"City of Tacoma Solid Waste Management 2008 Annual Report"
Solid Waste Management 2008 Financial Report City of Tacoma Public Works Environmental Services Table of Contents Independent Auditor’s Report........................................................................................................................... 3 Management’s Discussion and Analysis .......................................................................................................... 7 Financial Statements .......................................................................................................................................... 13 Notes to Financial Statements .......................................................................................................................... 21 1 (This page intentionally left blank.) 2 Independent Auditor’s Report 3 (This page intentionally left blank.) 4 INDEPENDENT AUDITOR'S REPORT Honorable Mayor and City Council City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management Tacoma, Washington We have audited the accompanying balance sheets of City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management (the Division) as of December 31, 2008 and 2007 and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The management’s discussion and analysis preceding the financial statements is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Portland, Oregon May 15, 2009 5 (This page intentionally left blank.) 6 Management’s Discussion and Analysis 7 City of Tacoma, Washington Public Works Department – Environmental Services Solid Waste Management Management’s Discussion and Analysis December 31, 2008 and 2007 Introduction The following is management’s discussion and analysis (MD&A) of the financial activities of the City of Tacoma’s Solid Waste Management Division (the Division) for the years ended December 31, 2008 and 2007. The MD&A is designed to focus on significant financial transactions and activities and to identify changes in financial position. This information should be read in conjunction with the financial statements which are prepared on a full accrual basis of accounting. Financial Highlights • The change in net assets for 2008 is $2.6 million compared to $5.6 million in 2007 and $5 million in 2006. • Operating revenues are $56.1 million in 2008, $57.5 million in 2007 and $51.3 million in 2006. • Total net assets are $6.4 million at December 31, 2008 compared to $3.8 million and ($1.9) million at year‐end 2007 and 2006, respectively. • Cash and equity in pooled investments is $75.4 million at December 31, 2008 compared to $70.4 million in 2007 and $72.1 million in 2006. Financial Analysis – Condensed Balance Sheets December 31, 2008 2007 2006 Current, restricted and other assets $ 82,791,112 $ 77,819,733 $ 79,390,226 Capital assets, net 57,208,240 58,170,751 53,866,887 Total assets $ 139,999,352 $ 135,990,484 $ 133,257,113 Current liabilities and liabilities payable from restricted assets $ 52,988,389 48,684,365 $ $ 48,993,379 Noncurrent liabilities 80,615,506 83,545,667 86,114,951 Total liabilities 133,603,895 132,230,032 135,108,330 Invested in capital assets, net of related debt 22,431,198 23,957,070 16,549,926 Restricted for bond reserve 1,077,000 ‐ ‐ Unrestricted (17,112,741) (20,196,618) (18,401,143) Total net assets 6,395,457 3,760,452 (1,851,217) Total liabilities and net assets $ 139,999,352 $ 135,990,484 $ 133,257,113 Current, restricted and other assets Current, restricted and other assets increased $5 million in this year compared to a decrease of $1.6 million last year. The most significant changes are: • Operating cash increased $7.2 million in 2008 compared to a decrease of $2.7 million in 2007. The primary reason for this is using roughly $7.8 million less to fund capital projects. In 2008, cash used for acquisition of capital assets is $3.1 million compared to $11 million in 2007. The 2007 acquisition of the Urban Waters land and building required the use of $5.8 million of operating cash and not bond funds due to possibly exceeding the 10% limitation of private use on bond funded projects. In 2007, the bond construction fund increased $818,000 compared to a decrease of $4.0 million in 2008. 8 • Operating cash includes the rate stabilization funds with balances of $4.7 million at year‐end 2008 and 2007. This is down from the 2006 balance of $6.9 million. The decrease during 2007 is due to transfers of $1.5 million to the Port of Tacoma for environmental cleanup of an old landfill site and $750,000 to the Nuisance Code Enforcement Fund. • Restricted cash for bond reserves increased $1.7 million as required by the bond covenants. Capital assets, net Net capital assets decreased $963,000 in 2008 and increased $4.3 million in 2007. Significant changes from year to year include: • Completed projects in 2008 include the Landfill Access Improvement and the Receiving Building project. 2007 completed projects include the White Goods Processing Building and the Division’s share of costs for the purchase of the Urban Waters land and building. • Allowance for accumulated depreciation increased $5 million in 2008 compared to a decrease of $2.6 million in 2007. The decrease in 2007 was largely due to the $9.7 million disposal of fully depreciated vehicles and containers. • Additional detail is provided under the caption “Capital Assets”. Current liabilities and liabilities payable from restricted assets Total current liabilities and liabilities payable from restricted assets increased $4.3 million in 2008 and decreased $309,000 in 2007. Significant changes include: • The accrued landfill liability increased $3.3 million in 2008 compared to an increase of $1.1 million in 2007 due to changes in estimates concerning the remaining landfill capacity and inflation on construction costs. • 2008 includes an increase of $1.1 million in accounts payable mainly due to $2.3 million for seven trucks received in December and a decrease of $527,000 in external contract services. • 2007 includes a decrease of $2.3 million in rate stabilization. Noncurrent liabilities Noncurrent liabilities consist of revenue bonds payable and related debt accounts, noncurrent compensated absences and OPEB liabilities. Total noncurrent liabilities decreased $2.9 million in 2008 and $2.6 million in 2007 primarily due to principal payments on revenue bonds. The Division issued 2008 Revenue Refunding bonds on September 5, 2008. The 1997 Revenue Refunding Bonds for 2013 through 2017 inclusive were refunded. Refer to Note 4 Long‐Term Debt to see the details of the impact on the financial statements. 9 Financial Analysis ‐ Condensed Statements of Revenues, Expenses and Changes in Net Assets Year Ended December 31, 2008 2007 2006 Operating revenues $ 56,060,141 $ 57,489,393 $ 51,336,933 Operating expenses 48,105,568 46,051,501 40,024,592 Net operating income 7,954,573 11,437,892 11,312,341 Nonoperating revenues (expenses): Investment income 3,157,651 3,762,878 2,038,008 Interest expense (4,184,544) (4,206,425) (3,808,866) Other, net 324,370 (869,428) (509,816) Total nonoperating expenses (702,523) (1,312,975) (2,280,674) Net income before transfers 7,252,050 10,124,917 9,031,667 Contributed capital ‐ ‐ 2,000 Transfers ‐ gross earnings tax (4,260,593) (4,513,248) (4,022,715) Transfers ‐ Fleet equipment (356,452) ‐ ‐ Change in net assets 2,635,005 5,611,669 5,010,952 Total net assets ‐ beginning 3,760,452 (1,851,217) (6,862,169) Total net assets ‐ ending $ 6,395,457 $ 3,760,452 $ (1,851,217) Operating revenues Operating revenues decreased $1.4 million in 2008 and increased $6.2 million in 2007 including the $2.3 million deferred revenue recognition in 2007. The following graph provides a comparison of operating revenues from year to year, including recognition of deferred revenue. 