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2006 Financial StatementCITY OF FAIRLAWN, OHIO BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 JER®ME F,. APPLE, FINANCE DIRECTOR CITY OF FAIRLAWN SUMMIT COUNTY TABLE OF CONTENTS TITLE PAGE Independent Accountants' Report .................................................................................................................1 Management's Discussion and Analysis ....................................................................................................... 3 Basic Financial Statements: Govemment-Wide Financial Statements: Statement of Net Assets .............................................................................................. ............15 Statement of Activities ................................................................................................. ............16 Fund Financial Statements: Balance Sheet Governmental Funds ........................................................................................... .............17 Reconciliation of Total Governmental Fund Balances to Net Assets of Governmental Activities ................................................................. .............18 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds ...................................:........................................................ .............19 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities ............ .............20 Statement of Revenues, Expenditures and Changes in Fund Balance -Budget and Actual (Non-GAAP Budgetary Basis) General Fund ..............................................................................................................21 Statement of Fiduciary Net Assets Fiduciary Funds ................................................................................................................. 2<' Notes to the Basic Financial Statements ...... ............................................................ 23 Independent Accountants' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Required by Government Auditing Standards ..........................................................................................47 This page intentionally left blank. . , ,. ~. City of Fairlawn Summit County 3487 South Smith Road Fairlawn, Ohio 44333 1VTary Taylor, cpA Auditor of State INDEPENDENT ACCOUNTANTS' REPORT To the Honorable Mayor and Members of City Council: We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Fairlawn, Summit County, Ohio, (the City) as of and for the year ended December 31, 2006, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our 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 the Comptroller General of the United States' Government Auditing Standards. Those standards require that we plan and perform the audit to reasonably assure whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Fairlawn, Summit County, Ohio, as of December 31, 2006, and the respective changes in financial position thereof and the respective budgetary comparison for the General fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. As described in Note 3, a restatement is required to properly report a Iiabiiity for income tax refunds previously recorded in the Capital Improvement Fund. The General and Capital Improvement Funds have been restated as of December 31, 2005. In accordance with Government Auditing Standards, we have also issued our report dated August 8, 2007, on our consideration of the City's internal control over financial reporting arrd our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. While we did not opine on the internal control over financial reporting or on compliance, that report describes the scope of our testing of internal control over financial reporting and compliance and the results of that testing. That report is an integral part of an audit performed in accordance with Government Auditing Standards. You should read it in conjunction with this report in assessing the results of our audit. 101 Central Plaza South / 700 Chase Tower /Canton, OI-I4470Z-1509 Telephone: (330) 438-0617 (800) 443-9272 Fax: (330) 471-0001 www.aud itor.state.oh.us City of Fairlawn Summit County Independent Accountants' Report Page 2 Management's Discussion and Analysis is not a required part of the basic financial statements but is supplementary information accounting principles generally accepted in the United States of America requires. We have applied certain limited procedures, consisting principally of inquiries of management regarding the methods of measuring and presenting the required supplementary information. However, we did not audit the information and express no opinion on it. ~~.~ Mary Taylor, CPA Auditor of State August 8, 2007 CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 20D6 UNAUllITED The management's discussion and analysis of the City of Fairlawn's (the "City") financial performance provides an overall review oi'the City's financial activities for the year ended December 31, 2006. The intent of this discussion and analysis is to look at the City's financial performance as a whole; readers should also review the basic financial statements and the notes to the basic financial statements to enhance their understanding of the City's financial performance. Financial Highlights Key Financial highlights for 2006 are as follows: - The total net assets of the City increased $241,287. Net assets of govemmental activities increased $241,287 or 0.32% from 2005, to a total of $75,276,903 in 2006. - General revenues accounted for $12,318,096 of total governmental activities revenue. Program specific revenues accounted for $1,361;880 or 9.95% of total governmental activities revenue. - The City had $13,438,689 in expenses related to govemmental activities; $1,361,880 of these expenses was offset by program specific charges for services, grants or contributions. The remaining expenses of the governmental activities of $12,076,809 were offset by general revenues (primarily property taxes, income taxes and unrestricted grants and entitlements, including Joint Economic Development District (JEDD) revenue). - The City has three major funds, the general fund, bond retirement fund and capital improvement fund. The general fund, the largest major fund, had revenues and other financing sources of $]0,481,764 in 2006. This represents an increase of $230,649 from 2005 revenues and other financing sources, largely due to [he sale of land. The expenditures and other Financing uses of the general fund, which totaled $9,518,855 in 2006, increased $127,355 from 2005. The net increase in fund balance for the general fund was $962,909 or 16.60%. - The bond retirement fund had revenues of $263,301 in 20D6. The expenditures of the bond retirement fund totaled $300,392 in 2006. The net decrease in fund balance for the bond retirement fund was $37,091 or 18.55%. - The capital improvement fund had revenues and other financing sources of $2,530,998 in 2006. The expenditures of the capital improvement fund totaled $2,]48,590 in 2006. The net increase in fund balance for the capital improvement fund was $382,408 or 9.27%. The increase is attributed to less capital spending in 2006 as compared to 2005. Using this Annual Financial Report This annual report consists of a series of financial statements and notes to these statements. These sta[etnents are organized so the reader can understand the City as a financial whole, an entire operating entity. The statements then proceed to provide an increasingly detailed look at specific financial activities. The statement of net assets and statement of activities provide information about the activities of the City as a whole, presenting both an aggregate view of the City's finances and alonger-term view of those finances. Fund financial statements provide the next level of detail For governmental funds, these statements tell how services were financed in the short-term as well as what remains for future spending. The fund financial statements also look at the City's most significant funds with all other nonmajor funds presented in total in one column. CITY OF FAIRLAWN, OHIO MANAGEMENT'S D15CUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBF,R 31, 2006 UNAUDITED Reporting the City as a Whole Statement of Net Assets and the Statement of Activities While this document contains a large number of funds used by the City to provide programs and activities, the view of the City as a whole looks at all tinancia] ttansactions and asks the question, "How did we do financially during 20067" The statement of net assets and the statement of activities answer [his question. These statements include all assets, liabilities, revenues and expenses using the accrual basis of acwunting similar to the accounting used by most private-sector companies. Phis basis of accounting will take into account all of the current year's revenues and expenses regardless of when cash is received or paid. These two statements report the City's net assets and changes in those assets. This change in net assets is important because it tells [he reader,that, for the City as a whole, the financial position of the City has unproved or diminished. The causes of this change may be the result of many factors, some financial, some not. Non-financial factors include the City's property tax base, current property tax laws in Ohio restricting revenue growth, facility conditions, required community programs and other factors. In the statement of net assets and the statement of activities, the Governmental activities include the City's programs and services including police, fire and rescue, street maintenance, capital improvements and general administration. These services are funded primarily by property and income taxes and intergovernmental revenues including federal and state grants and other shared revenues. The City's statement of net assets and statement of activities can be found on pages 15-16 of this report Reporting the City's Most Significant Funds Frond 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 two categories: governmental funds and fiduciary fimds. Pund financial repots provide detailed information about the City's major funds. The City uses many funds to account for a multitude of 5nancial transactions. Flowevcr, these fund financial statements focus on the City's most significant funds. The analysis of the City's major governmental fundsbegins on page 9. Covernn:entat F7mds 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 statetents, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-terra financing requirements. Because the focus of the governmental funds is narrower than that of the government-wide financial statements, it is usefut to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing sn, the readers may better understand the long-term impact of the government's near-term financing decisions. Bath 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. CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2004 UNAUDITED The City maintains a multitude of individual govemmental funds. The City has segregated these funds into major funds and nonmajor funds. The City's major govemmental funds are the general fund, bond retirement fund and capital improvement fund. Information for major funds is presented separately in the govemrental fund balance sheet and in the govemmental statement of revenues, expenditures, and changes in fund balances. Data from the other govemmental funds are combined into a single, aggregated presentation. Tkte basic govemmental fund financial statements can be found on pages 17-21 of this report. Fiduciary Funds Fiduciary funds are used to account for resources held for the benefit of parties outside the City. Fiduciary funds are not reflected in the government-wide financial statement because the resources of those funds are not available to support the City's own prograrns. The City's only fiduciary funds are agency funds. Agency funds are custodial in nature (assets equal liabilities) and do not involve the measurement of results of operations. The basic fiduciary fund financial statement can be found on page 22 of this report. Notes to the Bnsic Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. These notes to the basic financial statements can be found on pages 23-45 of this report. Government-Wide Financial Analysis The Statement of Net Assets provides [he perspective of the City as a whole. The table below provides a summary of the City's net assets for 2004 compared to 2005: Net Assets Governmental Govemmentat Activities Activities 2006 2005 Assets Current and other assets $ 19,825,841 $ 20,165,263 Capital assets b9,206,066 10,456,951 Total assets 89,(13(,907 90,622,214 Liabilities Cunent and other liabilities 2,826,613 3,905,531 Long-term liabilities 10,928,391 11,681,067 Total liabilities 13,755,004 15,586,598 Net Assets Invested in capital assets, net of related debt 59,316,470 59,943,218 Restricted 9,283,952 8,357,391 Unrestricted 6,676,541 6,735,007 Total net assets $ 75,276,903 $ 75,035,616 Over time, net assets can serve as a useful indicator of a government's financial position. At December 31, 2006, the City's assets exceeded liabilities by $75,276,903. CCfY OF FA[RLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED Capital assets reported on the government-wide statements represent the largest portion of the City's assets. At year-end, capital assets represehted 77.73% of total assets. Capital assets include land, land improvements, buildings, machinery and equipment, licensed vehicles, infrastructure and construction in progress. Capital assets, net of related debt to acquire the assets at December 31, 2006, were $59,316,410. These capital assets are used to provide services to citizens and 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 to repay the debt must be provided from other sources, since capital assets may not be used to liquidate these liabilities. A portion of the City's net assets, $9,283,952, represents resources that are subject to external restriction on how they may be used. in the governmental activities, the remaining balance of unrestricted net assets of $6,676,541 may be used to meet the government's ongoing obligations to citizens and creditors. The table below shows the changes in net assets for fiscal years 2006 and 2,005 Change in Net Assets Revenues Program revenues: Charges for services Operating grants and contri6u[ions Capital grants and contributions Total program revenues General revenues: Property and other taxes Income taxes Unrestricted grants and entitlements 7EDD revenue Investment earnings Gain on sate of capital assets Miscellaneous Total general revenues Total revenues Governmental Governmental Activities Activities 2006 2005 $ 839,366 $ 865,168 385,5! 