26 Chapter 3: Financial Audit Government-Wide and Fund Financial Statements The government-wide financial statements, which are the statement of net assets and the statement of activities, report information of all of the nonfiduciary activities of the department. Governmental activities, normally supported by state allotments and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. For the most part, the effect of interfund activity has been removed from these government- wide financial statements. The statement of activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include charges to customers who purchase, use, or directly benefit from goods or services provided by a given function. Program revenues also include grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. State allotments and other items not properly included among program revenues are reported instead as general revenues. Resources that are dedicated internally are reported as general revenues rather than program revenues. Net assets are restricted when constraints placed on them are either externally imposed or imposed by constitutional provisions or enabling legislation. Internally imposed designations of resources are not presented as restricted net assets. When both restricted and unrestricted resources are available for use, it is generally the department’s policy to use restricted resources first, then unrestricted resources as they are needed. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds. However, the fiduciary funds are not included in the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Measurement Focus, Basis of Accounting, and Financial Statement Presentation Government-wide Financial Statements – The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. This is trial version www.adultpdf.com 27 Chapter 3: Financial Audit Governmental Fund Financial Statements – The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the department considers revenues to be available if they are collected within 60 days of the end of the current fiscal year-end. Principal revenue sources considered susceptible to accrual include federal grants and interest on investments. Some revenue items that are considered measurable and available to finance operations during the year from an accounting perspective are not available for expenditure due to the State’s present appropriation system. These revenues have been accrued in accordance with GAAP, since they have been earned and are expected to be collected within 60 days of the end of the period. Other revenues are considered to be measurable and available only when cash is received by the department. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. Modifications to the accrual basis of accounting include accrued vacation and workers’ compensation liability, which is recorded as an expenditure when due and payable. Proprietary Funds and Fiduciary Funds – The financial statements of proprietary funds and fiduciary funds are reported using the economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements described above. In accordance with GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the department has elected not to apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless FASB conflicts with GASB. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services or goods in connection with a proprietary fund’s principal ongoing operations. Revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. The principal operating revenues of the department’s enterprise funds are interest income and administrative loan fees on loans made to county governments. Federal grants, state matching funds, and interest income from investments are reported as nonoperating income. This is trial version www.adultpdf.com 28 Chapter 3: Financial Audit Fund Accounting The financial activities of the department are recorded in individual funds, each of which is deemed to be a separate accounting entity. The department uses fund accounting to report on its financial position and results of operations. Fund accounting is designed to demonstrate the legal compliance and to aid financial management by segregating transactions related to certain government functions or activities. A fund is a separate accounting entity with a self-balancing set of accounts. The financial activities of the department that are reported in the accompanying fund financial statements have been classified into the following major and nonmajor governmental and proprietary funds. In addition, a description of the department’s fiduciary fund is as follows: Governmental Fund Types The department reports the following major governmental funds: General Fund This fund is the department’s primary operating fund. It accounts for all financial activities of the department, except those required to be accounted for in another fund. The annual operating budget as authorized by the State Legislature provides the basic framework within which the resources and obligations of the general fund are accounted. Tobacco Settlement Fund This fund accounts for all tobacco settlement moneys and interest and earnings accruing from the investment of such moneys. The nonmajor governmental funds are comprised of the following: Special Revenue Funds These funds account for the financial resources obtained from specific revenue sources (other than major capital projects) that are legally restricted to expenditures for specified purposes. Capital Projects Fund This fund accounts for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds). Proprietary Fund Type – Enterprise Funds The major enterprise