2008 Operating Revenues 2007 2006 30.0 24.5 25.1 25.0 22.9 22.6 22.0 20.1 In $ Millionʹs 20.0 15.0 10.0 7.1 6.5 5.4 5.0 1.9 2.0 1.3 1.3 1.2 0.8 0.0 Re side ntial Comme rcial Disposal Salvage Othe r re ve nue s Revenues from residential customers are up $918,000 or 4% in 2008. Overall average rates increased 3.5% in both 2008 and 2007. Commercial revenues are down $607,000 or 2%, and $1.7 million or 24% for disposal revenue due to the economic downturn in 2008. 10 Operating expenses The following graph provides a three year comparison of operating expenses for each of the major cost centers. 2008 2007 2006 Operating Expenses Excluding Depreciation and Other 10.0 8.0 7.5 7.4 7.5 7.6 7.7 7.8 8.0 7.0 7.1 6.8 6.4 6.5 6.3 6.0 5.4 4.8 $ʹs In Millions 4.0 1.9 1.9 1.5 1.5 2.0 0.6 0.3 ‐ C La Re G C Lo Re St ol en le e n (2.0) cy n so am an le df er g cl ur ct up il l al ha P in io ce A la g /N ul n R n dm C ec t (4.0) (3.2) E in ov e ry Operating expenses are $48.1 million in 2008, an increase of $2.1 million over 2007 and 2007 operating expenses are $46.1 million, an increase of $6.0 million over 2006. Significant changes in operating costs include the following: • Landfill expenses include costs to maintain the landfill and process the disposal of solid waste, including public receiving, the scale‐house, on‐site transfer, and environmental systems. Costs increased $359,000 in 2008 and $1.2 million in 2007. o Landfill closure and post closure liability accruals increased in both years: $3.3 million in 2008 and $1.1 million in 2007. o Environmental cleanup costs of $395,000 in 2008 and $1.5 million in 2007 were paid to reimburse the Port of Tacoma for costs to cleanup contaminated soil and debris related to an old landfill site. Refer to Note 10 Litigation “Port of Tacoma Gog‐Le‐Hi‐Te Project Claim”. • Long haul includes both the transfer and disposal of solid waste to a site in Pierce County for which the Division has long‐term contractual arrangements. Long haul expenses decreased $157,000, or 2% in 2008 compared to an increase in 2007 of $819,000 or 11.7%. In 2007, the contract rates increased to cover landfill closure and post closure costs at the Pierce County site. • The steam plant is a refuse derived fuel project that was shut down in 2005. In 2006, the cost recovery, shown by the negative expense in the graph, represents $3.4 million received from a settlement with NRG net of $200,000 in expenses. • The Tacoma Cares and NCE costs increased $1.3 million while revenues increased $158,000 in 2008. Nonoperating revenues (expenses) Significant changes in 2008 and 2007 include: • Investment income is $3.2 million in 2008 and $3.8 million in 2007 for a decrease of $605,000 primarily due to the market value adjustment and lower interest rates in 2008. 2007 investment income is $1.7 million more than in 2006 due to increased cash balances from bond funding and higher interest rates. • Grant revenue is $543,000 in 2008 compared to $109,000 in 2007 due to a new Coordinated Prevention Grant covering the purchase of a truck and additional labor cost reimbursements on an existing Coordination Prevention Grant. 11 Capital Assets As of the end of 2008, the Division reports $57.2 million in utility plant net of accumulated depreciation; this compares to $58.2 million in 2007 and $53.9 million in 2006. 2008 activity Machinery and equipment increased $2 million including vehicles for $2.9 million and containers for $450,000 less disposal of $1.4 million for vehicles and equipment. Landfill infrastructures increased $4.8 million, including $3.1 million for the Landfill Access project, $898,000 for the Receiving Building, and $720,000 for the Landfill West Storm Water Pond project. 2007 activity Capital assets purchased in 2007 includes vehicles for $2.8 million, containers for $1.1 million, and land for $1.1 million. $4.7 million for the White Goods Processing Building was transferred to the assets in service building account. The Division disposed of $9.7 million in capital assets: $1.4 million for vehicles and equipment and $8.3 million for containers. Restricted Assets Restricted assets consist of cash and equity in pooled investments with restrictions both externally imposed and legally enforceable and established by the City Council. Principally, restricted assets include bond reserve funds, debt service funds, customer deposits, construction funds, and the reserve for landfill closure and post‐closure costs. Total restricted assets decreased $2.2 million from 2007 and $1.2 million since 2006. Debt Administration At December 31, 2008, the Division had $81.5 million in long‐term debt outstanding, of which $3.4 million is due within one year. On September 5, 2008 the Division issued 2008 Refunding Revenue Bonds to refund a portion of the 1997 Revenue Refunding Bonds. Refer to Note 4 long‐term debt for the detail of this transaction. The bonds have underlying ratings of A2 by Moody’s Investors Service, A+ by Fitch, Inc., and AA by Standard & Poor’ in 2008 compared to A3 by Moody’s Investors Service, A by Fitch, Inc and A+ by Standard & Poor’s in 2007. Debt Service Coverage The bond coverage ratio is 2.84 at the end of 2008. This compares to 2.99 reported in 2007 and 3.10 reported in 2006. A bond coverage ratio of 1.25 is required by bond covenants for the Division. Summary This Management’s Discussion and Analysis should be read in conjunction with the accompanying financial statements and notes. This report is prepared by our Financial Services Team. Moss Adams, LLP independently audited the financial statements and notes. Public Works Management and Finance Management are jointly responsible for the information contained in this report, as well as the financial statements and notes. 12 Financial Statements 13 City of Tacoma, Washington Public Works Department ‐ Environmental Services Solid Waste Management Balance Sheets December 31, ASSETS 2008 2007 Current assets: Cash and equity in pooled investments $ 19,493,047 $ 12,330,168 Rate stabilization fund in pooled investments 4,650,000 4,650,000 Customer accounts receivable 5,196,757 5,147,086 Allowance for uncollectible accounts (2,187,921) (1,835,439) Unbilled customer accounts receivable 2,900,000 2,700,000 Due from other funds 85,026 427,314 Due from other governmental units 159,364 116,630 Grant receivable 357,030 ‐ Total current assets 30,653,303 23,535,759 Restricted cash and equity in pooled investments: Bond reserve and debt service accounts 6,299,581 4,553,551 Customer deposits 59,299 66,420 Construction accounts 42,276,988 46,274,305 Reserve for landfill closure 2,654,116 2,551,044 Total restricted assets 51,289,984 53,445,320 Capital assets: Land 3,595,234 3,775,234 Buildings 25,737,189 25,791,326 Landfill infrastructure 58,891,025 54,091,560 Machinery and equipment 39,540,194 37,560,618 Computer software 3,983,793 3,983,793 Less accumulated depreciation (78,261,365) (73,307,590) Assets in service net of accumulated depreciation 53,486,070 51,894,941 Construction in progress 3,722,170 6,275,810 Total capital assets 57,208,240 58,170,751 Other assets ‐ unamortized bond costs 847,825 838,654 TOTAL ASSETS $ 139,999,352 $ 135,990,484 The accompanying notes are an integral part of the financial statements. 