1 440,341 137;003 252,348 1,361,380 1,557,857 (,043,288 990,128 • - 7,902,279 8,478,611 I,OS (,378 [,147,523 588,657 1,919,336 740,744 - 426,782 ~~ 86D,509 - (07,301 62,^,24 12,3 l 8, 096 l 3,024, 804 13,679,976 14,582,661 6 C[TY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED Change in Net Assets Govemmental Govemmental -. Activities Activities 20D6 2005 Expenses - General government 8 2,422,823 S 2,500,501 Security of persons and property 5,644,020 5,843,983 Public health services 112,680 1 11,977 Transportaticr, 3,1?0,809 3;575,269 Community environmenr 7.47;683 - 73,726 i3asic utility services 786,272 1,064,861 Leisure time activity 391,195 364,696 ~ Interest and fiscal charges 493,207 523,507 i Total expenses - 13,438,689 (4,058,520 Change in net assets 241,237 524,141 Net assets at beginning of year 75,035,61fi 74,51 L,475 Net assets et end of year 5 71,276,903 $ 75,D35,616 i I Governmental AcHviftes ~~ Govemmental activities net assets increased $241,287 in 2006. The increase is largely due to the sale of 8.5 acres of land owned by the City. 8ecuriry of persons and' property, which primarily supports the operations of the police and fire departments accounted for $5,844,020 of the total expenses of the City. These expenses were partially funded by $234,719 in ~~~ ~ direct charges to users of the services and $76,631 in operating grant and contributions, Transportation expenses totaled $3,140,809. Transportation expenses were partially funded by $475 indirect charges to users of the services, and $308,880 in operating grants and contributions and $137,003 in capital grants and contributions. The. county, state and federal governments contributed to the City a total of $385,511 in operating grants and contributions grid $137,003 in capital grants and contributions. These revenues are restricted to a particular program or purpose. Of the total operating grants and contributioris,.$76,631 subsidized security of persons andproperty and ,I $308,880 subsidized transportation programs. All of the total capital grants and contributions, $137,003 subsidized transportation programs. General revenues totaled $12,318,096, and amounted to 90.05% of total governmental revenues. These revenues primarily consist of property and income tax revenue of $8,945,507. The statement of activities shows the cost of program services and the chazges for services and grants offsetting those services. The following table shows, for governmental activities, the total cost of services and the net cost of services. That is, it identifies the cost of these services supported by tax revenue and unrestricted State grants and entitlements. The graph below illustrates the City's dependence upon general revenues as program revenues are not sufficient to cover total governmental expenses. CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED Governmental Activities -Program Revenues vs. Total Expenses $15,000,000 $12,500,000 $10,000,000 £7,500,000 $5,000,000 $2,500,000 5- ^-Program Revenues Expenses Governmental Activities Total Cost of Net Cost of Total Cost of Net Cost of Services Services Services Services 2D06 20D6 2005 2005 Program Expenses: Generaigovernment $ 2,422,823 $ 1,973,099 $ 2,500,501 $ 1,997,104 Security of persons and property 5,844,020 5,532,670 5,843,983 5,514,809 Publiahealth services 112,680 112,680 111,977. 111,977 Transportation 3,140,809 2,694,451 3,575,269 3,011,584 Community environment 247,683 242,749 73,726 66,419 n^asicutili[yservices 786,272 655,421 1,D64,861 929,570 Leisure time activity 391,195 372,532 364,696 345,693 Interest and fiscal charges 493,207 493,207 523,507 523,507 Total $ 13,438,689 $ 12,076,809 $ 14,058,520 $ 12,500,663 The dependence upon general revenues for governmental activities is apparent, with 89.87% of ex penses supported through taxes and other general revenues. The chart below illustrates the City's program revenu es versus general revenues for20D6: 8 Fiscal Year 2000 Fiscal Year 2005 CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED Governmental Activities -General and Program Revenues $14,000,000 $]2,000,000 $10,000,000 $0,000,000 $6,000,000 $a;DOO;noo $2,DDa,ooD $- ^ Program Revenues O General Revenues 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, unreserved fund balance serves as a useful measure of the City's net resources available for spending at year-end. The City's governmental funds (as presented on the balance sheet on page 17) reported a combined fund balance of $13,742,954 which is $1,566,613 greater than last yesr's total of $12,175,341. The schedule below indicates the fund balances and the total change in fund balances as of December 31, 2006 and 2005 for all major and nonmajor governmental funds. Restated Fund Balances Fund Balances Increase Percentage 12/31/06 12/31/05 (Decrease) Chanae Major funds: General $ 6,802,004 $ 5,801,556 $ 1,000,448 17.24 Bond retirement 162,896 199,987 (37,091) (18.55) Capital improvement 4,508,566 4,126,158 382,408 9.27 Other nonmajor governmental funds 2,269,488 2,048,640 220,848 10.78 Total $ 13,742,954 $ 12,176,341 $ 1,566,613 12.87 9 Fiscal Year 2006 Fiscal Year 2005 CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED GeneralFuud The City's general fund balance increased $1,000,448. The table that follows assists in illustrating the revenues of the general fund. 2006 2005 Percentage Amount Amount Change Revenues Taxes $ 6,465,892 $ 6,722,502 (3.82) Charges for services 25,886 8,249 213.81 Licenses and permits 76,782 63,213 21.47 Fines and forfeitures 192,127 150,615 27.56 Investment income 718,633 `390,927 83.83 °i° Intergovemmental 1,368,874 878,462 55.83 JEDD revenue 588,657 7,919,336 (69.33) Other 138,880 95,406 45.57 Total $ 9,575,731 $ 10,228,710 (6.38) Tax revenue represents 67.52% of atl general fund revenue. Tax revenue decreased by 3.82% from prior year. The increase in estate tax is reflected in Intergovemmental revenue. JEDD revemre decreased as a result Df the one-time payment from the JEDD to Bath Township in 2D06. The increase in investment income is due to increases in interest raies by the Federal Reserve Bank throughout the year. All other revenue remained comparable to 2005. Revenues -Fiscal Year 2006 Revenues -Fiscal Year 2005 Investment Fines and Investment tncame FarfeiWres Income Fines and 7.SW/ 1.47% ~~ 3.82 % fodeiwres - \ [ntmg°vcm- 2.U1% .Inter °vem- Licenses end mental & JEDD Revenue 859% Licenses and mental 615% Permits Pe~inils 14.30% 0.62% fEDD Revcncc 0.80% i 8,77% Charges for Cher cs fm Services r-~ _ E t~t~-S ye, "a _~c~• 0.08% i~r-,i n,~ t ~'; ,:- Services - ~'~ o.z7se Taxes Dther Revenues 1.45% Taxes @hcr Revenues 0.93 10 "G - I _ CITY OF FAIRLAWN, OHIO - MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED The table that follows assists in illustrating the expenditures of the general fund. 2006 2005 Percentage Amount Amount Chanee Exnehditures General government $ 2,372,280 $ 2,443,661 (2.92) Security of persons and property 4,837,325 4,714,322 2.61 Public health services 112,680 111,977 0.63 Transportation 1,556,894 1,585,956. (1.8"s) Community environment 67,057 66,799 0.39 °/a Basic utility services ;49,697 .161,327 (7.21) Leisure time activity 42,422 33,458 26.79 °.~o Total $ .9,138,355 $ 9,117,500 0.23 All expenditures remained comparable to 2005. The largest expenditure line item, security of persons and property, increased modestly due to wage and benefit increases and overall cost increases in purchased goods and services. Expenditures -Fiscal Year 2006 Basic utility Community services Leisure time envlrunment 1fi4% 073% actlvlty a.46% Transpod- atlon \ General 17.04% ~ \ ~governme 2586% Public health services 723% Secunty of persc ns and pra party 52.94% Bond Retiremenr Fund Expenditures -Fiscal Year 2005 Basic utility Community services Leisure time environment\ 177% activity Transport- atiw 77,39% ~ Public health / services ... 1.23%_.. Security ar persons and property 51.71% Geneat rvemme 26.80% The bond retirement fund had revenues of $263,301 in 2006. The expenditures of the bond retirement fund totaled $300,392 in 2006. The net decrease in fund balance for the bond retirement fund was $37,091 or 18.55%. Capitallmproverneut Freud The capital improvement fund had revenues of $2,530,998 in 2006. The expenditures of the capital improvement fund totaled $2,148,590 in 2006. The net increase in fund balance for the capital improvement fund was $382,408 or 9.27%. The increase is attributed to a greater general fund transfer into the capital improvement fund and less capital spending. I1 CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED Budgeting Highlights The City's budgeting process is prescribed by the Ohio Revised Code (ORC). Essentially the budget is the City's appropriations which are restricted by the amounts of anticipated revenues certified by the County Budget Commission in accordance with the ORC. Therefore, the City's plans or desires cannot be totally reflected in the original budget. If budgeted revenues are adjusted due to actual activity then the appropriations can be adjusted accordingly. Budgetary information is presented for the general fund. In the general fund, one of the most significant changes was between the original and final budgeted amount in the area of revenues, which increased $190,503 from $7,829,805 fo $8,020,308. Revenue budgeted for the sale of fixed assets was significantly increased to reflect the sale of 8.5 acres of undeveloped land owned by the City. Actual revenues of $9,685,572 exceeded final budgeted revenues by $1,665,264..Budgeted revenue was increased to reflect the increase in intergovernmental revenue and property tax, however amounts received for estate tax and local government revenues exceeded budget estimates. The other significant change was between the final budgeted expenditures and actual expenditures. Actual expendimres came in $565,297 lower than the final budgeted amounts due to less than full staffing in the police, fire, building & zoning and dispatch departments; less legal and consulting services than planned; less than anticipated utility expenses due to the City's aggregation programs; and overall prudent management. Capital Assets and Debt Administration Capital Assets At the end of fiscal 2006, the City had $69,206,066 (net of accumulated depreciation) invested in land, land improvements, buildings, machinery and equipment, licensed vehicles, infrastmcture and constmction in progress. The following table shows fisca12006 balances compared to 2005: Capital Assets at December 31 (Net of Depreciation) Land Land improvements Buildings and Improvements Machinery and equipment Licensed vehicles Infrastructure Construction in progress Governmental Activities 2006 ' 2005 $ 3,194,219 $ 3,2`s4,75'1 543,072 549,815 11,614,121 11.880,684 1,905,604 1,798,812 1,463,878 1,608,140 50,485,172 51,376,507 - 8,236 Totals $ 69,206,066 $ 70,456,951 12 r: CITY OF FAIRLAWN, OHIO MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED The following graphs show the breakdown of governmental capital assets by category for 2006 and 2005. Capital Assets -Governmental Activities 2006 Capital Assets - Governmental Activities 2005 ]2.95% Land imp. puildings Land e'79% 16.06% 4.59% tdachinery and tacfiiveryand ~@ equipment equipment 0.01% 2.55% 2.75% st~4 Licensed ~ a p3M~~I girl i~~4n ~~~ Llc¢n5ed vehicles vehicles 2.12 0 2.29°/ Infmsirvcwrc 92.92 % The City's largest capital asset category is infrastructure which includes roads, bridges, culverts, sidewalks and curbs. These items aze immovable and of value only to the City; however the annual cost of purchasing these items is quite significant. The net book value of the City's infrastructure (cost less accumulated depreciation) represents apprcximately 72.95% of the City's total govemmental capital assets at December 31, 2006. See Note 10 for more detail on the City's capital assets. Debt Administration The City had the following long-term obligations outstanding at December 31, 2006 and 2005: Govemmenta] Activities 2005 2005 General obligation bonds $ 8,510,000 $ 9,OSQ000 Special assessment bonds 810,000 940,000 OPWCloans 565,656 623,733 Compensated absences 1,038,735 1,067,334 Total long-term obligations $ 10,928;391 $ 11,681,067 See Note 11 for more detail on the City's long-term obligations. Economic Conditions and Next Year's General Fund Budget Outlook The City of Fairlawn is a residential community with a strong diversified business base. The City is home to several large corporations, a multitude of small, diverse businesses, and five thriving retail centers, including Summit Mall, Rosemont Commons, the Shops at Fairlawn, the Fairlawn Towne Center, and Miller-Market Square. t3 CITY OF FAIRLAWN, OHIO - MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006 UNAUDITED. The City's convenient location continues to amact and retain growing businesses and it has recently welcomed Buckingham, Doolittle and Burroughs, LLP, Mutual of America Life Insurance Company and Zellmed Solutions. Summit Mall began an exciting $9 million restoration in early 2007. The substantial rerovatian includes the addition of four new stores and a