funds are comprised of the following: This is trial version www.adultpdf.com 29 Chapter 3: Financial Audit Water Pollution Control Revolving Fund This fund accounts for federal and state funds used to provide loans in perpetuity to county and state agencies for the construction of wastewater treatment facilities and the repayment, interest and earnings from such loans, and the investment of such moneys. Drinking Water Treatment Revolving Loan Fund This fund accounts for federal and state funds used to provide loans and other types of financial assistance to public water systems for drinking water infrastructure and the repayment, interest and earnings from such loans, and the investment of such moneys. Fiduciary Fund Type Agency Fund This fund accounts for assets held by the department in an agency capacity. Capital Assets Capital assets, which includes property and equipment, are reported in the applicable governmental or business-type activities in the government-wide financial statements and in the proprietary fund financial statements. Capital assets are defined by the department as those assets with estimated useful lives greater than one year and with an acquisition cost greater than: Land All capitalized Land improvements $100,000 Building and building improvements 100,000 Equipment 5,000 Purchased and constructed capital assets are valued at cost. Donated assets are recorded at their fair market value at the date of donation. Capital outlays for items utilized in the governmental funds are recorded as expenditures when incurred in the governmental fund financial statements. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Depreciation expense is recorded in the government-wide financial statements, as well as the proprietary fund financial statements. The department utilizes the straight-line method over the assets’ estimated useful life. No depreciation is recorded for land. Generally, the useful lives are as follows: This is trial version www.adultpdf.com 30 Chapter 3: Financial Audit Governmental Business-type Activities Activities Land improvements 15 Not applicable Building and building improvements 30 Not applicable Furniture and equipment 5 – 7 5 - 7 Cash and Cash Equivalents Cash and cash equivalents include short-term investments with original maturities of three months or less. It also includes amounts held in the state treasury. The state director of finance is responsible for safekeeping of all moneys paid into the state treasury (cash pool). The state director of finance may invest any moneys of the State, which in the director’s judgment are in excess of the amounts necessary for meeting the immediate requirements of the State. Cash is pooled with funds from other state agencies and departments and deposited into approved financial institutions or invested in the State Treasury Investment Pool System. Cash accounts that participate in the investment pool accrue interest based on the average weighted cash balances of each account. The State requires that the depository banks pledge, as collateral, government securities held in the name of the State for deposits not covered by federal deposit insurance. Investments can be categorized to give an indication of the level of custodial credit risk assumed by the department. Category 1 includes investments that are insured or for repurchase agreements, collateralized by underlying securities that are so held. Category 2 includes uninsured and unregistered investments for which the securities are held by the broker-dealer in the department’s name. Category 3 includes uninsured and unregistered investments for which the securities are held by the broker-dealer but not in the department’s name. Since all of the department’s cash is included in the state cash pool, the category of custodial credit risk is not determinable at the department level. Deferred Revenues Deferred revenues at the fund level and government-wide level arise when the department receives resources before it has a legal claim to them. In subsequent periods, when the revenue recognition criteria is met, or when the department has a legal claim to the resources, the liability for deferred revenue is removed from the statement of net assets This is trial version www.adultpdf.com 31 Chapter 3: Financial Audit or balance sheet and revenue is recognized. Deferred revenues at June 30, 2003 consist primarily of federal grant funds for which all eligibility requirements have not been met. Compensated Absences Employees hired on or before July 1, 2001 earn vacation at the rate of one and three-quarters working days for each month of service. Employees hired after July 1, 2001 earn vacation at rates ranging between 1 and 2 working days for each month of service, depending upon the employees’ years of service and job classification. Vacation days may be accumulated to a maximum of 90 days each calendar year. Employees are entitled to receive cash payment for accumulated vacation upon termination. Accumulated vacation is not reported in the governmental fund financial statements until it is due and payable, as that amount is otherwise not expected to be paid with current funds. The government-wide financial statements present the cost of accumulated unpaid vacation as a liability. A reconciliation of changes in aggregate liabilities for accumulated vacation is as follows: Governmental Activities Balance at July 1, 2002 $ 17,852,053 Additions 9,967,618 Deletions (9,316,052) Balance at June 30, 2003 18,503,619 Less current portion (6,661,303) $ 11,842,316 Employees hired on or before July 1, 2001 also earn sick leave credits at the