14 City of Tacoma, Washington Public Works Department ‐ Environmental Services Solid Waste Management Balance Sheets December 31, LIABILITIES 2008 2007 Current liabilities: Accounts payable $ 3,161,573 $ 2,097,343 Accrued wages payable 335,026 251,056 Accrued taxes payable 686,830 823,903 Due other funds 381,272 520,060 Deferred revenue 92,647 79,813 Deferred credit ‐ rate stabilization 4,650,000 4,650,000 Current portion of long‐term debt 3,148,750 2,992,917 Total current liabilities 12,456,098 11,415,092 Liabilities payable from restricted assets: Current: Deposits payable 59,068 66,044 Bond interest payable 354,259 370,200 Current portion of long‐term debt 286,250 272,083 Noncurrent: Accrued landfill closure and post closure costs 39,832,714 36,560,946 Total liabilities payable from restricted assets 40,532,291 37,269,273 Noncurrent liabilities: Long‐term debt 79,051,852 82,244,928 Compensated absences 1,243,660 1,126,976 Net OPEB obligation 319,994 173,763 Total noncurrent liabilities 80,615,506 83,545,667 Total liabilities 133,603,895 132,230,032 NET ASSETS Invested in capital assets, net of related debt 22,431,198 23,957,070 Restricted for bond reserve 1,077,000 ‐ Unrestricted (17,112,741) (20,196,618) Total net assets 6,395,457 3,760,452 TOTAL LIABILITIES AND NET ASSETS $ 139,999,352 $ 135,990,484 The accompanying notes are an integral part of the financial statements. 15 City of Tacoma, Washington Public Works Department ‐ Environmental Services Solid Waste Management Statements of Revenues, Expenses, and Changes in Net Assets Year Ended December 31, 2008 2007 OPERATING REVENUES Residential collection $ 22,903,255 $ 21,984,960 Commercial collection 24,474,033 25,081,252 Disposal revenues 5,408,984 7,144,986 Salvage revenue 1,948,663 2,033,531 Tacoma Cares/NCE revenue 841,559 683,221 Other operating revenue 483,647 561,443 Total operating revenues 56,060,141 57,489,393 OPERATING EXPENSES Collection 7,501,511 7,357,752 Landfill 7,963,873 7,604,954 Long haul 7,681,564 7,839,062 Resource recovery 1,528,770 1,456,240 Recycling 7,130,619 6,479,832 Tacoma Cares/NCE 1,877,882 616,850 General administration 4,760,948 5,355,375 Other 3,336,822 3,290,400 Depreciation 6,323,579 6,051,036 Total operating expenses 48,105,568 46,051,501 Net operating income 7,954,573 11,437,892 NONOPERATING REVENUES (EXPENSES) Investment income 3,157,651 3,762,878 Operating grants 542,999 108,991 Interest on revenue bonds (4,184,544) (4,206,425) Amortization of bond premium, discount, issuance costs and refunding loss (239,335) (694,984) Other 20,706 (283,435) Total nonoperating expenses (702,523) (1,312,975) CHANGE IN NET ASSETS Net income before transfers 7,252,050 10,124,917 Transfers ‐ gross earnings taxes (4,260,593) (4,513,248) Transfers ‐ Fleet equipment fund (356,452) ‐ CHANGE IN NET ASSETS 2,635,005 5,611,669 TOTAL NET ASSETS ‐ BEGINNING 3,760,452 (1,851,217) TOTAL NET ASSETS ‐ ENDING $ 6,395,457 $ 3,760,452 The accompanying notes are an integral part of the financial statements. 16 (This page intentionally left blank.) 17 City of Tacoma, Washington Public Works Department ‐ Environmental Services Solid Waste Management Statements of Cash Flows Year Ended December 31, 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 55,769,675 $ 54,747,508 Payments to suppliers (22,002,137) (21,426,948) Payments to employees (16,081,975) (15,611,460) Taxes paid (820,453) (771,596) Net cash from operating activities 16,865,110 16,937,504 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Gross earnings taxes paid (4,332,305) (4,461,483) Operating grants received 108,991 185,969 Net cash from noncapital financing activities (4,146,336) (4,352,492) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital assets transfer (356,452) ‐ Acquisition and construction of capital assets (3,130,129) (10,964,136) Principal paid on revenue bonds (3,265,000) (2,935,000) Interest paid on revenue bonds, net of capitalized interest (4,207,066) (4,237,089) Proceeds from sale of capital assets 73,050 57,545 Net cash from capital and related financing activities (10,885,597) (18,078,680) CASH FLOWS FROM INVESTING ACTIVITIES Investment income received 3,157,651 3,762,878 Rental income 62,417 56,036 Low income assistance (45,702) (32,998) Net cash from investing activities 3,174,366 3,785,916 Net change in cash and equity in pooled investments 5,007,543 (1,707,752) Cash and equity in pooled investments at beginning of year 70,425,488 72,133,240 Cash and equity in pooled investments at end of year $ 75,433,031 $ 70,425,488 The accompanying notes are an integral part of the financial statements. 18 City of Tacoma, Washington Public Works Department ‐ Environmental Services Solid Waste Management Statements of Cash Flows Year Ended December 31, 2008 2007 Reconciliation of cash and equity in pooled investments to balance sheets: Cash and equity in pooled investments in operating funds $ 24,143,047 $ 16,980,168 Cash and equity in pooled investments in restricted funds 51,289,984 53,445,320 75,433,031 $ 70,425,488 $ Reconciliation of operating income to net cash from operating activities: Operating income 7,954,573 $ $ 11,437,892 Adjustments to reconcile operating income to net cash from operating activities: Depreciation expense 6,323,579 6,051,036 Project costs expensed ‐ 245,216 Change in assets and liabilities: Accounts receivable, net of allowance for uncollectible accounts 102,811 140,841 Due from other funds (84,897) (420,875) Due from other governmental units (42,734) 26,740 Accounts payable, excluding capital related (1,235,770) 15,010 Accrued wages and long‐term compensated absences, excluding construction related 200,654 4,148 Accrued taxes payable (65,361) 25,529 Deposits payable (6,976) 3,109 Due other funds 288,398 385,261 Deferred revenue 12,834 (3,217) Deferred credit ‐ rate stabilization ‐ (2,250,000) Accrued OPEB 146,231 173,763 Closure and post‐closure liability 3,271,768 1,103,051 Total adjustments 8,910,537 5,499,612 Net cash from operating activities 16,865,110 $ 16,937,504 $ Noncash investing, capital and financing activities: Issuance of 2008 Revenue Refunding Bonds to defease 1997 Revenue Refunding Bonds 12,055,000 $ The accompanying notes are an integral part of the financial statements. 19 (This page intentionally left blank.) 20 Notes to Financial Statements 21 City of Tacoma, Washington Public Works Department – Environmental Services Solid Waste Management Notes to Financial Statements Years Ended December 31, 2008 and 2007 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations of the Solid Waste Management Division. The Solid Waste Management Division (the Division) is presented as an enterprise fund within the Department of Public Works under the provisions of the City of Tacoma Charter. The Division, with approximately 182 employees, provides mandatory solid waste collection and disposal services for residential and commercial entities located within in the City. The population is approximately 202,700 and covers an area of 49 square miles. Disposal methods include recycling, long‐haul to an outside landfill, and disposal in the City owned landfill. The Division receives certain services from other departments and agencies of the City, including those normally considered to be general and administrative. The Division is charged for services received from other City departments and agencies and, additionally, must pay an 8% gross earnings tax to the City. These transactions are required to be arms‐length transactions by law. Basis of Accounting and Presentation. The financial statements of the Division are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). Revenues are recognized when earned and expenses are recognized when incurred. The Division has elected to apply all applicable Governmental Accounting Standards Board (GASB) pronouncements. The Division generally follows the uniform system of accounts prescribed by the Division of Audits of the State Auditorʹs Office. The Division is exempt from payment of Federal income tax. Cash and Equity in Pooled Investments. The Division’s cash is deposited with the City Treasurer