 ,2 1 6 2 2 ,3 0 1 2 2 ,2 9 9 1 1 1 ,1 8 7 7 3 ,7 0 3 4 9 ,4 6 3 4 9 ,4 7 4 4 ,2 0 8 T o tal 5 ,6 8 5 9 ,8 9 3 $ 2 4 5 ,1 1 3 2038 $ 1 6 0 ,7 3 3 $ 4 0 5 ,8 4 6 . The City has pledged future power system revenues, net of specified operating expenses, to repay $245,113,000 in various Public Power System Revenue Bonds issued in various years since 1994. Proceeds from the bonds provided financing for Public Power System improvements. The bonds are payable from Public Power System net revenues and are payable through 2038. Annual principal and interest payments on the bonds are expected to require less than 70 percent of net revenues. The total principal and interest remaining to be paid on the various Power System Revenue Bonds is $405,846,000. Principal and interest paid for the current year and total net revenues were $19,796,000 and $28,320,000, respectively. Effective February 24, 2012, the City issued $15,325,000 Public Power System Revenue Refunding Bonds, Series 2012, to refund all of the outstanding $15,980,000 Public Power System Refunding Revenue Bonds, Series 2001. Net proceeds of the Series 2012 Bonds and amounts on deposit in the Series 2001 Bond Fund together totaling $16,293,627 were placed in an irrevocable trust account to pay the principal and interest on the refunded Series 2001 Bonds on March 26, 2012. As a result, the refunded bonds were defeased and the liability for these bonds has been removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $1,169,000 or an economic gain (the difference between the present values of the old and new debt service) of approximately $1,148,000 or 7.18%. These bonds were sold through a private sale to Wells Fargo Bank, National Association. The Division has, at various times, defeased certain revenue bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the Division's financial statements. The Division has no defeased debt outstanding at December 31, 2012. 26 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Revenue bonds are payable from the revenues derived from operations of the Public Power System, after the payment of all operating and maintenance expenses (net revenues). The bonds are collateralized by a pledge of and lien on such net revenues and the special funds described below. The indenture requires that, at all times, the Division will charge rates and fees for the products and services of the Public Power System. Revenues will be at least sufficient to provide funds for the payment in each year of the necessary operating and maintenance expenses of the power system and in an amount equal to 1.25 times the payments of principal and interest on the revenue bonds then outstanding and due in that year. As of December 31, 2012 and 2011, the Division was in compliance with the terms and requirements of the bond indenture. The indenture establishes the following fund accounts for the application of revenues: Revenue Fund: All revenues will be deposited into this fund and will be used for payment of current operating expenses and deposits into other funds. Debt Service Fund: Monthly deposits will be made from the revenue fund to cover succeeding principal and interest payments as they become due on the revenue bonds. Debt Service Reserve Fund: Deposits will be made to this fund if the amount in the debt service fund at any time is less than the debt service reserve requirement. However, the Division has elected, pursuant to provisions of the indenture governing the Division's bonds, to satisfy the bond reserve requirement with a surety bond in an aggregate amount at least equal to the bond reserve requirement. Renewal and Replacement Fund: The balance in this fund is maintained at a minimum of $1,000,000 and is to be applied against the cost of repair or replacement of capital assets in order to maintain the system. Construction Fund: The proceeds from Series 1991, Series 1994 and Series 2008 Bonds of $12,050,000, $79,386,000, and $72,608,000, respectively, were deposited into this fund to be used, along with earnings from investments of amounts held therein, for the payment of capital costs. As of December 31, 2012 and 2011, the Division had $46,195,000 and $47,456,000, respectively, of outstanding commitments for future constructions that will be funded by available bond proceeds and operating revenue. Capital costs include all costs of additions, extensions, renewals, replacements, alterations, betterments and any other capital improvements to the system. Amounts held in this fund are subject to a lien in favor of bondholders and may be used to pay principal of outstanding bonds to the extent that amounts in all other funds are insufficient. No payment needs to be made into a fund if the amounts in such fund are equal to the required fund balance, if any. Amounts held in trust may be invested by the City Treasurer or the trustee in permitted investments. However, the use of funds is limited by the bond indenture and, accordingly, the amounts are classified as restricted assets in the financial statements. 27 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS Deposits: At December 31, 2012 and 2011, the Division's carrying amount of deposits totaled $14,096,000 and $17,695,000, respectively, and the Division's bank balances totaled $14,002,000 and $18,132,000, respectively. The differences represent positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $14,002,000 and $18,132,000 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Division will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Division's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by State statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Under City policy, investments are limited to repurchase agreements, U.S. Government securities, certificates of deposit, investments in certain money market mutual funds, and STAROhio. Generally, investments are recorded in segregated accounts by way of book entry through the banks' commercial or trust department and are kept at the Federal Reserve Bank in the depository institutions' separate custodial account for the City, apart from the assets of the depository institution. Ohio statute prohibits the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect the portfolio value. Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Division invests primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the following table. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Division will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The Division does not have an investment policy dealing with investment custodial credit risk beyond the requirement in the State statute. 28 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS (Continued) Credit Risk: The Division's investments as of December 31, 2012 and 2011 include U.S. Treasury Bills, U.S. Agency Obligations, STAROhio, commercial paper and mutual funds. The Division maintains the highest ratings for its investments. Investments in STAROhio and First American Government Obligations mutual funds carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. The Division's investment in U.S. Bank N.A. Open Commercial Paper carries a Standard & Poor's rating of A-1+. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. Concentration of Credit Risk: The Division places a limitation on the amount it may invest in any one issuer to help minimize the concentration of credit risk. The Division had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the statement of net position in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: 2012 Fair Value Type of Investment U.S. Treasury Bills U.S. Agency Obligations STAROhio Commercial Paper Investment in Mutual Funds $ 2011 Fair 2011 Value Cost (In thousands) $ 3,739 $ Investment Maturities Less than One Year $ 3,739 45,475 1,133 49,825 $ 45,475 1,133 49,825 5,059 38,322 1,131 58,199 5,019 38,322 1,131 58,199 45,475 1,133 49,825 100,172 14,096 Total Investments Total Deposits Total Deposits and Investments 3,739 $ 2012 Cost 100,172 14,096 102,711 17,695 102,671 17,695 100,172 14,096 114,268 $ 114,268 $ 120,406 $ 120,366 $ 114,268 These amounts are monies invested by the City Treasurer on behalf of the Division and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. As of December 31, 2012, the investments in U.S. Treasury Bills, STAROhio, commercial paper and mutual funds are approximately 4%, 45%, 1% and 50%, respectively, of the Division's total investments. As of December 31, 2011, the investments in U.S. Agency Obligations, STAROhio, commercial paper and mutual funds are approximately 5%, 37%, 1% and 57%, respectively, of the Division's total investments. 29 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS Capital Asset Activity: Capital asset activity for the year ended December 31, 2012 was as follows: Balance January 1, 2012 Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated $ 4,863 52,049 56,912 Additions Reductions (In thousands) $ 386 18,246 18,632 $ Balance December 31, 2012 $ (23,712) (23,712) 5,249 46,583 51,832 Capital assets, being depreciated: Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated 305 473,921 20,080 79,996 574,302 21,313 1,333 2,980 25,626 (1,940) (1,940) 305 495,234 21,413 81,036 597,988 Less: Accumulated depreciation (299,162) (16,971) 1,940 (314,193) 275,140 8,655 Total capital assets being depreciated, net Capital assets, net $ 332,052 $ . 30 27,287 $ (23,712) $ 283,795 335,627 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS (Continued) Capital Asset Activity: Capital asset activity for the year ended December 31, 2011 was as follows: Balance January 1, Balance December 31, 2011 Capital assets, not being depreciated: Land $ Additions Reductions (In thousands) 2011 4,863 $ 4,863 42,642 14,132 (4,725) 52,049 47,505 14,132 (4,725) 56,912 Capital assets, being depreciated: Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated 305 472,178 18,699 78,502 569,684 1,743 1,381 1,602 4,726 (108) (108) 305 473,921 20,080 79,996 574,302 Less: Accumulated depreciation (282,694) (16,576) 108 (299,162) 286,990 (11,850) - 275,140 Construction in progress Total capital assets, not being depreciated Total capital assets being depreciated, net Capital assets, net $ 334,495 $ 2,282 $ (4,725) $ 332,052 Commitments: The Division has outstanding commitments of approximately $59,544,000 and $51,775,000 for future capital expenditures at December 31, 2012 and 2011, respectively. It is anticipated that these commitments will be financed from the Division's cash balances; however, at the discretion of the Division, additional long-term debt may be issued in the future to finance a portion of the costs. 31 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E - DEFINED BENEFIT PENSION PLAN Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 3) The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Division's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $2,037,000, $2,012,000 and $1,939,000 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27, and it is effective for employer fiscal years beginning after June 15, 2014. 32 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F - OTHER POST-EMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multipleemployer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-andservice retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a standalone financial report Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Division's actual contributions to OPERS to fund postemployment benefits were $815,000 in 2012, $804,000 in 2011 and $1,105,000 in 2010. The required payments due in 2012, 2011, and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. 33 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE G - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: In November 2009, participants in the American Municipal Power Generating Station (AMP) voted to terminate development of the 1,000 MW coal-fired generating station that was to be located on the Ohio River in Meigs County, Ohio. The Division was one of 81 member participants in the project and had committed to receive an 80 MW share of the project's output. AMP has instituted litigation against the EPC contractor to recover costs incurred as a result of the project's cancellation. The Division and the other members participated in the project through "take or pay" contracts with AMP and are obligated to pay for the project's sunk costs based on each member's allocation. The Division's share of the incurred project costs is $13,556,845 plus interest of $79,704. AMP anticipates that any such costs that are not recovered through participation in a replacement project will be financed by AMP and recovered from the AMP participants over a period of time yet to be determined. AMP has rolled over a portion of the Meigs County facility cost into the Fremont Energy Center (Fremont), a new natural gas generating station that AMP purchased in July 2011. AMP has provided the Division a Development Cost Credit of $6,281,771. These credits cut the Division's risk of loss in half. None of these credits have been recorded in the Division's financial statements through December 31, 2012. Cleveland City Council passed legislation in 2011 allowing the Division to pass through 50% of any costs for which CPP is determined to be responsible to customers in their monthly electricity bills over time. Through this legislation, the Division will purchase power from the Fremont project, pay about half of its allocable share in AMP costs as power costs purchased from Fremont and include the costs in bills to customers over time. The legislation directs the Division to pay its remaining share of the costs due to AMP, estimated at $3,677,390, from operating funds over a period of time yet to be determined. The Division has not paid any monies to AMP towards the project's sunk costs. Furthermore, the Division has not reported the stranded costs in the financial statements as the Division's communication received from AMP to date is that the actual amount of incurred costs that are not recoverable from the vendor is undeterminable. In addition, various claims are pending against the City involving the Division for personal injuries, property damage and other matters. The City is responsible for the lawsuits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Division's financial position, results of operations or cash flows. Risk Management: The Division is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Division carries insurance to cover particular liabilities and property protection. Otherwise, the Division is generally selfinsured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. There were no significant decreases in any insurance coverage in 2012. In addition, there were no insurance settlements in excess of insurance coverage during the past three years. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio's workers' compensation retrospective rating program. 34 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE G - CONTINGENT LIABILITIES AND RISK MANAGEMENT (Continued) In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs) and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims liability for the Division is reported as part of accounts payable on the statement of net position and is immaterial. The Division suffered a loss of a transformer amounting to $1,120,000 in 2012. After the insurance claim, the Division's loss is expected to be $250,000. NOTE H - RELATED PARTY TRANSACTIONS Revenues and Accounts Receivable: The Division provides services to the City, including its various departments and divisions. The usual and customary rates are charged to all City departments and divisions. Operating Expenses: The Division is provided various intra-city services. Charges are based on actual use or on a reasonable pro-rata basis. The more significant costs for the years ended December 31, 2012 and 2011 are as follows: 2012 2011 (In thousands) City Administration Telephone Exchange Division of Water Utilities Administration and Fiscal Control Motor Vehicle Maintenance $ 1,092 727 435 947 700 $ 1,054 565 427 871 630 NOTE I - CUYAHOGA COUNTY REAL PROPERTY TAXES The Division is required by ordinance to keep records of the estimated property taxes which would be payable to Cuyahoga County were it subject to such taxes. The estimated property taxes for the Division, based on book value of real estate at the current tax rates, would have been approximately $1,023,000 and $746,000 for the years ended December 31, 2012 and 2011, respectively. 35 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF CLEVELAND PUBLIC POWER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE J - KILOWATT PER HOUR TAX In May 2001, the Division started billing its customers the electric deregulation kilowatt-hour tax according to the laws of the State of Ohio. This law requires the Division to remit the proceeds to the City's General Fund, except for any proceeds attributable to sales outside the City which are remitted to the State of Ohio. The Division billed $5,284,000 and $5,308,000 for this tax in 2012 and in 2011 respectively, of which $6,563 and $5,131 was remitted to the State. As noted previously, City Council passed Ordinance No. 1768-07, which required the General Fund to remit 50% of the proceeds back to the Division in 2008. However, City Council subsequently passed Ordinance No. 1248-09, which allocated 100% of the proceeds to the General Fund in 2009 and 2010. In accordance to Ordinance No. 1560-10 passed in November 2010, the General Fund retained 100% of the tax remittance during calendar years 2011 and 2012. In accordance with Ordinance No. 193-13 passed in March 2013, the General Fund will retain 100% of the tax remittance in 2013 and will also retain 50% during the calendar year 2014. NOTE K - INCREMENTAL CHARGES In 2000, Cleveland City Council passed Ordinance No. 910-98, which increased rates to CPP customers. The rate increase was originally scheduled to expire December 31, 2005, but was extended through legislation several times, most recently to June 30, 2012. The legislation originally restricted the use of the rate increase proceeds to the payment of bonded indebtedness. In recent years, City Council authorized additional uses and in December 2005, Council removed the restriction related to bond indebtedness. The Division retained a rates consultant in 2011 to support the Division's request to make the incremental charge permanent. The incremental charges billed were $13,448,000 and $13,670,000 in 2012 and 2011, respectively. NOTE L - SEAMS ELIMINATION COST ADJUSTMENT (SECA) PAYMENTS Between December 2004 and March 2006, the Division was required by the FERC to pay SECA payments totaling $10,800,000. The payments arose from a transmission restructuring effort aimed at reducing transmission costs by allowing users such as Cleveland Public Power to pay a single rate for transmission across a regional system consisting of multiple utilities. These payments, made subject to refund and the outcome of litigation proceedings, were intended as a temporary replacement for revenues previously received by transmission owners in neighboring regional systems for transmission access across their systems. Through December 31, 2012, the Division received $5,655,000 as reimbursements for SECA payments. CPP's trade association, American Municipal Power, is pursuing an additional reimbursement on behalf of its members for $1,600,000 from transmission owners in the Midwest ISO and another $1,200,000 from Baltimore Gas & Electric, which they are contesting. If AMP is successful, CPP will receive some portion of these recoveries but the amount is unknown. The FERC has issued a SECA order requiring compliance filing, which the Division has filed, but so far it has not acted on the compliance filings. There have been appeals of the SECA orders and the parties involved have been negotiating the briefing schedule. 