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HomeMy WebLinkAbout2012 Comprehensive Annual Financial Report - Executive Summary Finalh Bend, fl Buttigieg C Executive Summary Fiscal Year ending December 31, 2012 Prepared by: Department of Administration and Finance Mark Neal, City Controller City of South Bend, Indiana Comprehensive Annual Financial Report — Executive Summary For The Year Ending December 31, 2012 Table of Contents Purpose & Summaries Purpose of the Executive Summary Quick Facts about South Bend....... Charts and Graphs ......................... Introduction Controller's Letter of Transmittal ... ............................... Independent Auditor's Report on Financial Statements Management's Discussion and Analysis ...................... Government -Wide Financial Statements: Statement of Net Position ...................... Statement of Activities ........................... Fund Financial Statements: Balance Sheet — Governmental Funds .............. ............................... Statement of Revenues, Expenditures and Other Changes in Fund Balances — Governmental Funds ................ ............................... Statement of Net Position — Proprietary Funds . ............................... Statement of Revenues, Expenses and Other Changes in Net Position — Proprietary Funds ................ ............................... Statement of Fiduciary Net Position — Fiduciary Funds .................... Statement of Changes in Fiduciary Net Position — Fiduciary Funds. Financial Trends Net Position by Component — Last Ten Years .... ............................... Changes in Net Position — Last Ten Years ......... ............................... Fund Balances, Governmental Funds — Last Ten Years ................... Changes in Fund Balances, Governmental Funds — Last Ten Years Revenue Capacit 2 3 -10 . .......................... 11 -23 . ............................... 24 -26 . ............................... 27-47 48-49 ...... 50 51 -52 ...... 53 54 -55 56 -57 ...... 58 ...... 59 ...... 60 61 -63 ...... 64 ...... 65 Property Tax Levies and Collections — Last Ten Years ............................ ............................... 66 Direct and Overlapping Property Tax Rates — Last Ten Years ................. ............................... 67 Assessed Value and Actual Value of Taxable Property— Last Ten Years .............................. 68 Property Tax Collections — Cash Basis — 2003 to 2012 ............................ ............................... 69 Debt Capacity Computation of Legal Debt Margin — December 31, 2012 ........................ ............................... 70 Ratios of Outstanding Debt by Type — Last Ten Years ............................ ............................... 71 Computation of Direct and Overlapping Debt — December 31, 2012 ....... ............................... 72 Demographic and Economic Information Demographic Statistics — Last Ten Years .......................................... ............................... 73 -74 Operating and Other Information Full -Time City Government Employees by Department — Last Ten Years ........................ 75 -76 Grant Compliance Schedule of Expenditures of Federal Awards ..................................... ............................... 77 -79 City of South Bend, Indiana 2012 CAFR Executive Summary Purpose of the Executive Summary The City of South Bend has prepared a Comprehensive Annual Financial Report (CAFR) for the year ending December 31, 2012. The 2012 CAFR totals 275 pages and meets all of the requirements set forth by the Government Finance Officers Association for its Certificate of Achievement for Excellence in Financial Reporting program. If the award is received for 2012, this will be the twenty -third consecutive year that the City of South Bend has received this prestigious award. The purpose of this Executive Summary is to present the most essential schedules and summaries from the 2012 CAFR, as determined by the City, to allow more ready access to them by the reader. The schedules and summaries are presented in their original format and the order of presentation is the same as in the full 2012 CAFR. In addition, the CAFR Executive Summary includes summary charts and graphs not featured in the 2012 CAFR. The Executive Summary totals 79 pages. The Executive Summary and full CAFR are available at: http: / /docs. southbendin .gov /WebLink8 /Browse.aspx ?dbid =0 or by contacting: Mark W. Neal, City Controller City of South Bend Department of Administration & Finance 227 W. Jefferson Boulevard South Bend, Indiana 46601 Telephone — (574) 235 -9261 Fax — (574) 235 -9928 On the cover: Top: The Salvation Army Kroc Community Center officially opened on January 28th, 2012. The 110,000 square -foot community center was paid for by a donation from Ray and Joan Kroc and community support. "The Center is comprised of five major components: a center of worship and performance venue, an aquatics center, fitness and recreation center, fine arts, music and education, and special event facilities" ( http:// www .mvkroc.org /about/history.php). SpUTR� _'N i ri e Quick Facts about South Bend = �-- .1865. Yearof Incorporation ................................................. ............................... ...........................1865 Mayor.................................................................................... ............................... Pete Buttigieg Numberof Council Members ....................................................................... ..............................9 Population (2010 census) ......................................... ............................... ........................101,168 Full -time Employees ( 12/ 31/ 12) ................................. ............................... ..........................1,112 2012 Governmental Fund Expenditures ............................... ............................... $ 162,460,000 2012 Government -Wide Expenses ........................................ ............................... $ 195,040,779 Net Position (12/31/12) .......................................................... ............................... $ 462,042,590 Unrestricted Net Position (12/31/12) .................................... ............................... $ 101,255,736 Largest Employer .............................................. ............................... University of Notre Dame (5,590 employees) Gross Assessed Property Tax Value ................................... ............................... $ 5,091,222,000 Local Colleges: • The University of Notre Dame • Indiana University - South Bend • Bethel College • Saint Mary's College • Holy Cross College • Trine University - South Bend • Brown Mackie College - South Bend • Ivy Tech Community College - South Bend Attractions: • Morris Performing Arts Center • Century Center • South Bend Silver Hawks • East Race Waterway • Potawatomi Zoo • Palais Royale • Blackthorn Golf Course 2 C � R � O L C Q d .a O C d U � m y 3 O 'y w C a cya _ d U Z O O O O O O O O O O O O O O O O O O O O O O O O O LO M N 9 M 1-- O N M N N _ N r M � O O V O N N O N (M 1fl N r 1-- N T w 04 co �O (R N r r V 1fl � W r O O N N O co 00 t0 11Y N r � 0o V N W) N r 1l� N O N Q1 p r t0 00 N N 0) N r N N 1� I L Q tO O ID Q W O N w N t0 O 1- V N N r co co 0o M co rn r• n O O N co O N to N 00 V ao N r M CD O O O 00 t7 M O T to r Q N N M t0 01 N r M Ln Cl) 00 r N N Q O M O O co 1` to O N M T O N M N � Ln M 00 O 1- N O p 00 N It N co O f0 N O N 1� N O Wi r N � O O p O O N N 00 LO O N T r r O V oc N O 00 M r o r O M O T N ao of co l0 N O O 0 O N C a V co O Z a) E (0 U) m Q a N N a z E E (D T E C 0 a i O a) t O C 'o H H 0 a N r N N� I.f 1 L 0 m U +�+ N �Ln E' v _ ! 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C 'Q LL m ` U L N O E N � j O U C C O 0 CL O C C M C O N CD 0U) O Z City of South Bend, Indiana Full -Time City Government Employees by Department Highways & Internal Streets, 52 Service Fund, 42 General Economic Government, Development, 90 24 Culture & Recreation 128 Enterprise Funds, 201 Public Safety, 575 Full -Time Department Positions Mayor's Office 6 City Clerk's Office 5 Common Council (elected officials, part -time) 8 • Administration and Finance 22 City Attorney's Office 9 Code Enforcement 25 Engineering 15 Police Department • Communication Center 291 35 Fire Department 249 Parks and Recreation Convention and Events Management 114 14 • 9 :4"yrLQ Community and Economic Development 24 Street Department 52 • Water Works 73 Wastewater 46 Organic Resources (formerly in Wastewater) 6 Sewer 39 Solid Waste 24 Building De artment 13 Central Services 42 Total Full -Time Positions 10 Year Trend 1,400 1,294 1,288 1,213 1,200 1,116 1,132 1,133 1,000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10 120ON COUNTY -CITY BUILDING 227 W. JEFFERSON BLVD. SOUTH BEND, INDIANA 46601 -1830 CITY OF SOUTH BEND PETE BUTTIGIEG, MAYOR PHONE 574/ 235 -9216 FAX 574/ 235 -9928 DEPARTMENT OF ADMINISTRATION AND FINANCE June 28, 2013 The Honorable Pete Buttigieg, Mayor of the City of South Bend Members of the City of South Bend Common Council Residents of the City of South Bend: The comprehensive annual financial report of the City of South Bend, Indiana (the "City ") for the year ended December 31, 2012 is hereby submitted. Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with management. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the various funds of the City. All disclosures necessary to enable the reader to gain an understanding of the government's financial activities are included. Generally Accepted Accounting Principles (GAAP) requires that management provide a narrative introduction, overview and analysis to accompany the basic financial statements in the form of the Management's Discussion and Analysis (MD &A). This letter of transmittal is designed to complement the MD &A and should be read in conjunction with it. The City of South Bend's MD &A can be found immediately following the independent auditors report. The comprehensive annual financial report is presented in four sections: introductory information, financial information, statistical information and federal compliance information. The introductory section includes this transmittal letter, the City's organizational chart, a list of principal City officials and the Certificate of Achievement for Excellence in Financial Reporting awarded to the City of South Bend for the year ending December 31, 2011. The financial section begins with the independent auditors' report on the City's financial statements and schedules, the City managements' discussion and analysis report, followed by the City's basic financial statements and accompanying notes. The remaining portion of this section includes the combining and individual fund and other financial statements and schedules. The statistical section includes selected financial and demographic information generally presented on a multi- year basis, which has been provided to give the reader a broader understanding of the City. The federal awards compliance section, which includes the results of the supplemental audit of the City's federal awards and the internal controls necessary for compliance, is included in a separate report. The City is required to undergo an annual single audit in conformity with the provisions of the U.S. Office of Management and Budget Circular A -133, Audits of States, Local Governments 11 and Non - Profit Organizations, the provisions of Indiana Code section 5- 11 -1 -9 and the requirements of the Indiana State Board of Accounts. Information related to the single audit, including the schedule of federal financial assistance, findings and recommendations, and the auditors' reports on the internal control structure and compliance with applicable laws and regulations, is included in a separate report. The following pages of this transmittal letter begin with a general overview of South Bend and the surrounding area. Also summarized are the key financial, budgetary and property tax controls with which the City is required to comply. The remainder includes a discussion of the prior year's financial challenges and accomplishments, the City's goals and objectives for this year and beyond and other key issues the City is facing along with the impact they may have on current and future budgets. GENERAL INFORMATION The City of South Bend is the county seat of St. Joseph County, Indiana, and is the fourth largest city in the state. The City of South Bend's 2010 U.S. Bureau of the Census population was 101,168. Accordingly, South Bend is classified as a "City of the Second Class" under Indiana statutes (cities with a population of 35,000 to 250,000). The City of South Bend operates with a mayor as chief executive and a nine - member City Common Council composed of six members elected from districts and three members elected at- large. The City provides a full range of traditional general governmental services to its citizens. These services include police and fire protection; sanitation services; the construction and maintenance of highways, streets and infrastructure; recreational activities and cultural events. In addition to general governmental activities, the City exercises oversight over the South Bend Water Works, the South Bend Wastewater Treatment Facility, the Century Center Convention Center, the Morris Performing Arts Center, the Studebaker National Museum, the City of South Bend Redevelopment Commission and Authority, and several downtown parking facilities. Location St. Joseph County lies within the heartland of the manufacturing belt and metropolitan regions of the Upper Midwest and Canada. The City of South Bend is located in the north central part of Indiana, ten miles south of the Michigan state line, and is commonly known to be within the " Michiana" area. The Michiana area is a vibrant and diverse area with a strong economy based on a mix of health care, agricultural, service, manufacturing, education and other commercial and tourism industries. This diverse economic mix creates varied employment opportunities for the area's residents while providing insulation via diversification from future economic downturns. The city is approximately 90 miles east of Chicago and 140 miles north of Indianapolis. Accessibility to