Answer the following questions using the attached state's CAFR. 1. Explain the difference among non-spendable, restricted, committed, assigned, and unassigned fund balances. 2. Explain how
Answer the following questions using the attached state's CAFR.
1. Explain the difference among non-spendable, restricted, committed, assigned, and unassigned fund balances.
2. Explain how the balance sheet for the General Fund is different from the Statement of Net Position of the state you are examining. Provide examples of notable differences.
3.On the Statement of Net Position, in the net positionsectionat the bottom of the statement, explain why the majority of the amounts are listed as ?restricted?.
4. On the Cash Flows Statement, is the direct or indirect method being used (per SFAS No. 95)? Does a reconciliation schedule follow the Cash Flows Statement?
5. On the Cash Flows Statement, briefly discuss some of other operating activities (inflows and outflows). For example, if one of the enterprise funds is a lottery, what are the inflows and outflows in the operating area?
6. On the Cash Flows Statement for propriety funds, how does the order of activities reported differ with the order of activities of a for-profit operation?
7. On the Cash Flows Statement, explain how the financing activities section is presented and contrast such reporting with the financing activities? section of a for-profit operation. Provide specific examples in your response.
8. In the Basic Financial Statement section, what are the specific component units of the state government? What are the financial statements that were prepared? List them.
9. In the Basic Financial Statement section, on what page do the Notes to Financial Statements begin and on what page do they? How many disclosure notes are provided? What is the first disclosure note referred to as?How much debt is the state carrying (see disclosure on debt)?
2015 DELAWARE Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2015 Report Issued: December 30, 2015 State of Delaware Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2015 Jack A. Markell Governor Thomas J. Cook Secretary, Department of Finance Kristopher E. Knight, CPA Director, Division of Accounting Prepared by the Department of Finance, Division of Accounting This document and related information is available at http://accounting.delaware.gov/ Acknowledgments The State of Delaware's Comprehensive Annual Financial Report was prepared by the Department of Finance, Division of Accounting, Financial Accounting & Reporting Section: Dawn M. Haw-Young, CPA, CGFM, CICA Assistant Director of Financial Reporting Jane L. Cole, CPA Manager of Financial Reporting & Internal Control Robert C. Johnson, CICA State Accountant V Karen V. Smalls, CFE, CGFM State Accountant V Christine L. Talley, CICA State Accountant IV Scott G. Sipple, Jr., CPA State Accountant IV Christine T. Cosgrove, CICA State Accountant IV Jennifer Thornton, CICA State Accountant III Special appreciation to: All fiscal and accounting personnel throughout the State whose efforts and cooperation to submit accurate, timely financial data for their agencies made this report possible. State of Delaware Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2015 Table of Contents INTRODUCTORY SECTION Letter of Transmittal ............................................................................................................ i Certificate of Achievement for Excellence in Financial Reporting .................................. vii Selected State Officials .................................................................................................... viii Organizational Chart .......................................................................................................... ix FINANCIAL SECTION Independent Auditors' Report..............................................................................................1 Management's Discussion and Analysis .............................................................................4 Basic Financial Statements Government -Wide Financial Statements Statement of Net Position ......................................................................................20 Statement of Activities ...........................................................................................21 Governmental Fund Financial Statements Balance Sheet ........................................................................................................22 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position ...................................................................................23 Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficits) - Governmental Funds ...............................................24 Reconciliation of the Net Changes in Fund Balances Total Governmental Funds to Change in Net Position of Governmental Activities .....................................................................................25 Proprietary Fund Financial Statements Statement of Net Position ......................................................................................26 Statement of Revenues, Expenses, and Changes in Fund Net Position .................27 Statement of Cash Flows .......................................................................................28 Fiduciary Fund Financial Statements Statement of Fiduciary Net Position ......................................................................29 Statement of Changes in Fiduciary Net Position ...................................................30 Table of Contents (continued) Page Component Unit Financial Statements Combining Statement of Net Position ...................................................................31 Combining Statement of Activities ........................................................................32 Notes to the Financial Statements Note 1 - Summary of Significant Accounting Policies .......................................33 Note 2 - Cash, Investments and Restricted Assets ..............................................49 Note 3 - Receivables ...........................................................................................65 Note 4 - Interfund Receivables, Payables and Transfers ....................................67 Note 5 - Deferred Outflows and Inflows of Resources .......................................68 Note 6 - General Obligation Bonds .....................................................................69 Note 7 - Revenue Bonds ....................................................................................72 Note 8 - Loans and Notes Payable ......................................................................81 Note 9 - Lease Commitments ..............................................................................82 Note 10 - Other Long-Term Obligations ..............................................................83 Note 11 - Changes in Long-Term Obligations ......................................................84 Note 12 - No Commitment Debt (Not Included In Financial Statements)............85 Note 13 - Capital Assets ........................................................................................85 Note 14 - Risk Management .................................................................................87 Note 15 - Other Post-Employment Benefits (OPEB) ...........................................88 Note 16 - Pensions ................................................................................................95 Note 17 - Governmental Fund Balance ...............................................................114 Note 18 - Affiliated Organizations ......................................................................116 Note 19 - Commitments ......................................................................................116 Note 20 - Contingencies ......................................................................................116 Note 21 - Restatements .......................................................................................118 Required Supplementary Information Notes to Required Supplementary Information ...................................................121 Budgetary Comparison Schedule - General Fund ...............................................123 Budgetary Comparison Schedule - Special Fund ................................................123 Statutory/Budgetary Reconciliations ..................................................................124 Information About Infrastructure Assets Reported Using the Modified Approach ........................................................................................126 Delaware Public Employees' Retirement System (DPERS) Schedule of Liabilities and Contributions ...................................................128 DelDOT - Delaware Transit Corporations - Pension Data Schedule of Liability and Contributions .........................................................133 OPEB Trust Schedule of Funding Status and Progress ......................................................136 Schedule of Employer Contributions .............................................................136 Table of Contents (continued) Page Delaware Transit Corporation - OPEB Trust Schedule of Funding Status and Progress ......................................................137 Schedule of Employer Contributions .............................................................137 Supplementary Information - Combining Statements Delaware Public Employees Retirement System: Combining Statement of Fiduciary Net Position ............................................139 Combining Statement of Changes in Fiduciary Net Position .........................140 Investment Trust Funds: Combining Statement of Net Position ............................................................141 Combining Statement of Changes in Net Position .........................................142 All Agency Funds: Combining Statement of Changes in Assets and Liabilities........................143 Local School District Funds: Combining Balance Sheet...........................................................144 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ...............................................................................146 STATISTICAL SECTION Statistical Section Index .......................................................................................148 Net Position by Component .................................................................................149 Changes in Net Position .......................................................................................150 Changes in Fund Balances, Governmental Funds ...............................................152 Fund Balances, Governmental Funds ..................................................................154 Personal Income by Industry ...............................................................................155 Personal Income Tax Rates ..................................................................................156 Personal Income Tax Filers and Liability by Income Level ...............................157 Franchise Taxes ...................................................................................................158 Ratios of Outstanding Debt by Type ...................................................................159 Debt Limits ..........................................................................................................160 General Obligation Debt Support ........................................................................161 Pledged Revenue Coverage .................................................................................162 Demographic and Economic Statistics ................................................................163 Principal Employers by Industry .........................................................................164 State Employees by Function...............................................................................165 Operating Indicators by Function ........................................................................166 Capital Assets Statistics by Function ...................................................................167 Capital Asset Balances by Function ....................................................................168 Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards .....................................................169 Introductory Section Comprehensive Annual Financial Report PROFILE OF THE GOVERNMENT The State is located on the eastern seaboard of the United States and is bordered by the Atlantic Ocean, the Delaware Bay and the states of New Jersey, Pennsylvania and Maryland. The State is 96 miles long and has a land area of 1,955 square miles. In 2014, it is estimated that over 935,000 people reside here. As the first state to ratify the United States Constitution on December 7, 1787, The State of Delaware is known as "The First State." The