36 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER TABLE OF CONTENTS Page Independent Auditors' Report .................................................................................................... 1-2 Management's Discussion and Analysis ................................................................................... 3-15 Statements of Net Position......................................................................................................... 17-18 Statements of Revenues, Expenses and Changes in Net Position ............................................. 20 Statements of Cash Flows.......................................................................................................... 21-22 Notes to Financial Statements.................................................................................................... 23-45 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Division of Water Department of Public Utilities City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Division of Water, Department of Public Utilities, City of Cleveland, Ohio (the Division) as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Division of Water, Department of Public Utilities, City of Cleveland, Ohio, (as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note A, the Division adopted the provisions of Governmental Accounting Standards Board Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Division and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 15 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Public Utilities, Division of Water (the Division), we offer readers of the Division's financial statements this narrative overview and analysis of the financial activities of the Division for the years ended December 31, 2012 and 2011. Please read this information in conjunction with the Division's financial statements and footnotes that begin on page 17. The Division services not only the City, but also 69 surrounding communities, six master meter communities, and eight emergency standby communities. They provide water to approximately 417,069 city and suburban accounts in the Cleveland metropolitan area. They also sell water to master meter communities that operate their own distribution systems, and they provide billing and payment services for the Northeast Ohio Regional Sewer District and other communities. During 2012, the Division provided services to approximately 124,520 accounts located within Cleveland and approximately 292,549 accounts located in direct service communities. Water provided to each master meter community is metered at each community's boundary. Consumers within the City of Cleveland accounted for 21% of the Division's metered sales revenue, while the direct service and master meter communities accounted for 70% and 9% of metered sales revenue, respectively. The Division, along with Division of Utilities Fiscal Control (UFC), provides a complete array of processing services including billing, payment processing, mailing delinquency notices, terminating water service on delinquent accounts and distributing the money collected to the communities. UFC processes approximately 5,000 bills daily, which include bills for water only, sewer only, water and sewer, final notices and delinquent bills. COMPARISON OF CURRENT YEAR'S AND PRIOR YEARS' DATA FINANCIAL HIGHLIGHTS o The Division restated its 2011 beginning capital assets due to the acquisition of $167,777,000, net of accumulated depreciation, of suburban distribution water mains by agreements signed with 21 suburbs from 2005 through 2010. o The Division's net position was $1,259,472,000, $1,197,743,000 and $1,190,443,000 at December 31, 2012, 2011 and 2010, respectively. Of these amounts, $257,578,000, $204,911,000 and $207,491,000 are unrestricted net position at December 31, 2012, 2011 and 2010, respectively, and may be used to meet the Division's ongoing obligations to customers and creditors. o In 2012, the operating revenues of the Division increased by $43,697,000 mainly due to a water rate increase. In 2011, the operating revenues of the Division decreased by $644,000. o In 2012 the Division had a decrease in water pumpage of 0.16%. The major users of water consumption were ISG-Cleveland, Cuyahoga Metropolitan Housing Authority, Nestle Inc., Cleveland Clinic Foundation, Alcoa Inc., Northeast Ohio Regional Sewer District, Pepsi Inc. and Case Western Reserve University. In 2011 the Division had an increase in water pumpage of 0.2%. The major users of water consumption were ISG-Cleveland, Cuyahoga Metropolitan Housing Authority, Nestle Inc., Alcoa Inc., Cleveland Clinic Foundation, Pepsi Inc., Northeast Ohio Regional Sewer District and NASA Lewis Research Center. 3 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FINANCIAL HIGHLIGHTS (Continued) o The Division's overall net position increased by $61,729,000 and $7,300,000 in 2012 and 2011 respectively. o The Division had increases in capital assets, net of accumulated depreciation, of $26,286,000 and $23,318,000 in 2012 and 2011, respectively. The major additions during these years were related to the continuing renovation projects for plant enhancements at the Morgan, Baldwin, Crown and Nottingham sites, suburban water main renewal and the meter reading program. The Division added the water mains for three suburbs in 2012 for $20,044,000. The major projects that were closed in construction in progress and moved to assets were Cleveland Security Contracts, Keller II Water Tower, Warehouse Improvements, Baldwin Residuals and Fairmount, Morgan Chemical Facility and the Plant Enhancements Program. o The total long-term revenue bonds and loans payable of the Division increased $81,844,000 in 2012. This increase is primarily attributed to the issuance of $44,410,000 of Senior Lien, Series X Bonds and $76,710,000 Second Lien, Series A Bonds, which was offset by $40,239,000 of debt retired. The total long-term debt of the Division decreased $62,551,000 in 2011. This decrease is attributed to $43,407,000 of debt retired and $101,800,000 of debt defeased, which was offset by the issuance of $82,090,000 of revenue bonds and receipt of one Ohio Water Development Authority loan totaling $566,000. o In July, 2012 the Division issued $50,000,000 of Water Revenue Subordinate Lien Notes Series 2012 in order to refund notes issued in 2011 to fund a portion of the Automated Meter Reading program. The 2012 Notes were redeemed in November 2012 with a portion of the proceeds from Second Lien Series A 2012 Bonds. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Division's basic financial statements. The accompanying financial statements present financial information for the City's Division of Water Fund, in which the City accounts for the operations of the Department of Public Utilities, Division of Water. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The Division is considered an Enterprise Fund because the operations of the Division are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Division, the economic resources measurement focus and the accrual basis of accounting is used. This is similar to businesses in the private sector. The basic financial statements of the Division can be found on pages 17 - 22 of this report. 4 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) OVERVIEW OF THE FINANCIAL STATEMENTS (Continued) The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the financial statements can be found on pages 23 - 45 of this report. CONDENSED STATEMENT OF NET POSITION INFORMATION Provided below is condensed statement of net position information for the Division as of December 31, 2012, 2011 and 2010: 2012 Assets: Capital assets, net Restricted assets Unamortized bond issuance costs Current assets Total assets Deferred outflows of resources: Derivative instruments-interest rate swaps Total deferred outflows of resources Total assets and deferred outflows Restated 2011 (In thousands) Restated 2010 $ 1,686,939 $ 1,660,653 $ 1,637,335 171,598 240,993 211,843 4,517 4,911 5,151 308,093 271,720 276,285 2,212,026 2,108,488 2,159,524 27,699 27,699 2,239,725 17,664 17,664 2,177,188 914,193 99 87,602 257,578 1,259,472 899,231 881,062 93,601 204,911 1,197,743 101,890 207,491 1,190,443 27,699 27,699 27,955 27,955 17,664 17,664 869,040 83,514 952,554 Net Position, Deferred Inflows and Liabilities: Net position: Net Investment in capital assets Restricted for capital projects Restricted for debt service Unrestricted Total net positon Deferred inflows of resources: Derivative instruments-interest rate swaps Total deferred inflows of resources Liabilities: Long-term obligations Current liabilities Total liabilities Total net position, deferred inflows and liabilities 27,955 27,955 2,136,443 765,540 145,205 910,745 819,238 149,843 969,081 $ 2,239,725 $ 2,136,443 $ 2,177,188 5 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Total Assets and Deferred Outflows: The Division's investment in total assets and deferred outflows as of December 31, 2012 amounted to $2,239,725,000, which is an increase of $103,282,000 from 2011. The Division had an increase in restricted assets and current assets of $40,245,000 and $36,373,000 respectively, due primarily to the issuance of revenue bonds of $44,410,000 and second lien water bonds of $76,710,000, and an increase of $634,000 in unamortized bond issuance costs. The division had a decrease in deferred outflows of resources of $256,000. The Division's capital assets as of December 31, 2012 amounted to $1,686,939,000, which is an increase of $26,286,000. The Division's plant enhancements continue to be the primary reason for the increase in capital assets. Utility plant had additions of $145,112,000, buildings, structures and improvements had additions $17,159,000 and furniture, fixtures, equipment and vehicles had additions of $21,158,000. Included in these additions is $20,044,000, net of accumulated depreciation, of distribution mains acquired from three suburbs. Also, construction in progress had deletions of $146,245,000 due to the completion of several major projects: Kirtland Pump Station Rehab, Fairmount Pump Station Rehab, Morgan Pretreatment and Residuals, Warehouse Rehabilitation and Baldwin Residuals and Fairmount offset by several ongoing major projects: Automated Meter Reading program, Crown Water Plant Improvements, Suburban Water Main Renewal, Morgan Chemical Facility Improvements, plant enhancement program improvements and 800MHz radio system renewal. The Division's investment in total assets and deferred outflows as of December 31, 2011 amounted to $2,136,443,000 which is a decrease of $40,745,000 from 2010. The Division had decreases in restricted assets of $69,395,000, current assets of $4,565,000 and unamortized bond issuance costs of $394,000. The Division had an increase in deferred outflows of resources of $10,291,000. The Division's capital assets as of December 31, 2011 amounted to $1,660,653,000 which is an increase of $23,318,000. The Division's plant enhancements continue to be the primary reason for the increase in capital assets. Utility plant had additions of $112,795,000, buildings, structures and improvements had additions $1,437,000 and furniture, fixtures, equipment and vehicles had additions of $5,709,000. Also, construction in progress decreased by $35,012,000 due to the completion of several major projects: Kirtland Pump Station Rehab, Fairmount Pump Station Rehab, Morgan Pretreatment and Residuals, Water Tank Rehabilitation and Water and Aurora Road Water Main Improvement, offset by several ongoing major projects: Automated Meter Reading program, Warehouse Improvements Phase 1 and 2, Crown Water Plant Improvements, Suburban Water Main Renewal, Morgan Chemical Facility Improvements and plant enhancement program improvements. The increase in restricted assets of $40,245,000 as of December 31, 2012 is mainly attributed to increased cash balances in the debt service fund and restricted funds mainly due to the sale of the new Series X and the Second Lien Series A 2012 bonds. The decrease in restricted assets of $69,395,000 as of December 31, 2011 is mainly attributed to decreased cash balances in the debt service fund and restricted funds for revenue bonds Series K, N, O and T. The deferred outflow of resources related to the Division's interest rate swap agreements decreased from $27,955,000 in 2011 to $27,699,000 in 2012. The fair value of the swaps is determined by the taxable LIBOR rate as of December 31, 2012. 6 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Capital Assets: The Division of Water restated their capital assets balances for 2011. The Division entered into amended Water Service Agreements with 21 member communities prior to 2011. These Agreements transferred ownership of the distribution mains from the member communities to the Division of Water. The Division's increase in their capital assets balance as a result of the restatement is $167,777,000 as of January 1, 2011. This is an increase of 11.4% compared to the reported capital assets balance prior to the restatement. In 2012, the Division of Water entered into amended Water Service Agreements with three member communities. The amended Water Service Agreements transferred the ownership of the distribution mains to the Division. These new assets account for $20,044,000, net of accumulated depreciation, or 7.8% of the additions recorded in 2012. The Division's investment in capital assets, as of December 31, 2012 amounted to $1,686,939,000 (net of accumulated depreciation). The total increase in the Division's investment in net capital assets for the current year was approximately 1.6%. The Division's investment in capital assets, as of December 31, 2011 amounted to $1,660,653,000 (net of accumulated depreciation). The total increase in the Division's investment in net capital assets for 2011 was approximately 1.4%. A summary of the activity in the Division's capital assets during the years ended December 31, 2012 and 2011 is as follows: Balance January 1, 2012 Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress $ Total $ 2,440,162 (779,509) Less: Accumulated depreciation Capital assets, net 5,463 16,549 1,354,191 221,373 566,679 275,907 Additions Reductions (In thousands) $ 1,660,653 $ 7 $ Balance December 31, 2012 145,112 17,159 21,158 71,505 (1,288) (146,245) 5,463 16,549 1,497,878 238,532 586,549 201,167 254,934 (148,958) 2,546,138 (82,370) 172,564 $ $ (1,425) 2,680 (146,278) $ (859,199) 1,686,939 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Restated Balance January 1, 2011 Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Construction in progress Total Less: Accumulated depreciation Capital assets, net $ 5,463 16,549 1,241,644 219,953 565,014 310,919 2,359,542 Additions Reductions (In thousands) $ $ 112,795 1,437 5,709 84,929 204,870 (722,207) $ 1,637,335 Balance December 31, 2011 (248) (17) (4,044) (119,941) (124,250) (61,611) $ 143,259 $ 4,309 $ (119,941) $ 5,463 16,549 1,354,191 221,373 566,679 275,907 2,440,162 (779,509) 1,660,653 Major events during 2012 affecting the Division's capital assets included the following: o The construction, renovations and plant enhancements were completed on the Morgan, Baldwin and Nottingham facilities, the rehabilitation of the Fairmount and Kirtland pump stations and the rehabilitation of water mains and water tanks amounted to $148,401,000 in 2012. The major projects still under construction include: Security Enhancements Program, Plant Enhancement Program, Pump Station Enhancement Program, Water Tank Rehabilitation and Automated Meter Reading program. o Three cities signed asset transfer agreements that turned over their distribution water mains in the amount of $20,044,000, net of accumulated depreciation. Major events during 2011 affecting the Division's capital assets included the following: o The construction, renovations, and plant enhancements on the Morgan, Baldwin and Nottingham facilities, the rehabilitation of the Fairmount and Kirtland pump stations and the rehabilitation of water mains and water tanks amounted to $135,070,000. The major programs totaling $124,645,000 are: Security Enhancements Program, Plant Enhancement Program, Pump Station Enhancement Program, Water Tank Rehabilitation, Automated Meter Reading program and the purchase of office equipment and vehicles. Other smaller programs, such as the Electrical Power Reliability program comprise the remaining $10,425,000. Additional information on the Division's capital assets, including commitments made for future capital expenditures, can be found in Note D to the basic financial statements. 