rate of one and three-quarters working days for each month of service. Employees hired after July 1, 2001 earn sick leave credits at the rate of one and one-quarter or one and three-quarters working days for each month of service, depending upon the employees’ years of service and job classification. Sick leave credits may be accumulated without limit. Sick leave can be taken only in the event of illness, and is not convertible to pay upon termination of employment. Accordingly, no liability for unpaid sick leave credits is reported in the accompanying basic financial statements. However, a department employee who retires or leaves government service in good standing with 60 days or more of unused sick leave is entitled to additional service credit in the Employees’ Retirement System of the State of Hawaii. Accumulated sick leave as of June 30, 2003, relating to the department approximated $57,263,000. This is trial version www.adultpdf.com 32 Chapter 3: Financial Audit Insurance Insurance coverage is maintained at the state level. The State is substantially self-insured for all perils including workers’ compensation. Expenditures for workers’ compensation and other insurance claims are appropriated annually from the state general fund. Under the provisions of GASB Statement 10, liabilities related to certain types of losses (including torts, theft of, damage to, or destruction of assets, errors or omissions, natural disasters, and injuries to employees) are reported when it is probable that the losses have occurred and the amount of those losses can be reasonably estimated. During the year ended June 30, 2003, the department was covered by the State’s self-insured workers’ compensation program for medical expenses of the injured department employees. However, the department was required to pay Temporary Total Disability (TTD) and Temporary Partial Disability (TPD) benefits for employees on the department’s payroll. Claims expenditures and liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liability does not necessarily result in an exact amount. Claims liabilities are reevaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. The department paid $679,000 for workers’ compensation claims during the year. A reconciliation of changes in the department’s workers’ compensation liability is as follows: Balance at July 1, 2002 $ — Current year claims 1,313,373 Claim payments (679,000) Balance at June 30, 2003 $ 634,373 Transfers Transfers are used to move revenues from the fund that statutes require to collect them to the fund that statute requires to expend them. The government-wide statement of activities eliminates transfers within the segregated governmental and business-type activities. This is trial version www.adultpdf.com 33 Chapter 3: Financial Audit Receivables and Payables Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as interfund receivables/interfund payables. Any residual balances outstanding between the governmental activities and the business-type activities are reported in the government-wide financial statements as internal balances. Use of Estimates In preparing basic financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Nonimposed Employee Fringe Benefits Payroll fringe benefit costs of the department’s employees are funded by general fund appropriations and are assumed by the State, accordingly, such costs are not charged to the department’s operating funds. These costs, totaling $30,535,685, of which $7,334,000 was for retirement benefits, have been reported as revenues and expenditures in the department’s basic financial statements for the fiscal year ended June 30, 2003. Payroll fringe benefit costs related to federally funded salaries are not assumed by the State and are recorded as expenditures in the department’s basic financial statements. Revenue estimates are provided to the State Legislature at the time of budget consideration and are revised and updated throughout the fiscal year. Budgeted expenditures are derived primarily from acts of the State Legislature and from other authorizations contained in the State Constitution, the Hawaii Revised Statutes (HRS) and other authorizations contained in other specific appropriation acts in various Session Laws of Hawaii. To the extent not expended or encumbered, general fund appropriations generally lapse at the end of the year for which the appropriations were made. The State Legislature specifies the lapse date and any other particular conditions relating to terminating the authorization for other appropriations. For budgeting purposes, the department’s budgetary fund structure and accounting principles differ from those utilized to present the basic financial statements in conformity with GAAP. Encumbrances represent Note 2 – Budgeting and Budgetary Control This is trial version www.adultpdf.com 34 Chapter 3: Financial Audit executed but unperformed purchase orders or contracts. Encumbrances are recorded as expenditures for budgetary purposes and as reservations of fund balance for GAAP purposes. Since budgetary basis differs from GAAP, budget and actual amounts in the accompanying Required Supplementary Information – Budgetary Comparison Schedules are presented on the budgetary basis. A reconciliation of the excess of revenues over expenditures on a budgetary basis to the excess (deficiency) of revenues over expenditures presented in conformity with GAAP is set forth in the Note to Budgetary Comparison Schedules. At June 30, 2003, the proprietary fund loans receivable consists of loans to county governmental units for the water pollution control and drinking water