in the Cityʹs general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and investments in the Cityʹs general investment pool are reported at fair value and allocated changes in unrealized gains and losses are recorded in the Divisionʹs Statements of Revenues, Expenses, and Changes in Net Assets. The allocation is based on a prorated share of equity as of the balance sheet date. Interest earned on such pooled investments is allocated to the participating funds based on each fundʹs average daily cash balance during the allocation period. The general investment pool operates like a demand deposit account in that all City departments may deposit cash into the pool at any time and can also withdraw cash out of the pool without prior notice or penalty. As such, balances are considered to be cash equivalents. Accounts Receivable. Accounts receivable are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for uncollectible accounts is estimated based on taking a percentage of accounts receivable aged balances with consideration given to the Division’s historical losses, review of specific problem accounts, the existing economic conditions and the financial stability of its customers. Generally, the Division considers accounts receivable past due after 30 days. 22 Solid Waste Management Notes to Financial Statements Continued Interfund Balances. Transactions unsettled between funds at year end are recorded as due to or due from other funds. Restricted Assets. Restricted assets are cash and equity in pooled investments with restrictions both externally imposed and legally enforceable and established by the City Council. Principally, restricted assets include bond construction, reserve and debt service funds; landfill closure funds and customer deposits. Capital Assets and Depreciation. Capital assets consist of utility plant and are stated at original cost (See Note 2), which includes both direct costs of construction or acquisition and indirect costs. The cost of maintenance and repairs is charged to expense as incurred while the cost of improvements, additions and major renewals that extend the life of an asset are capitalized. Depreciation is recorded using the straight‐line method based upon estimated useful lives of individual assets. The estimated useful lives range as follows: Years Buildings and Improvements 20 ‐ 50 Resource Recovery Facility 5 ‐ 50 Vehicles 5 ‐ 10 Containers and Equipment 5 ‐ 10 Other Assets 3 ‐ 10 The Division periodically reviews the carrying amount of its capital assets and other long‐lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is deemed not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows. Allowance for Funds Used During Construction. The Division capitalizes, as an additional cost of construction work in progress (CWIP), an allowance for funds used during construction (AFUDC), which represents the cost of borrowing funds used for such purposes. During 2008, capitalized interest related to construction projects funded by revenue bonds is $48,451; in 2007 the amount was $396,675. Deferred Credit. In accordance with FASB Statement No. 71, “Accounting for the Effects of Certain Types of Regulation”, and as passed by ordinance by the Tacoma City Council, the Division has established a rate stabilization account for the purpose of better matching revenues with expenses. Deposits into the fund are not included as revenue in the year deposited, but rather in the year funds are withdrawn. The balance in this account at December 31, 2008 is $4,650,000, the same as the previous year end. Bond Premium, Discount, Issuance Costs and Refunding Losses. Bond premium, discount, and issuance costs are amortized over the life of the bond by using the weighted balance of the bonds outstanding. The losses on refundings are amortized on a straight‐line basis over the applicable bond period. 23 Solid Waste Management Notes to Financial Statements Continued Compensated Absences. The City has two different policies for compensated absences. The Cityʹs original policy allows employees to accrue vacation based on the number of years worked with a maximum accrual equal to the amount earned in a two‐year period. These employees also accrue one day of sick leave per month without any ceiling on the maximum accrued. The City implemented a new policy in 1998 allowing employees to earn PTO (personal time off) without distinction between vacation and sick leave. Employees who worked for the City prior to the change could choose to stay with the original policy or opt to convert to the new policy. The amount of PTO earned is based on years of service. The maximum accrual for PTO is 960 hours, and upon termination, employees are entitled to compensation for unused PTO at 100%. Vacation pay and PTO are recorded as a liability and expense in the year earned. Employees in the original policy accumulate sick leave at the rate of one day per month with no maximum accumulation specified. Employees receive 25% of the value at retirement or 10% upon termination for any other reason. In the event of death, beneficiaries receive 25% of the value. The accrued liability is computed at 10%, which is considered the amount vested. Sick leave pay is recorded as an expense in the year earned. Operating Revenues. Revenues are derived from providing solid waste services to both residential and commercial customers. Residential rates are based on the size of the garbage container and include services for recycling, yard waste and costs for other special programs. Commercial rates are based on the garbage container type and frequency of collection with additional charges for recycling services. The rate structure is designed to meet the Division’s needs and obligations on a cost‐of‐service basis while adhering to legal requirements. These legal requirements include computing rates on a reasonable basis, charging rates uniformly within classes, and using the revenues for utility and regulatory purposes. In addition, there may be laws imposed by the State, City Charter or to meet grant or bond requirements. The City has a parity bond ordinance that it will establish, maintain and collect rates or charges in connection with the ownership and operation of the utility to 1) pay the cost of maintenance and operation of the utility, 2) to make all payments required to be made for the parity bonds, 3) to make all payments required to be made on any other junior debt, 4) to pay municipal taxes and payments to the City in lieu of taxes, and 5) to prepay debt, invest in improvement projects to utility assets, make payments to the Solid Waste Rate Stabilization Fund, or other lawful City purposes including payment of legal claims and judgments against the utility. Customers are billed on bi‐monthly or monthly billing cycles. At year end, unbilled revenues are estimated and accrued based on these billing cycles. Environmental Remediation Costs. The Division recognizes environmental obligations according to GASB Statement No. 49 “Accounting and Financial Reporting for Pollution Remediation Obligations”. Accruals for expected pollution remediation outlays are recorded when one of five obligating events occurs and adjusted as further information develops or circumstances change. The five obligating events are applied when the Division is: 1) compelled to take action because of an imminent endangerment, 2) in violation of a pollution prevention‐related permit or license, 3) named or evidence indicates that it will be named by a regulator as a responsible party or potentially responsible party, 4) named in a lawsuit to compel participation in pollution remediation, or 5) the Division commences or legally obligates itself to commence pollution remediation. 