8 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Liabilities: In 2012, the factors for the Division's net increase in long-term obligations of $103,500,000 is primarily attributed the issuance of $122,283,000 of new bonds and loans and an increase in the unamortized discount and premium of $16,686,000, a decrease in unamortized loss on debt refunding of $2,788,000, offset by $40,239,000 of debt retirement. The increase in long-term obligations occurred due to the Division issuing bonds in order to refinance the $50,000,000 Series 2012 Notes with the balance of the proceeds used to fund the Automated Meter Reading program. In 2011, the factors for the Division's net decrease in long-term obligations of $53,698,000 is attributed to additional Ohio Water Development Authority Loans of $566,000, the issuance of $132,090,000 of new bonds and notes and an increase in the unamortized discount and premium of $3,829,000. These amounts were offset by $93,407,000 of debt retirement, $101,800,000 of debt defeased, a decrease in unamortized loss on debt refunding of $1,857,000 and a decrease in accrued wages and benefits of $499,000. Current Liabilities: In 2012, total current liabilities decreased by $61,691,000. The significant component of the change was a reduction to the current portion of long-term debt obligations and short-term notes of $52,281,000, which was primarily due to the retirement of the $50,000,000 Series 2011 short-term notes. Other decreases included customer deposits and other liabilities of $8,062,000, which was due to recognizing completed construction deposits and current payable from restricted assets of $2,087,000. These reductions were offset by a minor increase in accrued interest payable of $794,000. In 2011, total current liabilities decreased by $4,638,000. The significant components of the change were increases to payable from accounts payable of $565,000, due to other City departments, divisions or funds of $547,000 and customer deposits and other liabilities of $1,669,000. These increases were offset by reductions to the current portion of long-term debt obligations and short-term notes of $3,322,000, current payable from restricted assets of $885,000, of accrued interest of $2,870,000 and current portion of accrued wages and benefits of $344,000. Long-term Debt: At the end of 2012, the Division had total long-term debt outstanding of $892,939,000. All bonds are backed by the revenues generated by the Division. The Ohio Water Development Authority (OWDA) loans do not have a lien on revenues of the Division. At the end of 2011, the Division had total long-term debt outstanding of $811,095,000. All bonds are backed by the revenues generated by the Division. The Ohio Water Development Authority (OWDA) loans do not have a lien on revenues of the Division. Short-term Debt: The Division had no short-term debt outstanding at the end of 2012. The City issued $50,000,000 Subordinate Lien Water Revenue Notes, Series 2012 in July 2012 to retire the Series 2011 Notes. The Series 2012 Notes were then redeemed on November 1, 2012 from the proceeds of the Second Lien Series A, 2012 Bonds. At the end of 2011, the Division had $50,000,000 of Water Revenue Subordinate Revenue Notes outstanding. The Notes, which are subordinate to the Division's outstanding revenue bonds, were redeemed on July 26, 2012 with the proceeds of Series 2012 Notes and were backed by the revenues generated by the Division. 9 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The activity in the Division's debt obligations outstanding during the year ended December 31, 2012 is summarized below (excluding unamortized discounts, premiums and losses on debt refundings): Balance January 1, 2012 Long-Term Debt Water Revenue Bonds: Series G, 1993 Series N, 2005 Series O, 2007 Series P, 2007 Series Q, 2008 Series T, 2009 Series U, 2010 Series V, 2010 Series W, 2011 Series X, 2012 Second Lien, Series A 2012 Ohio Water Development Authority Loans Total $ 81,225 33,045 133,315 119,095 90,800 77,415 54,935 26,495 82,090 Debt Debt Issued Retired (In thousands) $ Balance December 31, 2012 (6,085) $ (14,365) $ (5,030) (2,705) (5,815) 66,860 28,015 130,610 113,280 90,800 71,330 54,935 26,495 82,090 44,410 76,710 (6,239) 107,404 44,410 76,710 112,680 $ 963 811,095 $ 122,083 $ Balance January 1, 2012 (40,239) $ Debt Debt Issued Retired (In thousands) 892,939 Balance December 31, 2012 Short-Term Debt Water Revenue Notes: Sub. Lien Revenue Notes, 2011 Sub. Lien Revenue Notes, 2012 Total $ 50,000 $ (50,000) $ (50,000) - 50,000 $ (100,000) $ - $ 50,000 $ 50,000 $ 10 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The activity in the Division's debt obligations outstanding during the year ended December 31, 2011 is summarized below (excluding unamortized discounts, premiums and losses on debt refundings): Balance January 1, 2011 Long-Term Debt Water Revenue Bonds: Series G, 1993 Series H, 1996 Series J, 2001 Series K, 2002 Series N, 2005 Series O, 2007 Series P, 2007 Series Q, 2008 Series T, 2009 Series U, 2010 Series V, 2010 Series W, 2011 Ohio Water Development Authority Loans Total $ 94,830 2,020 43,230 52,810 33,045 138,725 135,410 90,800 83,340 54,935 26,495 Debt Issued $ Balance December 31, 2011 Debt Debt Defeased Retired (In thousands) $ $ (13,605) $ (80) (365) (4,715) (1,940) (42,865) (48,095) (2,825) (6,075) (2,585) (10,240) (5,925) 82,090 566 118,006 $ 873,646 $ 82,656 $ (101,800) $ Balance January 1, 2011 Short-Term Debt Water Revenue Notes: Sub. Lien Revenue Notes, 2010 Sub. Lien Revenue Notes, 2011 $ Total $ (5,892) Debt Debt Issued Retired (In thousands) 50,000 (43,407) $ Balance December 31, 2011 $ (50,000) $ 50,000 50,000 $ (50,000) $ 50,000 $ 50,000 50,000 $ 11 81,225 33,045 133,315 119,095 90,800 77,415 54,935 26,495 82,090 112,680 811,095 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) The bond ratings for the Division's outstanding revenue bonds as of December 31, 2012 are as follows: Moody's Investors Service Standard & Poor's Waterworks Revenue Bonds Second Lien Water Revenue Bonds Aa1 Aa2 AA AA- The ratio of net revenue available for debt service to debt service requirements (revenue bond coverage) is a useful indicator of the Division's debt position to management, customers and creditors. The Division's revenue bond coverage for 2012, 2011 and 2010 was 231%, 144% and 132%, respectively. Additional information on the Division's long-term debt can be found in Note B on pages 27 - 37. Net Position: Net position serves as a useful indicator of a government's financial position. In the case of the Division, assets and deferred outflows exceed liabilities and deferred inflows by $1,259,472,000, $1,197,743,000 and $1,190,443,000 at December 31, 2012, 2011 and 2010, respectively. Of the Division's net position, $914,193,000 or 72.6% and $899,231,000 or 75.1% at December 31, 2012 and 2011, respectively, reflects its investment in capital assets, net of accumulated depreciation, less any related, still-outstanding debt used to acquire those assets. The Division uses these capital assets to provide services to its customers; consequently, these assets are not available for future spending. Although the Division's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the Division's net position, $87,701,000 or 7.0%, and $93,601,000 or 7.8%, at December 31, 2012 and 2011, respectively, represents resources that are subject to external restrictions. These funds are set aside for the payment of revenue bonds and capital projects. The remaining balance of unrestricted net position, $257,578,000 or 20.4% and $204,911,000 or 17.1%, at December 31, 2012 and 2011, respectively, may be used to meet the Division's ongoing obligations to customers and creditors. 12 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION The Division's net position increased during 2012 and 2011 by $61,729,000 and $7,300,000, respectively. The following table identifies the key elements of the Division's results of operations as of and for the years ended December 31, 2012, 2011 and 2010: 2012 Operating revenues Operating expenses $ Restated 2011 (In thousands) 280,323 $ 216,624 236,626 $ 207,844 Restated 2010 237,270 208,016 63,699 Capital and other contributions Increase (decrease) in net position Net position, beginning of year (as restated) 1,965 (28,322) 4,284 (15) (22,088) 2,349 (27,071) 2,682 (22,040) 4,007 (27,410) 2,189 1 (21,213) 41,611 6,742 8,041 558 5,001 7,300 13,042 1,197,743 Income (loss) before capital and other contributions 29,254 61,729 Non-operating revenue (expense): Investment income Interest expense Amortization of bond issuance costs, premiums and discounts Gain (Loss) on disposal of capital assets Total non-operating revenue (expense), net 28,782 20,118 Operating income (loss) 1,190,443 1,177,401 $ 1,259,472 $ 1,197,743 $ 1,190,443 Net position, end of year Operating revenue: In 2012, total operating revenues increased by $43,697,000. The Division of Water had a minor decrease in pumpage of 0.16% and an increase in new rates and a full year of the fixed rate fee in 2012. The major users of water were as follows: ISG-Cleveland, Cuyahoga Metropolitan Housing Authority, Nestle Inc., Alcoa Inc., Cleveland Clinic Foundation, Pepsi Inc., Northeast Ohio Regional Sewer District and Case Western Reserve University. In 2011, total operating revenues decreased by $644,000. The Division of Water had a minor increase in pumpage of 0.2%. The major users of water were as follows: ISG-Cleveland, Cuyahoga Metropolitan Housing Authority, Nestle Inc., Alcoa Inc., Cleveland Clinic Foundation, Pepsi Inc., Northeast Ohio Regional Sewer District and NASA Lewis Research Center. 13 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) Operating expenses: In 2012, the overall increase in operating expenses of $8,780,000 was primarily due to a $3,466,000 increase in operations expense and a $5,844,000 increase in depreciation expense. Operations expense increases were identified in the following areas: bad debt expense and professional services. Depreciation increased because several assets were brought into service during the year. In 2011, the overall decrease in operating expenses of $172,000 was due to a $611,000 increase in operations expense and a $3,109,000 increase for depreciation expense. These increases were offset by a decrease of $3,892,000 in maintenance expenses. Operations expense increases were identified in the following areas: contractual services and electricity. The decrease in maintenance expenses were noted in the following areas: computer hardware maintenance and Ohio Public Employee Retirement System. Salary and benefit costs also decreased as a result of retirements, reductions in overtime costs, hospitalization and workers compensation costs. Non-operating revenue (expense): The major changes in 2012 were an increase of $1,251,000 in interest expense and an increase of $1,602,000 in amortization of bond costs, premiums and discounts. The major changes in 2011 were a decrease of $1,658,000 in investment income (attributed to declining interest rates), decrease of $339,000 in interest expense and an increase of $493,000 in amortization expense. Capital and other contributions: In 2012, there was a $19,560,000 rise in capital and other contributions as compared to 2011. The increase is primarily attributed to the Division acquiring suburban distribution mains totaling $20,044,000 throughout the year. FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS Water rate increases will continue to have a positive impact on the financial position of the Division: WATER RATES CLEVELAND - PER 1st .6 MCF CLEVELAND - PER ADDITIONAL MCF (Thousand cubic feet) (Thousand cubic feet) EFFECTIVE REGULAR January 1, 2013 $15.51 January 1, 2014 $17.34 January 1, 2015 $19.26 HOMESTEAD $8.53 $10.41 $12.52 14 REGULAR $29.48 $31.22 $32.74 HOMESTEAD $8.53 $10.41 $12.52 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FACTORS EXPECTED TO IMPACT THE DIVISION'S FUTURE FINANCIAL POSITION OR RESULTS OF OPERATIONS (Continued) WATER RATES DIRECT SERVICE SUBURBS - PER 1st .6 MCF DIRECT SERVICE SUBURBS-PER ADDITIONAL MCF (Thousand cubic feet) (Thousand cubic feet) EFFECTIVE REGULAR January 1, 2013 $22.11-$30.33 January 1, 2014 $23.63-$33.00 January 1, 2015 $25.04-$35.63 HOMESTEAD $12.16-$16.68 $14.18-$19.80 $16.27-$23.16 REGULAR $42.01-$57.63 $42.53-$59.39 $42.56-$60.57 HOMESTEAD $12.16-$16.68 $14.18-$19.80 $16.27-$23.16 These increase in rates, fixed customer charges and recommended modifications to the Division's water rate structure were adopted by the Cleveland City Council on May 23, 2011. The fixed customer charges change became effective July 16, 2011 and was first billed on October 16, 2011. The new fixed customer charges are based on meter size. The first increase in a series of annual increases in water consumption charges became effective January 1, 2012. The annual rate increases for the years 2013 through 2015 are expected to increase operating revenues to adequately cover anticipated operating expenses. The increases in rates within the City of Cleveland average 12.7%, 11.8% and 11.1% for the first .6 MCF and 7.1%, 5.9% and 4.9% for each additional MCF for the years 2013, 2014 and 2015, respectively. The increases in rates within the suburbs average 8.0%, 6.9% and 6.0% for the first .6 MCF and 0.7%, 1.2% and 0.1% for each additional MCF for the years 2013, 2014 and 2015, respectively. The increases for fixed customer charges for Cleveland and suburbs average 16.7%, 14.3% and 12.5% for the years 2013, 2014 and 2015, respectively. On July 24, 2012, the City issued $50,000,000 Subordinate Lien Water Revenue Notes, Series 2012. Proceeds of the notes were used to retire the $50,000,000 Subordinate Lien Water Revenue Notes issued in 2011. The Series 2012 Notes were redeemed on November 1, 2012 from the proceeds of the Second Lien Series A 2012 Bonds. The original notes, which were issued in 2010, provided a portion of the funds needed for a new Automated Meter Reading program for the Division. Effective October 24, 2012, the Division issued $44,410,000 of Senior Lien Water Revenue Bonds Series X 2012 and $76,710,000 of Second Lien Water Revenue Bonds Series A 2012. Proceeds of the Series X Bonds will be used to pay costs of improvements to the Waterworks System and to pay costs of issuing the bonds. From the proceeds of the Series A 2012 Bonds, $42,000,000 will be used to fund the rest of the Automated Meter Reading program and the remainder was used to refund all of the outstanding $50,000,000 Water Revenue Subordinate Notes Series 2012 and to pay issuance costs. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Division's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 15 BASIC FINANCIAL STATEMENTS CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) Restated 2012 2011 ASSETS AND DEFERRED OUTFLOWS OF RESOURCES CAPITAL ASSETS Land Land improvements Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles $ Less: Accumulated depreciation Construction in progress CAPITAL ASSETS, NET RESTRICTED ASSETS Cash and cash equivalents Accrued interest receivable 5,463 16,549 1,497,878 238,532 586,549 2,344,971 (859,199) 1,485,772 201,167 1,686,939 $ 5,463 16,549 1,354,191 221,373 566,679 2,164,255 (779,509) 1,384,746 275,907 1,660,653 211,759 84 211,843 171,498 100 171,598 5,151 4,517 194,377 12,755 146,027 14,842 12,141 48,868 31,540 14,662 54,175 27,225 12,449 1 4,713 1,178 3,722 1,138 TOTAL CURRENT ASSETS 308,093 271,720 DEFERRED OUTFLOWS OF RESOURCES Derivative instruments-interest rate swaps TOTAL DEFERRED OUTFLOWS OF RESOURCES 27,699 27,699 27,955 27,955 TOTAL ASSETS AND DEFERRED OUTFLOWS $ 2,239,725 $ 2,136,443 TOTAL RESTRICTED ASSETS UNAMORTIZED BOND ISSUANCE COSTS CURRENT ASSETS Cash and cash equivalents Restricted cash and cash equivalents Investments Receivables: Accounts receivable - net of allowance for doubtful accounts of $15,299,000 in 2012 and $23,401,000 in 2011 Unbilled revenue Due from other City of Cleveland departments, divisions or funds Accrued interest receivable Materials and supplies - at average cost, net of allowance for obsolescence of $127,200 in 2012 and $126,500 in 2011 Prepaid expenses (Continued) 17 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) Restated 2012 2011 NET POSITION, LIABILITIES AND DEFERRED INFLOWS OF RESOURCES NET POSITION Net investment in capital assets Restricted for capital projects Restricted for debt service Unrestricted $ TOTAL NET POSITION 914,193 99 87,602 257,578 1,259,472 $ 899,231 93,601 204,911 1,197,743 LIABILITIES LONG-TERM OBLIGATIONS-excluding amounts due within one year Revenue bonds OWDA loans 766,975 100,700 1,365 869,040 657,481 106,595 1,464 765,540 37,804 4,951 12,755 2,630 13,521 10,083 395 1,375 90,085 4,870 14,842 2,770 12,727 10,079 395 9,437 TOTAL CURRENT LIABILITIES 83,514 145,205 TOTAL LIABILITIES 952,554 910,745 27,699 27,955 27,699 27,955 Accrued wages and benefits TOTAL LONG-TERM OBLIGATIONS CURRENT LIABILITIES Current portion of long-term debt, due within one year and short-term notes Accounts payable Current payable from restricted assets Due to other City of Cleveland departments, divisions or funds Accrued interest payable Current portion of accrued wages and benefits Other accrued expenses Customer deposits and other liabilities DEFERRED INFLOW OF RESOURCES Derivative instruments-interest rate swaps TOTAL DEFERRED INFLOWS OF RESOURCES TOTAL NET POSITION, LIABILITIES AND DEFERRED INFLOWS See notes to financial statements. $ 2,239,725 $ 2,136,443 (Concluded) 18 This page intentionally left blank. 19 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 (In thousands) Restated 2012 2011 OPERATING REVENUES Charges for services TOTAL OPERATING REVENUES 280,323 $ 280,323 236,626 236,626 TOTAL OPERATING EXPENSES 103,687 45,482 67,455 216,624 100,221 46,012 61,611 207,844 OPERATING INCOME (LOSS) 63,699 28,782 1,965 (28,322) 4,284 (15) (22,088) 2,349 (27,071) 2,682 (22,040) INCOME (LOSS) BEFORE CAPITAL AND OTHER CONTRIBUTIONS 41,611 6,742 CAPITAL AND OTHER CONTRIBUTIONS INCREASE (DECREASE) IN NET POSITION 20,118 61,729 558 7,300 1,197,743 1,190,443 1,259,472 $ 1,197,743 $ OPERATING EXPENSES Operations Maintenance Depreciation NON-OPERATING REVENUE (EXPENSE) Investment income Interest expense Amortization of bond issuance costs, premiums, and discounts Gain (loss) on disposal of capital assets TOTAL NON-OPERATING REVENUE (EXPENSE), NET NET POSITION, beginning of year (as restated) $ NET POSITION, end of year See notes to financial statements. 