structure of the State's government, which is similar to other states, consists of three branches that operate through a system of checks and balances. The executive branch is comprised of the Governor, Lt. Governor, State Treasurer, State Auditor, Attorney General and Insurance Commissioner. The legislative branch is bicameral and consists of a 21-member Senate and a 41-member House of Representatives. The judicial branch includes the Supreme Court, Superior Court, Court of Chancery, and other courts. The State's reporting entity reflected in the CAFR, which is described more fully in Note 1 to the basic financial statements, conforms to the requirements of GASB Statement No. 61, The Financial Reporting Entity: Omnibus and amendment of GASB Statements No. 14 and No. 34. The objective of this Statement is to improve financial reporting for a governmental financial reporting entity and to better meet user needs and to address reporting entity issues that have arisen since the issuance of Statements No. 14 and No. 34. Consequently, the transmittal letter, MD&A, and the financial statements focus on the primary government and its activities. Although information pertaining to the discretely presented component units is provided, their separately issued financial statements should be read to obtain a complete overview of their financial position. The State budgets and controls its financial activities on the cash basis of accounting during its fiscal year. In compliance with State law, the State records its financial transactions in either of two major categories - the budgetary general fund or budgetary special funds. References to these funds include the terms "budgetary" or "budgetary basis" to differentiate them from the GAAP funds of the same name which encompass different funding categories. GAAP fund definitions for accounting purposes differ from those of the budgetary basis. General and special funds are fully explained in Note 1 to the basic financial statements. The budgetary general fund provides for the cost of the State's general operations and is credited with all tax and other revenue of the State not dedicated to budgetary special funds. All disbursements from the budgetary general fund must be authorized by appropriations of the General Assembly. Budgetary special funds are designated for specific purposes. The appropriate budgetary special fund is credited with tax or other revenue allocated and is charged with the related disbursements. Examples of specific uses of budgetary special funds include the Transportation Trust Fund, which collects some of its revenue through motor fuel taxes and tolls. Federal payments, unemployment compensation and local school funds are examples of nonappropriated special funds. Some special funds, such as the Delaware State Housing Authority and the State Pension Office, contain both appropriated funds for operations and non-appropriated funds for specific programs, such as public housing and pension benefits. ii Federal funds, which are credited to budgetary special funds, are not appropriated, but are subject to the review and approval of the State Office of Management and Budget and the Delaware State Clearinghouse Committee for Federal Aid Coordination. The Committee is comprised of 10 members, including the Secretary of Finance, Director of the Office of Management and Budget, Director of the Delaware Economic Development Office, the Controller General, and six legislators. Budgetary Control and Financial Management Systems Disbursements are controlled by an encumbrance accounting system, via purchase orders, designed to provide information on the actual extent of the State's obligations and guard against over-committing available funds. Appropriations are reduced immediately when purchase orders are issued for goods and services. The total amount of budgetary general fund cash disbursements, plus unliquidated encumbrances, cannot exceed the amount appropriated by the General Assembly for any specific budgetary line items by department. Internal controls prevent State organizations from spending beyond budgetary limits and statutory requirements described in the Budget and Accounting Manual (the BAM), which dictates the process for handling cash, assets, the use of credit cards, payroll procurement, budgeting and approvals over all financial transactions. (See Notes to Required Supplementary Information for more details). The majority of the State's financial transactions are processed through the State's statewide accounting system, which is a comprehensive, enterprise-wide financial system. However, certain special funds have financial activity external to that system, such as the Delaware Transportation Authority, the Delaware State Housing Authority and Delaware State University. This activity is governed in strict adherence to legislative regulations and guidelines established by their boards. In addition, these entities are audited annually and produce published financial reports. Budget Process Each fall, State organizations submit requests for operating and capital funds for the next fiscal year to the Office of Management and Budget and public hearings are held to review the requests. The Governor's proposed operating and capital budgets for the general fund and special funds, including the Transportation Trust Fund, are then drafted and presented by the Governor to the General Assembly in January. The General Assembly's Joint Finance and Bond Bill Committees hold hearings and mark up the Governor's proposed operating and capital budgets. As amended, the budgets are expected to be enacted on July 1. Appropriation Limit The State Constitution limits annual appropriations by majority vote of both houses of the General Assembly to 98% of estimated budgetary general fund revenue plus the unencumbered budgetary general fund balance from the previous fiscal year. An exception to this limit may be made in the event of a declared emergency, with the approval of a three-fifths vote of the members of each house of the General Assembly. No appropriation may be made which exceeds 100% of estimated budgetary general fund revenue plus the unencumbered general fund balance iii from the previous fiscal year. Tax Limitations The State Constitution was amended in May 1980 to limit tax and license fee increases or the imposition of any new taxes or fees to a three-fifths vote of each house of the General Assembly, rather than by a simple majority vote. An exception exists for tax