restaurant, and improves pedestrian access to the mall. The City's Land Use Plan designated 200+ acres of former farmland as an office park in the Ciry's southwest comer. The azea now known as Fairlawn Corporate Park is currently booming with activity. Two office buildings have been completed and aze partially occupied. Two others are under constmction and are expected to be finished soon. Five additional buildings have been proposed in the Corporate Park. ' The City's primary revenue source is the 2% local income tax withheld on the estimated 40,000 people working in the City. The City is foriunate~ to be able to weather the economic conditions through its broad tax base and is projecting nominal growth far 2007. The City is proud to offer outstanding city services to its residents. In addition to excellent police and fire protection, Fairlawn safety forces are active in the community, offering education programs such as Dmg Abuse Resistance Education (DARE), Fire Prevention, and Safety Town for our youngest residents. Fairlawn police support neighborhood Block Parent groups, offer residential checks and a Senior Call program to check on senior citizens living alone. The popular Special Traffic Enforcement Program boosts traffic control where residents most see a need. The City's highly trained emergency medical teams are outfitted with advanced medical equipment and provide free emergency utedical care to Fairlawn residents. The Municipal Service Center Complex houses all public service functions and equipment in one area. The City provides trash and recycling services at no charge to residents at the Andrew Sombati Compactor site, an all-weather drive-thru trash compactor facility. The City operates fifty-three (53) acres of parks which offer year-round recreational programs for children and adults. The Learning Resource Center, staffed with afull-time Naturalist, offers nature-related programs and lectures to groups of al] ages. The City is currently exploring the feasibility of joining forces with neighboring communities to create a join*. recreational center. The City is prcjecting moderate growth in general fund revenue in 2007. Expenditures for 2007-are budgeted at 12.1% greater than the prior year due to projected full staffing, moderate wage increases, general inflation and a city-wide radio equipment upgrade partially funded through grants. Programs supported by the general fund are budgeted at the same level of service as last year. There are no new hires planned far 20D7. Contacting the City's Financial Management Thisrinancial report is designed to provide our citizen's, taxpayers, investors and crediiors with a general overview of the City's finances and to show the City's accountability for the money it receives. If you have questions about this report or need additional. financial information, contact Mr. Jerome E. Apple, Finance Director, City of Fairlawn, 3487 S. Smith Road, Fairlawn, Ohio 44333. 14 ~. i i CITY OF FAIRLAWN, OHIO STATEMENT OF NET ASSETS DECEMBER 31, 2006 Governmentai Activities Asses: Equity in pooled cash and cash equivalents......... $ 13,850,885 Cash and cash equivalents in segregated accounts ..... 210,418 Receivahies (net of allowances for uncollectibles): Incometaxes ........................ ~ 1,872,359 Real and other taxes ................... 905,957 Accounts ........ ................: 49,606 .4cerued interest ..................... 121,863 Special assessments .................. . 1,919,473 Due from othergovernments ................ 517,902 Prepayments ........................ 103,041 Malarial, and supplies inventory .............. 274,337 Capital assets: Land and construction in progress............ 3,194,279 Depreciable capital assets, net ............. 66,011,847 Total capital assets .................... 69,206,066 Total assets ........................ . 89,037,907 Liabilities Accounts payable ...................... 1,238,957 Contracts payable ...................... 6,60D Accrued wages and benefits ..............:. 210,387 Due to other govemmens ................ 480,087 Deferred revenue ...................... 837,594 Accrued interest payable .................. 52,988 Long-teRn liabilities: Due within one year ................... 1,095,810 Due in more Chap one year ............... 9;832,581 Total liabilities ............. ......... 13,755,004 Net assets: Invested in capital assets, net of related debt ....... 59,316,410 Restricted for: Capital projects ..................... 5,553,789 Debt service ...................... 2,060,554 Other purposes ..................... 1,669,6D9 Unresbicled ........................ 6,676,541 Total net assets ...................... $ 75,276.903 SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 15 CITY OF FAIRLAWN, OHIO ST'AT'EMENT OF. ACTIVITIES FOR THE YEAR ENDED DECEMBER 3 1, 2006 Net (Expense) , Revenue and Changes in ~ - Pro>ram Revenues Net Assets Operating Capital Charges Tor Grants and Grants and Governmental ' Expenses Services Contributions Contributions Activities Governments! Activities: General government ........... ..... $ 2,422,823 $ 449,724 $ $ - $ (1,973,099) Security of persons and property.... ...... 5,844,020 234,719 76,631 - (5,532,670) Public health services .. .... ...... 112,680 - - - (172,680) Transportation... ........ ..... 3,14D,809 475 308,880 137,003 (2,694,451) Community environment ........ ...... 247,683 4,934 - - (242,749) Basic utility services .......... ...... 786;272 130,557 - - (655,427) Leisure time activity .......... ...... 391,795 18,663 - (372,532) , Interest and fiscal charges ....... ...... 493,207 - - - (493,207) Total governmental activities...... ...... 13.438,689 839,366 385,571 ] 37,D03 (12,076,809) Genera! Revenues: Property and other taxes levied for: General purposes ........ ............ ......... 662,301 ~ ' Police and fire pension ..... ............ ......... 188,006 Parks and recreation ...... ............ ......... 192,981 Income taxes levied for: Generai purposes ......... ............ ......... 5,646,608 Capital projects ......... ............ ......... 2,255,611 7EDD revenue ........... ....... .... .......... 588,657 Grants and entitlements not restricted to specific progra ms ........ 1,081,378 _ Im~estment comings ...... ........... ........ 740,744 Gain on sale of capital assets .... ........... ......... . 86C,509 Miscellaneous ........... ........... .......... 101,307 Total genera] revenues ........................... 12,318,096 Change ir, net assets ............................ 241,287 Net assets at beginning of year ..................... 75,035,67 6 Net assets at end o(year .......................... $ 75,276,903 SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 16 CITY OF FAIRLAWN, OHIO Assets: ` Equity in pooled cash and cash equivalents ................. . Cash and cash equivalents in segregated accounts ............ . ~: -. Receivables (net of allowance for uncollectibles): i Income taxes ................. . Real and ether taxes .............. . - Accounts ............... ... . Accrued interest ................ . ,. , Special assessments .............. . Due fom other funds ............... . r t Due from other governments...... . Prepayments ................... . - ~ Materials and supplies inventory......... . Total assets ..................... . Liabilities: Accounts payable . . .............. . Contracts payable ................ . Accrued wages and benefits ........... . Due to other funds ................ . Due to other governments ............ . Deferred revenue................. . Total liabilities .................... . Fund Balances: keserved for encumbrances ........... . Reserved for prepayments ............ . Reserved for materials and supplies inventory.. . Reserved for unclaimed monies ......... . Reserved for debt service ............ . Unreserved: Undesignated, reported in: General fund ................. . Special revenue funds ............ . Capital projects fnnds ............ . Total fund balances ................. . Totat liabilities and fund balances ......... . BALANCE SHEET GOVERNMENTAL FUNDS DECEMBER 31, 2006 .Other Total Bond Capital Governmental Governmental General Retirement Improvement Funds Funds $ 7,707,645 $ 162,896 $ 4,200,695 $ 2,379,649 $ 13,850,885 210,418 - - - 210,418 1,263,842 - 608,517 - 1,872,359 695,553 - 210,404 905,957 7,678 - - 41,988 49,606 116,299 - - 5,568 121,863 - 1,378,909 540,564 - 1,919,473 - - - 5,013 5,013 359,326 - - 158,576 517,902 103,041 - - - 103,041 258,698 - - 75,639 274,337 $ 10,122,436 $ 1,541,805 $ 5,349,776 $ 2,816,837 $ 79,830,854 $ 1,224,990 $ - $ 4,265 $ 9,702 $ 1,233,957 - - 2,340 4,260 5,600 209,302 - - 1,085 210,387 5,073 - - - 5,013 293,621 - - 186,466 480,087 1,587,506 1,378,909 834,605 345,836 4,146.856 3,320,432 1,378,909 841,210 547,349 6,087,900 258,936 - 49,817 326,369 635,176 103,041 - ~ - - 103,041 258,698 - - 15,539 274,337 25,842 - - - 25,342 - 162,896 - 162,896 6,155,487 - - - 6,]55,487 - - - 1,211,457 1,217,457 4,458,755 716,023 5,174,778 6,802,004 162,896 4,508,566 2,269,488 13,742,954 $ ]0,722,436 $ 7,547,805 $ 5.349.776 $ 2.816,837 $ 19,830,854 SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 17 CITY OF FAIRLAWN, OHIO RECONCiLIATtON OF TOTAL GOVERNMENTAL FUND BALANCES TO NET ASSETS OF GOVERNMENTAL ACTIViTIF.S DECEMBER 3I, 2006 Total governmental fund balances Amounts repor[edfargovernmenta! activities in 11ie slafemenl ojnet assets are differen! because: Capital assets used in govemmenta] activities are not financial resources and therefore are not reported in the funds. Other long-terrn assets are not available to pay for current period expenditures and therefore are deferred in the funds. Income taxes Investment income Special assessments Other intergovemmen[al revenues Total $ 904,741 67,262 1,919,473 25,012 392,774 S 13,742,954 ~. 69,206,066 3,309,262 Long-term liabilities are not due and payable in the current period and therefore are not reported in the funds. The long-term liabilities are as follows: Accrued interest payable General obligation bonds Special assessment bonds OPWC loans Compensated absences Net assets of governmental activities (52,988) (8,510,D00) (810,000) (569,656) {1,038,735) SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS (ID,981,379) $ 75,276,903 18 CITY OF FAIRLAWN, OHIO STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED DECEMBER 31, 2006 Other Total Bond Capital Governmental Governmental l G Retirement Improvement Funds Funds enera Revenues: 591 803 $ 5 $ - $ 2,331,195 $ - $ 134,786 8, Incmne taxes ............. ... , , 301 662 - - 381,637 1,043,938 Property and other taxes ............ , 25 886 - - 292,387 318,273 Charges for services .............. , 782 '16 - _ 71 682 148,464 Licenses and permits ...... . ....... , 192 127 - - SD,763 272,890 Fines and forfeitures .............. , 874 1 368 ~ - 137,003 400,042 1,905,919 Intergovernmental ............... , , 263,301 62,800 _ 326,101 S ecial assessments ............... P 718 633 - - 29,034 747,667 Inveshnent income ............... , 634 53 - - 9,128 62,762 Rentals ..................... , - - 4,025 4,025 Contributions and donations ...... - . ~ - - - 588,657 SEDD revenue ................. 588,657 246 85 - - - 11,972 97,216 Other .... .................. , 731 575 9 263,301 2,530,998 1,280,670 13,650,700 Total revenues ................. , , Expenditures: Current: 28D 2 372 13,890 - 168 2,386,338 General government ............ , , 325 4 837 - - 664,037 5,501,362 Security of persons amd property . - .... , , - 112,680 Public health services ........... . 112,680 - - 231 176 1,733,125. Transportation ................ 1,556,894 - - , 552 204 271,609 Community environment .......... 67,057 - , 697 149 Basic utility services ............. 149,697 - - 579. 285 , 328,001 Leisure time activities............ 42,422 - - 1,813,692 , 109,391 1,323,083 Capital outlay .... ..... ..... . .. Deb[service: - 077 184 540,000 - 724,077 Principal retirement............ - , 425 102 394,898 - 457.323 Interest and fiscal charges .......... 138 355 9 , 300,392 2,148,590 1,439,958 13,027,295 Total expenditures ............... , , Excess (deficiency) of revenues 376 437 (37,091) 382,408 (159,266) 623,A05 aver (under)expendilures.......... , _ Other financing sources (uses): 906.033 Proceeds from sale of capital assets ...... 9D6,033 _ _ 380,500 380,500 Transfers in ....... . .......... - (380,500) Transfers out ................. (380,500) - ._ 500 380 906,033 Total other financing sources (uses) ....... 525,533 - , Net change in fund balances .... - ....... 962,909 (37,091) 362,408 221,212 1,529,438 Fund balances at beginning of year as restated S,SO 1,556 199,987 4,126,158 2,048,640 64 12,176,341 175 37 37 539 - - (3 ) , Increase (decrease)in reserve for inventory.. , 4 896 $ 162 566 $ 4 508 $ 2,269,488 $ 13,742,954 Fund balances at end of year .......... S 6,802,00 , , , SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 19 CITY OF FAIRLAWN, OHIO RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2006 Net change in fond balances -total governmental funds ~Inaounts reported jor governnental activities in lbe statenewvt of activities are d~erenl becaase: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets are allocated over their estimated useful lives as depreciation expense. This is the amount by which depreciation expense ($1,982,715) exceeded capital outlays ($782,737) in the current period. Govemmentat funds only report the disposal of capital assets to the extent proceeds are received from the sale. In the statement of activities, a gain or loss is reported for each disposal. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the t'unds. Govemmentat funds report expenditures for inventory when purchased. However, in the statement of activities, they are reported as an expense when consumed. Repayment of bond and loan principal is an expenditure in the govemmental funds, but the repayment reduces long-term liahilities in the statement of net assets. in the statement of activities, interest is accrued on outstanding bands and (pans whereas in govemmental funds, an interest expenditure is reported when due. Some expenses reported in the statement of activities, such as compensated absences, do not require the use of torten[ financial resources and therefore are not reported as expenditures in ttse govemmental fiords. Change in net assets of governmental activities SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 1,529,438 (1,199,978) (50,907) (831,233) 37,175 724,077 4,116 26,599 $ 2ai;z87 20 CITY OF FAiRLAWN, OHIO STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE -BUDGET AND ACTUAL (NON-GAAP BUDGETARY BASiS) GENERAL FWD FOR THE YEAR ENDED DECEMBER 31, 2006 Revenues: Income taxes .................... . Property and other taxes ....... . ...... . Charges for services ................ . Licenses and permits ................ . Fines and forfeitures............ 7EDD revenue ......... . .... . .... . intergovernmental ................. . Investment income ................ . Rentals ...................... . Other ....... ................ Total revenues .................. . Expenditures: Current General government ............. . Security of persons and property ....... . Public health services ............. . Transportation .............. ~ • Community environment...... - .... . Basic utility services .......... Leisure time activities ............ . Total expenditures ............... . Excess (deficiency) of revenues over (under) expenditures ........... . Variance with Final Budget Positive (Negative) Budgeted Amounts Original Final Actual $ 5,293,355 603,561 14,411 62,421 196,659 765,200 461,698 350,000 46,000 36,500 7,829,805 $ 5,293,355 655,341 14,41 I 68,421 196,659 765,200 592,684 350,000 46,000 38,237 8,020,308 $ 5,880;545 657,204 21,675 76,782 191,943 588,657 1,472,162 657,666 53,634 85,304 9,685,572 $ 587,190 1,863 7,264 8,361 (4,716) (176,543) 879,478 307,666 7,634 47,067 1,665,264 024,005 4 3,891,586 3,771,751 119,835 , 286 495 5 5,126,662 4,873,083 253,579 , , 500 113 113,500 112,680 820 , 683,869 1 1,722,876 1,567,148 155,668 , 252 98 102,252 77,886 24,366 , 164,073 169,073 160,401 8,672 39,810 39.810 37,453 2.357 11,618,795 ll 165,699 10,600,402 565,297 391) 145 (3 914,830 2.230,561 (3,788.990) . , ^ Other financing sources (uses): 20,000 900,000 881,033 Q8967) Sale of capital assets........ 11,800 Transfers out ................... (360,000) (392,300) (380,500) Total other financing sources (uses) ........ (340 000) 507,700 500,533 (7.167) Net change in fund balance ............ . Fund 6atance at beginning of year ........ . Prior year encumbrances appropriated ..... . Fund balance at end of year ........... . (4,128,990) (2,637,691) (414,297) 2,223,394 6,875,247 ~ 6,875,247 6,875,247 - 378.556 378,556 378,556 $ 3 124,813 $ 4,616.112 ~ 6.839,506 $ 2,223 394 SEE ACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 21 CITY OF FA7ILLAW N, OHIO STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY F[JNDS UECEMBER 3l, 2006 Assets: Equity in pooled cash and cash equivalents ..... . Total assets .......... .......... . Lia6itities: Undistributed monies ...:............. . Total liabilities ................... . Agency $ 43,982 $ 43,982 $ 43,982 $ 43,982 SEEACCOMPANYING NOTES TO THE BASIC FINANCIAL STATEMENTS 22 CITY OF FAIRLAWN, OH10 NOTES TO THE BASIC FINANCIAL STATEivIENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 1-DESCRIPTION OF THE CITY The City of Fairlawn (the "City") is a charter municipal corporation established and operated under the laws of the State of Ohio. The City is organized as a Mayor/Council form of govemment. The Mayor, Council and Finance Director are elected. NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The basic financial statements (BFS) of the City have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to local governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial principles. The City also applies Financia6Accounting Standards Board (FASB) Statements and Interpretations issued on or before November 30, 1989, to its govemmental funds provided they do not conflict with or contradict GASB pronouncements. The mast significant of the City's accounting policies are described below. A. Reporting Entity For financial reporting purposes, the City's BFS include all funds, agencies, boards, commissions, and departments for which the Cityis financially accountable. Financial accountability, as defined by the GASB, exists if [he City appoints a voting majority of an organization's goveming board and is either able to impose its will on that organization or there is a potential for ttie organization to provide specific financial benefits to, or impose specific burdens on, the City. The City may also be financially accountable for govemmental organizations with a separately elected governing board, a goveming board appointed by another govemment, or a jointly appointed board that is fiscally dependent on the City. The City also took into consideration other organizations For which the nature and significance of their relationship with the City are such thatexclusion would cause the City's basic financial statements to be misleading or incomplete. Based on these criteria, the City has no component units. The City provides various services including police and Fire protection, emergency medical, recreation (including parks), planning, zoning, street maintenance and repair, and general administrative services. The operation of each of these activities is directly controlled by [he Council through the budgetary process. None of these services are provided by a legally separate organization; therefore, these operations are included in the primary government. The Copley/Fairlawn City School District and the Summit County Public Library have been excluded from the City's financial statements. Both are legally separate from the City. Neither imposes a financial burden nor provides a financial benefit to the City. The City cannot significantly influence the operations of these entities. The City participates in the Ba[h-Akron-Fairlawn Joint Economic Development District (JEDD), which is a jointly governed organization. The JEDD was created to assure the continued economic viability of Bath Township. Anine-member board of directors, three appointed from Bath Township, Akron, and Fairlawn, respectively, controls the operation of the JEDD. The board exercises total control over the operation of the .IEDD including budgeting, appropriating, contracting and designating management. Each participant's degree of control is limited to its representation on the board. All 2006 JEDD revenues were the result of the income tax levied by the JEDD effective January I, 1999. 23 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) S. Basis of Presentation -Fund Accounting The City's BFS consist of govemment-wide statements, including a statement of net assets and a statement of activities, and fund financial statements which provide a more detailed level of financial information. Governrnent-wide Financial Statea:ents -The statement of net assets and the statement of activities display information about the City as a whole. These statements include the Fnancial activities of the primary govemment, except for fiduciary funds. The statement of net assets presents the financial condition of the governmental activities of the City at- year-end. The statement of activities presents a comparison between direct expenses and program revenues for each program or function of the City's governmental activities. llirect expenses are those that are specifically associated with a service, program or department and therefore clearly identifiable to a particular function. Program revenues include charges paid by the recipient of t(te goods or services offered by the program, grants and contributions that are restricted to meeting [he operational or capital requirements of a particular program and interest earned on grants that is required [o be used to support a particular program. Revenues which are not ctassified as program revenues are presented as genera( revenues of the Ci[y, with certain limited exceptions. The comparison of direct expenses with program revenues identifies the extent to which each business segment or governmental functions are self-financing or draw from the general revenues of the City. Fund Financial Staternents -During the year, [he City segregates transactions related [o certain City functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. Fund financial statements are designed to present financial information of the City at this more detailed level. The focus of governmental fund financial statements is on major funds. Each major fund is presented in a separate column. Nonmajor funds are aggregated and presented in a single column. Fiduciary funds are reported by type. C. Fund Accounting The City uses funds to maintain its financial records during the year. A fund is defined as a fiscal and accounting entity with a self balancing set of accounts. There are two categories of fitnds: govemmental and fiduciary. Governenental Fnnds - Govemmen[al funds are [hose through which must governmental functions typically are financed. Governmental fund reporting focuses on [he sources, uses and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the City's major governmental funds: General Fund -The general fund accounts for alt financial resources except those required to be accounted for in another fund. Bond Retirement -The bond retirement fund accounts for the acrumulation of resources for, and payment of, long-term debt principal, interest and related casts. Capital lmprovernent -This hand is used to account for the acquisition and construction of major capital facilities. 24 CITY OF FAIRLAWN, OHtO NOTES TO THF, BASIC FINANCIAL STATEMENTS FOR'I'}IE YEAR ENDED DECEMBER 3 i, 2006 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Other governmental funds of the City are used to account for (a) the accumulation of resources for, and payment of, general long-term debt principal, interest and related costs; (b) financial resources to be used for the acquisition, construction, or improvement of capital facilities other than those financed by proprietary funds; and (c) for grants and other resources whose use is restricted to a particular purpose. fiduciary Futrds -Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into four classifications: pension tmst funds, investment tryst fiords, private-purpose tryst funds and agency funds. Tmst funds are used to account for assets held by the City under a tryst agreement for individuals, private organizations, or other governments and are therefore not available to support the City's own programs. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The City's only fiduciary funds are agency funds. The agency funds are used to account for deposits that will be returned after the proper performance of certain landscape or street repair projects. D. Measurement Focus and Basis of Accounting Covernrnenf-wide Financial Statements -The govemmeut-wide financial statements are prepared using the economic resources measurement focus. All assets and all liabilities associated with the operation of the City are included on the statement of net assets. Fnnd Financial Statements -All governmental funds are accounted for using a flow of current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures and changes in fund balances reports on the sources (i.e., revenues and otlter financing sources) and uses (i.e., expenditures and other financing uses) of current financial resources. This approach differs from the ma»ner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements therefore include, reconciliations with brief explanations to better identify the relationship between the government-wide statements and the financial statements for governmental funds. E. Basis of Accounting Basis of accounting determines when transactions are recorded in the financial records and reported on the financial statements. Government-wide financial statements are prepared using the accmal basis of accounting. Governmental funds use the modified accmal basis of accounting. Agency funds also use the acemal basis of accounting. Differences in the accrual and modified accrual basis of accounting arise in the recognition of revenue, the recording of deferred revenue and in the presentation of expenses versus expenditures. Revenues - Exchange and Non-exchange Transactions - Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrval basis when the exchange takes place. On a modified accmal basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter [o be used to pay liabilities of the current fiscal year. For the City, available means expected to be received within thirty-one days of year-end. 25 CITY OF FAIRLAWN, UlilO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Nonexchange transactions, in which the City receives value without directly giving equal value in return, include income taxes, property taxes, grants, entitlements and donations. On an accmal basis, revenue from income taxes is recognized in the period in which the income is earned (See Nnte 7). Revenue from property taxes is recognized in the year for which the taxes are levied (See Note 6). Revenue From grants, entitlements and donations is recognized in the year in which s11 eligibility requirements have been satisfied. Etigibility requirements include timing requirements, which specify the year when the resources are required to be used or the year when use is first permitted, matching requirements, in which the City must provide local resources to be used for a specified purpose, and expenditure requirements, in which the resources are provided to the City on a reimbursement basis. On a modified accmal basis, revenue from nonexchange transactions must also be available before it can be recognized. Under the modified accmal basis, the following revenue sources are considered to be both measurable and available at year-end: income tax, state-levied locally shared taxes (including gasoline tax, local government funds and permissive tax), fines and Forfeitures, fees and special assessments. Deferred Revenue -Deferred revenue arises when assets are recognized before revenue recognition criteria have been satisfied. Property taxes for which there is an enforceable legal claim as of December 31, 2006, but which were levied to finance year 2007 operations, have been recorded as deferred revenue. Special assessments no[ received within the available period and grants and entitlements received before the eligibility requirements are met are also recorded as deferred revenue. On governmental fund financial statements, receivables that will not be collected within the available period have also been reported as deferred revenue. F,xpenses/Expendir:eres - On the accmal basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund tiability is incurred, if measurable. Allocations of'cost, such as depreciation and amortization, are not recognized in governmental funds. F. Budgetary Data The budgetary process is prescribed by provisions of the Ohio Revised Code and entails the preparation of budgetary documents within an established timetable. The major documents prepared are the [ax budget, the certificate of estimated resources and the appropriations resolution, all of which are prepared on the budgetary basis of accounting. The certificate of estimated resources and the appropriations ordinance are subject to amendment throughout the year with the legal restriction that appropriations cannot exceed estimated resources, as certified. Far all funds, Council appropriations are made at the object level within each department. This is known as the legal level of budgetary control. Budgetary modifications may only be made by resolution of the City Counci] at the legal level of control. All funds, other than agency funds, are legally required to be budgeted and appropriated. 