20 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ Cash payments to suppliers for goods or services Cash payments to employees for services Other NET CASH PROVIDED BY(USED FOR) OPERATING ACTIVITIES $ 229,625 (64,085) (75,905) (226) (12,044) 6,998 2,588 (2,458) 86,524 (82,749) 332,367 $ (169,700) (99,959) 112,004 2,158 14,203 CASH AND CASH EQUIVALENTS, beginning of year (89,005) 558 1,362 (93,407) (39,158) (104,676) 104,626 50,000 (48,906) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 89,409 (90,239) (34,236) (50,000) 142,924 50,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from sale and maturity of investment securities Interest received on investments NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 121,227 (67,355) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Capital grant proceeds Proceeds of OWDA loan Principal paid on long-term debt Interest paid on long-term debt Cash paid to escrow agent for refunding Proceeds of bonds, premiums and discounts Proceeds from sale of notes NET CASH PROVIDED BY (USED FOR) CAPITAL AND RELATED FINANCING ACTIVITIES CASH AND CASH EQUIVALENTS, end of year 264,534 (66,921) (76,526) 140 415,116 418,891 $ 332,367 (Continued) 21 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) Restated 2012 2011 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES OPERATING INCOME (LOSS) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in assets and liabilities: Accounts receivable, net Unbilled revenue Due from other City of Cleveland departments, divisions or funds Materials and supplies, net Prepaid expenses Accounts payable Due to other City of Cleveland departments, divisions or funds Accrued liabilities Accrued wages and benefits Customer deposits and other liabilities $ 63,699 $ 28,782 67,455 5,307 (4,315) (2,213) (991) (40) 81 (140) (95) (7,521) (4,834) 1,475 (585) 218 (65) 565 547 2 (499) 2,192 57,528 TOTAL ADJUSTMENTS 61,611 60,627 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ SCHEDULE OF NON-CASH CAPITAL AND RELATED FINANCING ACTIVITIES Contribution of capital assets See notes to financial statements. $ 121,227 $ 89,409 20,044 (Concluded) 22 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Division of Water (the Division) is reported as an Enterprise Fund of the City of Cleveland's Department of Public Utilities and is a part of the City of Cleveland's (the City) primary government. The Division was created for the purpose of supplying water services to customers within the metropolitan area. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Division comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of publicprivate or public-public partnership. The Division has determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Division has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Division has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. As required, the Division has implemented GASB Statement No. 64 effective for the 2012 fiscal year. 23 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Division's net position is accounted for in the accompanying statement of net position and the net position is divided into the following categories: o Net investment in capital assets o Amount restricted for capital projects o Amount restricted for debt service o Remaining unrestricted amount In addition, certain financial information regarding the Division is included in these footnotes. The implementation of the new GASB statements did not result in a change in the Division's beginning net position/equity balance as previously reported. Basis of Accounting: The Division's financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized as incurred. Revenues: Revenues are derived primarily from sales of water to residential, commercial and industrial customers based upon actual water consumption and from a fixed charge based upon meter size. Water rates are authorized by City Council and billings are made on a cyclical basis. Estimates for services between the ends of the various cycles and the end of the year are recorded as unbilled revenue. Statement of Cash Flows: The Division utilizes the direct method of reporting for the statement of cash flows as defined by GASB Statement No. 9, Reporting Cash Flows of Proprietary and Non-expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In a statement of cash flows, cash receipts and cash payments are classified according to operating, noncapital financing, capital and related financing, and investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Division. Cash equivalents are defined as highly liquid investments with a maturity of three months or less when purchased and include certificates of deposit, U.S. Treasury bills, State Treasury Asset Reserve of Ohio (STAROhio) and repurchase agreements. The City's policy is to enter into repurchase agreements with local commercial banks and to obtain confirmation of securities pledged. Investments: The Division follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value in the balance sheet and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair value is based on quoted market prices. 24 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The City has invested funds in STAROhio during 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. Restricted Assets: Proceeds from debt and amounts set aside in various fund accounts for payment of revenue bonds are classified as restricted assets since their use is limited by the bond indentures. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost, or if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as an item with a useful life in excess of one year and an individual cost of more than $5,000 for land, furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Utility plant Land improvements Buildings, structures and improvements Furniture, fixtures, equipment and vehicles 5 to 100 years 15 to 100 years 5 to 60 years 3 to 60 years The Division's policy is to capitalize interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest is included in the cost of the assets and is depreciated on the straight-line basis over the estimated useful lives of such assets. The Division applies General Accounting Standards Board guidance pertaining to capitalization of interest costs for its revenue bonds. This statement requires capitalization of interest cost of eligible borrowings, less interest earned on investment of the related bond proceeds from the date of borrowing until the assets constructed from the bond proceeds are ready for their intended use. For 2012 and 2011, total interest costs incurred amounted to $37,094,000 and $39,260,000, respectively, of which $8,581,000 and $11,998,000, respectively, was capitalized, net of interest income of $191,000 in 2012 and $191,000 in 2011. Bond Issuance Costs, Discounts and Unamortized Losses on Debt Refundings: Bond issuance costs are recorded as deferred expenses, and unamortized original issuance discounts are netted against long-term debt. Both are amortized over the lives of the related bonds. Unamortized losses on debt refundings are netted against long-term debt and are amortized over the shorter of the remaining life of the defeased bond or the newly issued bond. 25 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Compensated Absences: The Division accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statement of net position. The portion of the compensated absence liability that is not expected to be paid or utilized within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Division allows employees to carryover vacation from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three highest year average base salary rate, with the balance being forfeited. Interfund Transactions: During the course of normal operations the Division has numerous transactions between other City divisions and departments. Unpaid amounts at year end are generally reflected as due to or due from in the accompanying financial statements. Deferred Outflows/Inflows of Resources: In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future period(s) and so will not be recognized as an inflow of resources (revenues) until that time. 26 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS Debt outstanding at December 31, 2012 and 2011 is as follows: Original Issuance Interest Rate Water Revenue Bonds: Series G, 1993, due through 2021 Series N, 2005, due through 2023 Series O, 2007, due through 2037 Series P, 2007, due through 2028 Series Q, 2008, due through 2033 Series T, 2009, due through 2021 Series U, 2010, due through 2033 Series V, 2010, due through 2033 Series W, 2011, due through 2026 Series X, 2012, due through 2042 Second Lien Series A, 2012, due 2027 Ohio Water Development Authority Loans payable annually through 2032 5.50% 3.50%-5.00% 4.25%-5.00% 4.00%-5.00% Variable 2.00%-5.00% Variable Variable 2.00%-5.00% 3.63%-5.00% 4.00%-5.00% $ 2012 (In thousands) 2011 228,170 $ 64,480 143,570 135,410 90,800 84,625 54,935 26,495 82,090 44,410 76,710 66,860 $ 28,015 130,610 113,280 90,800 71,330 54,935 26,495 82,090 44,410 76,710 81,225 33,045 133,315 119,095 90,800 77,415 54,935 26,495 82,090 151,625 107,404 112,680 $ 1,183,320 892,939 811,095 38,244 (25,704) (37,804) 21,558 (28,492) (40,085) 867,675 $ 764,076 0.00%-4.14% Adjustments: Unamortized discount and premium Unamortized loss on debt refunding Current portion $ Total Long-Term Debt Original Issuance Interest Rate Water Revenue Notes: Subordinate Lien Revenue Notes, due 2012 2012 (In thousands) Total Short-Term Debt 27 $ 50,000 $ $ 1.00% 50,000 $ 2011 $ - 50,000 $ 50,000 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long and short-term obligations for the year ended December 31, 2012 are as follows: Balance Balance Due January 1, December 31, Within 2012 Increase Decrease 2012 One Year (In thousands) Water Revenue Bonds: $ $ (14,365) $ 66,860 Series G, 1993, due through 2021 $ 81,225 $ 310 Series N, 2005, due through 2023 33,045 (5,030) 28,015 5,280 Series O, 2007, due through 2037 133,315 (2,705) 130,610 Series P, 2007, due through 2028 119,095 (5,815) 113,280 Series Q, 2008, due through 2033 90,800 90,800 Series T, 2009, due through 2021 77,415 (6,085) 71,330 6,180 Series U, 2010, due through 2033 54,935 54,935 Series V, 2010, due through 2033 26,495 26,495 Series W, 2011, due through 2026 82,090 82,090 19,330 Series X, 2012, due through 2042 44,410 44,410 Second Lien Series A 2012, due through 2027 76,710 76,710 Ohio Water Development Authority Loans payable annually through 2032 112,680 963 (6,239) 107,404 6,704 Total revenue bonds/loans Accrued wages and benefits 811,095 11,543 $ Total 122,083 9,984 (40,239) (10,079) 892,939 11,448 37,804 10,083 822,638 $ 132,067 $ (50,318) $ 904,387 $ 47,887 Balance December 31, 2012 Due Within One Year Balance January 1, 2012 Water Revenue Notes: Subordinate Lien Revenue Notes, due 2012 Subordinate Lien Revenue Notes, due 2013 Total revenue notes $ Increase Decrease (In thousands) 50,000 $ $ (50,000) $ (50,000) - $ - 50,000 $ (100,000) $ - $ 50,000 $ 50,000 $ 28 - CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2011 are as follows: Balance January 1, 2011 Increase Decrease (In thousands) Balance December 31, 2011 Due Within One Year $ $ 14,365 Water Revenue Bonds: Series G, 1993, due through 2021 $ 94,830 $ $ (13,605) 81,225 Series H, 1996, due through 2026 2,020 (2,020) - Series J, 2001, due through 2016 43,230 (43,230) - Series K, 2002, due through 2021 52,810 (52,810) - Series N, 2005, due through 2023 33,045 Series O, 2007, due through 2037 138,725 Series P, 2007, due through 2028 135,410 Series Q, 2008, due through 2033 90,800 Series T, 2009, due through 2021 83,340 Series U, 2010, due through 2033 54,935 54,935 Series V, 2010, due through 2033 26,495 26,495 33,045 (5,410) 119,095 5,815 90,800 (5,925) 77,415 6,085 82,090 118,006 873,646 12,042 $ 566 82,656 9,924 (5,892) (145,207) (10,423) 112,680 811,095 11,543 6,085 40,085 10,079 885,688 $ 92,580 $ (155,630) $ 822,638 $ 50,164 Increase Decrease (In thousands) December 31, 2011 Within One Year $ $ January 1, 2011 Total revenue notes 2,705 82,090 Ohio Water Development Authority Loans payable annually through 2031 Total revenue bonds/loans Accrued wages and benefits Water Revenue Notes: Subordinate Lien Revenue Notes, due 2011 Subordinate Lien Revenue Notes, due 2012 133,315 (16,315) Series W, 2011, due through 2026 Total 5,030 $ 50,000 $ $ (50,000) 50,000 $ 50,000 29 $ 50,000 $ (50,000) 50,000 $ 50,000 50,000 $ 50,000 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Minimum principal and interest payments on long-term debt for the next five years and thereafter are as follows: Principal Interest (In thousands) Total 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033-2037 2038-2042 $ 37,804 $ 46,829 48,341 48,657 51,400 245,174 232,413 113,780 64,785 14,565 37,900 $ 38,119 36,082 33,813 31,405 121,885 67,856 30,193 10,298 1,893 75,704 84,948 84,423 82,470 82,805 367,059 300,269 143,973 75,083 16,458 Total $ 903,748 $ 409,444 $ 1,313,192 . The above schedule of minimum principal and interest payments on long-term debt includes the amortization on ten loans provided to the City by the Ohio Water Development Authority (OWDA). OWDA provided the City with the amount expected to be financed, the interest rate, initial repayment date and other significant items(s) for each of the ten loans. From the information received, the City prepared a detailed amortization schedule for each loan based upon the amount expected to be financed. However, the amortization schedule is tentative and will be adjusted if, and when, OWDA revises the amount to be financed. Further, OWDA requires the City to begin making semi-annual payments for each loan based on the agreed upon initial repayment date, regardless of whether the City has received all loan proceeds or has completed the project(s). In 2012, the Division expended another $817,000 for the Baldwin Residuals and Fairmount Reservoir. The OWDA loan associated with this project is a zero percent loan for the face value of $8,304,000 which matures January 1, 2031. The Division also expended $146,000 on the Crown Chemical project which is funded by a 2.0% OWDA loan maturing in July 2032. 30 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) At December 31, 2012, the amount financed on these ten loan projects, less principal payments made, totaled $118,213,000 and is reflected in the debt service payment schedule. However, the total of the actual loan balances received by the City was $107,404,000 as reflected on the schedules of long-term debt outstanding and changes in long-term debt obligations as of December 31, 2012. The difference of $10,809,000 will be received or accrued in future years. The Division has defeased certain Revenue Bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. In 2011, the Division deposited cash in the amount of $9,327,000 in an escrow account for the payment of future debt service requirements. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the Division's financial statements. The aggregate amount of defeased debt outstanding at December 31, 2012 and 2011 is as follows: Bond Issue Series H, 1996 Series J, 2001 Series K, 2002 Series O, 2007 Series P, 2007 Total 2012 2011 (In thousands) $ $ $ 2,825 6,075 8,900 $ 1,940 52,335 116,420 2,825 6,075 179,595 In 1996, the City authorized the adoption of the eighth supplemental indenture to amend and restate the existing indenture, subject to the receipt of consent of the requisite number of bondholders. With the issuance of the Series J bonds, the City reached the 66.7% consent required to enact the Amended and Restated Indenture. Effective October 5, 2001, all outstanding bonds and any future bonds are secured by the Amended and Restated Indenture. Under the new indenture, the bonds are no longer secured by a mortgage lien. All bonds are secured by the Division's net revenues and by the pledged funds. The Division's indentures have certain restrictive covenants and principally require that bond reserve funds be maintained and charges for fees to customers are sufficient amounts, as defined, to satisfy the obligations under the indenture agreements. In addition, special provisions exist regarding covenant violations, redemption of principal and maintenance of properties in good condition. The indenture requires that at all times the Division will charge rates and fees for the products and services of the waterworks system, so that revenues will be at least sufficient to provide funds for the payment in each year of the necessary operating and maintenance expenses of the waterworks system and the greater of (1) an amount equal to 1.25 times the payments of principal, premium, if any, and interest on the revenue bonds then outstanding due in that year or (2) an amount sufficient to maintain the required balances in all funds and accounts created under the indenture. As of December 31, 2012 and 2011, the Division was in compliance with the terms and requirements of the bond indenture. 31 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) The indenture establishes the following fund accounts for the application of revenues: Revenue Fund: All revenues will be deposited into this fund and will be used for payment of current operating expenses and deposits into other funds. An amount equal to one-sixth of the operating expenses, before depreciation, for the preceding fiscal year must be maintained in this fund. Debt Service Fund: Deposits will be made from the revenue fund to cover succeeding principal and interest payments as they become due on the revenue bonds. Debt Service Reserve Fund: Deposits will be made to this fund if the amount in the debt service fund at any time is less than the debt service reserve requirement. Amounts in the fund were deposited from the proceeds of the revenue bonds and represent the maximum annual debt service requirement of these bonds. Contingency Fund: The balance in this fund must be maintained at $3,500,000. Construction Fund: Proceeds from the revenue bonds were deposited into this fund to be used, along with earnings from investments of amounts held therein, for the payment of capital costs. Capital costs include all costs of additions, extensions, renewals, replacements, alterations, betterments and any other capital improvements to the waterworks system. Amounts held in this fund are subject to a lien in favor of bondholders and may be used to pay principal of outstanding revenue bonds to the extent that amounts in all other funds are insufficient. No payments need be made into a fund if the amounts in such fund are equal to the required fund balance, if any. Amounts held in any fund may be invested by the City Treasurer or the trustee in permitted investments. However, the use of funds is limited by the bond indenture and accordingly, the funds are classified as restricted assets in the accompanying financial statements. Effective October 24, 2012, the City issued $44,410,000 of Senior Lien Water Revenue Bonds, Series X, 2012 and $76,710,000 of, Second Lien Water Revenue Bonds, Series A, 2012. Proceeds of the Series X Bonds will be used to pay costs of improvements to the Waterworks System and to pay costs of issuing the bonds. From the proceeds of the Series A 2012 Bonds, $42,000,000 will be used to fund the rest of the Automated Meter Reading program and the remainder was used to refund all of the outstanding $50,000,000 Water Revenue Subordinate Notes, Series 2012 and to pay issuance costs. In conjunction with the issuance of the Second Lien Water Revenue Bonds, Series A, 2012 in October 2012, the Division established a Subordinate Bonds indenture. Bonds issued under this indenture are special obligations of the City payable solely from and secured solely by a pledge of and lien on the Subordinate Pledged Revenues and the Subordinate Pledged funds. The Subordinate Pledged Revenues generally consist of the net revenues of the Division which remain after the payment of all operating expenses and the deposit of all funds required to be made on the Senior Bonds. Bonds issued under this indenture are subordinate to those issued as senior lien bonds under the Amended and Restated Indenture. 