increases to meet debt service on outstanding obligations of the State for which insufficient revenue is available when such debt service is due. Revenue and Expenditure Forecasting The Delaware Economic and Financial Advisory Council (DEFAC), an entity created by executive order in 1977, is comprised of 33 members from the executive and legislative branches of State government and the private sector, as appointed by the Governor. DEFAC submits revenue and expenditure forecasts for the Budgetary General Fund and the Transportation Trust Fund to the Governor and the General Assembly regularly throughout the fiscal year. These forecasts are meant to ensure compliance with State constitutional limits on spending authority so future expenditures do not exceed expected revenues. In addition, revenue forecasts near year-end for the next fiscal year are utilized to calculate the corresponding statutory debt limits. DEFAC prepares revenue estimates six times each fiscal year in September, December, March, April, May and June for the current fiscal year and the succeeding two fiscal years. A revenue forecast for the current fiscal year and the succeeding four fiscal years is generated once each year, generally in September. In addition, budgetary general fund and transportation trust fund expenditure forecasts are generated for the current fiscal year in September, December, March, April, May and June. Additionally, DEFAC advises the Governor and General Assembly on economic conditions in the State and advises the Governor and the Secretary of Finance on tax policy. An independent, in-depth review of the State's revenue portfolio recently recommended changes to certain of the State's tax policy and a recently formed expenditure review committee will look for state-wide cost cutting measures. DEFAC meetings, as well as meetings of the revenue and expenditure review committees, are open to the public and provide a forum for members of the public and private sectors to exchange views on matters of economic and fiscal concern for the State. ECONOMIC CONDITION AND OUTLOOK Delaware's recent economic performance has largely mirrored national trends in terms of employment and income growth. The State's average unemployment rate for calendar year 2014 fell to 5.7% from 6.7% in calendar year 2013 comparing favorably to the nation and to the Mid-Atlantic region both at 6.2%. Positive job gains in the professional business services, financial services, and construction sectors bode well for the State's medium term employment outlook. In addition, Delaware's per capita personal income is expected to align with the nation over the next two years, helped by the job outlook and strong levels of in-migration. The Federal iv Reserve Bank of Philadelphia's leading index for the State suggests expansion in the state's economy into the first quarter of 2016. As a result of active economic development policies, Delaware's economy is now based in large part on service-providing enterprises, especially financial activities. Delaware has targeted statutory and tax policy changes to encourage financial sector development and the State's major employers, Bank of America, N.A., JPMorgan Chase & Co., Barclays Bank Delaware and Capital One, continue to maintain a major presence in the State and demonstrate the State's importance as a financial center. In the short and medium terms, Delaware's financial sector is expected to benefit from a rebound in the credit card industry as a result of improving consumer fundamentals, a steady U.S. economic recovery, and rising demand for credit card borrowing. Although less reliant on manufacturing, the State has made important strides to reinvigorate and modernize its manufacturing base. For example, the site of the former Chrysler plant was purchased by the University of Delaware to pursue science, technology & advanced research. The \"STAR\" campus now houses a health sciences complex dedicated to advanced healthcare research, education and delivery. Future development will focus on leading research in health care, cyber security and alternative energy. To enhance its position in an increasingly competitive gaming market and to increase employment across the State, Delaware diversified its gaming portfolio to include sports betting and Keno at multiple retail venues and, in fiscal 2016, will have over 100 retail outlets available to players. Since i-gaming was introduced in 2013, Delaware and Nevada created the Multi-State Internet Gaming Agreement allowing poker players to participate in regulated multi-jurisdictional online poker rooms. Delaware continues to explore additional multistate compacts for online gaming as well as additional gaming offerings and launched mobile i-gaming in time for the summer 2015 tourist season. Through strategic investment, the State continues to pursue high technology industries, including life sciences research and development, pharmaceuticals, agricultural biotechnology, human biotechnology, information technology and, more recently, alternative energy and other green industries. The State has made a significant investment to establish the Delaware Biotechnology Institute, a partnership involving State government, the State's higher education institutions and the private sector. The Institute is designed to expand the State's scientific base and create opportunities for the development of new technologies in the emerging life sciences field. Delaware's business-friendly legal system continues to attract new incorporations. Even though initial public offering (\"IPO\") activity has not reached pre-Recession levels, the State has continued to register a record number of business formations in the form of limited liability companies and limited partnerships. At the end of calendar year 2014, the number of new business entities that were formed in Delaware rose to 16,140, bringing the total number of business entities registered in the State to more than 1,114,000 business entities. v vi vii State of Delaware Selected State Officials As of June 30, 2015 KEY ELECTED OFFICIALS: Governor Lt. Governor Attorney General State Treasurer Auditor of Accounts Insurance Commissioner Jack A. Markell Vacant Matthew Denn Ken Simpler R. Thomas Wagner, Jr. Karen Weldin Stewart KEY LEGISLATIVE OFFICIALS: President Pro Tem of the Senate Senate Majority Leader Senate Minority Leader Speaker of the House of Representatives House of Representatives Majority Leader House of Representatives Minority Leader Patricia M. Blevins