26 CITY OF FAIRLAWN, OHIO NOTES 7'O THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Tax Etidget -Alternative tax budget information of estimated revenue and expenditures for all funds is submitted to the Summit County Fiscal Officer, as Secretary of the County Budge[ Commission, by July 20 of each year, for the period January I to December 31 of the following year. All funds, except agency fitnds, are legally required to he budgeted; however, only govemmentat funds are legally required to be reported. Estimated Resources -The County Budget Commission determines if the budget substantiates a need to levy all or part of previously authorized taxes and reviews estimated revenue. The Commission certifies its actions to the City by September 1. As part of this certification, the City receives the official certificate of estimated resources, which states the projected revenue of each fund. Prior to December 31, the City must revise its budget so that the total contemplated expenditures from any fund during the ensuing fiscal year will not exceed the amount available as stated in the certificate of estimated resources. The revised budget then serves as the basis for the annual appropriations measure. On or about January 1, the certificate of estimated resources is untended to include unencumbered cash balances at December 31 of the preceding year. The certificate may be further amended during the year if the City Finance Director determines, and the Budget Commission agrees, that an estimate needs to be either increased or decreased. The amounts reported on the budgetary statement reflect. the amounts in the final amended official certificate of estimated resources issued during 2006. Appropriations - A temporary appropriation ordinance to control expenditures may be passed on or about January 1 of each year for the period January 1 to March 31. An annual appropriation ordinance must be passed by April 1 of each year for the period January 1 to December 31. The appropriation ordinance fixes spending authority a[ the fund, department and object level. The appropriation ordinance may be amended during the year as new information becomes available, provided that total fund appropriations do not exceed current estimated resources, as certified. The appropriations for a fund may only be modified during the year by an ordinance of Council. The amounts on the budgetary statement reflect the final appropriation amounts, including allamendments and modifications legally enacted by Council. Lapsing of Appropriations - At the close of each year, the unencumbered balance of each appropriation reverts to the respective fund from which it was appropriated and becomes subject to future appropriations. Encumbrances are carried forward and are not reappropriated as part of the subsequent year appropriations. G. Cash and Cash Equivalents Cash balances of the City's funds are pooled and invested in investments maturing within five years in order to provide improved cash management. Individual fund integrity is maintained through City records. Each fund's interest in the pooled bank account is presented on the balance sheet as "Equity in Pooled Cash and Cash Equivalents" on the financial statements. During fiscal year 2006, investments were limited to overnight repurchase agreements, certificates of deposit, investment in a Federal Home Loan Bank Bond and the State Treasury Asset Reserve of Ohio (STAR Ohio). Except for nonparticipating investment contracts, investments are reported at fair value which is based on quoted mar!<et prices. Nonparticipating investment contracts, such as nonnegotiable certificates of deposit and repurchase agreements, are reported at cost. 27 CITY OF FAIRLAWN, OliIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) The City invested funds in STAR Ohio during Fiscal 2006. STAR Ohio is an investment pool managed by the State Treasurer's Office which allows governments within the State to pool their funds for investment purposes. STAR Ohio is not registered with the SEC as an investment company, but does operate in a manner consistent with Rule 2a7 of dte Investment Company Act of 1940. Investments in STAR Ohio are valued at STAR Ohio's share price which is the price the investment could be sold for on December 31, 2006. Under existing Ohio statutes all investment earnings are assigned [o the general fund unless statutorily required to be credited to a specific fund. During fiscal 2006, interest revenue credited to the general fund amounted to $718,633 which includes $458,884 assigned from other City funds. The City has segregated bank accounts for monies held separate from the City's central bank account. These interest bearing depository accounts are presented in the financial statements as "Cash and Cash Equivalents in Segregated Accounts" since they aze not required to be deposited into the City treasury. For purpose of presentation on the financial statements, investments of the cash management pool and investments with original maturities of three months or less at the time they are purchased by the City are considered to be cash equivalents. Investments with an initial maturity of more than three months are reported as investments. An analysis of the City's investment account at year-end is provided in Note 4 H. Inventories of Materials and Supplies On government-wide and fund financial statements, inventories are presented at the lower of cost or market on a first-in, first-out basis and are expensed when used. Inventories are accounted for using the consumption method. On the fund financial statements, reported material and supplies inventory is equally offset by a fund balance reserva in the governmental funds which indicates that it does not constitute available spendable resources even though it is a component of net current assets. Inventory consists of expendable supplies held for consumption. 1. Caplta(Assets These assets generally result from expenditures in the governmental funds. These assets are reported in the governmental activities column of the government-wide statement of net assets but are not reported in the fund financial statements. All capital assets are capitalized a[ cost (or estimated historical cost) and updated for additions and retirements during the year. Donated capital assets are recorded at their fair market values as of the date received. The City maintains a capitalization threshold of $5,000. The City's infrastmc[ure consists of roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to [he value of the asset or materially extend an asset's life are not. 28 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) All reported capital assets are depreciated except for land and construction in progress. Improvements are depreciated aver the remaining useful lives of the related capital assets. Useful lives for infrastructure were estimated based on the Ciry's historical records of necessary improvements and replacement. Depreciation is computed using the straight-line method over the follc•wing useful lives: Governmental Activities Description Estimated Lives Land improvements 25 - 75 years Buildings and improvements 15 - 50 years Machinery and Equiptnent 5 - 30 years Licensed Vehicles 3 - 25 years Infrastmcmre l0 - 60 years .1. Compensated Absences Vacation benefits are accmed as a liability as the benefits are earned if the employees' rights to receive compensation are attributable to services already rendered and it is probable that the City will compensate the employees for the benefits through paid time off or some other means. The City records a liability for accumulated unused vacation time when earned for all employees with more than one year of service. Sick leave benefits are accrued as a liability using the vesting method. The liability includes employees currently eligible to receive termination benefits and those the City has identified as probable of receiving benefits itt the future. The amount is based on accumulated sick leave and the employees' wage rates at fiscal year end, taking into consideration any limits specified in the City's termination policy. The City records a liability for accumulated unused sic(c leave for all employees hired before December 31, 1991. The entire compensated absence liability is reported on the government-wide financial statements On governmental fund financial statements, compensated absences are recognized as liabilities and expenditures bt the extent payments come due each period upon the occurrence of employee resignations and retirements. These amounts are recorded in the account "compensated absences payable" in the fund from which the employees who have accumulated leave are paid. The noncurrent portion of the liability is not reported. K. Accrued Liabilities and Lung-Term Obligations All payables, accrued liabilities and long-term obligations are reported in the government-wide financial statements. In general, govemmental fund payables and accmed liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the funds. However, claims and judgments, compensated absences, and contractually required pension contributions that will be paid from govemmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. 29 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE'L - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) L. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans or goods and services are classified as "Due to/from other funds." On fund financial statements, long- term Interfund loans are classified as "advances to/from other funds" on the balance sheet and are equally offset by a fund balance reserve account which indicates that they do not constitute available expendable resources. These amounts are eliminated in the govemmental columns of the statement oP net assets. M. Interfund Activity Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as Interfund transfers. Interfund transfers aze reported as other financing sources/uses in governmental funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented on the BFS. N. Fund Balance Reserves and Designations Reserved or designated fund balances indicate that portion of fund equity which is not available for current appropriation or use. The unreserved and undesignated portions of fund equity reflected in the govemmental fiords are available for use within the specific purposes of the funds. The City reports a reservation of fund balance for amounts representing encumbrances outstanding, prepayments, unclaimed monies, debt service and materials and supplies inventory, in the governmental fund financial statements. O. Estimates The preparation of the BFS in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the BFS and accompanying notes. Actual results may differ from those estimates. P. Ne[ Assets Ne[ assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the' outstanding balances of any borrowing used.for the acquisition, construction or improvement of those assets. Net assets are reported as restricted when there are ]imitations imposed on their use either through [he enabling legislation or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. The City applies restricted resources first when an expense is incurred far purposes for which both restricted and unrestricted net assets are available. 