32 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) On July 24, 2012, the City issued $50,000,000 Subordinate Lien Water Revenue Notes, Series 2012. Proceeds of the notes were used to retire the $50,000,000 Subordinate Lien Water Revenue Notes issued in 2011. The Series 2012 Notes were subsequently redeemed on November 1, 2012 from the proceeds of the Second Lien Series A, 2012 Bonds. The original notes, which were issued in 2010, provided a portion of the funds needed for a new automated meter reading system for the Division. At the end of 2012, the Division no longer had any notes outstanding. In December 2011, the Division utilized cash on hand to defease $2,825,000 principal amount of outstanding Series O bonds and $6,075,000 principal amount of outstanding Series P bonds. The Division placed $9,327,000 in an irrevocable trust account which will be used to pay principal and interest on the defeased bonds. As a result the bonds are considered defeased and the liability for the bonds has been removed from long-term debt. Effective July 26, 2011, the Division issued $50,000,000 of Subordinate Lien Water Revenue Notes. The notes, which mature on July 26, 2012, refunded $50,000,000 Subordinate Lien Water Revenue Notes issued in 2010 to provide a portion of the funds needed for the acquisition and installation of a new automated meter reading system. Effective October 6, 2011, the City issued $82,090,000 Water Revenue Bonds, Series W, 2011. Proceeds of these bonds were used to refund all of 1) the outstanding $1,940,000 Waterworks Improvement and Refunding First Mortgage Revenue Bonds, Series H, 1996, 2) the outstanding $42,865,000 Waterworks Refunding Revenue Bonds, Series J, 2001 and 3) the outstanding $48,095,000 Water Revenue Bonds, Series K, 2002 and to pay issuance costs. Net proceeds of the Series W Bonds, amounts then on deposit in the Series H, J and K bond funds and an amount released from the debt service reserve fund all totaling $95,349,171 were placed in an irrevocable escrow account to pay the principal and interest on the refunded bonds on January 1, 2012. As a result, the refunded bonds were defeased and the liability for these bonds has been removed from long-term debt. The City completed the refunding in order to achieve debt service savings of approximately $9,527,000 or an economic gain (the difference between the present values of the old and new debt service payments) of approximately $8,955,000 or 9.6%. The City has pledged future water system revenues, net of specified operating expenses, to repay $785,535,000 in various Senior Lien Water Revenue Bonds and Subordinate Lien Bonds issued in various years since 1993. Proceeds from the bonds provided financing for Water System improvements. The bonds are payable from water system net revenues and are payable through 2042. Annual principal and interest payments on the bonds are expected to require less than 46% of net revenues. The total principal and interest remaining to be paid on the various Water Revenue Bonds is $1,165,786,000. Principal and interest requirements for the current year and total net revenues were $60,856,000 and $133,119,000, respectively. Interest Rate Swap Transactions: Upon the refunding of the Series M Bonds in 2009, the Division's swap became associated with the Series Q, Series R and Series S Bonds. When the Series R and Series S Bonds were refunded in 2010, the swap associated with these bonds was transferred to a portion of the new Series U and Series V bonds. 33 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Terms: Simultaneously with the issuance of the City's $175,000,000 Water Revenue Bonds, Series M, on August 10, 2004, the City entered into floating to fixed rate swap agreements with notional amounts equal to the total declining balance of the Series M Bonds. Bear Stearns Financial Products Inc. (Bear Stearns), (which has since been acquired by JPMorgan Chase Bank, N.A. (JPM)), was the counterparty on a two-thirds pro-rata share of the transaction and Morgan Stanley Capital Services Inc. (Morgan Stanley) is the counterparty on a one-third pro-rata share of the transaction. Under the original swap agreements for the Series M Bonds, the Water System was the fixed rate payor, paying a fixed rate of 3.533%. Each counterparty was a floating rate payor, with each paying the Water System 61.25% of one month LIBOR plus a spread of 28 basis points. Net payments were exchanged semiannually on January 1 and July 1. The obligation of the Water System to make periodic payments (but not any termination payment) was secured by a pledge of and lien on the net revenues of the Water System on a parity with the pledge and lien securing the payment of debt service on the bonds. Both the bond debt service payments on the Series M bonds and the periodic swap payments were insured by Financial Security Assurance (FSA). As part of the refunding of the Series M Bonds, the City amended and restated the original swap agreements to (a) eliminate the swap insurance and related insurer rights, (b) modify the payment frequency, (c) transfer the original swap agreement from Bear Stearns to JPM and (d) split each original swap agreement into two separate interest rate swaps in order to hedge separate series of bonds. The original Bear Stearns swap, which has been assumed by JPM, hedged the entire principal amount of Series R and certain maturities of the Series Q Bonds. The original Morgan Stanley swap hedged the entire principal amount of Series S and a portion of the Series Q Bonds. The floating rate received by the City was not altered. However, the fixed rate paid by the City was adjusted to 3.553% for the JPM swap and 3.5975% for the Morgan Stanley swap. The termination date for the swaps associated with the Series Q Bonds is January 1, 2021 while the termination date for the Series R and Series S swaps is January 1, 2033. Net payments are now exchanged monthly. With the refunding of the Series R and Series S Bonds, the JPM swap now hedges all but $200,000 of the Series U Bonds and the Morgan Stanley Swap hedges all but $200,000 of the Series V Bonds. Objective: The City entered into the swaps in order to maximize the savings associated with the refunding of the bonds. The actual savings to be realized by the Water System will depend upon the payments made on the variable rate bonds and the payments received under the swap agreement. Basis Risk: By entering into swaps based upon the 30 day LIBOR rate of interest, the City has undertaken basis risk associated with a change in tax rates and structure. While the average relationship between Securities Industry Financial Markets Association (SIFMA) (tax-exempt) and LIBOR (taxable) interest rates has been 67%, this relationship may not always apply. If the payments received from the counterparties are less than the amount paid on the variable rate bonds, the Water System must make up the difference in addition to paying the fixed rate resulting from the swap. As a result of the turmoil in the financial markets since 2008, the SIFMA/LIBOR ratio has been significantly higher than 67% for large periods of time. In addition, a reduction in federal income tax rates might increase the percentage relationship between SIFMA and LIBOR and may potentially increase the cost of the financing. 34 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Counterparty Risk: The City selected highly rated counterparties in order to minimize this risk. However, in the wake of the subprime mortgage crisis, Bear Stearns was acquired by JPM. The portion of the City's swap with Bears Stearns as the counterparty has been assumed by JPM. Over the long-term it is possible that the credit strength of JPM and/or Morgan Stanley could change and this event could trigger a termination payment on the part of the City. Termination Risk: The swap agreement may be terminated prior to its stated termination date under certain circumstances. Upon termination, a payment may be owed by the City to JPM and Morgan Stanley, or by JPM and Morgan Stanley to the City, depending upon the prevailing economic circumstances at the time of the termination. Fair Value: The fair value of the swaps (including accrued amounts) at December 31, 2012 and December 31, 2011 as reported by JPM and Morgan Stanley totaled $27,699,000 and $27,955,000, respectively, which would be payable by the City. Derivative Instruments: Derivative instruments are contracts, the value of which depends on, or derives from, the value of an underlying asset, index or rate. The most common types of derivatives used by governments are interest rate swaps and interest rate locks. The City has entered into various derivative or hedging agreements since 1999. A detailed description of each outstanding derivative, including its terms, objectives, risks and fair value, can be found in the section discussing the bonds to which the derivative relates. Changes in Fair Value Classification Amount Fair Value at December 31, 2012 Classification Amount Notional (In thousands) Hedging Derivatives: Floating to fixed interest rate swaps 2008 Q Water Swap Deferred inflow 2010 U Water Swap Deferred outflow 2010 V Water Swap Deferred outflow $ 592 (192) (144) 35 Debt Debt Debt $ (9,569) $ (12,096) (6,034) 76,375 54,735 26,295 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Changes in Fair Value Classification Amount Fair Value at December 31, 2011 Classification Amount Notional (In thousands) Hedging Derivatives: Floating to fixed interest rate swaps 2008 Q Water Swap Deferred outflow 2010 U Water Swap Deferred outflow 2010 V Water Swap Deferred outflow $ (2,210) (5,467) (2,614) Debt Debt Debt $ (10,161) $ (11,904) (5,890) 82,625 54,735 26,295 The following table presents the objective and significant terms of the City's derivative instruments at December 31, 2012, along with the credit rating of each swap counterparty. Notional Bonds Type Water Series Q Pay Fixed Interest Rate Swap Objective Hedge of changes in cash Effective Maturity Amount Date Date $ 50,190,000 8/10/2004 1/1/2021 flow on the Series Q Counterparty Terms Credit Rating Pay 3.553%, receive Aa3/A+/A+ 61.25% of LIBOR + 28 bps Water System Bonds Water Series Q Pay Fixed Interest Rate Swap Hedge of changes in cash $ 26,185,000 8/10/2004 1/1/2021 flow on the Series Q Pay 3.5975%, receive Baa1/A-/A 61.25% of LIBOR + 28 bps Water System Bonds Water Series U Pay Fixed Interest Rate Swap Hedge in changes in cash $ 54,735,000 2/12/2009 1/1/2033 flow on the Series U Pay 3.553%, receive Aa3/A+/A+ 61.25% of LIBOR + 28 bps Water System Bonds Water Series V Pay Fixed Interest Rate Swap Hedge in changes in cash $ 26,295,000 flow on the Series V 2/12/2009 1/1/2033 Pay 3.5975%, receive Baa1/A-/A 61.25% of LIBOR + 28 bps Water System Bonds The following table presents the aggregate debt service requirements on the City's hedged debt and net receipts/payments on the associated hedging derivative instruments as of December 31, 2012. These amounts assume that the interest rates on variable rate bonds and the reference rates in existence as of December 31, 2012 remain the same for the life of the hedging agreement. However, these rates will vary over time and the actual interest payments on the variable rate bonds and the net receipts/payments on the hedging derivative instruments will deviate from the numbers presented below. 36 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - DEBT AND OTHER LONG-TERM OBLIGATIONS (Continued) Fiscal Year Ending December 31 Principal 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033 $ Total $ $ 17,000 81,415 61,730 12,085 172,230 Hedging Derivatives, Net (In thousands) 800 $ 4,786 800 4,522 799 4,244 801 4,186 800 4,147 3,850 14,804 1,491 3,712 274 257 2 1 Interest $ 9,617 $ 40,659 Total $ 5,586 5,322 5,043 4,987 4,947 35,654 86,618 62,261 12,088 $ 222,506 Ohio Water Development Authority (OWDA) Loans: These loans are payable from net revenues derived from the Waterworks System. These obligations do not have a lien on revenues of the Division. The Division received an increase in OWDA loans in the amount of $963,000 and $566,000 during 2012 and 2011, respectively. The current loans are being paid directly to the contractor by the State of Ohio, but accounted for as if the Division received and disbursed those monies. NOTE C - DEPOSITS AND INVESTMENTS Deposits: The carrying amount of the Division's deposits at December 31, 2012 and 2011 totaled $133,643,000 and $126,903,000, respectively, and the Division's bank balances were $134,956,000 and $128,025,000, respectively. The differences represent positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $134,956,000 and $128,025,000 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Divisions will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Division's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. 37 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS (Continued) Investments: The City's investment policies are governed by state statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers and are not to exceed a period of one year and confirmation of securities pledged must be obtained. Under City policy, investments are limited to repurchase agreements, U.S. Government securities, STAROhio, certificates of deposit, commercial paper and investments in certain money market mutual funds. Generally, investments are recorded in segregated accounts by way of book entry through the bank's commercial or trust department and are kept at the Federal Reserve Bank in the depository institution's separate custodial account for the City, apart from the assets of the depository institution. Ohio statute prohibits the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value. Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Division invests primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the table below. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Division will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The Division does not have an investment policy dealing with investment custodial credit risk beyond the requirement in the State statute. Credit Risk: The Division's investments as of December 31, 2012 and 2011 include U.S. Agencies, STAROhio, commercial paper, mutual funds, guaranteed investment contracts and other investments. The Division maintains the highest ratings for their investments. Investments in STAROhio and Allegiant Government Money Market Funds carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. The Division's investment in U.S. Bank N.A. Open Commercial Paper carries a Standard & Poor's rating of A-1+. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. 38 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS (Continued) Concentration of Credit Risk: The Division places a limitation on the amount it may invest in any one issuer to help minimize the concentration of credit risk. The Division had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the statement of net position in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: Type of Investment $ U.S. Agency Obligations STAROhio Commercial Paper Investment in Mutual Funds Guaranteed Investment Contracts Other Investments Total Investments Total Deposits Total Deposits and Investments $ 2012 Fair Value 2011 Fair 2011 Value Cost (In thousands) 2012 Cost $ 63,604 89,164 63,604 89,164 $ 12,141 32,134 135,521 $ 12,045 32,134 135,521 94,252 94,252 959 36,850 1,378 36,850 285,248 133,643 217,605 126,903 217,509 126,903 418,891 $ 418,891 $ 344,508 $ 344,412 $ 36,850 285,248 133,643 $ 959 36,850 1,378 Investment Maturities Less than 1-5 One Year Years 63,604 89,164 94,252 36,850 1,378 248,398 133,643 $ 382,041 36,850 $ 36,850 These amounts are monies invested by the City Treasurer on behalf of the Division and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. As of December 31, 2012, the investments in STAROhio, commercial paper, mutual funds, guaranteed investment contracts and escrow are approximately 22%, 31%, 33%, 13% and 1%, respectively, of the Division's total investments. As of December 31, 2011, the investments in U.S. Agency Obligations, STAROhio, commercial paper, mutual funds, and guaranteed investment contracts are approximately 6%, 15%, 62%, <1% and 17%, respectively, of the Division's total investments. The City's current guaranteed investment contracts are not categorized as investments on the financial statements because they are reserved against future debt service requirements and may need to be liquidated prior to maturity. 