24 Solid Waste Management Notes to Financial Statements Continued Costs related to environmental remediation are charged to expense when the liability is recognized; outlays are capitalized when goods and services are acquired under specific circumstances as described in Statement No. 49. Measurement is based on the current value of the outlays for the individual remediation components using the expected cash flow technique adjusted for recoveries. Refer to Note 8 Environmental Liabilities. Landfill Closure and Post‐Closure Costs. In accordance with GASB Statement No. 18, “Accounting for Municipal Solid Waste Landfill Closure and Post‐closure Care Costs”, the Division is required to expense a portion of the estimated closure and post‐closure costs in each period that the landfill accepts solid waste. The Division has been reporting a portion of these costs as a liability and as an operating expense since 1994. The liability balance is $39,832,714 at December 31, 2008, and $36,560,946 at December 31, 2007. The 2008 liability balance includes $31,913,562 for post closure and $7,919,152 for closure costs. Net Assets. Net assets consist of the following components: • Invested in capital assets, net of related debt ‐ This component of net assets consists of unspent bond proceeds and capital assets, net of accumulated depreciation and outstanding debts, attributable to the acquisition, construction, or improvement of those assets. • Restricted ‐ This component consists of restricted assets net of related obligations. If obligations exceed assets, the balance is reported as unrestricted. • Unrestricted ‐ This component consists of net assets available for use. Use of Estimates. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Significant Risks and Uncertainty. The Division is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include, but are not limited to, water conditions, weather and natural disaster‐related disruptions, collective bargaining labor disputes, fish and other endangered species act issues, Environmental Protection Agency regulations, federal government regulations or orders concerning the operation, maintenance, and licensing of facilities. Reclassification. Changes have been made to prior year account balances as needed to conform to the current year presentation format. 25 Solid Waste Management Notes to Financial Statements Continued NOTE 2 CAPTIAL ASSETS Transfers & 2007 Additions Retirements Adjustments 2008 Land $ 3,775,234 $ ‐ $ ‐ $ (180,000) $ 3,595,234 Buildings 25,791,326 ‐ (54,137) 25,737,189 Landfill infrastructure 54,091,560 4,799,465 58,891,025 Property plant & equipment 37,560,618 3,418,436 (1,438,860) ‐ 39,540,194 Computer software 3,983,793 ‐ ‐ ‐ 3,983,793 Assets in service 125,202,531 3,418,436 (1,438,860) 4,565,328 131,747,435 Accumulated depreciation (73,307,590) (6,323,578) 1,369,803 (78,261,365) Assets in service, net 51,894,941 (2,905,142) (69,057) 4,565,328 53,486,070 Construction work in progress 6,275,810 2,011,688 (4,565,328) 3,722,170 6,275,810 2,011,688 ‐ (4,565,328) 3,722,170 Net capital assets 58,170,751 $ $ (893,454) $ (69,057) $ ‐ $ 57,208,240 NOTE 3 CASH AND EQUITY IN POOLED INVESTMENTS The City of Tacoma Investment Policy permits investments in certificates of deposit, obligations of the U.S. Treasury, agencies and instrumentalities, bankers’ acceptances, commercial paper and repurchase and reverse repurchase agreements. Repurchase agreements are settled delivered versus payment. The market value of collateralized securities must exceed the dollar amount of the repurchase agreement by 2% over the term of the agreement. Currently the City participates only in overnight agreements. The underlying collateral must be an investment instrument that the City is authorized to purchase. The Division’s cash held by the City Treasurer in the general investment pool is entirely covered by federal depository insurance or on deposit with financial institutions recognized as qualified public depositories of the State of Washington under the Revised Code of Washington (RCW) Chapter 39. 26 Solid Waste Management Notes to Financial Statements Continued NOTE 4 LONG‐TERM DEBT Long‐term debt activity for the year ended December 31, 2008 is as follows: Beginning Defeased or Ending Due within Balance Additions Refunded Payments Balance One Year Revenue bonds 85,710,000 $ $ 12,055,000 $ (13,030,000) $ (3,265,000) $ 81,470,000 $ 3,435,000 Plus: Unamortized premium 1,981,637 1,488,534 ‐ (240,041) 3,230,130 ‐ Less: Unamortized discount (138,405) ‐ 42,450 17,397 (78,558) ‐ Less: Loss on refunding (2,043,304) (826,517) 371,981 363,120 (2,134,720) ‐ Total long‐term debt 85,509,928 $ $ 12,717,017 $ (12,615,569) $ (3,124,524) $ 82,486,852 $ 3,435,000 The Division’s long‐term debt at December 31 consists of the following payable from revenues of the Division: 2008 2007 1997 Revenue Refunding Bonds, with interest rates ranging from 5.5% to 6.0% 8,630,000 $ 23,520,000 $ due in yearly installments of $1,975,000 to $2,350,000 through 2012 2001 Revenue Refunding Bonds, with interest rates ranging from 4.0% to 5.375% 9,085,000 10,490,000 due in yearly installments of $1,460,000 to $1,695,000 through 2014 2006 Series A Revenue Bonds, with interest rates ranging from 4.25% to 5.0% 29,385,000 29,385,000 due in yearly installments of $455,000 to $4,290,000 through 2026 2006 Series B Revenue Refunding Bonds, with an interest rate of 5.0% due in 22,315,000 22,315,000 yearly installments of $340,000 to $6,480,000 through 2021 2008 Revenue Refunding Bonds, with interest rates ranging from 3.42% to 4.05% 12,055,000 ‐ due in yearly installments of $2,150,000 to $2,685,000 through 2017 Total revenue bonds outstanding 81,470,000 85,710,000 Less: Unamortized discount (78,558) (138,405) Unamortized loss on refunding (2,134,720) (2,043,304) Current portion (3,148,750) (2,992,917) Current portion payable from restricted assets (286,250) (272,083) Plus: Unamortized premium 3,230,130 1,981,637 Total long‐term debt $ 79,051,852 $ 82,244,928 27 Solid Waste Management Notes to Financial Statements Continued Annual debt service requirements to maturity are as follows: Total Debt Principal Interest Service 2009 $ 3,435,000 $ 4,250,388 $ 7,685,388 2010 3,625,000 4,058,888 7,683,888 2011 3,830,000 3,856,738 7,686,738 2012 4,045,000 3,643,088 7,688,088 2013 4,120,000 3,410,982 7,530,982 2014‐2018 24,420,000 13,472,714 37,892,714 2019‐2023 25,730,000 6,579,000 32,309,000 2024‐2026 12,265,000 1,246,500 13,511,500 $ 81,470,000 $ 40,518,298 $ 121,988,298 The fair value of the Division’s revenue bonds is based on quoted market prices. At December 31, 2008, the fair market value of revenue bonds debt was $84,263,436 and at December 31, 2007 it was $90,653,473. In September 2008, Solid Waste Management issued $12,055,000 of Revenue Refunding Bonds. The bond proceeds were used to refund the 1997 Revenue Refunding Bonds maturing in years 2013 through 2017, as well as pay costs of issuance, bond issuance and underwriter’s fees. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $827,000. The difference is reported in the accompanying financial statements as a loss on refunding. Solid Waste Management completed the advance refunding to reduce its annual debt service requirements for the five refunded years by approximately $195,000 and to obtain an economic gain (difference between the present values of the old and new debt service payment) of $1.1 million. Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s have assigned ratings of “A2,” “A+” and “AA”, respectively. As of December 31, 2008, the following outstanding bonds are considered defeased or refunded: Issue Amount 1993 Refuse Utility Revenue Bonds $ 6,645,000 1997 Solid Waste System Revenue Bonds (2001) 24,155,000 $ 30,800,000 These defeased or refunded bonds constitute a contingent liability of the Division only to the extent that cash and investments presently in the control of the refunding trustees are not sufficient to meet debt service requirements and therefore are excluded from the financial statements because the likelihood of additional funding requirements is considered remote. The Division’s revenue bonds are secured by net operating revenue and cash and equity in pooled investment balances in the bond and construction funds. The bonds are also subject to certain financial and non‐financial covenants. 28 Solid Waste Management Notes to Financial Statements Continued NOTE 5 INSURANCE The Division’s risk exposure includes but is not limited to injuries and property damage due to collection and transfer activities, groundwater contamination, chemical spills and asset damage from earthquakes. Mitigating controls, safety procedures, and emergency and business resumption plans are in place. To the extent damage or claims exceed insured values, rates may be impacted. The City of Tacoma has established a Self‐Insurance Fund to insure the Division and other divisions within the City for certain losses arising from personal and property damage claims by third parties. The Division is required to make payments to the Self‐Insurance Fund to cover claims incurred by the Division and administrative expenses of the Fund. The Division’s premium payments totaled $362,000 both in 2008 and 2007. In addition, the City maintains an excess general liability policy with limits of $10 million, subject to a self‐insured retention of $3 million. The City has a policy to cover extraordinary workers’ compensation claims with a limit of $25 million ($1 million deductible), and a property coverage policy with a limit of $483 million replacement cost ($100,000 deductible per occurrence). Earthquake coverage has a three percent per building self‐insured retention. The Division participates in the City’s self‐insurance program for claims that arise during the normal course of business. Environmental claims generally are paid for out of revenue of the Division and not from the Self Insurance Fund. NOTE 6 TACOMA EMPLOYES’ RETIREMENT SYSTEM (TERS, OR THE SYSTEM) Employees of the Division are covered by the Tacoma Employees’ Retirement System (the System), an actuarially funded system operated by the City. The following information is provided on a city‐wide basis. Pursuant to GASB Statement No. 50, “Pension Disclosures ‐ an amendment of GASB Statements No. 25 and No. 27”, this note emphasizes the employer disclosures and detailed information presented in an independent CAFR issued by the Retirement System. Further detailed information regarding these disclosures can be found in that report which may be obtained by writing to Tacoma Employees’ Retirement System, 3628 South 35th Street, Tacoma, Washington 98409. Plan Description and Contribution Information. The System is a single employer, defined benefit retirement plan covering employees of the City of Tacoma and is administered in accordance with RCW Chapter 41.28, and Chapter 1.30 of the Tacoma Municipal Code. There are 1,820 vested retirees and beneficiaries of deceased retirees currently receiving benefits and 367 vested terminated employees entitled to future benefits but not yet receiving them. 3,124 active members are currently part of the System. Basis of Accounting. The financial statements are prepared using the accrual basis of accounting. Employee and employer contributions are recognized as revenues in the period in which employee services are performed and expenses are recorded when the corresponding liabilities are incurred, regardless of when payment is made. The employer contribution rate is determined by the actuarial funding method identified as the ʺentry age cost method.ʺ 29 Solid Waste Management Notes to Financial Statements Continued Method Used to Value Investments. Equity securities, fixed income securities, real estate, and short‐term investments are all reported at fair market value. Fair market value was determined by our custodian bank utilizing standard industry practices and verified by our performance consultant. No investment in any one corporation or organization exceeded five percent of net assets available for benefits. Investments and Contracts. The System has no securities of the employer and related parties included in the plan assets. The System has not made any loans to the employer in the form of notes, bonds, or other instruments. Contributions. Covered employees are required by Chapter 1.30 of the Tacoma City Code to contribute a percentage of their gross wages to the System, and the employer contributes an additional percentage. The contribution rates are provided in the following table: Applicable Period City Rate Member Rate Total Rate 1/1/1980 to 12/31/1996 10.44% 8.89% 19.33% 1/1/1997 to 12/31/2000 9.02 7.68 16.70 1/1/2001 to 2/1/2009 7.56 6.44 14.00 2/2/2009 to 12/31/2009 8.64 7.36 16.00 1/1/2010 Forward 9.72 8.28 18.00 Contributions city‐wide totaled $27.2 million in 2008 ($14.5 million employer contributions and $12.7 million employee contributions) and totaled $25.7 million in 2007 ($13.6 million employer contributions and $12.1 million employee contributions). Funding Status and Progress. Historical trend information about TERS is presented herewith as supplementary information. This information is based on the most recent actuarial valuation performed, dated January 1, 2007 and is intended to help assess TERS funding status on a going‐concern basis, assess progress made in accumulating assets to pay benefits when due, and make comparisons with other public employee retirement systems. Actuarial Methods and Significant Actuarial Assumptions: Valuatio n Date . . . . . . . … … … … … . . Janu ary 1, 2007 Actuarial Cost Metho d: . . . . . . . . . . . . . . Entry Age Amortization M ethod: . . . . . . . . . . . . . . . Level Percentage of the System’s Projected Payroll Remaining Amortization Period: . . . . . 30 years, o pen Asset Valuation M ethod: . . . . . . . . . . . . . Assets are valued at market value, with a four‐year sm oo thing of all market value gains and losses. Actuarial Assum ptions: Investment Rate o f Return . . . . . . . . .. 7.75% Projected Salary Increases . . . . . . . . .. 4.0% Includ es Inflation at . . . . . . . . . . . . . . .. 3.25% Postretirement Benefit Increases . . .. 2.125% 30 Solid Waste Management Notes to Financial Statements Continued Schedule of Funding Progress ($ in millions): Actuarial UAAL as a Accrued Percentage Actuarial Actuarial Liability Unfunded of Valuation Value of (AAL) AAL Funded Covered Covered Date Assets Entry Age (UAAL) Ratio Payroll Payroll (a) (b) (b‐a) (a/b) (c) (b‐a/c) 1/1/03 $740.1 $686.8 ($53.3) 107.8% $154.2 (34.6%) 1/1/05 $807.3 $754.3 ($53.0) 107.0% $172.5 (30.7%) 1/1/07 $1,021.3 $895.8 ($125.5) 114.0% $175.0 (71.7%) Annual Pension Cost and Net Pension Obligation. The City’s annual pension costs and net pension obligation to the Retirement System for 2006 were as follows: ($ in millions) Annual Required Contribution (ARC) $ 13.2 Adjustment to ARC ‐ Annual Pension Cost (APC) 13.2 Contributions made 13.2 Increase (decrease) in pension obligation ‐ Net pension obligation ‐ beginning of year ‐ Net pension obligation ‐ end of year $ ‐ Year Annual Net Ending Pension % of APC Pension December 31, Cost (APC) Contributed Obligation 2004 $13.0 100% $ 0 2005 $13.0 100% $ 0 2006 $13.2 100% $ 0 NOTE 7 OTHER POST EMPLOYMENT BENEFITS Plan Description. The City charges some early retirees not yet eligible for Medicare a health premium based on the claims experience of both actives and retirees. Since health claims costs generally increase with age, retiree health premiums would be significantly higher if they were determined without regard to active claims experience. GASB 45 requires that the portion of age‐adjusted expected retiree health claims costs that exceed the premium charged to retirees be recognized as a liability for accounting purposes. Funding Policy. The City uses pay as you go funding; GASB 45 does not require contributions to a separate trust. 