transportation, including Interstate 80/90, a regional airport (which is the second busiest in the State of Indiana) and the South Shore Line has supported economic growth within the community. Proximity to Chicago, the largest rail and intermodal (rail /truck/ocean/inland 12 waterway) transfer point in the country, is a significant advantage to the City of South Bend as is proximity to the University of Notre Dame with its scenic campus located adjacent to the city limits. St. Joseph County / South Bend - Economic Conditions and Outlook St. Joseph County, with its 2010 U.S. Bureau of the Census population of 266,931, boasts a strong history of manufacturing which continues today. The service industry and retail trade have also flourished, creating a balance that serves the community well. The County experienced a net growth in population of 28,317 (11.8% increase) between 1960 and 2010. After experiencing a reduction of 2.6% during 1969 to 1983, at which time the entire Midwest was at the depth of its economic restructuring and recess, the County's population increased 4.0% between 1983 and 1990 and another 7.5% between 1990 and 2000. The population of St. Joseph County has remained fairly flat during the past decade increasing by only 1,372 residents from 2000 to 2010. The estimated labor force in St. Joseph County is 135,516 workers (US Census Bureau 2007- 2011 Survey 5 -Year Estimates). The workers are typical of the Midwest: well trained with a strong work ethic. Approximately 87.5% of the area's adult population are high school graduates or higher (as compared to the national average of 75 %) with an estimated 26.2% with a Bachelor's Degree or higher. There are ten colleges, universities and technical schools within South Bend and the surrounding area including the University of Notre Dame; Indiana University South Bend; Bethel College; Saint Mary's College; Purdue University College of Technology at South Bend; Holy Cross College; Trine University South Bend; Brown Mackie College; ITT Technical Institute; and Ivy Tech Community College. At the high school level, there are school - to -work transition programs. As of April 2013, St. Joseph County is experiencing an unemployment rate of 9.7 %, which is higher than the State of Indiana unemployment rate of 8.5 %. The unemployment rate in St. Joseph County is somewhat higher than some of its surrounding counties—Elkhart (9.4 %), LaPorte (11.6 %), and Marshall (9.5 %) in Indiana and Cass (7.3 %) and Berrien (8.8 %) in Michigan (as of March 2013). The employment profile for St. Joseph County provides a good overview of the economic make- up of this community. Employment estimates for the County's major economic sectors are as follows (US Census Bureau 2007 -2011 Survey 5 -Year Estimates Civilian Employed Population): Economic Sector Number Employed % of Total Educational Services, Healthcare, Social Assistance 32,442 26.7% Manufacturing 20,204 16.6% Retail Trade 14,014 11.5% Arts, Entertainment, Recreation, Accommodation, 11,120 9.1% Food Services Professional, Scientific, Management, Administrative, 9,858 8.1% Waste Management Services Finance and Insurance, Real Estate, Rentals, Leasing 6,956 5.7% Construction 6,168 5.1% Transportation and Warehousing, and Utilities 5,644 4.6% Other Services, except Public Administration 5,530 4.5% Wholesale Trade 3,824 3.1% 13 Public Administration 3,334 2.7% Information 2,105 1.7% Agriculture, Forestry, Fishing, Hunting, Mining 514 0.4% Total 121,713 100.00% St. Joseph County presently has an estimated 101,071 households with an average per capita personal income of $23,420, which compares to the State of Indiana average per capita income of $24,497 and the United States per capita income of $27,915. The per capita income in St. Joseph County compares favorably with many of its surrounding counties — Elkhart ($21,879), La Porte ($22,968), and Marshall ($22,376) in Indiana and Cass ($23,045) and Berrien ($24,490) in Michigan. Health and education lead the employment statistics for St. Joseph County. The largest employers in St. Joseph County as of December 2012 were as follows: University of Notre Dame (4,707); South Bend Community School Corporation (3,212); Memorial Health Systems (3,545); Saint Joseph Regional Medical Center (2,123); The Diocese of Fort Wayne /South Bend (1,094); AM General (2.400); 1St Source Bank (1,257); the City of South Bend (1,361); St. Joseph County (1,211); and Martin's (1,062). The following provides a profile of the residents of St. Joseph County: Gender: 48.5% male; 51.5% female Age: 36.2% 0 -24 years of age; 25.3% 25 -44 years of age; 25.3% 45 -64 years of age; and 13.2% 65 years of age and older. Race: 76.0% White; 12.4% Black/African American; 7.1 % Hispanic /Latino; 1.7% Asian; and 2.8% Other Marital Status: 46.1% Married; 53.9% Single/Widowed/Divorced/Other Home Ownership: 70.7% own; 29.3% rent /other The cost of living continues to be one of the greatest advantages of living in this community. The housing costs in South Bend are well below the national and regional averages. Per a report compiled by the National Association of Realtors in the first quarter of 2012, the median sales price for a single family home in the South Bend - Mishawaka Statistical Area was $69,400 as compared to a median sales price of $157,200 in Chicago and $115,400 in Indianapolis. The national median sales price is $158,000. The City of South Bend continues to place high emphasis on a growing and diversified local economy. It has been active in developing ten industrial parks, offering itself as a low -cost alternative to the Chicago metropolitan area to companies engaged in light manufacturing, distribution and services. More than 240 businesses operate in South Bend's industrial parks, 14 including companies engaged in metalworking, plastics, warehousing and distribution, and professional services. In recent years, the City has developed Innovation and Ignition parks, the first dual -site, state - certified technology park in the State of Indiana. The South Bend Community School Corporation serves the entire City and some of the surrounding area and has a current enrollment of approximately 18,982 students in grades kindergarten through high school. An estimated 5,757 students attend private or parochial schools within the City. The nine institutions of higher education and technical training located within the South Bend area have a total enrollment of approximately 31,166. Over the years, the University of Notre Dame has provided a stabilizing influence on the economy with a very significant positive economic impact upon the community. South Bend History and Amenities In 1820, Pierre Navarre of the American Fur Trading Company was the first settler in the area to become later known as South Bend. South Bend has continued to progress in its growth since 1842 when Father Edward Sorin named his rustic log chapel "Notre Dame du Lac" and began to teach the local Indians. Today the chapel has grown into the University of Notre Dame. In 1852, H.C. Studebaker started the industry of making wagons and horse -drawn buggies that evolved into the manufacturing of the Studebaker automobile. It made the name Studebaker synonymous with the area of South Bend and its major employer until its closure in 1963. Another industrial firm that would later become the area's largest began in 1923 when Vincent Bendix began manufacturing automotive brakes. In 1929 the company became the Bendix Aviation Corporation, and now, as Honeywell (formerly AlliedSignal Inc.), is a leading manufacturer of automotive and aerospace products. The Singer Sewing Company and the Oliver Chilled Plow Works were other important companies during the early history of South Bend. Special attractions within the South Bend area include the Olympic -class East Race Waterway and the East Bank area; the renovated Morris Performing Arts Center, which provides for the Broadway Theater League, the South Bend Symphony Orchestra with the Chamber and Pops Orchestras, and the Southold Dance Theater and Patchwork Dance Company; the award - winning South Bend Civic Theater; the Studebaker National Museum; the South Bend Museum of Art; the Snite Museum of Art at Notre Dame; the Northern Indiana Center for History; Copshaholm /The Oliver Mansion; Century Center; Potawatomi Zoo; the Morris Conservatory /Muessel- Ellison Tropical Gardens; Healthworks! Kids Museum; the Farmers' Market; and the Belleville Softball Complex. The Coveleski Regional Baseball Stadium (named after South Bend native and Hall of Fame pitcher Stanley Coveleski) is a 5,000 -seat facility which opened in 1987 and is rated among the best in minor league baseball. The stadium is home to the South Bend Silver Hawks, a minor league team affiliated with the Arizona Diamondbacks. During 2011, the Silver Hawks were sold to Chicago businessman, Andrew Berlin, who has forged a strong partnership with the City and plans to keep the team in South Bend for many years to come. Attendance at the stadium has increased significantly in recent years. 15 Additional miscellaneous information about the City of South Bend can be found in the statistical section of this report. Financial, Budgetary and Property Tax Controls The City's management team is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the government are protected from loss, theft or misuse and to ensure that adequate accounting data is compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Single Audit. As a recipient of federal and state financial assistance, the City also is responsible for ensuring that an adequate internal control structure is in place to ensure compliance with applicable laws and regulations related to those programs. This internal control structure is subject to periodic evaluation by management of the City. As part of the City's single audit described earlier, tests are performed to determine the adequacy of the internal control structure, including that portion related to federal financial assistance programs, as well as to determine that the City has complied with applicable laws and regulations. The results of the City's single audit for the year ended December 31, 2012 are included in a separate report. Budgetary Controls. In accordance with Indiana statutes, the City maintains budgetary controls integrated within the accounting system. The objective of these budgetary controls is to ensure compliance with legal provisions embodied in the annual appropriated budget (prepared on a cash basis) which is adopted by the City Common Council or Redevelopment Commission (depending on the fund) and then reviewed and approved by the State of Indiana Department of Local Government and Finance (DLGF). Activities of the general fund, special revenue funds, capital project funds, enterprise funds, internal service funds, pension trust funds and debt service funds are included in the annual budget. The level of budgetary control (that is, the level at which expenditures cannot legally exceed the appropriated amount) is established by major budget classification within funds. The Mayor and Common Council may transfer appropriations from one major budget classification to another within a department by ordinance as long as the total appropriations for that fund are not exceeded. Additional appropriations in excess of the original budget must be approved by the Mayor and Common Council and are also submitted to the DLGF for either approval or acknowledgement (depending on the fund). Additional appropriations for funds approved by the Redevelopment Commission do not require DLGF approval. Beginning in budget year 2009, the City must also submit its annual budget to the St. Joseph County Common Council for a non - binding review and recommendation. The deadline for adoption of the annual budget is November 1. The city's fiscal year begins on January 1. The City maintains an encumbrance accounting system as one technique of accomplishing budgetary control. Encumbered amounts do not lapse at year end and are carried over to the following year as a part of the subsequent year's budget. 16 Property Tax Controls. In addition to budgetary and other controls established by Indiana statute, the City must operate within specific and rigid controls governing the amount of property tax it may levy. The property tax control program, which began in 1973, limits the amount of property tax that may be levied by each unit of government in its legally budgeted funds. The total amount of property tax levied by the unit may increase by the six year average annual growth in Indiana personal non -farm income, as calculated by the U.S. Bureau of Economic Analysis, with a 6% maximum. During March 2008, the State of Indiana General Assembly enacted property tax reform legislation which made significant changes in the property tax system by capping the amount of property taxes at 1% of grossed assessed value for residential homesteads, 2% for agricultural /rental properties and 3% for all other real and personal property. This legislation was phased in over a two year period beginning in 2009. The loss of revenue to the City due to this legislation was significant but has been overcome by cost savings and the adoption of local option income taxes to in order to continue providing essential City services, including police and fire protection. A historical view of the City's tax rate and its net assessed valuation has been included in the statistical section of this document. Citywide Goals and Obiectives for 2013 and Beyond The City has developed eight broad goals that focus on the following areas: economy, safety, quality of life, trust, responsiveness, infrastructure, finance and workforce. The City has identified various objectives that are tied directly to these goals which, if achieved, will result in the attainment of these goals. The eight goals are listed below. GOAL ONE: The Community's Economy Improve South Bend's economy to ensure a vigorous local business climate; ample employment, business and investment opportunities for all our customers; and a tax base that is sufficient to meet the needs of the City, its residents and other customers. GOAL TWO: The Community's Public Safety and Civility Improve South Bend's public safety and civility to ensure that every resident and other