MANAGEMENT'S DISCUSSION AND ANALYSIS

 

As management of the McKinleyville Community Services District, we offer readers of the McKinleyville Community Service District's financial statements this narrative overview and analysis of the District's financial activity for the year ended June 30, 2007.  Please read it in conjunction with the Report of the Independent Auditor and the District's financial statements.

 

FINANCIAL HIGHLIGHTS

 

·            The District's Net Assets increased by $889,454 or 4.3%, as a result of this year's operation.  The District's Net Assets are now $21,674,922. Net Assets of our business-type activities (providing water and sewer services) increased by $519,923 or 2.9%.

 

·            Over the past five years, the District's Net Assets have increased by $3,999,142.  That is an average increase of 4.5% per year.

 

·            The District invested $152,018 in capital improvements during 2007. Projects during the year included improvements at the Hiller Park Sports Complex soccer fields and playground.    

 

·            Other capital projects funded by grants from the State included $24,630 for waste-tire ground covering for the Pierson Park playground and $35,228 for repairs to the sewer main on Railroad Avenue.

 

·            Additionally, capital infrastructure (streetlights, water mains, and sewer mains) installed by subdividers and donated to the District was valued at $252,821.

 

·            The total cost of District programs was $3.7 million in 2007 compared to $3.8 million in 2006. That decrease of about 2.5% resulted from decreases in general fund capital expenditures, the cost of water purchased from Humboldt Bay Municipal Water District and other enterprise fund operating efficiencies.

 

·            During 2007, the District increased its cash and investments by $808,917 while decreasing its liabilities (loans, notes payable, leases, and other amounts due to customers, vendors and others) by $453,992. 

 

·            Over the past five years, the District has increased its cash and investments by $1,960,915 while decreasing its liabilities by $1,817,044.

 

 

USING THIS ANNUAL REPORT

 

This annual report consists of a series of financial statements.  The Statement of Net Assets and the Statement of Activities provide information about the activities of the District as a whole and present a longer-term view of the District's finances.  The fund financial statements for governmental activities tell how these services were financed in the short term as well as what remains for future spending.  Fund financial statements also report the District's operations in more detail than the government-wide statements by providing information about the District's most significant funds. 

 

Reporting the District as a Whole

 

The Statement of Net Assets and the Statement of Activities

 

One of the most important questions asked about the District's finances is "Is the District as a whole better off or worse off as a result of this year's activities?" The Statement of Net Assets and the Statement of Activities report activities of the District as a whole and about its activities in a way that helps answer this question.  These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies.  All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. 

 

These two statements report the District's net assets and changes in them.  You can think of the District's net assets--the difference between assets and liabilities--as one way to measure the District's financial health, or financial position.  Over time, increases or decreases in the District's net assets are one indicator of whether its financial health is improving or deteriorating.  You will need to consider other non-financial factors, however such as changes in the District's property tax base and the condition of the District's infrastructure to assess the overall health of the District.  

 

In the Statement of Net Assets and the Statement of Activities, we divide the District into two kinds of activities:

 

·            Governmental activities--The District's parks, recreation programs, open space zones, streetlight zones and management of the District's buildings at Pierson Park (Azalea Hall, the Activity Center, the Library and the Law Enforcement Facility).  These activities are funded by property taxes, the Measure B Assessments (for recreational facility development), zone assessments, grants, donations and user fees.

 

·            Business-type activities--The District charges fees to customers to cover the cost of services it provides.  The District's water and sewer systems are reported here.

 

Reporting the District's Most Significant Funds

 

Fund Financial Statements

 

The fund financial statements provide information about the most significant funds, not the District as a whole.  The District's two kinds of funds--governmental and proprietary--use different accounting approaches.

 

·            Governmental funds--The District's parks, recreation programs, open space zones, streetlight zones and building management functions are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending.  These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can be readily converted to cash.  The governmental fund statements provide a detailed short-term view of the District's general governmental operations and the basic services it provides.  Governmental fund information helps you determine whether there are more or fewer financial resources, which can be spent in the near future to finance the District's programs.  We describe the relationship (or differences) between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds in a reconciliation at the bottom of the fund financial statements.

 

·            Proprietary funds--When the District charges customers for the services it provides, these services are generally reported in proprietary funds.  Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Assets and the Statement of Activities.  In fact, the District's enterprise fund is the same as the business-type activities we report in the government-wide statements but provide more detail and additional information such as cash flows.

 

THE DISTRICT AS A WHOLE

 

For the year ended June 30, 2007, net assets changed as follows:

 

 

That reflects an increase of 4.8% for governmental activities and an increase of 2.9% for business-type activities. The overall increase of $889,454 represents a 4.3% increase in the net assets of the District as a whole.  Over the past five years, the net assets of the District as a whole increased by $3,999,142.  That is an average annual increase of 4.5%.

 

Governmental Activities

 

Following is a comparison of revenues and expenses for governmental activities, which includes operation of the District's parks, recreation programs, open space zones, streetlight zones and building management functions.  It also includes revenues from fees assessed for operation of those programs, general property tax revenues and property assessments for the development and operation of the District's sports fields and recreation programs. 

 

Recreation program revenues, at about $267,000, remained about the same as the previous year. Compared with FY06, General Fund revenues increased by $133,600 (12%) and expenditures decreased by $88,868 (8%).  Property Tax revenues totaling about $267,000 were appropriated by the State in FY05 and FY06 as a result of Proposition 1a.  That revenue stream was restored in FY07 as property tax revenues increased by $122,212 compared with FY06.