David B. McBride F. Gary Simpson Peter C. Schwartzkopf Valerie Longhurst Daniel B. Short CABINET POSITIONS AND OTHER APPOINTED OFFICIALS: Agriculture Correction Delaware Economic and Development Office Delaware State Housing Authority Education Finance Health and Social Services Labor Delaware National Guard Natural Resources and Environmental Control Office of Management and Budget Safety and Homeland Security Services for Children, Youth and Their Families State Technology and Information Transportation W. Edwin Kee, Jr. Robert Coupe Bernice Whaley Anas Ben-Addi Mark Murphy Thomas J. Cook Rita M. Landgraf John McMahon (Major General) Frank D. Vavala David Small Ann S. Visalli Lewis D. Schiliro Jennifer Ranji Jeffrey W. Bullock James Collins Jennifer Cohan viii State of Delaware Oranizational Chart Citizens of Delaware Judiciary (1) Lieutenant Governor Auditor of Accounts Insurance Commissioner Governor General Assembly Higher Education Treasurer Attorney General Public Defender Executive Finance National Guard Correction Labor Health & Social Services Office of Mgt. & Budget Children, Youth & Their Families Agriculture Natural Resources & Environmental Control State Transportation Education Safety and Homeland Security Principal Boards and Commissions Technology and Information - Board of Education - Elections - Exceptional Citizens - Fire Prevention (1) Judiciary - All Judges are appointed by the Governor with the consent of the Senate. ix - Health Care - Interstate Cooperation - Parole - State Banking Financial Section Comprehensive Annual Financial Report CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS' REPORT The Honorable Governor and Honorable Members of the State Legislature State of Delaware Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the businesstype activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the State of Delaware (the State), as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the State'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. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of certain agencies and component units of the State of Delaware, which represent the indicated percent of total assets and deferred outflows of resources, total net position and fund balance, and total revenues as presented in the table below. Those financial statements were audited by other auditors, whose reports thereon have been furnished to us, and our opinion, insofar as it related to the amounts included for those funds and component units, is based solely on the reports of the other auditors. Percentage Audited by Other Auditors Governmental Activities Business-type Activities Discretely Presented Component Units General Fund Lottery Fund DelDOT Fund Aggregate Remaining Fund Information An independent member of Nexia International Assets and Deferred Outflows of Resources 0% 98% 100% 1% 100% 100% 95% Revenues 0% 91% 100% 0% 100% 100% 74% Net Position/ Fund Balance 27% 98% 100% 3% 100% 100% 97% 1 The Honorable Governor and Honorable Members of the State Legislature State of Delaware 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 by the 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. The financial statements of Delaware Sustainable Energy Utility, Delaware Public Employees' Retirement System, Delaware State University and the Riverfront Development Corporation of Delaware were not audited in accordance with Government Auditing Standards, issued by the Comptroller General of the United States. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' 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 entity'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 statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the State of Delaware as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter Change in Accounting Principles During fiscal year ended June 30, 2015, the State adopted GASB Statement No. 68, Accounting and Financial Reporting for Pensions and the related GASB Statement No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Datean amendment of GASB Statement No. 68. As a result of the implementation of these standards, the State reported a restatement for the change in accounting principle (see Note 21). Our auditors' opinion was not modified with respect to the restatement. Correction of Errors As described in Note 21 to the financial statements, the State restated beginning balances resulting from the correction of accounting errors that occurred in the prior period. Our opinion is not modified with respect to that matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and required supplementary information as listed in the accompanying table of contents (collectively referred to as RSI) be presented to supplement the basic 2 The Honorable Governor and Honorable Members of the State Legislature State of Delaware 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 and other auditors 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 State of Delaware's basic financial statements. The introductory section, supplementary information and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information, as listed in the table of contents, is the responsibility of management and was 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, based on our audit and the report of other auditors, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section and statistical section has 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 provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 28, 2015, on our consideration of the State's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 result 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 the State's internal control over financial reporting and compliance. a CliftonLarsonAllen LLP Baltimore, Maryland December 28, 2015 3 STATE OF DELAWARE Management's Discussion and Analysis The following is a discussion and analysis of the State of Delaware's (the State's) financial activities as of and for the fiscal year ended June 30, 2015. Readers are encouraged to consider the information presented here in conjunction with additional information that is furnished in the letter of transmittal, which can be found on pages i-vi of this report, and the State's financial statements, which follow this section. These financial statements have been prepared using the financial accounting model adopted by the Governmental Accounting Standards Board (GASB). Financial Highlights The assets and deferred outflows of resources