customers can live, work, play, run a business and raise a family in a humane, pleasant and safe environment; have adequate, affordable and timely access to all forms of emergency services; and can contribute and participate in a community where people of different backgrounds live in mutual respect and harmony. GOAL THREE: The Community's Quality of Life 17 Improve South Bend's quality of life to ensure that every resident and every family can earn an adequate income; secure adequate housing; live in a safe, pleasant and humane neighborhood; enjoy a wide range of social, cultural and recreational opportunities; and have access to quality educational and medical services within an excellent natural and manmade environment. GOAL FOUR: Trust in City Government Improve residents' trust in City government to ensure that South Bend has a broad base of consensus and support on which to build the future, a strong foundation for collaborative action and community partnerships; and an increase in resident and customer participation in the daily public life of the community. GOAL FIVE: The City's Responsiveness, Efficiency, and Effectiveness Improve the responsiveness, efficiency, and effectiveness of City government to ensure that the City's customers get the value they expect and deserve. GOAL SIX: The City's Infrastructure Improve the City's infrastructure to ensure that South Bend can support physical growth and economic development; and offer an excellent quality of life to all of its residents and other customers. GOAL SEVEN: The City's Financial Condition Improve the financial condition of City government to ensure that South Bend has the financial resources necessary to achieve all of its goals during the next five years. GOAL EIGHT: The City's Workforce Improve the City government's existing workforce, work environment and human development systems to ensure that South Bend has the human resources necessary to achieve all its goals during the next five years. City Mission Statement and Department Purpose Statements The City provides services to its customers through thirteen administrative departments. These departments have unique purposes that are intended to support the citywide mission statement which is "to be recognized as a model city." Each department has developed a purpose statement which identifies their specific role. Mayor's Office: Leading the community to become a model city through formulating policy, directing operations and responding to customer concerns. 18 Common Council: Making certain that our City government is always responsive to the needs of our residents and that the betterment of South Bend is always our highest priority. City Clerk's Office: Preserving all City Ordinances and Council meeting minutes for generations yet to be, and providing fair and consistent treatment of our Ordinance Violations Bureau customers. Administration and Finance: Providing financial and organizational stability for the City through sound financial and human resources management while ensuring the existence of a safe work environment, quality employee benefits and equal treatment for all City employees. Legal Department: Providing superior, professional and ethical legal services for our client, the City of South Bend. Police Department: Protecting the life, property and personal liberties of all individuals; improving the overall quality of life by deterring criminal activity and respecting cultural diversity; delivering fair and impartial law enforcement services to all residents. Fire Department: Providing the highest level of fire protection and emergency medical services possible to all of our customers, saving lives and property, and striving to become a model Fire Department for other cities in an efficient and cost - effective manner. Code Enforcement: Maintaining and improving the physical quality of life in our neighborhoods. Parks and Recreation: Offering all residents and guests of South Bend the highest quality of recreational and leisure activities, while providing well- managed parks and recreational facilities with updated programming and friendly productive service. Community Investment (Econ Dev): Public Works: Creating and expanding opportunities through partnerships in neighborhood revitalization, commercial and industrial development and community enhancement. Providing leadership in the development and delivery of engineering, fleet, 19 transportation, sanitation, wastewater, water and other services as called upon by our customers. Building Department: Serving our customers by inspecting, informing and ensuring a safe place to work, play and live. Century Center: Providing a state -of -the -art convention facility with excellent services to customers while generating maximum economic benefit to our community. Building South Bend in 2013 and beyond The City Administration's theme for the past several years has been "We're Building South Bend." That theme has had a major influence on the development of the 2013 budget. There are five areas of concentration that became or remained budget priorities for 2013. We're Building Neighborhoods - The City continues with its strong commitment to neighborhoods. The City will make a significant investment to fund or leverage state and federal funding for housing assistance, development and home ownership programs, neighborhood public works and parks, neighborhood development for social services and organizations, and public safety initiatives. Committing these resources will help us maintain, improve and support strong neighborhood development. We're Building a Safe City - Public safety is the foundation of all the City's efforts to build South Bend. Through the targeted and creative use of available resources, the City is working to provide quality police, fire and ambulance services for the community. The crime rate has decreased in several significant categories over the past year. The City's Fire Departments is rated one of the best in the State. A key initiative will focus on community policing, youth violence, and placing more emphasis on training and recruitment for the Police and Fire Departments. We're Building an Attractive City - We are working to enhance the natural and man -made beauty of our city through effective City programs. The City has taken steps through its Department of Code Enforcement and a Mayoral Task force to address the issue of vacant and abandoned properties. The City is funding major programs to renovate the former Studebaker Corridor area and other parts of the City. The City has been recognized as a Bicycle Friendly Community by the League of American Bicyclists and has established over 60 miles of bicycle routes to date. • We're Building Opportunity - A key issue for any city is education and opportunity for young people. The City is committed to keeping schools open in our neighborhoods and to maximizing their use by the community. We are building partnerships with the South Bend School Corporation and other key stakeholders that will create new strategies for enhancing 20 our formal educational systems. Working together with families, student groups, school officials, neighborhoods, the faith community and civic organizations, we can support our local schools and improve the level of individual student performance. We're Building a Strong Economy - Local government plays a key role in economic development. By providing adequate infrastructure and offering targeted assistance, the City can stimulate private investment, creating business opportunities and jobs. The City's policies encourage new start-up businesses, strengthen existing business, attract new jobs, increase assessed value and emphasize direct investment in hard -to- develop areas. Efforts have been and will continue to focus on implementing the comprehensive plans for the areas around the East Bank and Coveleski Stadium, including a new Veteran's Clinic across from the stadium. The City has had many recent economic development projects including Eddy Street Commons, a $220 million dollar mixed -use development south of Notre Dame, with more than 20 stores and restaurants, office space and hundreds of town homes, apartments and condominiums. In addition, the City has created Indiana's first dual -site, state - certified technology park site known as Innovation Park and Ignition Park. Mayoral Leadership Transition Mayor Stephen J. Luecke retired effective December 31, 2011. As South Bend's longest serving chief executive (1997- 2011), Mayor Luecke had many significant accomplishments during his tenure including the City's receipt of the All - America City Award from the National Civic League in 2011. Mayor Pete Buttigieg, a Harvard University graduate and Rhodes scholar, assumed office on January 1, 2012 bringing with him a group of leaders with new ideas and energy to implement transformational reform to city government. Elected at age 29, Mayor Buttigieg is the youngest chief executive of a municipality exceeding 100,000 residents in the United States. During 2012, Mayor Buttigieg launched six new initiatives to improve city government: New Economic Partnerships — to lay out a new economic vision for our community as well as to agree on a smarter division of labor among various groups involved in economic development. An Economic Summit was held in June 2012 to promote this initiative. In addition, the Department of Community and Economic Development was reorganized under the leadership of new Director Scott Ford and renamed the Department of Community Investment. 2. High Ethical Standards — on his first day in office the Mayor issued an executive order introducing a new ethics code for City employees. 3. Customer Service Mentality — design ways that City employees can track and resolve citizens' issues efficiently by using more advanced technology. This effort led to the creation of a "311 call center" for non - emergency municipal telephone calls during 2012. 4. Strong Partnerships with Schools — the Mayor has improved dialogue with the South 21 Bend School Corporation and other stakeholders to ensure a strong educational system in the City. The Mayor has begun programs to double the number of public school mentors and curb youth and gun violence. 5. Transparency and Accessibility – choosing not to serve from behind his desk, Mayor Buttigieg has conducted a series of monthly "Mayor's Night Out" and "Mayor's Night In" events around town to allow citizens to speak to him and his department heads directly about concerns and ideas. Also, efforts to implement a first -class performance management system have been initiated and departmental performance measures are being monitored on a monthly basis. The City website has been re- designed and additional financial and operational reports are being made available online. 6. Vacant and Abandoned Buildings – as with many large cities, the City of South Bend has an issue with vacant and abandoned buildings. The city has taken on this issue with the appointment of a blue -ribbon task force that developed new strategies and initiated an aggressive three -year program -1,000 buildings in 1,000 days —to reduce the number of vacant and abandoned buildings. Funding for demolition and remediation has increased significantly and is over $1.0 million dollars in the 2013 budget. Administration Vision The administration of Mayor Buttigieg has a single, overarching visiona safe, inclusive and well- connected South Bend. In support of this vision, the Mayor has established three main pillars of administration policy: 1. Basics are easy – it is essential to provide City residents basic services so seamlessly that they take them for granted and are able to focus on their own families and daily challenges. 2. Good government – make government more accessible and accountable to those it serves by adopting a people- focused approach, trading partisanship for partnership and using technology to better serve all residents. 3. Create Jobs – focus on economic growth and make much needed investments in the future. Awards The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of South Bend for its comprehensive annual financial report for the fiscal year ended December 31, 2011. This was the 22nd consecutive year that the City has achieved this prestigious award. In order to be awarded a Certificate of Achievement for Excellence in Financial Reporting, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. 22 A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledtments The preparation of the comprehensive annual financial report (CAFR) was made possible by the dedicated service of the City's departmental fiscal officers and the staff of the Department of Administration and Finance. Each fiscal officer and member of the Administration and Finance Department has my sincere appreciation for the contributions made in the preparation of this report. I would especially like to acknowledge the efforts of the core CAFR preparation team of Deputy Controller John Murphy, Rahman Johnson, Cecil Eastman and Intern Amy O'Connor. In addition, I would like to thank the Field Examiners of the Indiana State Board of Accounts (led by Doug Wiese, Bruce Snyder and Alex Flores) for their hard work and dedication in this effort. In closing, without the leadership and support of Mayor Pete Buttigieg, City Department Heads, and members of the City of South Bend Common Council, preparation of this report would not have been possible. Sincerely, C) Mark W. Neal, City Controller City of South Bend 23 STATE OF INDIANA AN EQUAL OPPORTUNITY EMPLOYER STATE BOARD OF ACCOUNTS 302 WEST WASHINGTON STREET ROOM E418 INDIANAPOLIS, INDIANA 46204 -2769 Telephone: (317) 232 -2513 Fax_ (317) 232 -4711 Web Site: www.in.gov /sboa INDEPENDENT AUDITOR'S REPORT TO: THE OFFICIALS OF THE CITY OF SOUTH BEND, ST. JOSEPH COUNTY, INDIANA Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business - type activities, each major fund and the aggregate remaining fund information of the City of South Bend (City), as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the Table of Contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in.the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued bythe Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 24 INDEPENDENT AUDITOR'S REPORT (Continued) Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, each major fund and the aggregate remaining fund information of the City as of December 31, 2012, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended, in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis, Schedules of Funding Progress, Schedules of Contributions From the Employer and Other Contributing Entities, and Budgetary Comparison Schedules (general and major special revenue funds) as listed in the Table of Contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City basic financial statements. The introductory section, combining fund financial statements, other budgetary comparison schedules, and statistical schedules, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining fund financial statements and other budgetary comparison schedules are the respon- sibility of management and were derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and other budgetary comparison schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Included in the financial statements are the revenues and expenses from emergency telephone system fees (IC 36 -8 -16) and enhanced wireless emergency telephone fees (IC 36 -8- 16.5). In accordance with Indiana Code 36- 8 -16 -14 and Indiana Code 36 -8- 16.5 -41 these fees have been subject to an annual audit performed by the State Board of Accounts and, in our opinion, are fairly stated, in all material respects, in relation to the financial statements taken as a whole. 