31 Solid Waste Management Notes to Financial Statements Continued Annual OPEB Cost and Net OPEB Obligation. The Present Value of Benefits (PVB) is the present value of projected benefits discounted at the valuation interest rate. The valuation interest rate used is 4.00% based upon the expected return for short term fixed income securities. This rate is used as the required contributions net of benefits paid are not prefunded. The Normal Cost is that portion of the City provided benefit attributable to employee service in the current year. The Actuarial Accrued Liability (AAL) is the portion of the present value of benefits attributed to past service only. The Annual Required Contribution (ARC) is the amount the City would be required to report as an expense for the year. The ARC is equal to the Normal Cost plus an amount to amortize the unfunded Actuarial Accrued Liability (AAL). The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. Each year the ARC, less current year benefit payments, will accumulate as a liability, Net OPEB Obligation, on the balance sheet. The following table is a summary of actuarial valuation results as of January 1, 2007. Total membership: Active employees 3,674 Terminated vested employees 247 Retired employees 729 Dependents 184 Total 4,834 Annual Benefit Payments 8,527,863 $ Discount rate 4.00% Present Value of Benefits (PVB) 236,595,810 $ Actuarial Accrued Liability (AAL) 178,137,499 $ Normal Cost 4,949,734 $ Annual Required Contribution (ARC) 14,159,338 $ 32 Solid Waste Management Notes to Financial Statements Continued The following table shows the City’s Net OPEB Obligation broken down by the total value of the benefits provided, the member premiums and the City paid benefits as of December 31, 2007. Value of Subsidy at 4.00% Interest Total Value of Member Paid City Paid Rate Benefits Premiums Benefits Present Value of Benefits (PVB) Active employees $ 233,919,911 $ 128,671,261 $ 105,248,650 Inactive employees 151,028,255 19,681,095 131,347,160 Total $ 384,948,166 $ 148,352,356 $ 236,595,810 Actuarial Accrued Liability (AAL) Active employees $ 94,449,644 $ 47,659,305 $ 46,790,339 Inactive employees 151,028,255 19,681,095 131,347,160 Total $ 245,477,899 $ 67,340,400 $ 178,137,499 Normal Cost 11,155,450 $ $ 6,205,715 4,949,735 $ Annual Benefit Payments 11,074,373 $ $ 2,546,510 8,527,863 $ The following table shows the calculation of the Annual Required Contribution and Net OPEB Obligation for the City and for the Division as of December 31, 2008. Determination of Annual Required Contribution City Division Normal Cost at Year‐end $ 4,949,734 $ 192,184 Amortization of UAAL 9,209,604 60,266 Annual Required Contribution (ARC) $ 14,159,338 $ 252,450 Determination of Net OPEB Obligation Annual Required Contribution (ARC) $ 14,159,338 $ 252,450 Interest on prior year Net OPEB Obligation 225,259 6,951 Adjustments to ARL (318,828) (9,838) Annual OPEB Cost 14,065,769 249,563 Actual benefits paid 9,266,967 103,332 Increase in Net OPEB Obligation 4,798,802 146,231 Net OEPB Obligation ‐ beginning 01/01/2007 5,631,475 173,763 Net OPEB Obligation ‐ ending 12/31/2008 $ 10,430,277 $ 319,994 Funded Status and Funding Progress. The City uses pay as you go funding. 33 Solid Waste Management Notes to Financial Statements Continued The following table shows the annual OPEB costs and net OPEB obligation for three years. Annual OPEB Cost Contributed Net OPEB Obligation Yeard Ended City Division City Division City Division 12/31/2006 N/A N/A N/A N/A N/A N/A 12/31/2007 14,159,338 $ $ 252,450 $ 8,527,863 $ 78,687 5,631,475 $ $ 173,763 12/31/2008 14,065,769 $ $ 249,563 $ 9,266,967 $ 103,332 10,430,277 $ $ 319,994 Actuarial Methods and Assumptions. The actuarial cost method used for determining the benefit obligations is the Entry Age Normal Cost Method. Under the principles of this method, the actuarial present value of the projected benefits of each individual included in the valuation is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit (until maximum retirement age). The portion of the actuarial present value allocated to a valuation year is called the normal cost. The portion of this actuarial present value not provided for at a valuation date by the sum of (a) the actuarial value of the assets, and (b) the actuarial present value of future normal costs is called the Unfunded Actuarial Accrued Liability (UAAL). In determining the Annual Required Contribution, the UAAL is amortized as a level percentage of expected payrolls over 30 years for non‐Law Enforcement Officer and Fire Fighter Retirement Pension System 1 (LEOFF 1) groups; for LEOFF 1, the UAAL is amortized as a level dollar amount over 30 years. Actuarial Methods and Significant Actuarial Assumptions: Valuation Date . . . . . . . . . . . . . . . . . . . . . . January 1, 2007 Census Date . . . . . . . . . . . . . . . . . . . . . . . . . July 31, 2006 Actuarial Cost Method: . . . . . . . . . . . . . . Entry Age Amortization Method: . . . . . . . . . . . . . . . Combination of level percentage and level dollar amount, see note above. Remaining Amortization Period: . . . . . 30 years, open Demographic Assumptions . . . . . . . . . . . Demographic assumptions regarding retirement, disability, and turnover are based upon pension valuations for the various pension plans. Actuarial Assumptions: Discount Rate . . . . . . . . . . . . . . . . . . . . . . 4.0% Health Cost Trend. . . . . . . . . . . . . . . . . . 10.0% in the first year (2007‐8), 9% in the second year, and graded down 1% per year to 5.00% per year in the sixth and beyond. Projected Payroll Increases. . . . . . . . . . 4.0% Eligibility: TERS members are eligible for retiree medical benefits after becoming eligible for service retirement pension benefits (either reduced or full pension benefits): • Age 55 with 10 years of service • 20 years of service 34 Solid Waste Management Notes to Financial Statements Continued Valuation of Retiree Premium: The City uses the same premiums for retirees under age 65 as for active employees. Therefore, the retiree premium rates are being subsidized by the inclusion of actives in setting non‐Medicare retiree rates. For TERS retirees, Regence developed monthly premium levels for 2007 and a projected claims cost per retiree under age 65. 