39 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS Capital Asset Activity: Capital asset activity for the year ended December 31, 2012 was as follows: Balance January 1, 2012 Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated $ Additions Deletions (In thousands) 5,463 $ 275,907 71,505 (146,245) 5,463 201,167 281,370 71,505 (146,245) 206,630 16,549 1,354,191 145,112 (1,425) 16,549 1,497,878 Buildings, structures and improvements 221,373 17,159 Furniture, fixtures, equipment and vehicles 566,679 21,158 (1,288) 586,549 Total capital assets, being depreciated Less: Accumulated depreciation 2,158,792 (779,509) 183,429 (82,370) (2,713) 2,680 2,339,508 (859,199) Total capital assets being depreciated, net 1,379,283 101,059 (33) 1,480,309 1,660,653 $ 172,564 $ Capital assets, being depreciated: Land improvements Utility plant Capital assets, net $ 40 $ Balance December 31, 2012 $ 238,532 (146,278) $ 1,686,939 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS (Continued) Capital Asset Activity: Capital asset activity for the year ended December 31, 2011 was as follows: Restated Balance January 1, 2011 Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated $ Additions Deletions (In thousands) 5,463 $ 310,919 84,929 (119,941) 5,463 275,907 316,382 Capital assets, being depreciated: Land improvements Utility plant $ 84,929 (119,941) 281,370 (248) 16,549 1,354,191 16,549 1,241,644 Buildings, structures and improvements 112,795 $ 219,953 566,679 119,941 (4,309) 2,158,792 (61,611) 4,309 (779,509) 1,320,953 $ 221,373 (4,044) (722,207) Total capital assets being depreciated, net (17) 5,709 2,043,160 Less: Accumulated depreciation 1,437 565,014 Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated Capital assets, net Balance December 31, 2011 58,330 - 1,379,283 1,637,335 $ 143,259 $ (119,941) $ 1,660,653 Capital assets were restated for 2011 due to the Division entering into amended Water Service Agreements with 21 member communities prior to 2011. Additional information is provided in Note J on page 45. Commitments: The Division has outstanding commitments at December 31, 2012 and 2011 of approximately $93,395,000 and $84,911,000, respectively, for future capital expenditures. It is anticipated that these commitments will be financed from the Division's cash balances; however, at the discretion of the Division, additional long-term debt may be issued in the future to finance a portion of the costs. 41 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E - DEFINED BENEFIT PENSION PLAN Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) 2) 3) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Division's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $5,452,000, $5,406,000 and $5,286,000 each year, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27 and it is effective for employer fiscal years beginning after June 15, 2014. 42 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F - OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multipleemployer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-andservice retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement No. 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a standalone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Division's actual contributions to OPERS to fund postemployment benefits were $2,180,000 in 2012, $2,162,000 in 2011 and $3,013,000 in 2010. The required payments due in 2012, 2011, and 2010 have been made. Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. 43 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE G - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Division for personal injuries, property damage and other matters. The City is responsible for the suits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Division's financial position, results of operations or cash flows. Risk Management: The Division is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Division is generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The City participates in the State of Ohio workers' compensation retrospective rating program. In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs), and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims liability for the Division is immaterial. NOTE H - RELATED PARTY TRANSACTIONS Revenues and Accounts Receivable: The Division provides water services to the City, including its various departments and divisions. Standard consumption rates are charged, except for the Division of Fire, public buildings and certain other facilities owned by the City, which by ordinance are provided free water services. The Division performs billing and collection services for the Division of Water Pollution Control for a fee. This fee is based on the number of billings made on behalf of that division during the year at the same rates as charged to other users of the billing system. Revenue realized from the Division of Water Pollution Control for such services was approximately $2,421,000 and $2,414,000 in 2012 and 2011, respectively. The Division also provides miscellaneous services to other departments and divisions of the City. Revenue realized from such services was approximately $3,586,000 and $3,716,000 in 2012 and 2011, respectively. 44 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE H - RELATED PARTY TRANSACTIONS (Continued) Operating Expenses: The Division is provided various intra-city services. Charges are based on actual use or on a reasonable pro-rata basis. The more significant costs for the years ended December 31 were as follows: 2012 2011 (In thousands) Electricity purchases City administration Motor Vehicle Maintenance Telephone exchange Utilities Administration and Utilities Fiscal Control Street construction $ 12,988 $ 2,612 3,572 955 3,313 451 13,147 2,549 3,699 865 3,119 578 NOTE I - CUYAHOGA COUNTY REAL PROPERTY TAXES The Division is required by ordinance to keep records of the estimated property taxes which would be payable to Cuyahoga County were it subject to such taxes. The estimated property taxes for the Division, based on book value of real estate at the current tax rates, would have been approximately $5,258,000 and $4,045,000 for the years ended December 31, 2012 and 2011, respectively. NOTE J - RESTATEMENT The Division of Water entered into amended Water Service Agreements with 21 member communities prior to 2011. As part of the Agreements, ownership of distribution mains was transferred to the Division of Water. The City also gained tax sharing agreements with each suburb related to commercial entities relocating in or out of the City. The financial impact of the addition of these assets was not included in the financial statements in the year the Agreements were finalized and ownership was officially transferred. As a result, the following restatements are necessary: Restated January 1, 2011 Capital assets Accumulated depreciation Net Position Restatment (In thousands) January 1, 2011 $ 2,120,467 $ 239,075 $ 2,359,542 (650,909) (71,298) (722,207) 1,022,666 167,777 1,190,443 Depreciation expense was restated for the 2011 fiscal year from $58,796,000 to $61,611,000. 45 This page intentionally left blank. CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL REPORT ON AUDITS OF FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL TABLE OF CONTENTS Page Independent Auditors' Report .................................................................................................... 1-2 Management's Discussion and Analysis ................................................................................... 3-11 Statements of Net Position......................................................................................................... 13-14 Statements of Revenues, Expenses and Changes in Net Position ............................................. 16 Statements of Cash Flows.......................................................................................................... 17-18 Notes to Financial Statements.................................................................................................... 19-32 INDEPENDENT AUDITORS' REPORT To the Honorable Frank G. Jackson, Mayor, Members of Council and the Audit Committee Division of Water Pollution Control Department of Public Utilities City of Cleveland, Ohio: Report on the Financial Statements We have audited the accompanying financial statements of the Division of Water Pollution Control, Department of Public Utilities, City of Cleveland, Ohio (the "Division") as of and for the years ended December 31, 2012 and 2011 and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. one east fourth street, ste. 1200 cincinnati, oh 45202 www.cshco.com p. 513.241.3111 f. 513.241.1212 cincinnati | cleveland | columbus | miami valley | springfield | toledo Opinions In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of the Division of Water Pollution Control, Department of Public Utilities, City of Cleveland, Ohio as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note A, the Division adopted the provisions of Governmental Accounting Standards Board Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements, Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision. Our opinion is not modified with respect to this matter. Other Matters As described in Note A, the financial statements present only the financial position and the changes in financial position and cash flows of the Division and do not purport to, and do not, present fairly the financial position of the City of Cleveland as of December 31, 2012 and 2011, and the respective changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 11 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio June 25, 2013 2 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL As management of the City of Cleveland's (the City) Department of Public Utilities, Division of Water Pollution Control (the Division), we offer readers of the Division's financial statements this narrative overview and analysis of the financial activities of the Division for the years ended December 31, 2012 and 2011. Please read this information in conjunction with the Division's basic financial statements and footnotes that begin on page 13. The Division was created for the purpose of supplying sewer services to customers within the Cleveland metropolitan area. Embarking with a rudimentary system in the late 1800's, the Cleveland Sewer System developed as the City itself expanded. Prior till the early 1970's, the City operated the entire system and managed all aspects of sewage treatment and disposal. In 1972, a court order created the Northeast Ohio Regional Sewer District (NEORSD) and transferred the operation of all wastewater treatment plants and interceptors to the NEORSD during December 1973. The City retained responsibility for the sewer collector system in Cleveland. The Division serves a significant portion of the entire metropolitan area by managing the sanitary sewage and storm water drainage collection system. The sewer collection system transfers sanitary and storm sewage from its point of origin to an interceptor sewer or treatment plant for processing. The system is comprised of over 1,400 miles of sewer lines with attendant catch basins and includes 15 pump/lift stations. The Division is also responsible for the cleaning of 127,000 catch basins and for maintaining two storm detention basins. The Division currently has 125,577 customer accounts in the City of Cleveland of which 96.4% are residential and 3.6% commercial. Also, in 2012, the Division's sewers transported 1,858,142 Mcf's (thousand cubic feet) of water. The Division's capital improvement program is supported by a "pay as you go" system funded by its operating revenue and loans. The Division has a low debt burden. The Division maintains an unencumbered cash balance that allows its current debts to be paid. Maintaining this approach helps the Division stabilize the rates charged to its customers. COMPARISON OF CURRENT YEAR'S AND PRIOR YEARS' DATA FINANCIAL HIGHLIGHTS o The assets of the Division exceeded its liabilities (net position) by $99,204,000, $100,384,000 and $99,104,000 at December 31, 2012, 2011 and 2010, respectively. Of these amounts, $32,655,000, $34,208,000 and $33,267,000 are unrestricted net position at December 31, 2012, 2011 and 2010, respectively and may be used to meet the Division's ongoing obligations to customers and creditors. o The Division's net position decreased by $1,180,000. The main components of the change were an increase in operating revenues of $677,000, offset by an increase of $1,493,000 in operating expenses and a decrease of $1,637,000 in capital and other contributions. 3 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) FINANCIAL HIGHLIGHTS (Continued) o The regular sewage rate was $12.53 per thousand cubic feet in 2011 and 2012. Also, the homestead sewage rate was $7.43 per thousand cubic feet in 2011 and 2012. o During 2012, the Division's current assets decreased by $13,067,000. The primary component was a decrease of $23,141,000 in net accounts receivable as a result of collection of accounts and accounts written-off, offset by a $10,070,000 increase in cash and cash equivalents. In 2011, the Division's current assets decreased by $930,000. o The Division's total debt decreased in 2012 and 2011 by $505,000 and $486,000, respectively, due to the continuing scheduled debt payments made during the year. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Division's basic financial statements. The accompanying financial statements present financial information for the City's Division of Water Pollution Control Fund, in which the City accounts for the operations of the Department of Public Utilities, Division of Water Pollution Control. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. The Division of Water Pollution Control is considered an enterprise fund because the operations of the Division are similar to a private sector business enterprise. Accordingly, in accounting for the activities of the Division, the economic resources measurement focus and the accrual basis of accounting is used. The basic financial statements of the Division can be found on pages 13 - 18 of this report. The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages 19 - 32 of this report. 4 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION Provided below are the statements of net position information for the Division as of December 31, 2012, 2011 and 2010: 2012 Assets: Capital assets, net Restricted assets Current assets Total assets $ Net Positon and Liabilities: Net position: Net investment in capital assets Restricted for capital projects Unrestricted Total net position Liabilities: Long-term obligations Current liabilities Total liabilities 68,709 586 138,452 207,747 2011 (In thousands) $ 66,371 178 32,655 99,204 $ Total net position and liabilities 1,949 106,594 108,543 207,747 69,019 $ 1,081 151,519 221,619 2010 69,166 1,250 152,449 222,865 66,176 34,208 100,384 $ 65,837 33,267 99,104 2,482 118,753 121,235 221,619 $ 3,010 120,751 123,761 222,865 Current Assets: In 2012, there was a decrease of $13,067,000 in current assets due to the increase in current cash and cash equivalents of $10,070,000, which was the product of increased collection activity, offset by a decrease in net accounts receivable of $23,141,000, which was the result of increased write-offs. In 2011, there was a decrease of $930,000 in current assets due to the decrease in net accounts receivable of $2,765,000, which was the result of increased collection activity. There were also increases in current cash and cash equivalents and unbilled revenue of $1,111,000 and $652,000, respectively. 5 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Capital Assets: In 2012, the Division's net capital assets amounted to $68,709,000. This was a decrease of $310,000 from 2011. The change is primarily due to scheduled depreciation. In 2011, the Division's net capital assets amounted to $69,019,000. This was a decrease of $147,000 from the prior year. The change is primarily the result of a $2,572,000 increase in utility plant, offset by a $4,163,000 net increase in accumulated depreciation. A summary of the activity in the Division's capital assets during the years ended December 31, 2012 and 2011 is as follows: Balance January 1, 2012 Additions Reductions (In thousands) Land $ 297 $ $ Utility plant 131,132 6,660 Buildings, structures and improvments 8,948 15 Furniture, fixture, equipment and vehicles 12,481 1,320 4,368 Construction in progress 9,340 Total 162,198 12,363 Less: Accumulated depreciation Capital assets, net (93,179) $ 69,019 $ 6 (5,108) 7,255 $ Balance December 31, 2012 $ (755) (7,565) (8,384) 297 137,728 8,963 13,046 6,143 166,177 819 (97,468) (7,565) $ 68,709 (64) CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Balance January 1, 2011 Land Utility plant Buildings, structures and improvments Furniture, fixture, equipment and vehicles Construction in progress Total $ $ $ 69,166 $ $ 2,572 78 4,563 7,213 (571) (2,626) (3,197) (4,734) (89,016) Less: Accumulated depreciation Capital assets, net 297 128,560 8,948 12,974 7,403 158,182 Additions Reductions (In thousands) Balance December 31, 2011 $ 2,479 297 131,132 8,948 12,481 9,340 162,198 571 $ (93,179) (2,626) $ 69,019 During 2012, the two largest capital additions were the 800MHZ System Upgrade for $1,281,000 and the Rehabilitating and Relining Sewers for $651,000. The major capital projects/expenses for the year included: o o o o Big Creek Project Sewer Replacement City Wide Storm Water Management Initiative Emergency Sewer Repairs During 2011, the capital additions of emergency sewer repairs were $925,000. There were several projects in 2011 within construction in progress that are expected to be completed in the next few years. The major capital projects/expenses for the year included: o o o Emergency Sewer Repairs Henninger Avenue Sewer Replacement Catch Basin and Manhole Repairs Additional information on the Division's capital assets, including commitments made for future capital expenditures, can be found in Note D. 7 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Current Liabilities: Total current liabilities decreased by $12,159,000. The major component was a decrease of $15,133,000 in amounts due for billings on behalf of others, which was the result of $20,000,000 in writeoffs, offset by a $1,979,000 increase in due to other City departments, divisions or funds . During 2011, total current liabilities decreased by $1,998,000. The major component was a decrease of $2,408,000 in amounts due for billings on behalf of others. Long-Term Debt: At the end of the current year, the Division had total debt outstanding of $2,338,000 associated with five OWDA construction loans and two OPWC construction loans. At the end of the 2011, the Division had total debt outstanding of $2,843,000 associated with these loans. These loans are payable by revenues generated by the Division. The activity in the Division's debt obligations outstanding during the year ended December 31, 2012 is summarized below: Balance January 1, 2012 Ohio Water Development Authority Loans (OWDA) $ 2,604 Ohio Public Works Commission Loans (OPWC) Total Debt Debt Issued Retired (In thousands) $ $ 2,843 (481) $ $ - $ 2,123 215 (24) 239 $ Balance December 31, 2012 (505) $ 2,338 The activity in the Division's debt obligations outstanding during the year ended December 31, 2011 is summarized below: Balance January 1, 2011 Ohio Water Development Authority Loans (OWDA) $ Ohio Public Works Commission Loans (OPWC) Total 3,066 Debt Debt Issued Retired (In thousands) $ $ 3,329 (462) $ (24) 263 $ Balance December 31, 2011 $ - $ (486) $ 2,604 239 2,843 Additional information on the Division's long-term debt can be found in Note B on pages 22 - 24. 