25 INDEPENDENT AUDITOR'S REPORT (Continued) The introductory section and statistical schedules have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or pro- vide any assurance on that information. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 10, 2013, on our consideration of the City's internal control over financial reporting and on our tests of its compli- ance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering City's internal control over financial reporting and compliance. June 10, 2013 26 Bruce Hartman State Examiner Management Discussion & Analysis The Management of the City of South Bend, Indiana ( "City ") provides herewith this Management Discussion & Analysis ( "MD &A ") of the financial activities and condition of the City of South Bend, Indiana for the fiscal year ended December 31, 2012. Readers of the information contained within this Management Discussion & Analysis, and any opinion derived therein, should be considered as a part of the greater whole of the financial statements, notes to the financial statements, supplemental information and letter of transmittal, as contained within this Comprehensive Annual Financial Report ( "CAFR "). The City of South Bend is the county seat of St. Joseph County, Indiana, and is the fourth largest city in the State of Indiana. St. Joseph County is located within the heartland of the manufacturing and metropolitan regions of the Upper Midwest. The City of South Bend is located in the north central region of the State of Indiana, five (5) miles south of the Indiana / Michigan State boundary line. The City is approximately ninety (90) miles east of the city of Chicago and one hundred forty (140) miles north of the city of Indianapolis. The 2010 U.S. Bureau of the Census population for the City of South Bend was reported as 101,168 and the 2010 Census population for St. Joseph County was reported as 266,931. Accordingly, South Bend is classified as a "City of Second Class" under State of Indiana statutes, defined as cities with a population between 35,000 and 250,000 residents. South Bend and St. Joseph County is a vibrant and diverse area with a strong local economy based on a mix of agricultural, manufacturing and service, higher education and other commercial and tourism based industries. The diverse economic mix creates varied employment opportunities for residents while providing insulation via diversification from economic downturns. The City of South Bend provides a full range of general governmental services to citizens. Services include general government, public safety, street construction and maintenance, infrastructure construction and maintenance, parks & recreation services, arts & culture, and sanitation services. In addition, the City provides Water Utility and Wastewater Utility services to commercial and residential properties within the city. City operations also include the Century Center convention venue, Morris Performing Arts Center, Palais Royale Ballroom, Studebaker Museum, South Bend Redevelopment Authority and Public Parking Garages within the city footprint. The City of South Bend governmental structure includes elected officials as follows with defined management and legislative authority in compliance with Indiana Statute. Mayor Chief Executive Officer 4 year term Common Council 9 member legislative body 4 year term 6 from defined districts within the City 3 at large members City Clerk Secretary of the Common Council 4 year term All elected official current terms of office expire on December 31, 2015. The City of South Bend was incorporated in 1865, compliant to Indiana Statute, and remains as such through the period covered by this Management Discussion & Analysis report. 27 Management Discussion & Analysis Financial Highlights • Government wide net position was $462,042,590 as of December 31, 2012. • Government wide net position increased by $12,016,301 or 2.7% during fiscal 2012. Governmental activity net position increased by $4,739,556 or 1.6% and business -type activity net position increased by $7,276,745 or 4.5% during fiscal 2012. • Total assets and deferred outflows of resources as of December 31, 2012 of $825,999,409 increased by $39,946,089 or 5.1% as compared to total assets and deferred outflows of resources as of December 31, 2011. • Total liabilities and deferred inflows of resources as of December 31, 2012 were $363,956,819, increased by $27,929,788 or 8.3% as compared to total liabilities and deferred inflows of resources as of December 31, 2011. • As of December 31, 2012, government wide net position of $323,476,503 was invested in capital assets net of debt and are, therefore, not available for spending. Net position of $101,255,736 was classified as unrestricted and may be used to meet ongoing obligations to creditors. A total of $37,310,351 was classified as restricted for debt service and capital outlay. • Government wide revenue achieved in fiscal 2012 amounted to $207,057,080, a decrease of ($4,790,352) or (2.3 %) versus government wide revenues achieved in fiscal 2011. Governmental activity revenue decreased by ($5,431,186) or (3.6 %), whereas business -type activity revenue increased by $640,834 or 1.1 %. • Government wide expenses in 2012 amounted to $195,040,779, a decrease of ($6,184,790) or (3.1 %) as compared to expenses of $201,225,569 in 2011. Government activity expenses decreased by ($8,420,409) or (5.4 %), while business -type activity expenses increased by $2,235,619 or 4.8 %, when compared to fiscal 2011. • Explanatory commentary concerning the changes in assets, liabilities, revenue and expenditures can be found in later sections of this MD &A. 28 Governmental Activities 2012 2011 Business type Activities 2012 2011 Government wide Activities 2012 2011 Assets /deferred outflows 514,511,174 512,479,366 311,488,235 273,573,954 825,999,409 786,053,320 Liabilities /deferred inflows 221,879,951 224,587,699 142,076,868 111,439,332 363,956,819 336,027,031 Net position Capital net of debt 210,282,574 196,265,413 113,193,929 103,463,004 323,476,503 299,728,417 Restricted 8,050,418 9,354,772 29,259,933 12,937,988 37,310,351 22,292,760 Unrestricted 74,298,231 82,271,482 26,957,505 45,733,630 101,255,736 128,005,112 Total net position 292,631,223 287,891,667 169,411,367 162,134,622 462,042,590 450,026,289 Change vs. prior year 4,739,556 911,788 7,276,745 9,710,075 12,016,301 10,621,863 Expenses 146,481,687 154,902,096 48,559,092 46,323,473 195,040,779 201,225,569 Revenues 147,341,522 152,772,708 59,715,558 59,074,724 207,057,080 211,847,432 • Government wide net position was $462,042,590 as of December 31, 2012. • Government wide net position increased by $12,016,301 or 2.7% during fiscal 2012. Governmental activity net position increased by $4,739,556 or 1.6% and business -type activity net position increased by $7,276,745 or 4.5% during fiscal 2012. • Total assets and deferred outflows of resources as of December 31, 2012 of $825,999,409 increased by $39,946,089 or 5.1% as compared to total assets and deferred outflows of resources as of December 31, 2011. • Total liabilities and deferred inflows of resources as of December 31, 2012 were $363,956,819, increased by $27,929,788 or 8.3% as compared to total liabilities and deferred inflows of resources as of December 31, 2011. • As of December 31, 2012, government wide net position of $323,476,503 was invested in capital assets net of debt and are, therefore, not available for spending. Net position of $101,255,736 was classified as unrestricted and may be used to meet ongoing obligations to creditors. A total of $37,310,351 was classified as restricted for debt service and capital outlay. • Government wide revenue achieved in fiscal 2012 amounted to $207,057,080, a decrease of ($4,790,352) or (2.3 %) versus government wide revenues achieved in fiscal 2011. Governmental activity revenue decreased by ($5,431,186) or (3.6 %), whereas business -type activity revenue increased by $640,834 or 1.1 %. • Government wide expenses in 2012 amounted to $195,040,779, a decrease of ($6,184,790) or (3.1 %) as compared to expenses of $201,225,569 in 2011. Government activity expenses decreased by ($8,420,409) or (5.4 %), while business -type activity expenses increased by $2,235,619 or 4.8 %, when compared to fiscal 2011. • Explanatory commentary concerning the changes in assets, liabilities, revenue and expenditures can be found in later sections of this MD &A. 28 Management Discussion & Analysis Overview of the Financial Statements The City of South Bend's financial statements are comprised of three components: 1) government wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also includes other supplementary information in addition to the basic financial statements themselves. Government wide financial statements The government wide financial statements are designed to provide readers with a broad overview of the City of South Bend's finances using "accrual based accounting," a method of accounting used by private- sector businesses. • Statement of net position This statement reports all assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the City of South Bend as of December 31, 2012. The difference between total assets and deferred outflows of resources less total liabilities and deferred inflows of resources is reported as "net position," and can generally be thought of as the net worth of the City. Increases in net position generally indicate an improvement in financial position while decreases in net position may indicate a deterioration of financial position. • Statement of activities This statement serves the purpose of the traditional income statement. It provides consolidated reporting of the results of all activities of the City of South Bend for the year ended December 31, 2012. Changes in net position are recorded in the period in which the underlying event takes place, which may differ from the period in which cash is received or disbursed. The statement of activities displays the expense of the City's various programs net of the related revenues, as well as a separate presentation of revenue available for general purposes including property and county option income taxes, fees for services and other revenue sources. The government wide financial statements distinguish between functions of the City that are principally supported by taxes and intergovernmental revenue (governmental activities) and other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business type activities). The major governmental activities of the City of South Bend include general government, public safety, street construction and maintenance, infrastructure construction and maintenance, parks & recreation services, and arts & culture. The major business -type activities of the City include the water utility, wastewater utility, solid waste sanitation services, Century Center convention center, and Blackthorn golf course operations. Fund Financial Statements A fund is a group 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 of South Bend can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. Governmental Funds Governmental funds are used to account for the same functions reported as governmental activities in the government wide financial statements. However, unlike government wide financial statements, governmental fund financial statements focus on short -term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the 29 Management Discussion & Analysis fiscal year. Such information may be useful in evaluating a government's short -term financing requirements. Governmental funds use the modified accrual accounting method. The City maintains six (6) major governmental funds (General, Parks and Recreation, Public Safety Local Option Income Tax, County Option Income Tax, Economic Development Income Tax, and Airport TIF) and sixty -four (64) non -major governmental funds. Proprietary funds The City of South Bend maintains two types of proprietary funds: enterprise and internal service. Enterprise funds are used to report the same functions presented as business -type activities in the government -wide financial statements. The City maintains seven (7) enterprise funds. Information is presented separately in the proprietary statement of net position and the proprietary statement of revenues, expense and changes in fund net position for the Water Utility, Wastewater Utility and Century Center convention center, which are considered major enterprise funds. Data from the other four (4) non -major enterprise funds (Consolidated St. Joseph County /South Bend Building Department, Parking Garage, Solid Waste and Blackthorn Golf Course) are combined into a single, aggregated presentation. Individual fund data for each of these non -major enterprise funds is provided in the form of combining statements elsewhere in this report. Internal service funds are used to accumulate and allocate costs internally among the City's various functions and funds. The City maintains five (5) internal service funds. The City of South Bend uses internal service funds to account for its self- funded liability insurance program, self- funded employee health benefits program, unemployment compensation claims, police take -home vehicle program and central services unit (a department that accounts for expenses related to fuel, vehicle repairs, printing and other services provided to City departments on a cost - reimbursement basis). Because these services predominantly benefit governmental rather than business type functions, they have been included within governmental activities in the government wide financial statements but are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in the report. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside the City government. Fiduciary funds are not reflected in the government wide financial statement because the resources of those funds are not available to support City programs. The City maintains five (5) fiduciary funds, which consist of two (2) pension trust funds (1925 Police Pension and 1937 Firefighter's Pension), two (2) agency funds (Payroll and Morris /Palais Royale Box Office), and one (1) private - purpose trust fund (Cemetery). Pension Trust Fund Operations City employees are covered by the Public Employees Retirement Fund ( "PERF ") and the 1977 Police Officers' and Firefighters' Pension Fund, both of which are administered by the State of Indiana. However, certain police officers and firefighters hired before May 1, 1977, (who did not opt into the 1977 fund) continue to be members of the 1925 Police Officer's Pension Fund or the 1937 Firefighters' Pension Fund. These two funds are administered by the City. The number of police officers and firefighters in the City- managed pension trust funds will continue to decline in the future as current participants pass away. Effective in fiscal 2009, with the passage of State legislation, funding responsibility for the 1925 and 1937 Police and Firefighter's Pension Funds was assumed by the State of Indiana. These funds no longer receive property tax revenue distributions beyond fiscal 2009. The transfer of pension responsibility to the State of Indiana is on a reimbursement basis and will not provide 30 Management Discussion & Analysis additional revenue to the City for use in other property tax funded areas. The administration of the pension plans remains the responsibility of the City. Notes to the financial statements The notes to the financial statements provide additional information that is essential in order to have a full understanding of the data provided in the government wide and fund financial statements. Other information In addition to the basic financial statements and accompanying note & disclosures, this CAFR report presents supplementary information. The combining statements referred to earlier in connection with non -major governmental, enterprise, internal service and fiduciary funds are presented immediately after the basic financial statements within the financial statement section of the CAFR report. Government wide financial statements The following financial analysis will focus on the statement of net position and statement of changes in net position of the City's governmental and business type activities. Statement of Net Position Governmental Business type Government wide Activities Activities Activities 2012 2011 2012 2011 2012 2011 Assets Current & other 212,400,950 216,082,758 88,996,021 59,847,710 301,396,971 275,930,468 Capital assets (net) 302,110,224 294,745,198 220,781,545 209,668,966 522,891,769 504,414,164 Total Assets 514,511,174 510,827,956 309,777,566 269,516,676 824,288,740 780.344,632 Deferred Outflows - 1,651,410 1,710,669 4,057,278 1,710,669 5,708,688 Liabilities 14,891 Net position Current 33,851,096 29,049,232 14,244,876 11,716,546 48,095.972 40,765,778 Long term 187,369,257 195,538,467 127,793,032 99,707,895 315,162,289 295,246,362 Total Liabilities 221,220,353 224,587,699 142,037,908 111,424,441 363,258,261 336,012,140 Deferred Inflows 659,598 - 38,960 14,891 698,558 14,891 Net position Capital net of debt 210,282,574 196,265,413 113,193,929 103,463,004 323,476,503 299,728,417 Restricted 8,050,418 9,354,772 29,259,933 12,937,988 37,310,351 22,292,760 Unrestricted 74,298,231 82,271,482 26,957,505 45,733,630 101,255,736 128,005,112 Total net position 292,631,223 287,891,667 169,411,367 162,134,622 462,042,590 450,026,289 31 Management Discussion & Analysis As of December 31, 2012, total assets and deferred outflows exceeded liabilities and deferred inflows by $462,042,590, an increase of $12,016,301, or 2.7 %, from the net position level as of December 31, 2011. Governmental activities net position of $292,631,223 increased by $4,739,556 over December 31, 2011, an increase of 1.6 %. Business -type net position of $169,411,367 increased by $7,276,745 over December 31, 2011, an increase of 4.5 %. Improvement in the net position of the City should be viewed as a favorable development indicative of the conservative and responsible fiscal management policy maintained and followed by City Management, especially in light of the revenue constraints due to state enacted property tax reform in 2009 and soft economic conditions in recent years. The increase in business type net position was due primarily to a 9% increase in sewer rates which will be used to support long- term capital projects of the Wastewater utility. The increase in governmental activity net position was due primarily to additional local option income taxes distributions during 2012 from the State of Indiana and economic development in tax increment financing areas resulting in higher property tax receipts in those funds Total assets and deferred outflows increased $39,946,089 or 5.1 % as compared to amounts as of December 31, 2011. The increase is largely attributed to an increase in capital assets net of depreciation and improvement in operating results in the water and wastewater utilities. The increase in capital assets (net of accumulated depreciation) of $20,188,274 is the result of several major capital construction projects capitalized or in process during the period. Major projects include Ignition Park development, Memorial Skyway facade improvements, several street and intersection road improvement projects, several sewer rehabilitation projects, and water and wastewater utility equipment projects. Total liabilities and deferred inflows increased by $27,929,788 or 8.3% as compared to amounts as of December 31, 2011. The increase is largely attributed to additional sewer bonding and an increase in net pension obligations. Government wide net position of $323,476,503 is invested in capital assets net of debt and is, therefore, not available for spending. A total of $101,255,736 is classified as unrestricted net position and may be used to meet ongoing obligations to creditors. Net position in the amount of $37,310,351 is classified as restricted for debt service and capital outlay. Statement of Changes in Net Position 32 Governmental Business type Government wide Activities Activities Activities 2012 2011 2012 2011 2012 2011 Revenue Program Revenue Charge for services 12,967,034 10,853,623 57,419,733 54,576,584 70,386,767 65,430,207 Operating grants 24,937,596 32,091,246 - - 24,937,596 32,091,246 Capital grants 2,468,120 2,328,468 2,010,253 4,291,731 4,478,373 6,620,199 General Revenue Taxes Property tax 71,775,415 76,445,349 - - 71,775,415 76,445,349 Othertax 23,360,791 22,555,864 23,360,791 22,555,864 Unrestricted grants 3,891,810 3,964,336 - - 3,891,810 3,964,336 Investment earnings 1,317,443 1,050,768 285,572 206,409 1,603,015 1,257,177 Other revenue 6,623,313 3,483,054 - - 6,623,313 3,483,054 Total Revenue 147,341,522 152,772,708 59,715,558 59,074,724 207,057,080 211,847,432 32 Management Discussion & Analysis Governmental Activities 2012 2011 Business type Activities 2012 2011 Government wide Activities 2012 2011 General government 13,788,310 16,783,351 13,788,310 16,783,351 Public safety 69,977,237 73,530,442 69,977,237 73,530,442 Highways & streets 14,639,158 7,574,003 14,639,158 7,574,003 Culture & recreation 21,724,589 15,566,794 21,724,589 15,566,794 Economic development 20,217,987 34,648,975 20,217,987 34,648,975 Interest on long term debt 6,134,406 6,798,531 - - 6,134,406 6,798,531 Water utility - - 12,228,014 11,972,840 12,228,014 11,972,840 Wastewater utility 23,809,975 22,260,005 23,809,975 22,260,005 Civic center 2,929,268 3,100,484 2,929,268 3,100,484 Building department 909,376 871,299 909,376 871,299 Parking 1,721,655 1,467,646 1,721,655 1,467,646 Solid waste 5,118,806 4,962,157 5,118,806 4,962,157 Golf course - - 1,841,998 1,689,042 1,841,998 1,689,042 Total Expense 146,481,687 154,902,096 48,559,092 46,323,473 195,040,779 201,225,569 Change in net position Before transfers / special 859,835 (2,129,388) 11,156,466 12,751,251 12,016,301 10,621,863 Transfers 3,879,721 3,041,176 (3,879,721) (3,041,176) - - Change in net position 4,739,556 911,788 7,276,745 9,710,075 12,016,301 10,621,863 Beginning net position 287,891,667 286,979,879 162,134,622 152,424,547 450,026,289 439.404.426 (restated) Ending net position 292,631,223 287,891,667 169,411,367 162,134,622 462,042,590 450.026,289 Governmental Activities Net position for governmental activities increased by $4,739,556 during fiscal 2012. Revenue of $147,341,522 decreased by ($5,431,186), or (3.6 %). Expenses were $146,481,687 during 2012, a decrease of ($8,420,409), or (5.4 %) as compared to fiscal 2011. The revenue decrease was due to lower revenue from operating grants for community development and housing along with reduced property taxes due to circuit breaker property tax reform and the elimination of a tax increment financing district in the southern part of the City. The decrease in expenses was due primarily to less spending in the areas of general government, public safety, and economic development. With the phase out of ARRA and other funding sources, less grant money was available for public safety, energy conservation, economic development and housing programs. Interest on long term debt of $6,134,406 decreased by ($664,125) from 2011, consistent with existing repayment obligations as a greater percentage of debt service payments are being applied to principal on existing debt obligations. Transfers in the amount of $3,879,721 for 2012 represent payment in lieu of taxes (PILOT) paid by the wastewater and water utilities to the General Fund, Parks & Recreation Fund and other funds that receive property taxes. The transfer amount was increased by $838,545 from 2011. 33 Management Discussion & Analysis Business -Type Activities Net position from business -type activities increased by $7,276,745 during fiscal 2012. During 2012, revenue of $59,715,558 increased by $640,834 or 1.1 % over fiscal 2011. During 2012, expenses of $48,559,092 increased by $2,235,619 or 4.8 %% when compared to fiscal 2011. Revenue increased primarily as the result of a 9% increase in sewer rates for 2012 designed to provide funding to cover long -term wastewater and sewer capital improvements. This revenue increase was offset in part by the reduction in capital grant funding available which decreased by ($2,281,478) as the result of lower Indiana State Revolving Fund and other grant funding. As a result of higher cash reserves, interest on investments increased. Expenses during 2012 were consistent with 2011 with slight increases in the wastewater utility to cover spending on capital projects and in solid waste to cover higher landfill costs. Expenses for the water utility, building department and Blackthorn golf course were also higher in 2012 than in fiscal 2011 as these departments experienced increasing revenue and adjusted their expenses accordingly. Expenses for Century Center (civic center) decreased during 2012 as costs were reduced in reaction to a continuing difficult sales market for convention centers. Financial Analysis of Government Funds The City of South Bend uses fund accounting to ensure and demonstrate compliance with finance - related legal requirements. Funds of the City are divided into three categories: governmental funds, proprietary funds and fiduciary funds. Condensed Balance Sheet, Statement of Revenue, Expenditures, and Changes in Fund Balance As of December 31, 2012 General Park & Rec PS LOIT COIT EDIT TIF Airport Other Total Total assets 31,119,888 5,135,657 2,992,510 18,004,313 13,280,102 28,162,505 107,763,359 206,458,334 Total liabilities 2,324,805 421,899 - 220,508 2,908,075 1,547,640 10,952,616 18,375,543 Fund Balances: Non - spendable 958,341 56,216 - 2,664,139 449,831 9,695,081 25,992,243 39,815,851 Restricted - 4,657,542 2,992,510 - - 16,919,784 53,756,731 78,326,567 Committed - - - - - - 11,142,045 11,142,045 Assigned 165,389 15,119,666 9,922,196 10,138,790 35,346,041 Unassigned 27,671,353 - - (4,219,066) 23,452,287 Total fund balance 28,795,083 4,713,758 2,992,510 17,783,805 10,372,027 26,614,865 96,810,743 188,082,791 Liability & fund balance 31,119,888 5,135,657 2,992,510 18,004,313 13,280,102 28,162,505 107,763,359 206,458,334 Revenues 65,631,784 11,550,193 6,065,100 8,267,654 8,517,523 11,885,064 35,461,766 147,379,084 Expenditures 74,038,026 11,794,638 - 6,770,551 3,480,762 15,926,862 50,449,161 162,460,000 Net surplus (deficit) (8,406,242) (244,445) 6,065,100 1,497,103 5,036,761 (4,041,798) (14,987,395) (15,080,916) Other sources (uses) 9,270,109 430,849 (5,301,098) (1,642,136) (4,502,146) 217,357 11,285,900 9,758,835 Net change in fund 863,867 186,404 764,002 (145,033) 534,615 (3,824,441) (3,701,495) (5,322,081) balances Beginning fund balances - restated 27,931,216 4,527,354 2,228,508 17,928,838 9,837,412 30,439,306 100,512,238 193,404,872 Ending fund balances 28,795,083 4,713,758 2,992,510 17,783,805 10,372,027 26,614,865 96,810,743 188,082,791 34 Management Discussion & Analysis As of December 31, 2012, the City governmental funds reported a combined ending fund balance of $188,082,791. Non - spendable fund balance of $39,815,851 is sequestered for property held for resale, inventory, non - current loans receivable and advances to other funds and