30 CITY" OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 3 -ACCOUNTABILITY AND COMPLIANCE A. Change in Accounting Principles For fiscal year 2006, the City has implemented GASB Statement No. 46, "Net Assets Restricted by Enabling Legislation" and GASB Statement No. 47, "Accounting for Termination Benefits". GASB Statement No. 46 defines enabling tegislation and specifies how net assets should be reported in the financial statements when there are changes in suchlegislation. The Statement also requires governments to disclose in the notes to the financial statements the amount of net assets restricted by enabling legislation: GASB Statement No. 47 establishes accounting standards for termination benefits. The implementation of GASB Statement No. 46 and GASB Statement No. 47 did trot have an effect on the fund balances/net assets of the City as previously reported at December 31, 2005. B. Restatement A restatement is required to properly report a liability for income tax refunds previously recorded in the Capital Improvement Fund. This adjustment had the following effect on fund balances of the governmental fiords: Governmental Funds Capital General Improvement Fund Balance at December 31, 2005 $ 6,524,920 $ 3,402,794 Adjustment of income tax refunds (723,364) 723,364 Restated Fund Balance at December 31, 2005 $ 5,801,556 $ 4,126,158 NOTE 4 -EQUITY IN POOLED CASH AND CASH EQUIVALENTS State statutes classify monies held by the City into three categories: Active deposits are public deposits necessary to meet current demands on the treasury. Such monies must be maintained either as cash in the City Treasury, in commercial accounts payable or withdrawable on demand, including negotiable order of withdrawal (NOW) accounts, or in money market deposit accounts. Inactive deposits are public deposits that Council has identified as not required for use within the current five year period of designation of depositories. Inactive deposits must be evidenced by certificates of deposit mamring not later than the end of the current period of designation of depositories, or by savings or depositaccounts including, but not limited to, passbook accounts. Interim deposits are deposits of interim monies. Interim monies are those monies which are not needed for immediate use but which will be needed before the end of the current period of designation of depositories. Interim deposits must be evidetced by time certificates of deposit maturing not more than one year from the date of deposit or by savings or deposit accounts including, but not limited to, passbook accounts. 31 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMEN'CS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 4 - EQUITY IN POOLED CASH AND CASH EQUIVALENTS - (Continued) Interim monies may be deposited or invested in the following: 1. United States Treasury Notes, Bills, Bonds, or any other obligation or security issued by the United States Treasury or any other obligation guaranteed as to principal or interest by the United States; 2. Bonds, notes, debentures, or any other obligations or securities issued by any federal govemment agency or instmmentality,~ including but not limited to, the Federal National Mortgage Association, Federal Home Loan Bank, Bederal Farm Credit Bank, Federal Home Loan Mortgage Corporation, Govenment National Mortgage Association, and Student Loan Marketing Association. All federal agency securities shall be direct issuances of federal government agencies or instmmentalities; 3. Written repurchase agreements in the securities fisted above provided that the market value of the securities subject to the repurchase agreement must exceed the principal value of the agreement by at least lwo percent and be marked to market daily, and that the term of the agreement must not exceed thirty days; 4. Bonds and other obligations of the State of Ohio; 5. No-toad money market mutual funds consisting exclusively of obligations described in division (1) or (2) and repurchase agreements secured by such obligations, provided that investments in securities described in this division are made only through eligible inskitu[ions 6. The State Treasury Asset Reserve of Ohio investment pool (STAR Ohio); 7. High grade commercial paper for a period not to exceed 180 days in an amount not [o exceed twenty- fivepercent of the City's interim monies available for investment; and 8. Bankers acceptances for a period not to exceed 180 days and in an amount nut to exceed twenty-five percent of the City's interim monies available for investment. The City may also invest any monies not required to be used for a period of six months. or more in the following: 1. Bonds of the State of Ohio; 2, Bonds of any municipal corporation, village, county, township, or other political subdivision of this State, as to which there is no default of principal, interest or coupons; 3. Obligations of the City. Protection of [he City's deposits is provided by the Federal Deposit Insurance Corporation (FDIC), by eligible securities pledged by [he financial institution as security for repayment, by surety company bonds deposited with the finance director by the financial institution or by a single collateral pool established by the financial institution to secure the repayment of all public moneys deposited with the institution. Investments in stripped principal or interest obligations, reverse repurchase agreements and derivatives are prohibited. The issuance of [axablenotes for the purpose of arbitrage, the use of leverage and short selling are also prohibited. An investment must mature within five years from [he date of purchase unless matched to a specific obligation or debt of the City, and must be purchased with the expectation that it will be held to maturity. Investments may only be made through specified dealers and institutions. 32 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 4 -EQUITY 1N POOLED CASH AND CASH EQUIVALENTS - (Continued) Payment for investments may be made only upon delivery of the securities representing [he investments to the finance director or qualified tmstee or, if the securities are not represented by a certificate, upon receipt of confirmation of transfer from the custodian. A. Cash on Hand At year-end, the City had $1,550 in un-deposited cash on hand which is included on the financial statements of the City as part of "Equity in Pooled Cash and Cash Equivalents". B. Cash in Segregated Accounts At December 31, 2006, the City had $210,418 in bank accounts outside of the City Treasury related to Mayor's Court operations and income tax refunds. These amounts are included on the financial statements as "Cash and Cash Equivalents in Segregated Accounts" and are included in deposits with financial institutions below. C. Deposits with Financial Institutions A[ December 31, 2006, the carrying amount of the City's deposits was $9,922,560 exclusive of the $2,282,942 repurchase agreement included in investments below. As of December 31, 2006, $9,986,859 of the City's bank balance of $10,324,192 was exposed [o custodial risk as discussed below, while $337,333 was covered by Federal Deposit Insurance Corporation. Custodial credit risk is the risk that, in the event of bank failure, the City will not be able to recover deposits or collateral securities that are in the possession of an outside party. As permitted by Ohio Revised Code, the City's deposits are collateralized by a pool of eligible securities deposited with Federal Reserve Banks, or at member banks of the Federal Reserve System, in [he. name of the depository bank and pledged as a pool of collateral against all public deposits held by the depository. The City has no deposit policy for custodial credit risk beyond the requirements of the State statute. Although the securities were held by -the pledging institutions' trust department and all statutory requirements for the deposit of money had been followed, noncompliance with federal requirements could potentially subject the City to a successful claim by the FDIC. D. Investments As of December 31, 2006, the City had the following investments and maturities: investment e Repurchase Agreement STAR Ohio Investment Maturity _ Balance at 6 months or Pair Value less $ 2,282,942 $ 2,282,942 1,898,233 1,898,233 $ 4,181,175 $ 4,181,175 Interest Rate Rrslc.• The Ohio Revised Code generally limits security purchases to those that mature within five years of the settlement date. Interest rate risk arises because potential purchasers of debt securities will not agree to pay face value for those securities if interest rates subsequently increase. 33 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR TIIE YEAR ENDED DECEMBER 31, 2006 NOTE 4 - EQUITY IN POOLED CASNi AND CASH EQUIVALENTS - (Continued) The City's investment policy addresses interest rate risk by requiring the consideration of market conditions and cash flow requirements in determining the term of the investment. Custodial Credit Risk: For an investment, custodial risk is the risk that, in the event of the failure of [he counterparty, the City will not be able to recover [he value of its investment or collateral securities that are in the possession of an outside party. The City has no investment policy dealing with investment custodial risk beyond the requirement in Ohio law that prohibits payments for investments prior to the delivery of the securities representing such investments to [he fnance director or qualified trustee. The City's investment in repurchase agreements is collateralized by underlying securities pledged by the investment's counterparty, not in the [tame of the City. Ohio law requires that market value of the securities subject to a repurchase agreement must exceed the principal value of the securities subject to a repurchase agreement by 2 percent. Credit Risk: STAR Ohio carries a rating of AAA by Standard & Poor's. Ohio law requires that STAR Ohio maintain the highest rating provided by at least one nationally recognized standard service rating. The custodial credit risk associated with the repurchase agreement is discussed above. Concentration of Credit Risk-• The City's investment policy addresses concentration of credit risk by requiring investments to be diversified [o reduce the risk of loss resulting from over concentration of assets in a specific issue or specific class of securities. The following [able includes the percentage of each investment type held by the City at December 3l, 2006: Investment tune Fair Value % of Total Repurchase Agreement $ 2,282,942 54.60 STAR Ohio 1,898,233 _ 45.40 $ 4,181,175 100.00 E. Reconciliation of Caslt and Investments to the Statement of Net Assets The following is a reconciliation of cash and investments as reported in the footnote above to cash ands investments as reported on the statement of net assets as of December 31, 2006: Cash and Investments ner footnote Carrying amount of deposits Investments Cash on hand Total Cash and investments oer Statement of Net Assets Governtnental activities Agency fiords Total $ 9,922,560 4,181,175 1,550 $ 14,!05,285 $ 14,D61,303 43,982 $ 14,105,285 34 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 20D6 NOTE 5 - [NTERFUND TRANSFERS Interfund transfers for the year ended December 31, 2006 consisted of the following, as reported in the fund financial statements: Transfers from Transfers to Nonmajor Special Revenue General $ 380,500 Transfers are used to (1) move revenues from the fund that statute or budget requires to collect them to the fund that stahrte or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts [o the debt service fund as debt service payments become due, and (3) use unrestricted reveuues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. Transfers between governmental fiends are eliminated for reporting on the government-wide statement of activities. NOTE 6 -PROPERTY TAXES Property taxes include amounts levied against all real, public utility, and tangible personal property located in the City. Real property taxes and public utility [axes are levied after October 1 on the assessed value as of the prior January 1, the tax lien date. Assessed values are established by state law a[ 35 percent of appraised market value, as established by the County Fiscal Officer. All real property is required to be revalued every six years. The last revaluation was completed in 2002. Real property taxes are payable annually or semiannually. The first payment for 20D6 was due January 1, with the remainder payable June 20. Public utility real and tangible personal property taxes collected in one calendar year are levied on assessed values as of the prior January 1, the lien date. Public utility tangible personal property currently is assessed at varying percentages of true value for taxable transmission and distribution property and 25% of true value for all other taxable property. Public utility property taxes are payable on the same dates as real property taxes described previously. Taxes collected on tangible personal property (other than public utility) ir. one calendar year are levied on the assessed values and at the close of the most recent fiscal year of the taxpayer (far businesses in operation more than one year) or' December 31. In prior years, tangible personal property assessments were twenty-five percent of true value fur capital assets and twenty-three percent of true value for inventory. TangiUle personal property tax is being phased out -the assessment percentage for property, including inventory, is 18.75% for 2006. This percentage will be reduced to 12.5% for 2007, 6.25% for 2008, and zero for 2009. Amounts paid by multi-county taxpayers are due September 20. Single county taxpayers may pay annually or semiannually. If paid annually, the first payment is due April 30; if paid semiannually, the first payment is due Apri130, with the remainder payable by September 20. House Bill No. 66 was signed into law on lone 30, 2005. House Bill No. 66 phases out the tax on tangible personal property of general businesses, telephone and telecommunicatimts companies, and railroads. The tax on general business and railroad property will be eliminated by calendar year 2009, and [he tax on telephone and telecommunications property will be eliminated by calendar year 2011. The tax is phased out by reducing the assessment rate on the property each year. The bill replaces the revenue lost by the City due to the phasing out of the tax. In calendar years 2006-2010, the City will be fully reimbursed for the lost revenue. [n calendar years 201 I-2017, the reimbursements will be phased out. The firs[ $10,000 of taxable value is