8 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF NET POSITION INFORMATION (Continued) Net Position: Net position serves as a useful indicator of a government's financial position. In the case of the Division, assets exceeded liabilities by $99,204,000, $100,384,000 and $99,104,000 at December 31, 2012, 2011 and 2010, respectively. The largest portion of the Division's net position, $66,371,000 and $66,176,000, at December 31, 2012 and 2011, respectively, reflects its investment in capital assets (e.g., land, buildings, utility plant, machinery and equipment), net of accumulated depreciation, less any related outstanding debt used to acquire those assets. The Division uses these capital assets to provide services to its customers. Consequently, these assets are not available for future spending. Although the Division's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the Division's net position, $178,000 and $0, at December 31, 2012 and 2011, respectively, represents resources that are subject to external restrictions. These funds are set aside for the payment of capital projects. The remaining balance of net position, $32,655,000 and $34,208,000, at December 31, 2012 and 2011, respectively, are unrestricted and may be used to meet the Division's ongoing obligations to customers and creditors. 9 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION The Division's operations for 2012 had decreased net position of $1,180,000 and during 2011, net position increased by $1,280,000. Provided below are the key elements of the Division's results of operations for the years ended December 31, 2012, 2011 and 2010: 2012 Operating revenues Operating expenses $ $ 22,199 22,884 2010 $ 25,110 23,926 (1,501) Income (loss) before other contributions 53 (121) 53 41 (139) 13 (15) (85) (1,523) Total non-operating revenue (expense), net 1,184 (22) Non-operating revenue (expense): Investment income Interest expense Other (685) 59 (102) 21 Operating income (loss) (700) 1,099 343 Net position, beginning of year $ 390 1,280 1,489 100,384 Increase (decrease) in net position 1,980 (1,180) Capital and other contributions Net position, end of year 22,876 24,377 2011 (In thousands) 99,104 97,615 99,204 $ 100,384 $ 99,104 Operating revenues: Total operating revenues amounted to $22,876,000 in 2012. This was an increase of $677,000 from the prior year, mainly due to increased consumption. In 2011, total operating revenues amounted to $22,199,000. 10 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION INFORMATION (Continued) Operating expenses: In 2012, total operating expenses increased by $1,493,000. There was an increase in operations costs of $879,000. The major component was accrued bad debt expense, which increased by $1,061,000. In 2011, total operating expenses decreased by $1,042,000. The main component was a decrease in operations costs of $683,000. Non-operating revenues and expenses: Other revenues decreased by $32,000 in 2012. In 2011, investment income increased by $12,000. ADDITIONAL INFORMATION This financial report is designed to provide a general overview of the Division's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Finance Director, City Hall, Room 104, 601 Lakeside Avenue, Cleveland, Ohio 44114. 11 BASIC FINANCIAL STATEMENTS 12 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF W ATER POLLUTION CONTROL STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) 2012 2011 ASSETS CAPITAL ASSETS Land Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles $ Construction in progress CAPITAL ASSETS, NET RESTRICTED ASSETS Cash and cash equivalents CURRENT ASSETS Cash and cash equivalents Receivables: Accounts receivable - net of allowance for doubtful accounts of $3,007,000 in 2012 and $5,932,000 in 2011 Unbilled revenue Due fromother City of Cleveland departments, divisions or funds Materials and supplies - at average cost TOTAL CURRENT ASSETS TOTAL ASSETS $ 13 297 131,132 8,948 12,481 152,858 (93,179) 59,679 9,340 69,019 586 Less: Accumulated depreciation 297 $ 137,728 8,963 13,046 160,034 (97,468) 62,566 6,143 68,709 1,081 48,630 38,560 86,134 2,831 495 362 138,452 109,275 2,949 416 319 151,519 207,747 $ 221,619 (Continued) CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL STATEMENTS OF NET POSITION December 31, 2012 and 2011 (In thousands) 2012 2011 NET POSITION AND LIABILITIES NET POSITION Net investment in capital assets Restricted for capital projects Unrestricted $ TOTAL NET POSITION 66,371 $ 178 32,655 99,204 66,176 34,208 100,384 LIABILITIES LONG-TERM OBLIGATIONS-excluding amounts due within one year: OWDA loans OPWC loans Accrued wages and benefits TOTAL LONG-TERM OBLIGATIONS 1,622 191 136 1,949 2,123 215 144 2,482 CURRENT LIABILITIES Current portion of long-term debt, due within one year Accounts payable Construction payable Amounts due for billing on behalf of others Due to other City of Cleveland departments, divisions or funds Current portion of accrued wages and benefits Other accrued expenses Customer deposits and other liabilities TOTAL CURRENT LIABILITIES 525 171 2,050 90,704 11,399 1,557 55 133 106,594 505 704 518 105,837 9,420 1,562 60 147 118,753 TOTAL LIABILITIES 108,543 121,235 207,747 $ 221,619 TOTAL NET POSITION AND LIABILITIES $ (Concluded) See notes to financial statements. 14 This page intentionally left blank. 15 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 OPERATING REVENUES Charges for services TOTAL OPERATING REVENUES $ 22,876 22,876 TOTAL OPERATING EXPENSES 10,194 9,075 5,108 24,377 9,315 8,835 4,734 22,884 OPERATING INCOME (LOSS) (1,501) (685) NON-OPERATING REVENUE (EXPENSE) Investment income Interest expense Other TOTAL NON-OPERATING REVENUE (EXPENSE), NET 59 (102) 21 (22) 53 (121) 53 (15) (1,523) (700) 343 1,980 (1,180) 1,280 100,384 99,104 OPERATING EXPENSES Operations Maintenance Depreciation INCOME (LOSS) BEFORE OTHER CONTRIBUTIONS Capital and other contributions INCREASE (DECREASE) IN NET POSITION NET POSITION, BEGINNING OF YEAR $ NET POSITION, END OF YEAR See notes to financial statements. 16 99,204 $ $ 22,199 22,199 100,384 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services Agency activity on behalf of other sewer authorities $ 22,996 (5,484) (9,947) 6,265 $ 22,328 (6,154) (10,227) (681) NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 13,830 5,266 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Principal paid on long-term debt Interest paid on long-term debt Capital grant proceeds NET CASH PROVIDED BY (USED FOR) CAPITAL AND RELATED FINANCING ACTIVITIES (3,996) (505) (102) 289 (5,750) (486) (121) 1,980 (4,314) (4,377) CASH FLOWS FROM INVESTING ACTIVITIES Interest received on investments NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 59 53 59 53 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,575 942 39,641 49,216 38,699 39,641 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ $ (Continued) 17 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In thousands) 2012 2011 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES $ OPERATING INCOME (LOSS) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation Write-off of bad debt expense Changes in assets and liabilities: Accounts receivable, net Accrued and unbilled revenue Due from other City of Cleveland departments, divisions or funds Materials and supplies, net Accounts payable Other accrued expenses Amounts due for billings on behalf of others Due to other City of Cleveland departments, divisions or funds Accrued wages and benefits Customer deposits and other liabilities TOTAL ADJUSTMENTS (1,501) $ 5,108 20,000 4,734 3,141 118 (79) (43) (533) (5) (15,133) 1,979 (13) 791 15,331 2,765 (652) 2 (74) 267 (5) (2,408) 571 (45) 796 5,951 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,830 $ (685) 5,266 (Concluded) See notes to financial statements. 18 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Division of Water Pollution Control (the Division) is reported as an Enterprise Fund of the City of Cleveland's Department of Public Utilities and is a part of the City of Cleveland's (the City) primary government. The Division was created for the purpose of supplying sewer services to customers within the metropolitan area. The following is a summary of the more significant accounting policies. Reporting Model and Basis of Accounting: The accounting policies and financial reporting practices of the Division comply with accounting principles generally accepted in the United States of America applicable to governmental units. In November of 2010, Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of publicprivate or public-public partnership. The Division has determined that GASB Statement No. 60 has no impact on its financial statements as of December 31, 2012. In December of 2010, Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: (1) Financial Accounting Standards Board (FASB) Statements and Interpretations, (2) Accounting Principles Board Opinions and (3) Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure. As required, the Division has implemented GASB Statement No. 62 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position was issued. This Statement is effective for fiscal periods beginning after December 15, 2011. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. As required, the Division has implemented GASB Statement No. 63 effective for the 2012 fiscal year. In June of 2011, Governmental Accounting Standards Board (GASB) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provision was issued. This Statement is effective for fiscal periods beginning after June 15, 2011. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. The Division has determined that GASB Statement No. 64 has no impact on its financial statements as of December 31, 2012. 19 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Division's net position is accounted for in the accompanying statements of net position and is divided into the following categories: o Net investment in capital assets. o Restricted for capital projects. o Remaining unrestricted amount. In addition, certain additional financial information regarding the Division is included in these footnotes. The implementation of the new GASB statements did not result in a change in the Division's beginning net position/equity balance as previously reported. Basis of Accounting: The Division's financial statements are prepared under the accrual basis of accounting. Under this method, revenues are recognized when earned and measurable and expenses are recognized as incurred. Revenues: Revenues are derived primarily from sales of sewer services to residential, commercial and industrial customers based upon actual water consumption. Sewer rates are authorized by City Council and billings are made on a cyclical basis. Estimates for services between the end of the various cycles and the end of the year are recorded as unbilled revenue. Accounts Receivables: The Division's share of the accounts receivable balance is $12,112,000 and $13,229,000, net of allowance for doubtful accounts of $3,007,000 and $5,932,000, for 2012 and 2011, respectively. The remaining accounts receivable balances of $74,022,000 and $96,046,000 for 2012 and 2011, respectively, belong to the Northeast Ohio Regional Sewer District and other municipalities in the Greater Cleveland Region and are offset by the corresponding amounts due for billings on behalf of others. Statement of Cash Flows: The Division utilizes the direct method of reporting for the statement of cash flows as defined by the Governmental Accounting Standards Board (GASB) Statement No. 9, Reporting Cash Flows of Proprietary and Non-Expendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. In a statement of cash flows, cash receipts and cash payments are classified according to operating, noncapital financing, capital and related financing and investment activities. Cash and Cash Equivalents: Cash and cash equivalents represent cash on hand and cash deposits maintained by the City Treasurer on behalf of the Division. Cash equivalents are defined as highly liquid investments with maturity of three months or less when purchased and include certificates of deposit, U.S. Treasury bills, State Treasury Asset Reserve of Ohio (STAROhio), mutual funds and repurchase agreements. The City's policy is to enter into repurchase agreements with local commercial banks and to obtain confirmation of securities pledged. 20 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments: The Division follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, which requires governmental entities to report certain investments at fair value and recognize the corresponding change in the fair value of investments in the year in which the change occurred. The fair value is based on quoted market rates. The City has invested funds in STAROhio during years 2012 and 2011. STAROhio is an investment pool managed by the State Treasurer's Office, which allows governments within the State to pool their funds for investment purposes. STAROhio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of the Investment Company Act of 1940. Investments in STAROhio are valued at STAROhio's share price, which is the price the investment could be sold for on December 31, 2012 and 2011. Capital Assets and Depreciation: Capital assets are stated on the basis of historical cost or, if contributed, at fair market value as of the date received. Depreciation is computed by allocating the cost of capital assets over the estimated useful lives of the assets using the straight-line method. A capital asset is defined as an item with a useful life in excess of one year and an individual cost of more than $5,000 for furniture, fixtures, equipment and vehicles and $10,000 for all other assets. When capital assets are disposed of, the cost and related accumulated depreciation are removed from the accounts with gains or losses on disposition being reflected in operations. The estimated useful lives are as follows: Utility plant Building, structures and improvements Furniture, fixtures, equipment and vehicles 5 to 100 years 5 to 60 years 3 to 60 years Compensated Absences: The Division accrues for compensated absences such as vacation, sick leave and compensatory time using the termination payment method specified under GASB Statement No. 16, Accounting for Compensated Absences. These amounts are recorded as accrued wages and benefits in the accompanying statement of net position. The portion of the compensated absence liability that is not expected to be paid or utilized within one year is reported as a long-term liability. Normally, all vacation time is to be taken in the year available. The Division allows employees to carryover sick leave from one year to the next. Sick days not taken may be accumulated until retirement. An employee is paid one-third of accumulated sick leave upon retirement, calculated at the three-year average base salary rate, with the balance being forfeited. 21 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM OBLIGATIONS Long-term obligations outstanding at December 31, 2012 and 2011 as follows: Original Interest Rate Ohio Water Development Authority (OWDA) Loans payable annually through 2017 4.04% - 4.18% Issuance $ 7,897 2012 (In thousands) $ 2,123 2011 $ 2,604 Ohio Public Works Commission (OPWC) Loans payable annually through 2022 0.00% 481 $ 215 239 8,378 2,338 2,843 Less: Current portion (505) (525) $ Total Long-Term Debt 22 1,813 $ 2,338 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM OBLIGATIONS (Continued) Summary: Changes in long-term obligations for the year ended December 31, 2012 are as follows: Balance January 1, 2012 Ohio Water Development Authority (OWDA) Loans payable annually through 2017 2,604 $ $ Ohio Public Works Commission (OPWC) Loans payable annually through 2022 239 2,843 1,706 Total loans Accrued wages and benefits Total Increase $ 4,549 Decrease (In thousands) $ (481) $ 1,549 2,123 (24) (505) (1,562) $ 4,031 Due Within One Year $ 501 215 2,338 1,693 (2,067) $ 1,549 $ Balance December 31, 2012 24 525 1,557 $ 2,082 Summary: Changes in long-term obligations for the year ended December 31, 2011 are as follows: Balance January 1, 2011 Ohio Water Development Authority (OWDA) Loans payable annually through 2017 $ 3,066 $ $ 263 3,329 1,751 5,080 $ Ohio Public Works Commission (OPWC) Loans payable annually through 2022 Total loans Accrued wages and benefits Total 23 Increase Decrease (In thousands) Balance December 31, 2011 Due Within One Year $ (462) $ 2,604 $ 481 1,539 1,539 $ (24) (486) (1,584) (2,070) $ 239 2,843 1,706 4,549 $ 24 505 1,562 2,067 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE B - LONG-TERM OBLIGATIONS (Continued) Minimum principal and interest payments on long-term debt are as follows: Principal 2013 2014 2015 2016 2017 2018-2022 Total Interest (In thousands) Total $ 525 546 515 481 177 94 $ 82 61 40 20 3 $ 607 607 555 501 180 94 $ 2,338 $ 206 $ 2,544 The Ohio Water Development Authority and Ohio Public Works Commission Loans are being paid from the revenues derived from operations of the Division. Water Pollution Control Loans: Under Title VI of the Clean Water Act, Congress created the State Revolving Fund (SRF). The SRF program provides federal capitalization grants to states, in addition to the 20% state matching funds, in order to capitalize state level revolving loan funds. Besides the traditional types of municipal wastewater treatment projects, Congress expanded the potential use of SRF funds to include correction of combined sewer overflows, major sewer rehabilitation and new collector sewers. In Ohio, this SRF program is known as the Water Pollution Control Loan Fund and is jointly administered by the Ohio EPA and the Ohio Water Development Authority. Principal balances on loans increase as project costs are incurred. Interest accrues on principal amounts outstanding during the construction period and is combined with the principal balance upon completion of the project. The repayment period for each loan commences no later than the 1st of January or July following the expected completion date of the project to which it relates utilizing an estimate of total eligible project costs as the preliminary loan amount. Construction loans and design loans are to be repaid in semi-annual payments of principal and interest over a period of twenty years and five years, respectively. The Division had five SRF loan awards related to projects as of December 31, 2012. In addition, the Division had two OPWC loan awards as of December 31, 2012. The loan related projects are for sewer repair and replacement at the Hamlet and Adolpha Streets intersection, and a storm water detention basin project at Kerruish Park. Both loans are interest-free and principal repayment will be made from the Division's operating revenues. 