is, therefore, not available for new spending. Restricted fund balance of $78,326,567 consists of monies in debt service funds or other funds such as road funds that are limited by external parties as to their use. Committed fund balance of $11,142,045 is designated by the South Bend Common Council to be used for certain purposes such as for environmental projects. Assigned fund balance of $35,346,041 includes balances in local option income tax funds that have not been committed to certain projects and are available for spending by the City. Unassigned fund balance of $23,452,287 consists of money primarily in the General Fund that has not been obligated in any manner by the City. The General Fund is the primary operating fund for City operations including general government, public safety, code enforcement, certain highways & streets expenses, certain culture & recreation expenses, and certain debt service obligations. As of December 31, 2012, the General Fund balance of $28,795,083 represents an increase of $863,867 or 3.1 % from the balance as of December 31, 2011. The increase in General Fund balance was due primarily to departments spending less than the 2012 budget particularly in the Police Department, Fire Department, Legal Department and Administration and Finance. As of December 31, 2012, the General Fund had unassigned fund balance of $27,671,353 which is equal to 42.2% of 2012 General Fund Revenue. The General Fund unassigned fund balance has traditionally been used by the City to fund certain capital projects and emergency contingencies. In addition, the City will use the unassigned fund balance in 2013 as a cash flow bridge to the receipt of property tax revenues from the County collection authority which distributes property tax revenue two times per year (June and December). General Fund unassigned balance will provide sufficient cash to cover City operating obligations without incurring tax anticipation notes and resultant borrowing costs during fiscal 2013. As discussed in Governmental Accounting, Auditing, and Financial Reporting (GAAFR), a general fund unassigned fund balance should be either 1) no less than 5 to 15 percent of regular general fund operating revenues, or 2) no less than one to two months of regular general fund operating expenditures. An unassigned fund balance may be higher if varying circumstances require such as a delay in collection of a major revenue source. The Parks and Recreation Fund experienced an increase in fund balance of $186,404 during fiscal 2012. The increase in fund balance was due primarily to the receipt of payment -in -lieu of taxes, which began in 2011, from the wastewater and water utilities in the amount of $616,596. Parks Board and Parks Administration continued in 2012 with prudent management of expenditures and commitments in light of current and future projected revenue streams. As of December 31, 2012, the restricted fund balance in the Parks and Recreation Fund was $4,657,542, or 40.3% of 2012 revenue. The Public Safety Local Option Income Tax Fund ( "Public Safety LOIT ") was created in October 2009, with the local legislative passage of an increase in local option income taxes of 0.95 %, a part of which (0.25 %) tax increase was established to fund public safety expenditures. The City has established the Public Safety LOIT Fund as a major governmental fund, due solely to its purpose of creating a funding source to sustain public safety staffing levels, which were compromised by state implementation of property tax reform that has reduced property tax revenues, which historically are the source of public safety funding. Operating transfers are made 35 Management Discussion & Analysis quarterly from the Public Safety LOIT Fund to the General Fund to cover the personnel costs of police officers and firefighters. Receipts of Public Safety LOIT tax revenue commenced in January 2010. The revenue collected in fiscal 2012 of $6,065,100 increased by 3.7% compared to 2011. The increase in fund balance in the amount of $764,002 during is restricted and will be used in future fiscal periods to fund full staffing levels for police and fire personnel. The County Option Income Tax Fund ( "COIT ") and Economic Development Income Tax Fund ( "EDIT ") funds are used to fund major capital and construction projects, economic development initiatives, certain subsidies and support to organizations and units that benefit city economic development and cultural venues, certain city -wide expenditures such as telephone costs, and certain debt service payments. The COIT fund decreased by ($145,033) during 2012, due to higher expenditures in the areas of public safety, economic development, and general government. The City has operationally sequestered COIT funds for use in major capital and construction funding initiatives, certain subsidies and support to organizations and units that benefit city economic development and cultural venues, information technology costs, city -wide expenditures like telephone costs, and certain debt service payments. As of December 31, 2012, the COIT Fund balance of $17,783,805 included assigned fund balance of $15,119,666 and non - spendable fund balance of $2,664,139, primarily for property held for resale and advances to other funds. The EDIT fund increased by $534,615 during 2012 due to higher income tax receipts than originally estimated and conservative commitment of expenses to initiatives of the highest priority. The City has operationally sequestered EDIT funds for use in major economic development initiatives, certain subsidies and support to organizations and units that benefit city economic development and cultural venues, operational costs of the street department, and certain debt service payments. As of December 31, 2012, the EDIT Fund balance of $10,372,027 included assigned fund balance of $9,922,196 and non - spendable fund balance of $449,831, consisting of property held for resale. The fund balance in the TIF Airport Fund decreased by ($3,824,441) during 2012 due to planned spending for capital projects including a new Animal Control facility, improvements at Ignition Park (industrial park), infrastructure for a new high tech company Data Realty, continued demolition of the historical Studebaker automobile factory buildings, the extension of Mayflower Road and other economic development initiatives. As of December 31, 2012 the TIF Airport Fund balance of $26,614,865 included $7,869,562 in property held for resale, $1,825,519 advances to other funds (primarily to the Blackthorn golf course) and $16,919,784 in restricted fund balance reserves. The TIF Airport Fund continues to be is a major success for the City of South Bend and has generated in excess of $500 million dollars in private investment since its inception. During 2012, the fund balances in Other Governmental funds decreased by ($3,701,495). This decrease in fund balance was primarily the result of the reduction in the amount of property taxes collected and the planned spend down of $2,274,404 in monies in the Excess Welfare Distribution Fund for police and fire department radio equipment. These fund balances provide available resources that the City requires to meet future capital construction needs, ongoing debt service obligations, and economic development project initiatives in concert with the City vision for economic development within the City footprint. Individual fund data for each of the non -major governmental funds is provided in the form of the combining statements in the Supplemental Information section of the CAFR report. 36 Management Discussion & Analysis Governmental Fund Revenue The following schedule presents a summary of governmental fund revenue for the year ended December 31, 2012 with comparison to the prior year: Non Tax Based 2012 % of 2011 % of Licenses and permits Actual Total Actual Total Tax Based 31,297,526 21.3% 34,419,714 22.5% General property 71,775,415 48.9% 76,445,349 50.0% County option income 13,748,824 9.3% 13,219,723 8.6% County economic development 8,324,878 5.6% 8,044,773 5.3% Professional sports development 633,904 0.4% 558,268 0.4% Community revitalization district 653,185 0.4% 733,100 0.5% Total Tax 95,136,206 64.6% 99,001,213 64.8% Non Tax Based Licenses and permits 189,714 0.1% 190,943 0.1% Intergovernmental 31,297,526 21.3% 34,419,714 22.5% Charge for services 12,442,553 8.4% 13,990,267 9.2% Fines and forfeitures 334,767 0.2% 636,749 0.4% Interest income 1,317,443 0.9% 1,050,768 0.7% Donations 324,266 0.2% 305,670 0.2% Other 6,336,609 4.3% 3,281,848 2.1% Total Non -Tax Based 52,242,878 35.4% 53,875,959 35.2% Total Revenue 147,379,084 100.0% 152,877,172 100.0% Tax revenue continues to represent the most significant source of revenue required to support services provided by the City. Property tax revenue is the primary source of funding for governmental expenditures. Property tax revenue is based on a relationship between two variables. The first variable is the assessed property valuation of industrial, commercial and residential parcels for both real and personal property. The second variable is the application of a tax rate to arrive at the total tax levy. Taxable property is assessed at 100% of the true tax value. The amount of property tax levied (billed to property owners) is further restricted by State of Indiana enacted property tax legislative reform, or so- called "circuit breaker" property tax caps in 2009 of 1.0% (homestead), 2.0% (other residential /rental) and 3.0% (commercial /industrial) of gross assessed valuation. Property tax revenue includes taxes collected on behalf of the following funds: General Fund, Parks and Recreation Fund, Cumulative Capital Development Fund, Redevelopment Tax Incremental Financing ( "TIF ") Funds, and a special levy to cover debt service of the College Football Hall of Fame. The City recognizes the need to further diversify the revenue stream, and to reduce its dependency on general property taxes to ensure that a broad base of users of city services, including nonresidents who work in the City, share in the funding of basic City services. As a result of the need to diversify the revenue stream, the City of South Bend Common Council and Saint Joseph County Council adopted an additional local option income tax of 0.95% during 2009, increasing the tax rate from 0.8% to 1.75 %. The local option income tax increase consisted of three components: 0.2% increase in the economic development income tax, a new 0.25% public safety local option income tax and a new 0.5% property tax relief local option income tax. The City continues to seek diversified sources of revenue that will reduce its reliance on property and income taxes. The City has supported efforts of the Indiana Association of Cities and Towns ( "IACT ") "Hometown Matters" to lobby the state legislature to legislatively enable alternative revenue sources that best fit the needs of the community. A viable source of revenue is from 37 Management Discussion & Analysis user fees and /or charges for services currently being performed. City performed services are priced based at levels representing the full cost of service, taking into consideration fees charged by providers of similar services. The City performs ongoing reviews of user fee costs incurred and revises service fee prices as required. Governmental Fund Expenditures The City accounts for government fund expenditures in seven categories as follows: 1) general government, 2) public safety, 3) highways and streets, 4) economic development, 5) culture and recreation, 6) debt service and 7) capital outlay. The following schedule presents a summary of governmental fund expenditures for the year ended December 31, 2012 with comparison to the prior year. 2012 % of 2011 % of Actual Total Actual Total General government 6,390,585 3.9% 6,680,855 3.9% Public safety 67,138,414 41.3% 69,612,754 40.4% Highways & streets 9,288,682 5.7% 5,079,041 2.9% Economic development 3,543,180 2.2% 9,698,611 5.6% Culture & recreation 18,557,986 11.4% 13,816,699 8.0% Debt service 17,557,026 10.9% 20,818,689 12.1% Capital outlay 39,984,127 24.6% 46,691,030 27.1% Total Expenditures 162,460,000 100.0% 172,397,679 100.0% Government fund expenditures in fiscal 2012 of $162,460,000 decreased by ($9,937,679) or (5.8 %), in comparison to government fund expenditures in fiscal 2011. Capital outlay expenditures decreased by ($6,706,903) during 2012 due primarily to less overall spending on economic development projects from tax increment financing (TIF) funds. In addition, there was less spending on general government capital projects from the EDIT fund. Capital outlay projects in 2012 included improvements at Ignition Park, the Triangle housing development, continued demolition of the Studebaker automobile factory buildings and other economic development initiatives. Public Safety expenditures decreased ($2,474,340) or (3.6 %) as less grant funding was available for police and fire programs. Highways and Street expenditures increased by $4,209,641 as the curb and sidewalk program was expanded and additional work on street maintenance was performed. Economic development spending decreased ($6,155,431) as there was less federal community development and housing grant funding available and certain economic development spending was included in the capital outlay category. Public Safety expenditure continues to be the primary use of government fund resources with 41.3% of expenditures used for this purpose in fiscal 2012. Public safety spending is followed by capital outlay expenditures (24.6 %), culture and recreation (11.4 %), debt service (10.9°/x), highways & streets (5.7 %), general government (3.9 %), and economic development operating (2.2 %). General government spending is comprised of the executive offices of the Mayor, Common Council, City Clerk, City Attorney, Controller, Engineering and other administrative offices. 