exempt from taxation For each business by state law. 35 C1TY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 6 -PROPERTY TAXES - (Continued) Public utility property taxes are assessed on tangible personal property, as well as land and improvements. The County Fiscal Officer collects property taxes on behalf of all taxing districts in the County, including the City. The County Fiscal Officer periodically remits to the City its portion of the taxes collected. The full rate for all City operations for the year ended December 31, 2006 was $2.70 per $1,000 of assessed value. The assessed values of real and tangible personal property, upon which taxes ~ for 2006 were collected, are as follows: Cateeory Assessed Value Residential $ 173,504,620 Conttnercial 139,567,530 Total real estate 313,072,150 Public utility property 4,166,940 Tangible personal property 12,066,907 Grand total $ 329,305.997 Acemed taxes receivable represent delinquent [axes outstanding and real, tangible personal, and public utility taxes which were measurable and unpaid as of December 3I, 2006. Although total property tax collections for the next fiscal year are measurable, amounts to be received during the available period are no[ subject to reasonable estimation at December 3I and are not intended to finance 2006 operations. Accordingly, the receivable is offset by a credit to "Deferred Revenue." NOTE7-LOCAL INCOME TAX The City levies a municipal income tax of 2 percent on gross salaries, wages, and other personal service compensation earned by residents of the City and on the earnings of nonresidents working within the City. This tax also applies to the net income of business operations within the City. Residents of the City are granted a credit of up to 2 percent for taxes paid to other municipalities. Employers within the City are required to withhold income tax on employee compensation and remit the tax to the City either monthly or quarterly, as required. Corporations and other individual taxpayers are required to pay their estimated tax quarterly and file a declaration annually. By City ordinance, income tax proceeds are credited as follows: the general fund receives 90 percent and the capital improvement fund receives l0 percent of the first 1.5 percent of [Ile 2 percent income [ax. The capital improvement fund receives the remaining .5 percent of the income tax. NOTE 8-ESTIMATED IP4COME TAX REFUNDS PAYABLE In 2005, the City erroneously received estimated income tax payments for public utility companies partially located in the Ci[y. The allocation of income taxable to the City was incorrectly calculated. The City will issue refunds to [he public utility companies for the overpayment upon receiving verification from [he State of Ohio Department of Taxation [hat proper corrected tax returns have been filed. The estimated overpayment is $1,112,868. A liability has been recorded in the General fund for the estimated refund due. This liability is a component of"accounts payable" reported on the financial statements. 36 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 9 -RECEIVABLES Receivables at December 31, 2006, consisted of taxes, accounts (billings for user charged services), accmed interest, special assessments, and intergovernmental receivables arising from grants, entitlements, and shared revenue. All intergovemmental receivables have been classified as "Due from Other Governments" on the financial statements. Receivables have been recorded to tire. extent that they are measurable of December 31, 2006, as well as intended to finance fiscal 20D6 operations, A summary of the principal items of receivables reported on the statement of net assets follows: Income taxes $ 1,326,492 Rea) and other taxes 905,957 Accounts 49,606 Accmed interest 121,863 Special assessments 1,919,473 Due from other governments S 17,902 Total $ 4,841,293 Receivables ]rave been disaggregated on the face of the BF5. The only receivable not expected to be collected within the subsequent year are the special assessments which are collected over the life of the assessment. Delinquent special assessments due to the City were $8,202 as of December 31, 2006. 37 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 10 -CAPITAL ASSETS Capital asset activity for the year ended December 31, 2006, was as follows: Balance Balance Governmental Activities: 12/31/05 Additions Disposals 12/31/06 Capital assets, not being depreciated.• Land $ 3,234,757 $ - $ (40,538) $ 3,194,219 Construction in progress 8,236 - (8,236) - Total capital assets, no[ being depreciated 3,242,993 - 48,774) 3,194,219 Capital assets, being depreciated: Buildings and Improvements 13,972,836 - - 13,972,836 Landlmprovements 1,220,761 30,600 (30,704) 1,220,657 Machinery and Equipment 2,772,526 273,237 (8,373) 3,D37,390 Licensed Vehicles 2,653,676 31,244 - 2,684,920 Infrastructure 72,016,855 455,892 - 72,472,747 Total capital assets, being depreciated 92,636,654 790,973 (39'077) 93,388,550 Less: accumulated depreciation: Buildings and Improvements (2,092,152) (266,563) - (2,358,715) Land Improvements (670,946) (32,357) 25,718 (677,585) Machinery and Equipment (973,714) (161,062) 2,990 (1,131,786) Licensed Vehicles (1,045,536) (175,506) - (1,221,042) Infrastmc[ure (2Q640,348) (1,347,227) - (21,987,575) Total accumulated depreciation (25,422,696) (1,982,715 28,708 (27,376,703) Total capita( assets, being depreciated, net 67,213,958 (1,191,742) (10,369) 66,UI1,847 Govemmental activities capital assets, net $70,456,951 $(1,191,742) $ (59,143) $69,206,066 38 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 70 -CAPITAL ASSETS - (Continued) Depreciation expense was charged to functions/programs of the City as follows: Governmental activities: General government $ 44,091 Basic Utilities - 544,392 Security of persons and property 288,110 Transportation 1,05 ] ,308 Community environment 3,864 Leisure time activity 50,950 'Cotal depreciation expense -governmental activities $ 1,982,715 NOTF, I1 -LONG-TERM OBLIGATIONS A. During the fiscal year 2006, the following changes occurred iu governmental activities long-term obligations: Interest Balance Due in i t R 12/37/05 Additions Reductions 12131/06 One Year es: Governmental Activit e a General obligation bonds 2.80-5.75% $ 9,050,000 $ - $(540,000) $ 8,510,000 $ 550,000 Special assessment bonds 4.80-7.00% 940,000 - (130,000) 810,000 140,000 OPWC loans 6.00% 623,733 - (54,077) 569,656 57,370 b s t d 067 334 1 3,600 3( 2,199) 7,038,735 348,440 a sence e Compensa , , Total $ 11,68t,067 $ 3,600 $(756,276) $ 10,)28,391 .. $ 1,095,870 The general obligation bands will be paid from income taxes receipted into the capital improvement fund. The special assessment bond and OPWC loans will be paid from the proceeds of special assessments levied against the benefited property owners. In the event that a property owner fails to pay the assessment, payment will be made by the City. Compensated absences reported in the "long- term liabilities" account will be paid from the fund from which the employees' salaries are paid; the General Fund, Children/Adolescent Fund and the Parks and Recreation Fund. 39 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMEN"fS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE i l -LONG-TERM OBLIGATIONS - (Continued) Principal and interest requirements to retire long-tens obligations outstanding at December 31, 2006 are follows: General Obli¢ation Bonds Special Assessment Bond Year Priocinal Interest Total Principal Interest Total _ _ 2007 $ 550,000 $ 374,070 $ 924,070 $ 14(1,000 $ 56,700 $ 196,700 2008 575,000 352,140 927,140 150,000 46,900 196,900 2009 60D,OOD 328,220 928,220 160,000 36,400 196,400 2010 625,000 302,530 927,530 175,000 25,200 200,200 2011 655,000 275,030 930,030 135,000 12,950 197,950 2012-2016 2,975,000 942,345 3,917,345 - _ - 2017-2021 2,17Q,OD0 346,708 2,516,708 - _ _ 2022 360,OD0 16,920 376,920 - _ _ Total $ 8,510,000 $2,937,963 $11,447,963 $ 810,000 $ 178,150 $ 988,150 OPWC Loans Year Principal Interest Total 2007 $ 57,370 $ 33,332 $ 90,702 2008 60,864 29,838 90,702 2009 64,571 26,131 90,702 2010 68,503 22,199 90,702 2011 72,675 18,027 90,702 2012-2014 245,673 26,431 272,104 Total $ 569,656 $ 155,958 $ 725,614 NOTE 12-OTHER EMPLOYEE iBENEFITS A. Compensated Absence The criteria for determining vested vacation and sick leave components are derived from negotiated agreements and state laws. Employees eam ten to thirty days of vacation per year, depending upon length of service. Vacation accumulation is typically limited to one year. Employees may carry over vacation earned for three years prior to the employee's retirement date. All accumulated unused vacation time is paid upon termination of employment. Employees eam sick leave at the rate of 1.25 days per month of service. Upon retirement, employees hired before 1991 are eligible to receive payment for accumulated unused sick days. The exact terms vary in accordance with the negotiated collective bargaining agreement in effect. In most cases, the sick leave ternination payment is limited to 90 days. Employees with a hire date subsequent to 1991 are generally not eligible to receive termination payments for sick leave. As of December 31, 2006, the total liability for unpaid compensated absences was $1,038,735. 40 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 12 -OTHER EMPLOYEE BENEFITS - (Continued) B. Health Care Benefits The City provides life insurance and accidental death and dismemberment insurance to most employees. The City has elected to provide employees' medical/surgical benefits through United Healthcare. The employees share the cost of the monthly premium. Dental insurance is provided by the City through Guardian Dental. NOTE 13 - RISK MANACF.MENT The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. During 2006, the City contracted with Wichert Insurance Service, Inc. for property and general liability insw'ance, including boiler and machinery. Police and professional liability policies are provided by Scottsdale Indemnity Company with a $1,000,OOD limit and a $10,000 deductible. A comrztercial umbrella policy through Westfield Insurance Company provides additional general liability and auto liability insurance up to an $11,000,000 limit. Vehicles are covered by Westfield Insurance Company and hold a $1,000 deductible for collision. Automobile liability coverage has no limit for collision, a $500,000 limit fot' uninsured/underinsured motorist and a $1,000,000 limit for bodily injury. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a signif cant reduction in coverage from the prior year. Volunteer Fireman's Insurance Services covers Firemen and EMT professional liability with a limit of $1,000,000 and no deductible. The City participates in the Ohio Municipal League (OML) public entity insurance purchasing pool for workers' compensation. The Group Rating Plan is administered by Gates McDonald Company. The OML Group Rating Plan is intended to achieve lower workers' compensation premium rates for the participants, and result in the establishment of a safer working environment. There are no additional contributions required by a participant other than [heir annual fee. The City pays the State Workers' Compensation system a premium based on a rate per $100 of salaries. This rate is calculated based on accident history and administrative costs. NOTE 14 -DEFINED BENEFIT PENSION PLANS A. Ohio Public Employees Retirement System The City participates in the Ohio Public Employees Ketixement System (OFERS). OPERS administers three separate pension plans. The traditional plan is acost-sharing, multiple-employer defined benefit pension plan. The member-directed plan is a defined contribution plan in which the member invests both member and employer contributions (employer contributions vest over five years at 20 percent per year). Under the member directed plans members accumulate retirement assets equal to the value of the member and vested employer contributions plus any investment earnings. The combined plan is acost-sharing, multiple-employer defined benefit pension plan that has elements of both a defined benefit and a defined contribution plan. Under the combined plan, employer contributions are invested by the retirement system to provide a formula retirement benefit similar to the traditional plan benefit. Member contributions, whose investment is self-directed by the member, accumulate retirement assets in a manner similar to the member directed plan. 41 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR TF1E YEAR ENDED DECEMBER 31, 2006 NOTE 14 -DEFINED BENEFIT PENSION PLANS - (Continued) OPERS provides retirement, disability, survivor and death benefits and annual cost of living adjustments to members of the traditional and combined plans. Members of the member directed plan do not qualify for ancillary benefits. Authority to established and amend benefits is provided by Chapter 145 of the Ohio Revised Code. OPERS issues astand-alone financial repart that may be obtained by writing to OPERS, 277 E. Town St., Co(uinbus, OH 43215-4642 or by calling (614) 222- 6701 or (800)222-7377. For the year ended December 31, 2006, the members of all three plans, except those in law enforcement or public safety participating in the traditional plan, were required to contribute 9.0 percent of their annual covered salaries. Members participating in the traditional plan that were in law enforcement contributed 10.1 percent of their annual covered salary. TheCity's contribution rate for pension benefits for 2006 was 9.20 percent. The Ohio Revised Cade provides statutory authority for member and employer contributions. 