2007 Monthly Projected Claim Value of Retiree Premium Levels Cost per Retiree Premium PPO $ 891.38 $ 1,479.44 $ 588.06 Selections $ 947.37 $ 1,532.44 $ 585.07 NOTE 8 ENVIRONMENTAL LIABILITITES Landfill Closure and Post‐closure Costs. The Division operates a 235 acre landfill site, which became part of the South Tacoma Channel Superfund Site in 1983. In 1991, the City entered a Consent Decree with the United States Environmental Protection Agency (“EPA”) and the Washington State Department of Ecology (“DOE”), reference United States et al v. City of Tacoma US District Court Cause No. C‐89C583T, to clean up the release of hazardous substances at the Landfill. The City completed the remedial actions required by the Consent Decree several years ago. The Consent Decree action was brought under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), and the state Model Toxics Control Act (“MTCA”). The Division elected to assume sole responsibility for the cost and performance of the cleanup to the standards set by EPA and DOE. The Agencies and the City negotiated a settlement of the matter in the form of a consent decree; the decree was approved by the United States District Court for the Western District of Washington in March 1991. Remediation consists of: (1) covering the landfill with a cap of soil, clay and plastic that is impermeable to water; (2) capturing methane gas within and at the landfill perimeter to prevent off‐site migration; (3) pumping and treating ground water to remove contamination beyond property boundaries; (4) closing the landfill over the next 10 to 25 years in accordance with the Tacoma Landfill Cleanup Consent Decree; (5) monitoring of cleanup results over the next 30 years. Initial remedial actions to comply with the consent decree were completed in prior years at a cost of $52.9 million, of which $11.5 million was reimbursed through Washington State DOE grants. State and Federal laws and regulations require the Division to place a final cover on the remaining open cell of its landfill when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for thirty years after closure. Although future closure and post‐closure care costs will be paid only near or after the date the landfill stops accepting waste, the Division began reporting a portion of these future closure and post‐closure care costs as an operating expense in 1994 based on landfill capacity used as of the balance sheet date. The $39,832,714 reported as landfill closure and post‐closure liability at December 31, 2008 represents an estimated closure and post‐closure liability based on 97% use of the total capacity of the landfill. The Division will recognize an additional estimated cost of closure and post‐closure care liability of $2,285,276 as the remaining capacity is filled. These amounts are based on what it would cost to perform all closure and post‐closure care in 2008. Actual costs may be higher or lower due to inflation, changes in technology, or changes in regulations. The Cityʹs permit to operate the landfill is valid through 2009 with one five‐year renewal option based on meeting permitting agency parameters. The City will be responsible for the costs of additional work if migration of pollutants from the site is not completely controlled by current remedial actions. The City expects to operate the landfill through the year 2014. The City satisfies the requirements of 40 CFR Part 258 (f) ʺLocal government financial test.ʺ To meet the previous requirements of State and Federal laws and regulations, annual contributions were made to a reserve for financing closure and post‐closure care. As of December 31, 2008, $2,654,116 is held for these purposes, and is reported as a restricted asset on the balance sheet. 35 Solid Waste Management Notes to Financial Statements Continued NOTE 9 COMMITMENTS AND CONTINGENCIES Long‐term Contract ‐ Land Recovery, Inc. In February 2000, the Division entered into a 20‐year contract with Land Recovery, Inc. (LRI) to dispose of all “acceptable waste” collected or handled by the Division (as that term is defined in the agreement), at the 304th Street landfill operated by LRI. The Division entered into this agreement to extend the life of the Tacoma landfill and to secure a long‐term disposal arrangement at a favorable disposal cost. The agreement excludes solid waste that LRI is not authorized by law or permit to receive, or which could create or expose LRI or the Division to liability. Recycling and/or composting waste is not covered by the agreement. The agreement further provides that LRI shall charge a base rate per ton for disposal services, and that said rate shall decrease as the tonnage increases during each contract year. The agreement also provides that the base rate charged by LRI shall increase annually based on the Seattle‐ Tacoma CPI. In 2006, the rate per ton was increased by LRI to cover their costs of landfill closure liabilities; this change in rates is part of the existing agreement. Long‐term Contract ‐ Pierce County Recycling, Composting and Disposal. In October 2004, the Division entered into a ten (10) year Agreement with Pierce County Recycling, Composting and Disposal (PCRCD), LLC, to accept organic material collected by the City curbside or delivered to the Cityʹs landfill for processing into compost. Under the Agreement, which has two 5‐year renewal options, PCRCD will charge a base rate per ton for the organic waste it receives from the City. This price may be adjusted beginning on the second anniversary of the Agreement, and thereafter annually based on the Seattle‐Tacoma‐Bremerton CPI. The Agreement also includes a revenue sharing component. The Division entered into this Agreement to extend the life of the Tacoma landfill and secure a long‐term composting arrangement at a favorable cost. Grants. Actual grant reimbursements received by the Division are based on total expenditures incurred which are subject to financial and compliance audits. Certain audits for the grants received by the Division have not yet been conducted by the granting agency; therefore, some expenditures may be disallowed. These amounts cannot be determined at this time although the Division expects such amounts, if any, to be immaterial. NOTE 10 LITIGATION Port of Tacoma Gog‐Le‐Hi‐Te Project Claim. On October 16, 2007, the City received a claim by the Port of Tacoma (“Port”) in the amount of $3,750,000 for costs the Port expected to incur handling, removing and disposing of contaminated solid waste during construction of its Gog‐Le‐Hi‐Te II (Phase 1) aquatic habitat project. The project area is located within a historic landfill site used by the City in the 1940s and 1950s to dispose of municipal solid waste. The City and the Port settled this claim in November 2007. Under the terms of the settlement, the City made a $1,500,000 payment to the Port in December 2007 and a final payment of $394,000 in 2008, the Port released the City from liability arising out of its historic use of the Gog‐Le‐Hi‐Te II (Phase 1) project area. Port of Tacoma Lincoln Avenue Grade Separation Project Claim. On January 30, 2009, the Port of Tacoma (“Port”) notified the City that it intends to file a future claim to recover a portion of the costs the Port incurs handling, removing and disposing of contaminated soil and refuse during the construction of its Lincoln Avenue Grade Separation project. The project includes surface street and utility improvements. In its notice, the Port indicated that it expects to encounter contaminated soil and refuse because a portion of its project extends into a historic landfill area used by the City in the 1940s and 1950s to dispose of municipal solid waste. The Port estimates the cost to handle, remove and dispose of contaminated soil and refuse encountered during the Lincoln Avenue project could total around $1.5 million, of which the City’s share would be forty percent. 36 Solid Waste Management Notes to Financial Statements Continued Litigation and Claims. Because of the nature of its activities, the Division is subject to various pending and threatened legal actions, which arise in the ordinary course of business. The Division believes, based on the information presently known, the ultimate liability for any legal actions, individually or in the aggregate, taking into account established accruals for estimated liabilities, will not be material to the financial position of the Division, but could be material to results of operations or cash flows for a particular annual period. No assurance can be given, however, as to the ultimate outcome with respect to any particular claim. 37 (This page intentionally left blank.) 38