38 Management Discussion & Analysis Proprietary funds Condensed Statement of Net Position Revenue, Expenses, and Changes in Fund Net Position As of December 31, 2012 Water Utility Wastewater Century Center Other Total Enterprise Internal Service Utility Total assets 79,664,266 199,865,594 18,483,089 13,687,561 311,700,510 17,316,623 Total deferred outflows - 19,193 - 1,691,476 1,710,669 - Total liabilities 24,606,352 113,575,012 254,985 5,524,503 143,960,852 7,275,311 Total deferred inflows 26,376 - - 12,584 38,960 - Net position: 14,190,243 30,963,483 1,149,365 8,672,788 54,975,879 Capital assets net of debt 45,579,124 32,046,775 22,000,586 13,567,444 113,193,929 1,392,349 Restricted for: 25,015,354 Operating income (loss) 3,340,897 12,239,763 (1,732,167) Debt service 3,302,782 13,332,530 - 543,914 17,179,226 - Capital outlay 4,146,001 6,659,721 1,274,877 108 12,080,707 - Unrestricted 2,003,631 34,270,749 (5,047,359) (4,269,516) 26,957,505 8,648,963 Total net position $55,031,538 $86,309,775 $18,228,104 $9,841,950 $169,411,367 $10,041,312 Operating revenues 14,190,243 30,963,483 1,149,365 8,672,788 54,975,879 21,133,578 Operating expenses 10,849,346 18,723,720 2,881,532 8,940,951 41,395,549 25,015,354 Operating income (loss) 3,340,897 12,239,763 (1,732,167) (268,163) 13,580,330 (3,881,776) Non - operating rev (exp) (101,255) (5,178,923) 1,483,568 (637,507) (4,434,117) 61,611 Income (loss) before 3,239,642 7,060,840 (248,599) (905,670) 9,146,213 (3,820,165) contributions & transfers Capital contributions 21,650 1,300,000 655,737 32,866 2,010,253 Transfers in - - - 651,500 651,500 Transfers out (1,468,339) (2,405,289) - (657,593) (4,531,221) Change in net position 1,792,953 5,955,551 407,138 (878,897) 7,276,745 (3,820,165) Total net position — 53,238,585 80,354,224 17,820,966 10,720,847 162,134,622 13,861,477 beginning Total net position — $55,031,538 $86,309,775 $18,228,104 $9,8419950 $16994119367 $1090419312 endinq The City of South Bend maintains two types of proprietary funds; enterprise and internal service The City maintains seven (7) enterprise funds. Information is presented separately in the proprietary statement of net position and the proprietary statement of revenues, expense and changes in fund net position for the Water Utility, Wastewater Utility and Century Center, which are considered major enterprise funds. Data from the other four (4) non -major enterprise funds (Consolidated St. Joseph County /South Bend Building Department, Parking Garage, Solid Waste and Blackthorn Golf Course) are combined into a single, aggregated presentation. The City maintains five (5) internal service funds. The City of South Bend uses internal service funds to account for its business insurance and self- funded liability insurance program, self - funded employee health benefits program, police take home vehicle program, unemployment compensation claims and central services unit (a department that accounts for expenses related 39 Management Discussion & Analysis to fuel, vehicle repairs, printing and other services provided to City departments on a cost - reimbursement basis). The internal service funds have been combined into a single, aggregated presentation. As of December 31, 2012, City enterprise funds reported a net position of $169,411,367, an increase of $7,276,745 or 4.5% versus the amount as of December 31, 2011. At December 31, 2012, net position includes capital assets, net of related debt of $113,193,929, restricted for debt service and capital outlay of $29,259,933 and unrestricted of $26,957,505. The Water and Wastewater utilities reported an increase in net position of $1,792,953 and $5,955,551, respectively, during 2012. During 2012, the Wastewater utility benefitted from a 9% increase in sewer rates. The Wastewater utility experienced an 8% increase in residential revenue and a 10% increase in commercial revenue. The rates for the Water utility did not increase but it did achieve an 8% increase in residential revenue and a 12% increase in commercial revenue. This was primarily due to unusually high drought conditions. During 2012, Century Center experienced an increase in net position of $407,138 as the result of capital contributions in the amount of $655,737 from capital improvements at the facility paid for from tax increment financing and other funding sources. Other Enterprise Funds experienced a decrease in net position of ($878,897) during 2012.. The Parking Garage Fund reported a decrease in net position of ($796,473) primarily as the result of the amortization of sales /leaseback charges on the original acquisition. The Blackthorn Golf Course Fund reported an operating loss of ($113,132) as the result of stagnant golf fee revenue. As of December 31, 2012, City internal service funds reported a net position of $10,041,312, a decrease of ($3,820,165) or (27.6 %) as compared to 2011. The Liability Insurance fund decreased its net position ($2,554,534) in 2012 due to the establishment of a higher reserve for claims and lawsuits that were in process at December 31, 2012. The Central Services fund reported an increase in net position of $170,701. The Self- Funded Employee Benefits fund reported a decrease in net position ($1,573,514) due to higher health insurance claims paid by Anthem, the City's insurance provider. The City has initiated changes in its health insurance plan design and has an ongoing, active employee wellness program to help control future health insurance costs. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. The City maintains five fiduciary funds, which consist of two pension trust funds (1925 Police Pension and 1937 Firefighter's Pension), one private - purpose trust fund (Cemetery) and two agency funds (Payroll and Morris /Palais Royale Box Office). Pension Trust Private Purpose Trust Total assets 3,659,633 41,147 2,437,671 Total liabilities 780 - 2,437,671 Total net position 3,658,853 41,147 Total Additions 11,989,067 182 Total Deductions 12,215,139 - Changes in net position (226,072) 182 40 Management Discussion & Analysis The net position in the pension trust funds decreased by ($226,072) during 2012. The net position in the private purpose trust fund (Cemetery) increased by $182 due to interest earnings. Effective in fiscal 2009, with the passage of State legislation, funding responsibility for the 1925 Police and 1937 Firefighter's Pension Funds was assumed by the State of Indiana. These funds no longer receive property tax revenue distributions beyond fiscal 2009. The transfer of pension responsibility to the State of Indiana is on a reimbursement basis and will not provide additional revenue to the City for use in other property tax funded areas. The administration of the pension plans remains the responsibility of the City. The State of Indiana reimbursement is on a year delayed basis whereas, reimbursement in fiscal 2012 from the State of Indiana included reimbursement for pension benefits paid by the City in fiscal 2011. In addition, State reimbursement excludes healthcare benefit coverage to pension plan members, which is covered under the City of South Bend pension benefit program and which is paid from the pension trust funds. The decline in the net asset position of the pension trust is the result of timing differences in the payment of pension benefits and the reimbursement of same from the State of Indiana, as well as the cost of healthcare benefits to pension members, not covered by the state reimbursement program. General Fund Budgetary Highlights The City prepares an annual budget for general fund expenditures, which is subject to City of South Bend Common Council approval for adoption, before November 1St of the year preceding, the budget period, according to state statute concerning the annual budget of second class cities and towns. The General Fund budget applicable for fiscal 2012 is reported as follows: Actual Budgetary Original Final Basis Variance Revenue 64,355,996 Expenditures 64,355,996 Surplus (deficit) 64,414,210 66,404,644 (1,990,434) 63,409,839 63.696.316 (286,477) (1,004,371) 2,708,328 1,703,957 General Fund revenue was originally budgeted at $64,355,996 for fiscal 2012 with Common Council adoption of the 2012 general fund budget on October 10, 2011. During 2012, the General Fund revenue budget was increased by $58,214 resulting in an ending revenue budget of $64,414,210. The revenue budget may be increased at any time based on updated revenue projections. During 2012, General Fund revenue achieved amounted to $63,409,839, a deficiency from the final budget level of $1,004,371. The primary reason for the revenue shortfall were property tax collections, intergovernmental grants and charges for services revenue that were lower than budgeted. General Fund expenditures were originally budgeted at $64,355,996 for fiscal 2012 with Common Council adoption of the 2012 general fund budget on October 10, 2011. During 2012, the General Fund expenditure budget was increased $2,048,648 resulting in an ending expenditure budget of $66,404,644. The expenditure budget increase resulted from an encumbrance roll over at year end 2011 to 2012 of $1,000,510 and additional appropriations of $1,048,138, which included additional appropriations for police and fire pension costs, graffiti removal and for a weekend illegal dumping cleanup crew. Cy Management Discussion & Analysis General Fund spending is reviewed on a monthly basis under the direction of the City Controller to ensure spending remains within budgetary constraints. Quarterly reviews are conducted as required with general fund department management to review spending projections to ensure that annual expenditures remain within the budgetary levels. Budget amendments for cost neutral redistribution between expense categories (i.e. personnel, supplies, services, capital) are submitted to Common Council at mid -year and year -end, as required to adjust the budget as necessary to prevent any budget overruns in any expense category. Additional appropriations for projects, initiatives, or unbudgeted spending requirements within the general fund are presented to the Common Council for adoption as deemed necessary by the Mayor. General Fund expenditures incurred on a budgetary basis, including cash expended and outstanding encumbrances as of year -end December 31, 2012 amounted to $63,696,316. The expenditures and commitments as of year -end December 31, 2012 are less than the 2012 General Fund expenditure budget by $2,708,328 or 4.2 %. The largest savings were in the police fire, city attorney and administration /finance department budgets as personnel and other costs spent were less than budgeted due to position vacancies and other factors. Capital Assets and Debt Administration Statement of Capital Assets Governmental Business type Government wide Activities Activities Activities Assets not depreciated Land Construction in progress Total Assets depreciated Buildings Non - building improvements Machinery & equipment Roads & Infrastructure 2012 2011 2012 2011 2012 2011 891,601,324 Accumulated depreciation 15,921,386 11,560,895 3,024,582 3,024,582 18,945,968 14,585.477 7,502,620 13,150,305 6,647,833 12,217,249 14,150,453 25,367,554 4,659,688 4,387,428 12,030,442 11,175,790 Machinery & equipment 33,647,007 23,424,006 24,711,200 9,672,415 15,241,831 33,096,421 39,953,031 127,656,887 122,117,290 82,297,980 82,634,703 209,954,867 204,751,993 16,038,868 13,472,228 23,987,898 14,127,251 40,026,766 27,599,479 50,304,539 48,052,987 29,235,757 31,056,887 79,540,296 79.109,874 420,291,533 404,725,515 190,938,764 175,414,463 611,230,297 580,139,978 Total Cost 614,291,827 588,368,020 326,460,399 303,233,304 940,752,226 891,601,324 Accumulated depreciation Buildings 36,735,257 33,542,840 31,348,151 29,662,880 68,083,408 63.205,720 Non - building improvements 7,370,754 6,788,362 4,659,688 4,387,428 12,030,442 11,175,790 Machinery & equipment 33,647,007 32,683,696 22,162,990 23,654,700 55,809,997 56,338,396 Roads 257,852,591 246,914,124 55,469,771 51,101,161 313,322,362 298,015,285 Total 335,605,609 319,929,022 113,640,600 108,806,169 449,246,209 428,735,191 Net Depreciated Assets 278,686,218 268,438,998 212,819,799 194,427,135 491,506,017 462,866,133 Net Capital Assets 302,110,224 293,150.198 222,492,214 209,668,966 524,602,438 502,819,164 IS, V, Management Discussion & Analysis City investment in capital assets for governmental and business type activities was $524,602,438 (net of depreciation) at December 31, 2012. The investment in capital assets includes land and land improvements, buildings and building improvements, vehicles, information technology computers, machinery and equipment, and construction in progress. A detailed explanation of these capital assets can be found in the Notes to the Basic Financial Statements. Under the category of roads and infrastructure, the current cost amount of $611,230,297 includes estimated costs derived primarily from the City's 2006 implementation of GASB Statement No. 34, which required the retroactive reporting of infrastructure capital assets. All other assets are recorded at historical cost. Maior Capital Asset Protect Spending in 2012 Buildings Improvements M &E Ignition Park Lot 4 $4,901,808 Continued project VA Clinic, land acquisition 1,487,724 New project Water utility improvements 422,937 Continued projects East Bank Sewer Separation, Phases 3 & 4 3,075,710 Continued project Wastewater digester upgrade 714,387 New project Manhole & sewer rehabilitation 466,712 New project Michigan St. lift station replacement 531,937 New project Automate DO controls for aeration blowers 523,885 Continued project Capital Assets Analysis Government wide capital assets, net of accumulated depreciation as of December 31, 2012 of $524,602,438 increased by $21,783,274 or 4.3% when compared to the level as of December 31, 2011. Construction in progress capital assets decreased by $11,217,101, whereas capitalized assets in land, buildings, improvements, machinery and equipment, and roads, net of depreciation, increased by $33,000,375, when compared to December 31, 2011.Several major capital projects were completed in fiscal 2012, as identified in the chart above, and included capital investments in buildings, improvements, machinery & equipment and roads. At December 31, 2012, the cost of Roads & Infrastructure ($611,230,296) was the major asset class followed by Buildings ($209,954,867) and Machinery & Equipment ($79,540,296). Total depreciation expense for 2012 was $25,827,428 as compared to $22,509,969 for 2011. Additional information on capital assets can be found in the notes to the financial statements in statement note I.D.6, capital asset capitalization policy, statement note III.C, capital