treatment programs. The loans are due in annual, semi-annual, or quarterly payments, including interest at 1.55 percent to 3.02 percent, commencing not later than one year after project completion or notice to proceed. Final payment is due not later than 20 years after project completion. Accrued interest receivable on the loans amounted to approximately $1,555,825 at June 30, 2003. The following is a schedule of principal payments due on loans for projects completed or in progress as of June 30, 2003: Year ending June 30: 2004 $ 11,233,023 2005 11,525,840 2006 11,807,261 2007 12,098,068 2008 12,396,571 Thereafter 114,618,713 $ 173,679,476 Note 3 – Loans Receivable This is trial version www.adultpdf.com 35 Chapter 3: Financial Audit Capital asset activity for the year ended June 30, 2003 was as follows: Depreciation expense for the year ended June 30, 2003 was charged to functions as follows: Governmental activities General administration $ 513,091 Environmental health 1,632,877 Behavioral health 1,598,868 Health resources 861,649 Total depreciation expense – governmental activities $ 4,606,485 Business-type activities: Environmental health $ 73,434 Note 4 – Capital Assets Beginning Ending Balance Additions Deletions Balance Governmental activities: Capital assets not being depreciated: Land $ 1,018,080 $ — $ — $ 1,018,080 Total capital assets not being depreciated 1,018,080 — — 1,018,080 Capital assets being depreciated: Land improvements 1,862,927 — — 1,862,927 Building and improvements 126,113,479 — (276,000) 125,837,479 Furniture and equipment 12,298,031 930,456 (1,029,979) 12,198,508 Total capital assets being depreciated 140,274,437 930,456 (1,305,979) 139,898,914 Less accumulated depreciation: Land improvements 1,475,755 115,023 — 1,590,778 Building and improvements 52,718,719 3,892,465 (276,000) 56,335,184 Furniture and equipment 10,515,309 598,997 (1,012,970) 10,101,336 Total accumulated depreciation 64,709,783 4,606,485 (1,288,970) 68,027,298 Total capital assets of governmental activities, net $ 76,582,734 $ (3,676,029) $ (17,009) $ 72,889,696 Business-type activities: Capital assets being depreciated: Equipment $ 459,907 $ 179,743 $ (46,188) $ 593,462 Less accumulated depreciation for equipment 214,667 73,434 (46,188) 241,913 Total capital assets of business-type activities, net $ 245,240 $ 106,309 $ — $ 351,549 This is trial version www.adultpdf.com [...]... employees of the contributory plan are required to contribute 7.8 percent of their salary Police officers, firefighters, investigators of the department of the prosecuting attorney and the attorney general, narcotics enforcement investigators, and public safety investigators are required to contribute 12.2 percent of their salary The actuarial cost or funding method used to calculate the total employer... hired after June 30, 1984, who are covered by Social Security, are generally required to join the noncontributory plan Both plans provide a monthly retirement allowance based on the employee’s age, years of credited service, and average final compensation (AFC) The AFC is the average salary earned during the five highest paid years of service, including the payment of salary in lieu of vacation, if the. .. issues a comprehensive annual financial report that is available to the public That report may be obtained by writing to the ERS at 201 Merchant Street, Suite 1400, Honolulu, Hawaii 96813 The ERS consists of a contributory plan and a noncontributory plan Employees covered by Social Security on June 30, 1984 were given the option of joining the noncontributory plan or remaining in the contributory plan All... is the entry age normal actuarial cost method Under this method, the total employer contributions to the ERS is comprised of normal cost plus level annual payments required to amortize the unfunded actuarial accrued liability over the closed period ending June 30, 2029 Post-Retirement Health Care and Life Insurance Benefits In addition to providing pension benefits, the State provides certain health. .. employee became a member prior to January 1, 1971 The AFC for members hired on or after this date is based on the three highest paid years of service excluding the payment of salary in lieu of vacation Vesting requirements for the contributory and noncontributory plans are five years and ten years, respectively All contributions, benefits, and eligibility requirements are governed by Chapter 88, HRS...Chapter 3: Financial Audit Note 5 – Retirement Benefits Employees’ Retirement System Plan Description All eligible employees of the State are required by Chapter 88, HRS, to become members of the Employees’ Retirement System of the State of Hawaii (ERS), a cost-sharing multiple-employer public employee retirement plan The ERS provides retirement benefits as well as death and disability benefits The. .. Benefits In addition to providing pension benefits, the State provides certain health care and life insurance benefits to all employees hired prior to July 1, 1996 who retire from State employment on or after attaining age 62 with at least ten years of service or age 55 with at least 30 years of 36 This is trial version www.adultpdf.com . estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported. self-balancing set of accounts. The financial activities of the department that are reported in the accompanying fund financial statements have been classified into the following major and nonmajor. 26 Chapter 3: Financial Audit Government-Wide and Fund Financial Statements The government-wide financial statements, which are the statement of net assets and the statement of activities, report