24 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS Deposits: The Division's carrying amount of deposits at years ended December 31, 2012 and December 31, 2011 totaled $26,347,000 and $21,617,000, and the Division's bank balances were approximately $26,752,000 and $25,909,000, respectively. The differences represent positions in pooled bank accounts and normal reconciling items. Based on the criteria described in GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements and GASB Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement No. 3, $26,752,000 and $25,909,000 of the bank balances at December 31, 2012 and 2011, respectively, were insured or collateralized with securities held by the City or by its agent in the City's name. Custodial credit risk for deposits is the risk that in the event of bank failure, the Division will not be able to recover deposits or collateral for securities that are in possession of an outside party. At year end, the Division's deposits were fully insured or collateralized. All deposits are collateralized with eligible securities pledged and deposited either with the City or with a qualified trustee by the financial institution as security for repayment of all public monies deposited in the financial institution whose market value at all times is equal to at least 110% of the carrying value of the deposits being secured. Investments: The City's investment policies are governed by State statutes and City ordinances which authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; State Treasurer Asset Reserve Fund (STAROhio); commercial paper; US Government Money Market Mutual Funds; guaranteed investment contracts; manuscript debt; bonds and other State of Ohio obligations; certificates of deposit; and repurchase transactions. Such repurchase transactions must be purchased from financial institutions or registered broker/dealers. Repurchase transactions are not to exceed a period of one year and confirmation of securities pledged must be obtained. Generally, investments are recorded in segregated accounts by way of book entry through the banks' commercial or trust department and are kept at the Federal Reserve Bank in the depository institutions' separate custodial account for the City, apart from the assets of the depository institution. Ohio statute prohibits the use of reverse repurchase agreements. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value. Interest rate risk: As a means of limiting its exposure to fair value losses caused by rising interest rates, the Division invests primarily in short-term investments maturing within five years from the date of purchase. The intent is to avoid the need to sell securities prior to maturity. Investment maturities are disclosed in the table on the following page. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Division will not be able to recover the value of the investments or collateral securities that are in the possession of an outside party. The Division does not have an investment policy dealing with investment custodial credit risk beyond the requirement in the State statute. 25 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE C - DEPOSITS AND INVESTMENTS (Continued) Credit Risk: The Division's investments as of December 31, 2012 and 2011 include STAROhio and mutual funds. The Division maintains the highest ratings for their investments. Investments in STAROhio and the Allegiant Government Money Market Fund carry a rating of AAAm, which is the highest money market fund rating given by Standard & Poor's. Ohio law requires that STAROhio maintain the highest rating provided by at least one nationally recognized standard rating service. Concentration of Credit Risk: The Division places a limitation on the amount it may invest in any one issuer to minimize the concentration of credit risk. The Division had the following investments at December 31, 2012 and 2011, which include those classified as cash and cash equivalents in the statement of net position in accordance with the provisions of GASB Statement No. 9 since they have a maturity of three months or less: 2012 Fair Value Type of Investment STAROhio 2011 Fair 2011 Value Cost (In thousands) 2012 Cost $ 21,815 $ 21,815 $ 6,135 $ Investment Maturities Less than One Year 6,135 $ 21,815 1,054 1,054 11,889 11,889 1,054 Total Investments 22,869 22,869 18,024 18,024 22,869 Total Deposits 26,347 26,347 21,617 21,617 26,347 39,641 $ 49,216 Investment in Mutual Funds $ 49,216 $ 49,216 $ 39,641 $ Total Deposits and Investments . These amounts are monies invested by the City Treasurer on behalf of the Division and are used in daily operations with excess monies invested daily in STAROhio and mutual funds. These investments are carried at cost which approximates market value. As of December 31, 2012, the investments in STAROhio and mutual funds are 95% and 5%, respectively, of the Division's total investments. As of December 31, 2011, the investments in STAROhio and mutual funds were 34% and 66%, respectively, of the Division's total investments. 26 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS Capital Asset Activity: Capital asset activity for the year ended December 31, 2012 was as follows: Balance January 1, 2012 Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated $ Additions Reductions (In thousands) $ $ 6,660 15 1,320 (64) (755) 7,995 (5,108) (819) 819 59,382 $ (7,565) (7,565) 152,561 (93,179) Total capital assets being depreciated, net 4,368 4,368 131,132 8,948 12,481 Capital assets, being depreciated: Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated Less: Accumulated depreciation Capital assets, net 297 $ 9,340 9,637 Balance December 31, 2012 2,887 69,019 $ 7,255 $ 27 (7,565) $ 297 6,143 6,440 137,728 8,963 13,046 159,737 (97,468) 62,269 68,709 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE D - CAPITAL ASSETS (Continued) Capital Asset Activity: Capital asset activity for the year ended December 31, 2011 was as follows: Balance January 1, 2011 Capital assets, not being depreciated: Land Construction in progress Total capital assets, not being depreciated $ Additions Reductions (In thousands) (2,626) 4,563 (2,626) 9,637 2,572 150,482 (89,016) 2,650 (4,734) 61,466 $ 4,563 297 9,340 128,560 8,948 12,974 Total capital assets being depreciated, net 297 $ 7,403 7,700 Capital assets, being depreciated: Utility plant Buildings, structures and improvements Furniture, fixtures, equipment and vehicles Total capital assets, being depreciated Less: Accumulated depreciation Capital assets, net Balance December 31, 2011 (2,084) 69,166 $ $ 78 2,479 $ $ (571) (571) 571 (2,626) $ 131,132 8,948 12,481 152,561 (93,179) 59,382 69,019 Commitments: The Division had outstanding commitments of approximately $11,744,000 and $4,796,000 for future capital expenses at December 31, 2012 and 2011, respectively. It is anticipated that these commitments will be financed from the Division's cash balances. However, at the discretion of the Division, additional long-term debt may be issued in the future to finance a portion of the costs. 28 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE E - DEFINED BENEFIT PENSION PLAN Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans as described below: 1) The Traditional Pension Plan - a cost-sharing, multiple-employer defined benefit pension plan. 2) The Member-Directed Plan - a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20% per year). Under the Member-Directed Plan, members accumulate retirement assets equal to the value of member and (vested) employer contributions plus any investment earnings. 3) The Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan. Under the Combined Plan, OPERS invests employer contributions to provide a formula retirement benefit similar in nature to the Traditional Pension Plan benefit. Member contributions, the investment of which is self-directed by the members, accumulate retirement assets in a manner similar to the Member-Directed Plan. OPERS provides retirement, disability, survivor and death benefits and annual cost-of-living adjustments to members of the Traditional Pension and Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a stand-alone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides statutory authority for member and employer contributions. For 2012, member and employer contribution rates were consistent across all three plans. Member contribution rates were 10.00% in 2012, 2011 and 2010. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Division's required employer contributions to OPERS for the pension portion of all the plans for the years ending December 31, 2012, 2011 and 2010 were $686,000, $704,000 and $691,000, respectively. The required payments due in 2012, 2011 and 2010 have been made. In June 2012, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This accounting standard replaces GASB Statement No. 27, and it is effective for employer fiscal years beginning after June 15, 2014. 29 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F - OTHER POSTEMPLOYMENT BENEFITS Ohio Public Employees Retirement System: All full-time employees, other than non-administrative full-time police officers and firefighters, participate in the Ohio Public Employees Retirement System (OPERS). OPERS administers three separate pension plans: The Traditional Pension Plan - a cost-sharing, multipleemployer defined benefit pension plan; the Member-Directed Plan - a defined contribution plan; and the Combined Plan - a cost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and defined contribution plan. OPERS maintains a cost-sharing multiple employer defined benefit postemployment health care plan, which includes a medical plan, prescription drug program and Medicare Part B premium reimbursement, to qualifying members of both the Traditional Pension and the Combined Plans. Members of the Member-Directed Plan do not qualify for ancillary benefits, including postemployment health care coverage. In order to qualify for postemployment health care coverage, age-andservice retirees under the Traditional Pension and Combined Plans must have 10 or more years of qualifying Ohio service credit. Health care coverage for disability benefit recipients and qualified survivor benefit recipients is available. The health care coverage provided by OPERS meets the definition of an Other Postemployment Benefit (OPEB) as described in GASB Statement 45. The Ohio Revised Code permits, but does not mandate, OPERS to provide OPEB benefits to its eligible members and beneficiaries. Authority to establish and amend benefits is provided in Chapter 145 of the Ohio Revised Code. OPERS issues a standalone financial report. Interested parties may obtain a copy by visiting https://www.opers.org/investments/cafr.shtml, writing to OPERS, 277 East Town Street, Columbus, Ohio 43215-4642, or by calling (614) 222-5601 or (800) 222-7377. The Ohio Revised Code provides the statutory authority requiring public employers to fund post-retirement health care through their contributions to OPERS. A portion of each employer's contribution to OPERS is set aside for funding of post-retirement health care benefits. Employer contribution rates are expressed as a percentage of the covered payroll of active members. The employer contribution rates were 14.00% of covered payroll in 2012, 2011 and 2010. The Ohio Revised Code currently limits the employer contribution to a rate not to exceed 14.00% of covered payroll. Active members do not make contributions to the OPEB Plan. OPERS' Postemployment Health Care plan was established under and is administrated in accordance with, Internal Revenue Code 401(h). Each year, the OPERS Retirement Board determines the portion of the employer contribution rate that will be set aside for funding of postemployment health care benefits. Employer contribution rates used to fund postemployment benefits were 4.00% for members of the Traditional Plan in 2012 and 2011, 6.05% for members of the Combined Plan in 2012 and 2011 and 5.50% from January 1, 2010 through February 28, 2010 and 5.00% from March 1, 2010 through December 31, 2010 for both plans. Effective January 1, 2013, the portion of employer contributions allocated to health care was lowered to 1.00% for both plans, as recommended by the OPERS Actuary. The OPERS Retirement Board is also authorized to establish rules for the payment of a portion of the health care benefits provided, by the retiree or their surviving beneficiaries. Payment amounts vary depending on the number of covered dependents and the coverage selected. The Division's actual contributions to OPERS to fund postemployment benefits were $274,000 in 2012, $281,000 in 2011 and $394,000 in 2010. The required payments due in 2012, 2011, and 2010 have been made. 30 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE F - OTHER POSTEMPLOYMENT BENEFITS (Continued) Changes to the health care plan were adopted by the OPERS Board of Trustees on September 19, 2012, with a transition plan commencing January 1, 2014. With the recent passage of pension legislation under SB343 and the approved health care changes, OPERS expects to be able to consistently allocate 4.00% of the employer contributions toward the health care fund after the end of the transition period. NOTE G - CONTINGENT LIABILITIES AND RISK MANAGEMENT Contingent Liabilities: Various claims are pending against the City involving the Division for personal injuries, property damage and other matters. The City is responsible for the suits. The City's management is of the opinion that ultimate settlement of such claims will not result in a material adverse effect on the Division's financial position, results of operations or cash flows. Risk Management: The Division is exposed to various risks of loss related to torts; thefts of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Division is generally self-insured. No material losses, including incurred but not reported losses, occurred in 2012 or 2011. The City provides the choice of four separate health insurance plans for its employees. These plans are provided by two different insurers through commercial insurance. Operating funds are charged a monthly rate per employee, by type of coverage. The Division participates in the State of Ohio workers' compensation retrospective rating program. In accordance with GASB Statement No. 10, claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are re-evaluated periodically to consider the effects of inflation, recent claim settlement trends (including frequency and amount of pay-outs), and other economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses, regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. Claims liability for the Division is immaterial. NOTE H - RELATED PARTY TRANSACTIONS Revenues and Accounts Receivable: The Division provides sewer services to the City, including its various departments and divisions. Standard consumption rates are charged, except for the Division of Fire, public buildings and certain other facilities owned by the City, which by ordinance are provided free sewer services. Billing and collection services for the Division are performed by the Division of Water for a fee. This fee is based on the number of billings made on behalf of the Division during the year at the same rates as charged to other users of the billing system. These fees were approximately $2,421,000 and $2,414,000 in 2012 and 2011, respectively. 31 CITY OF CLEVELAND, OHIO DEPARTMENT OF PUBLIC UTILITIES DIVISION OF WATER POLLUTION CONTROL NOTES TO FINANCIAL STATEMENTS (Continued) For the Years Ended December 31, 2012 and 2011 NOTE H - RELATED PARTY TRANSACTIONS (Continued) Operating Expenses: The Division is provided various intra-city services. Charges are based on actual use or on a reasonable pro-rata basis. The more significant costs for the years ended December 31, 2012 and 2011 were as follows: (In thousands) Electricity purchases Street construction and maintenance City Administration Motor Vehicle Maintenance Utilities Administration and Utilities Fiscal Control Services provided by the Division of Water 2012 $ 198 134 469 472 473 315 2011 $ 204 199 456 458 477 467 NOTE I - CUYAHOGA COUNTY REAL PROPERTY TAXES The Division is required by ordinance to keep records of the estimated property taxes which would be payable to Cuyahoga County were it subject to such taxes. The estimated property taxes for the Division, based on book value of real estate at the current tax rates, would have been approximately $24,552 and $21,181 for the years ended December 31, 2012 and 2011, respectively. 32 CITY OF CLEVELAND CUYAHOGA COUNTY CLERK'S CERTIFICATION This is a true and correct copy of the report which is required to be filed in the Office of the Auditor of State pursuant to Section 117.26, Revised Code, and which is filed in Columbus, Ohio. CLERK OF THE BUREAU CERTIFIED SEPTEMBER 5, 2013 88 East Broad Street, Fourth Floor, Columbus, Ohio 43215-3506 Phone: 614-466-4514 or 800-282-0370 Fax: 614-466-4490 www.ohioauditor.gov