 

General Fund Net Income			Increase
			(Decrease)	Percent
	FYE 6/30/07	Percent	from	Increase
	Amount	of Total	FYE 6/30/06	(Decrease)
Revenues:
Recreation Programs Fees	266,947	21%	(242)	0%
Property Taxes	403,353	32%	122,212	43%
Measure B Assessments	190,262	15%	5,017	3%
Donations and State Grants	133,921	10%	(30,198)	-18%
Park and Building Rentals and Services	75,333	6%	9,785	15%
Streetlight Zone Fees	57,447	5%	1,630	3%
Open Space Zone Fees	64,579	5%	12,718	25%
Interest Income	22,554	2%	8,597	62%
Other Revenues	61,800	5%	4,081	7%
	-----------------		-----------------
Total Revenues	$1,276,196	100%	$133,600	12%
Expenditures:
Principal and Interest on Debt	226,566	22%	(3,481)	-2%
Recreation Programs	217,772	21%	(11,990)	-5%
Capital Expenditures	80,614	8%	(150,889)	-65%
Building Operations	118,672	11%	4,707	4%
Streetlight Zones	60,886	6%	5,334	10%
Open Space Zone Maintenance	44,557	4%	14,365	48%
Other Salaries and Benefits	214,397	21%	15,153	8%
Other Expenditures	70,164	7%	34,452	96%
	-----------------		-----------------
Total Expenditures	$1,033,629	100%	$(92,348)	-8%
	-----------------		-----------------
Net Income	$242,569		$225,950

 

 

Business-type Activities

 

In reviewing departmental net revenue, it should be noted that McKinleyville continues to grow at a high rate.  Water and sewer connection (capacity) fees for new construction totaled $219,809.  Connection fees tend to be somewhat cyclical, and this was an increase of $20,139 compared with last year.  Connection fees to the sewer system for this year were equivalent to 115 new residences.  That is a 2% annual growth rate. The District has sustained an approximate 2% growth rate over the past ten years.  It is clear that there will be increasing demand on the District's facilities as McKinleyville continues to grow.  Overall operating revenues increased by 7% while operating expenses decreased by less than 1%.  Cost decrease came from the water supply contract from the Humboldt Bay Municipal Water District, operating efficiencies and non-recurring expenditures in FY06. The net operating income for the year was $270,036.  District staff has implemented a formal preventive maintenance and asset replacement programs and facilities are maintained in excellent condition. 

 

 

 

 

 

 

 

Business-type Activities (Enterprise)			Increase
			(Decrease)	Percent
	FYE 6/30/07	Percent	from	Increase
	Amount	of Total	FYE 6/30/06	(Decrease)
Operating Revenues:
User Fees for Water	1,306,106	45%	81,056	7%
User Fees for Sewer	1,161,794	40%	26,977	2%
Connection, Extension and Other Fees	402,691	14%	54,930	16%
Other	46,198	2%	1,697	4%
	-----------------		-----------------
Total Operating Revenues	2,916,789	100%	164,660	6%
Operating Expenses:
Salaries and Benefits	1,192,497	44%	82,214	7%
Purchased Water	352,935	13%	(34,845)	-9%
Utilities, Maintenance and Repairs	332,607	12%	(8,156)	-2%
Depreciation of Plant	621,027	23%	1,285	0%
Other Operating Expenses	183,259	7%	(29,547)	-14%
	-----------------		-----------------
Total Operating Expenses	2,682,325	100%	(10,951)	0%
	-----------------		-----------------
Net Operating Income	234,464		153,709

 

 

THE DISTRICT'S FUNDS

 

Debt

 

At year-end, the District had $5,901,345 in outstanding State, Federal and commercial loans and a capital lease agreement compared with $6,350,618 last year.  That is a decrease of $449,273 or 7.1% of the principal balance. No additional debt is anticipated in the upcoming year.

 

Variations from Final and Amended Budget for the General Fund

 

MCSD's budget was not amended during the year.  Salaries and benefits were about 4.9% under budget for the year and overall expenditures were 0.5% below budget.  Operating revenues were 6.2% above budget.  The budget for general fund anticipated a net income of $162,767 compared with an actual net income of $242,569.  That is a $79,802 favorable variance from budget.

 

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES

 

Improvements in the State budget situation have eased the District's uncertainty regarding property tax revenues.  As a result of Proposition 1a, MCSD saw a decrease in property tax revenue of $133,875 in FY05 and the same decrease in FY06.  That annual reduction was restored to MCSD's budget in FY07. Previously committed State grants for capital expansion appear to be secure and Measure B Assessments are not subject to State budget actions. The District has developed an ambitious capital improvement program that anticipates spending $5.06 million over the next five years.  High energy and transportation costs, increasing insurance rates (both liability and employee), low interest rates and the possibility of future inflation are also areas of concerns.  Management continues its commitment to maintaining user fees to cover the cost of providing services while supporting the District's capital improvement program.

 

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

 

This financial report is designed to provide our citizens, taxpayers, customers and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives.  Additional information about the District is available on our website www.mckinleyvillecsd.com.  If you have questions about this report or need additional financial information, contact the business office at 1656 Sutter Road, McKinleyville, California (e-mail: mcsd@mckinleyvillecsd.com).

 

James M. Harding, Treasurer/Business Manager