'fhe City's contributions for pension obligations to the traditional and combined plans for the years ended December 31, 2006, 2005, and 2004 were $243,867, $253,088, and $237,521, respectively; 92 percent has been contributed for 2006 and 100 percent for 2005 and 2004. The unpaid contribution to fund pension obligations for 2006, in the amount of $18,664 has been recorded as a liability. Contributions to the member-directed plan far 2006 were $2,734 made by the City and $1,796 made by plan members. S. Ohio Police and Fire Pension Fund The City contributes to the Ohio Police and Fire Pension Fund (OP&F), acost-sharing multiple- employerdefined benefit pension plan. OP&F provides retirement and disability 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 statements and required supplementary information for the plan. That report may be obtained by writing to the Ohio Police and Fire Pension Fund, 140 East Town Street, Columbus, Ohio 43215-5164. Plan members are required to contribute ]0 percent of their annual covered salary while the City is required to contribute 19.SU and 24.00 percent for police officers and firefighters, respectively. The portion of the City's bontributions to fund pension obligations was 11.75 percent for police officers and 16.25 percent for firefighters. The City's contributions for pension obligations to OP&F for the years ended December 31, 2006, 2005, and 2004 were $313,948, $300,078, and $285,408, respectively; 7'2 percent has been contributed for 2006 and 100 percent for 2005 and 2004. The unpaid contribution to fund pension obligations for 21)06, in the amount of $88,065, is recorded as a liability. C. Social Security System Effective August 3, 1992, all volunteer firefighters, not otherwise covered by another retirement system, are covered by social security. The City's liability is 6.20 percent of wages paid. 42 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE ]5 -POST RETIREMENT BENEFIT PLANS A. Ohio Public Employees Retirement System The Ohio Public Etnployees Retirement System (OPERS) provides postretirement health care coverage to age and service retirees with ten or more years of qualifying Ohio service credit with eitltet' the traditional or combined plans. Health care coverage for disability recipients and primary survivor recipients is available. Members of the member-directed plan do not qualify for postretirement health care coverage. The health care coverage provided by the retirement system is considered an Other Postemploymem Benefit as described in GASB Statement No. 12, "Disclosure of Information on Postemnloyment Benefits other than Pension Benefits by State and Local Government Emulovers". A portion of each employer's contribution to the traditional or combined plans is set aside for the funding of postretirement health care based on authority granted by State statute. The ?.006 local government employer contribution rate was 13.70 percent of covered payroll; 4.50 percent of covered payroll was the portion that was used to fund health care. Benefits are advance-funded using the entry age normal actuarial cost method. Significant actuarial assumptions, based on OPERS's latest actuarial review performed as of December 31, 2005, include a rate of return on investments of 6.50 percent, an annual increase in active etnpluyee total payroll of 4.D0 percent compounded annually (assuming no change in the number of active employees) and an additional increase in total payroll of between .50 percent and 63 percent based on additional annual pay increases. Health care premiums were assumed to increase at the projected wage inflation rate (4.00 percent) plus and an additional factor ranging from .50 percent to 6.00 percent for the next nine years. In subsequent years, (10 and beyond) health care costs were assumed to increase at 4.00 percent. All investments are carried at market value. For actuarial valuation purposes, a smoothed market approaches used. Under this approach, assets are adjusted to reflect 25 percent of unrealized market appreciation or depreciation ott investment assets annually, not to exceed a 12 percent corridor. 7'he number of active contributing participants in the traditional and combined plans was 369,214 as of December 31, 2006. The City's actual employer contributions for 2006 which were used to fund postemployment benefits were $119,283. The acntal contribution and the actuarially required contribution amounts are the same. OPERS's net assets available for paytnent of benefits at December 3l, 2005 (the latest information available) were $11.1 billion. At December 31, 2005 (the latest information available), the actuarially accrued liability and the unfunded actuarial accrued liability were $3 L3 billion and $20.2 billion, respectively. The Health Care Preservation Plan (HCPP) adopted by the OPERS Retirement Board on September 9, 2004, was effective on January (, 2007. OPERS took additional actions to improve the solvency of the health care fund in 2005 by creating a separate investment pool for healtYt care assets. Member and employer contribution rates increased as of January 1, 2D06 and January 1, 2007, which will allow additional funds to be allocated to the health care plan. B. Ohio Police and Fire Pension Fund The Ohio Police and Fire Pension Fund (OP&F) provides postretirement health care coverage to 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 pet'son. An eligible dependent child is any child under the age of l8 whether or not the child is attending school, or under [he age of 22 if attending school fitll-time or on a 213 basis. 43 CITY OF FAIRLAWN, OHIO NOTES TO THE SASiC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 NOTE 15 -POST RETIREMENT BENEFIT PLANS - (Continued) The health care coverage provided by the retirement system is considered an Other Post employment Benefit (OPEB) as described in GASB Statement No. 12, "Disclosure of Information on Post employment Benefits other than Pension Benefits by State and Local Government Ernolovers". The Ohio Revised Code provides the authority allowing the Ohio Police and Fire Pension Pund's board of tmstees to provide health care coverage and states, that health care costs paid from the funds of OP&F shall be included in the employer's contribution xate. health care funding and accounting is on apay-as-you-go basis. The total police employer contribution rate is 19.5 percent of covered payroll and the total firefighter employer contribution rate is 24 percent of covered payroll, of which 7.75 percent of covered payroll was applied to the postemployment health care program during 2005 and 2006. In addition, since July 1, 1992, most retirees have been required to contribute a potYion of the cost of their health care coverage through a deduction from their monthly benefit payment. Beginning in 2001, all retirees and survivors have monthly health care contributions. The Cily's actual contributions for 2006 that were used to fund postemployment bbnefits were $109,514 for police and $70,542 for firefighters. The OP&F's total health care expense for the year ended December 31, 2005 (the latest information available) was $108.039 million, which was net of member contributions of $55.272 million. The number of OP&F participants eligible to receive health care benefits as of December 31, 2005 (the latest information available), was 13,922 for police and 10,537 for firefighters. NOTE 76 -BUDGETARY BAS1S OF ACCOUNTING While the City is reporting financial position, results of operations and changes in fund balance on the basis of generally accepted accounting principles (GAAP), the budgetary basis as provided by law is based upon accounting for certain transactions on a basis of cash receipts, disbursements and encumbrances. The Statement of Revenues, Expenditures and Changes in Fund Balances -Budget and Actual (Non-GAAP Budgetary Basis) presented for the general fund is presented on the budgetary, basis to provide a meaningful comparison of actual results with the budget. The major differences between the budget basis and GAAP basis are as follows: 1. Revenues and other financing sources are recorded when received in cash (budget) as opposed to when susceptible to accrual (GAAP). 2. Expenditures/expenses and other financing uses are recorded when paid in cash (budget) as opposed to when the liability is incurred (GAAP). 3. Encumbrances are treated as expenditures (budget) rather than as a reservation of fund balance (GAAP). 4. Unreported cash represents amounts received but not included as revenue on the budget basis operating statements. These amounts are included as revenue on the GAAP basis operating statement. 44 CITY OF FAIRLAWN, OHIO NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THF, YEAR ENDED DECEMBER 31, 2006 NOTE 16 -BUDGETARY BASIS OF ACCOUNTING - (Continued) The following table summarizes the adjustments necessary to reconcile the GAAP basis statements (as reported in the fund Financial statements) to the budgetary basis statements for all governmental funds for which a budgetary basis statement is presented. Net Change in Fund Balance Genera( Budget basis $ (414,297) Net adjustment for revenue accmals and (84,841) other financing sources Net adjustment for expenditure accruals and 1,022,349 other financing uses Adjustment for encumbrances 439,69E GAAP basis $ 962,909 NOTE 17 -CONTINGENCIES A. Grants The City receives significant financial assistance from numerous federal and state agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with the terms and conditions specified in the gran[ agreements and is subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could became a liability of the general fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material effect on any of the financial statements of the individuat fund types included herein or on the overall financial position of the City at December 31, 20D6. B. Litigation The City is party to legal proceedings. The Ciry management is of the opinion that the ultimate disposition of these legal claims and legal proceedings will not have a material effect, if any, on the financial condition of [he City. NOTE 18 -CONTRACTUAL COMMITMENTS As of December 31, 2006, the City had various contractual commitments; for road maintenance and improvements of $57,407; sewer cleaning and improvements of $143,295; traffic signals $91,919; consulting services of $16,204; purchases of various capital equipment of $55,386; and park equipment and improvements of $15,384. 45 This page intentionally left blank. 46 ..., . ~~~. , = „~~, Auditor of State INDEPENDENT ACCOUNTANTS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS REQUIRED BY GOVERNMENT AUDITING STANDARDS City of Fairlawn Summit County 3487 Scuth Smith Road Fairlawn, Ohio 44333 To the Honorable Mayor and Members of City Council: We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Fairlawn, Summit County, Ohio, (the City) as of and for the year ended December 31, 2006, which collectively comprise the City's basic financial statements and have issued our report thereon dated August 8, 2007 in which we noted the City restated the fund balances of the General and Capital Improvement Funds as of December 31, 2005. 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 the Comptroller General of the United States' Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City's internal control over financial reporting as a basis far designing our audit procedures for expressing our opinions on the financial statements, but not to opine on the effectiveness of the City's internal control over financial reporting. Accordingly, we have not opined ort the effectiveness of the City's internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in performing their assigned functions, to prevent or detect misstatements on a timely basis. A signifcant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City's ability to initiate, authorize, record, process, or report financial data reliably in accordance with its applicable accounting basis, such that there is more than a remote likelihood that the City's internal control will not prevent or detect a more-than-inconsequential financial statement misstatement. A material weakness is a significant deficiency, or combination of significant deficiencies resulting in more than a remote likelihood that the City's internal control will not prevent or detect a material financial statement misstatement. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all internal control deficiencies that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider material weaknesses, as defined above. We noted certain matters that we reported to the City's management in a separate letter dated August 8, 2007. 101 Centro] Plaza South / 7D0 Chase Tower /Canton, OI-144702-1509 Telephone:- (33D) 438-0617 (800) 443-9272 Fax: (330) 471-0001 www.auditocsta te.oh.us 47 City of Fairlawn Summit County Independent Accountants' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Required By Government Auditing Standards Page 2 Compliance and Other Matters As part of reasonably assuring whether the City's financial statements are free of material misstatement, we tested its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could directly and materially affect 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 an opinion. The results of our tests disclosed no instances of noncompliance or other matters we must report under Government Auditing Standards. We did note a certain noncompliance or other matter that we reported to the City's management in a separate letter dated August 8, 2007. We intend this report solely for the information and use of management and City Council. We intend it for no one other than these specified parties. ~~~~~ Mary Taylor, CPA Auditor of State August 8, 2007 48 ... . a~~ rT~y~.~I, CPA _. ~. ,~} ' 3° Auditor of State CITY OF FAIRLAWN SUMMIT COUNTY CLERK'S CERTIFICATION This is a true and correct copy of the report which is required to be filed in the Uffice of the Auditor of State pursuant to Section 117.26, Revised Code, and which is filed in Columbus, Ohio. ~.~- ~ CLERK OF THE BUREAU CERTIFIED OCTOBER 16, 2007 88 E. Broad St. I Fourth Ftoor I Columbus, OH 43215-35D6 Teleyhone: (614) 46G-4514 (800) 282-0370 Fax: (614) 456-4490 www.audi tor.sta te.oh.us