asset activity, and statement note III.D, construction commitments. Debt Administration Outstanding debt principal as of December 31, 2012 was $263,325,022, an increase of $24,249,937 or 10.1%. City outstanding debt includes revenue bonds, mortgage bonds, notes & loans payable and capital leases. Type Beginning Additions Retirements Ending Revenue bonds 190,127,431 38,585,000 14,652,431 214,060,000 Mortgage bonds 20,385,000 13,595,000 15,495,000 18,485,000 Notes & loans 19,974,243 1,734,826 2,906,529 18,802,540 Capital leases 8,588,411 5,373,816 1,984,745 11, 977,482 Total Debt 239,075,085 59,288,642 35,038,705 263,325,022 43 Management Discussion & Analysis During 2012 the City issued the 2012 Sewage Works Revenue Bond in the amount of $25,000,000 for the purpose of funding improvements for the combined sewer overflow ( "CSO ") initiative. This bond is a twenty (20) year issue with maturity in 2032 with debt service coverage from the Sewage Works Bond Sinking fund. The bond issue will finance capital improvements addressing combined sewer overflow issues improving sewage discharge into the St. Joseph River, in compliance with the Environmental Protection Agency ( "EPA ") consent decree. It is a part of a twenty year long -term control plan which will require additional bonding and sewer rate increases. In addition, during 2012 the City issued the 2012 Water Works Revenue Bonds in the amount of $8,300,000 to finance improvements at the water utility. In 2012, the City also issued 2012 Career Academy Bonds in the amount of $1,500,000 to finance an economic development project. During 2012 the City entered into capital lease agreements in the amount of $5,373,816 to purchase certain vehicles, copiers, and equipment. The lease terms are typically for five years with semi - annual debt service paid from the operating budgets of the user departments. The 2012 capital leases were for various city vehicles and related equipment for the police department ($1,295,000), fire department ($206,299), parks & recreation ($344,500), leaf collection ($117,312), building department ($33,883) and public works ($3,376,822). The City solicits competitive financing proposals for lease financing from local and national companies. During 2012 the City also entered into a loan with a local company in the amount of $1,700,000 to purchase land for a new Veteran's Affairs (VA) clinic in the downtown area. During 2012 the City refunded two bond issuances in order to take advantage of a more favorable interest rate environment and lower future debt service payments. The City issued bonds in the amount of $13,595,000 to refinance a 2003 mortgage for the construction of a new fire station and police station. The City also issued bonds in the amount of $3,785,000 to refinance an existing 2002 water utility bond. The savings on the fire /police station and water utility bonds are approximately $1,514,992 and $514,153, respectively, over the remaining term of the bonds. Under the Indiana Constitution and State statute, the City's general obligation bonded debt and certain other debt is subject to a legal limitation based upon 2% of total assessed value of real and personal property. The City had no general obligation bonded debt outstanding at December 31, 2012 and none of the above debt issuance amounts are subject to this debt limitation. In 2013, the City anticipates issuing additional debt for sewer improvement and fire department projects and plans to continue issuing refunding bonds as appropriate to take advantage of lower interest rates. In April, 2013 the City issued sewer refunding bonds in the amount of $14,765,000 and plans to refinance its 2008 Century Center bonds of approximately $4,165,000 during 2013. Additional information on debt can be found in the notes to the financial statements in statement note I.D.8, long -term obligation accounting, statement note III.F.2, capital lease obligations, statement note III.G, long -term liabilities, and statement note IV.C, conduit debt. A calculation of the City's legal debt limitation can be found in the statistical debt capacity section of this document. Economic Factors and 2013 Budaet Economic Factors Property tax revenue, historically and at present, is the principal source of revenue for funding of governmental activities within the City of South Bend. 44 Management Discussion & Analysis The State of Indiana General Assembly enacted property tax reform legislation in March of 2008. House Enrolled Act 1001 (HEA 1001) which limits property taxes paid to 1% of gross assessed value for residential homesteads, 2% for agricultural /rental properties, and 3% for all other real and personal property. Under current legislation, all Indiana localities assess properties based on market values. Each year properties are trended. This process involves comparing property values to sales activity in the neighborhood and adjusting the current assessed values up or down according to the trended data. This legislation (known as "circuit breaker" legislation) was phased in commencing in fiscal 2009 and has lead to significant reductions in property tax revenues available to fund city governmental operations over the period from 2009 to the present. In 2012, the primary funds supported by property taxes (General Fund, Parks and Recreation Fund, and Cumulative Capital Development Fund) lost approximately $26 million dollars in taxable property tax levy due to the circuit breaker caps. As a consequence of the state enacted legislation in 2008, the City enacted a .95% local option income tax increase to partially offset the property tax revenue loss. The local option tax increase became effective in October, 2009, and has resulted in an increase in local income taxes available to the City to fund ongoing governmental operations of public safety, parks & recreation, code enforcement, highways & streets and general government. Management of the City of South Bend will continue to manage the financial affairs from a posture of fiscal conservatism similar to the management practices engaged during fiscal 2012. City Management believes that the national economic recovery will continue according to the predictions of governmental economists, with low to no inflation over the next fiscal period. In addition, job creation is the primary engine to drive economic recovery. 2014 Budget The City will engage to ensure effective delivery of required services to taxpayers and citizens within the constraints of available financial resources. The City will continue to provide required services within the constraints of a balanced general fund budget. The City has completed certain reengineering projects during fiscal 2012 targeted to create efficiency and cost improvements within City operations. Completed projects include payroll system reengineering, water utility customer service improvements, information technology server virtualization efforts, update to new Microsoft Office suite and operating system, implementation of a new telephone system and initial work creating a centralized 311 telephone call center. The City continues to pursue reengineering programs targeted to create efficiency and cost improvements within City operations. These include purchasing process reengineering, back office process improvements for human resources and other customer service operations. These initiatives, upon successful deployment completion, will achieve the desired results to create efficiency gains in the delivery of services to taxpayers. The City is committed to creating a budget for fiscal 2014 that will remain fiscally responsible to the effective delivery of required services to city citizens and stakeholders within the revenue constraints available. Specific concerns for the 2014 budget include the continuing impact of circuit breaker property tax reform on City revenue, high health and pension costs and other stagnant or declining revenue sources such as gasoline, wheel and auto excise taxes. 45 Management Discussion & Analysis Current Economic Development Projects Executive management of the City of South Bend continues to pursue economic development and public works opportunities that will have long term favorable impact on the economic prospects for the community as a whole. These projects include: Eddy Street Commons — Continued expansion of the currently existing $220 million dollar mixed -use development completed for occupancy in 2009. The current configuration includes a 119 -room hotel; 25 new City homes with 100% occupancy; more than 20 stores and restaurants; office space; and 268 town homes, apartments and condominiums, which are 95% occupied, 17 flats that wrap the garage are completed, 30 are under construction, with an additional 15 planned. This is the region's largest single development in decades. Phase II of Eddy Street Commons is in the planning stages. Ignition Park— Along with Innovation Park at Notre Dame, these two sites are Indiana's first dual -site, state - certified technology park. Transpo, the county's public transportation authority, was the first tenant in Ignition Park and dedicated its new facility in early 2010. The second tenant in Ignition Park, Data Realty, is a 50,000 square foot colocation, cloud services data center, with disaster recovery solutions and a managed analytics platform. Data Realty employs over 20 employees and committed over $15 million in private investment. • Renaissance District / Ivy Tower — Rehabilitation of an 800,000 square foot industrial space near downtown to create an expected 400 new jobs through a mixed use space to include data centers, high tech office space, and research facilities. The owner of this property has committed $10 million in private investment over a 10 year period. Triangle Development — Planned construction of 55 new single family residential properties in the Triangle area adjacent to the existing new Eddy Street Commons commercial development, creating a diverse new neighborhood in the City's northeast sector. Eleven new homes are underway, with many more in the planning stages. Seventy percent of the lots are being sold at market rate and thirty percent are reserved for income - eligible buyers. Six million dollars in private investment will transform this neighborhood. • East Bank Housing — Six "East Bank Townhomes" constructed and 100% occupied on the old Rink Riverside site; ten "River Race Townhomes" currently being constructed on the old Troeger site, with three occupied and three more under contract. The River Race project is planned to include apartments and mixed use on its southern end along Jefferson Street. • Main / Lafayette Connector - Three million dollar project to reconfigure Main and Lafayette and extend Barbie Street to the Chippewa Theatre. The project will create several developable sites for future business expansion and traffic flow on the south side of the City. • Memorial Hospital — A variety of City infrastructure and streetscape improvements totaling more than $6 million, in coordination with hospital investment, including a new fagade for the Bartlett Street parking garage and Skyway Building; reconstruction of four streets around the hospital campus; reconstruction of the Skyway Walkway over Michigan Street; new pervious parking lots along the 300 — 500 block of N. Michigan Street. • Rushton — This long vacant four story building at the corner of West Washington and William is being transformed through a partnership with South Bend Heritage Foundation. The building will house 23 units of senior housing and be completed with $3.1 million in private funding. 46 Management Discussion & Analysis • Workforce Strategy — The Department of Community Investment is preparing a workforce training initiative to coordinate those who offer workforce training into a single council. This council will focus its training efforts in areas of greatest need and growth, and will include measurable goals and assessment factors. Energy Efficiency and Conservation — Supported by a $1.046 million federal stimulus grant, the City has unveiled a new energy efficiency and conservation strategy which included the energy audit of 30 municipal buildings, synchronized timing of traffic signals at the 100 busiest intersections in the City and the production of hydroelectric power from the Saint Joseph River at the Century Center dam. A Municipal Energy Office has been established and a source of funding will be identified to allow for continuing energy projects. Existing Business Expansions — The City continues to work with private sector business concerns to enable expansion of their business operations in the City, adding new employment opportunities and tax base to the City. Tax abatements in 2012 are expected to result in $41,411,500 of new investment and add 83 jobs with an annual payroll of $4,921,000. Requests for Information This Management Discussion & Analysis as contained within the City of South Bend Comprehensive Annual Financial Report is intended to provide readers with a general overview of the financial condition of the City of South Bend as of December 31, 2012. Questions concerning any of the information provided in this report, or requests for additional information, should be addressed to: Mark W. Neal, City Controller City of South Bend Department of Administration and Finance 227 W. 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'd > a) co $ (D i�/ EEam k \� 2 �2� �kGGG + — c 2 w w� <w v(a J 7\ $ \u� $ I § o 3 w 3 3 Coveleski Stadium: Renovation of the Year Award Ballpark Digest, 2012 National League of Cities Gold Award for Municipal Excellence Northeast Neighborhood Revitalization, 2011 Blackthorn Golf Club: 44th Best Municipal Course in U.S. Golf Week Magazine, 2013 Morris Performing Arts Center: Top 100 Venues Worldwide Pollstar Magazine, 2012 All- America City Award 2011 National Civic League, 2011 West Washington Neighborhood: 2012 Best Places to Live list This Old House Magazine, 2012 Bicycle Friendly Community (bronze designation) League of American Bicyclist, 2012 Tree City USA Community Dept. of Natural Resources, 16 Years Running Palais Royale: "Best of Weddings" Award TheKnot.com, 2013 City of South Bend Website — Honorable Mention 2012 MARCOM Awards 4SpUT$8F W .EASE www.SouthbendlN.gov ' I �� South Bend, /IV 1865