of the State exceeded its liabilities and deferred inflows of resources at the close of the most recent fiscal year by $3,650.9 million (net position). Discretely presented component units reported a net position of $1,132.1 million, an increase of $41.6 million from the previous year as restated, resulting from the implementation of GASB 68 and conformance with other GASB pronouncements. As a result of its operations, the primary government's total net position increased by $54.9 million (1.5%) in fiscal year 2015 when compared to the previous year's ending net position as restated with the implementation of GASB 68. Net position of governmental activities decreased by $125.0 million (45.5%) from the previous year, while net position of the business-type activities increased $179.9 million (5.4%) from the previous year. The State's governmental funds reported combined ending fund balances of $1,975.0 million, an increase of $63.0 million (3.3%) in comparison with the prior year balance. The general fund reported unassigned fund balance of $763.2 million which was 16.3% of total general fund expenditures. The State's total general obligation debt increased $50.0 million (2.7%) during fiscal year 2015 to $1,875.4 million. Of the State's outstanding general obligation debt, $533.5 million (28.4%) has been issued on behalf of local school districts, which is supported by the property tax revenues of those districts. In addition, the State has $914.3 million in outstanding revenue bonds with $52.9 million for energy conservation projects and $861.4 million for transportation projects. The State's adoption of GASB No. 68 requires additional disclosures of pension information. The implementation of GASB No. 68 resulted in a prior period adjustment to the net position of $1,085.8 million for the primary government. This is comprised of the Net Pension Liability of $1,283.0 million, offset by the Deferred Outflows of Reources for contributions made during fiscal year 2014 of $197.2 million. Additional information for the pension can be found in Note 16 of the financial statements. 4 State of Delaware Management's Discussion and Analysis, June 30, 2015 Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the State's basic financial statements. The State's basic 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 contains additional required supplementary information and other supplementary information, in addition to the basic financial statements. Government-Wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the State's operations, in a manner similar to a private sector business. The statement of net position reports the difference between the State's assets, deferred outflows of resources, liabilities, and deferred inflows of resources as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the State is improving or deteriorating. The statement of activities presents information showing how the State's net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event that created the change occurs, regardless of the timing of related cash flows. As a result, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Both of the government-wide financial statements distinguish functions of the State that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the State include general government, health and children's services, judicial and public safety, natural resources and environmental control, labor and education. The business-type activities of the State include transportation, lottery and unemployment services. The government-wide financial statements include not only the State (known as the primary government), but also legally separate entities for which the State is financially accountable (discretely presented component units). These entities include the Delaware State Housing Authority, the Diamond State Port Corporation, the Riverfront Development Corporation, the Delaware State University, the Delaware Agricultural Lands Preservation Foundation and 24 charter schools (31 charter schools have been approved by the State but 7 were not operating during fiscal year 2015). Financial information for these component units is reported separately from the financial information presented for the primary government. The government-wide financial statements can be found on pages 20 - 21 of this report. 5 State of Delaware Management's Discussion and Analysis, June 30, 2015 Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The State, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The State's funds can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. - Governmental Funds Governmental Funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, the governmental fund financial statements focus on near-term inflows and outflows of available resources, as well as on balances of available resources on hand at the end of the fiscal year. Such information may be useful in evaluating a government's nearterm financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for government funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term financial decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The State's governmental funds include the general, federal, local school district, and capital projects funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balance (deficit) for these funds. The basic governmental funds financial statements can be found on pages 22 - 25 of this report. The combining schedule for the local school districts that reflects the local school district fund can be found on pages 144 - 147 of this report. The State budgets and controls its financial activities on the cash basis of accounting. In compliance with State law, the State records its financial transactions in either of two major categories - the General Fund or the Special Fund. References to these funds in this report include the terms \"budgetary\" or \"budgetary basis\" to differentiate them from the GAAP funds of the same name which encompass different funding categories. The State adopts an annual appropriated budget for its budgetary general fund and special fund. A budgetary comparison schedule has been provided for the budgetary general fund and special fund to demonstrate compliance with the budget. The schedules can be found on page 123 of this report. 6 State of Delaware - Management's Discussion and Analysis, June 30, 2015 Proprietary Funds Proprietary Funds charge customers for the services they provide - whether they are provided to outside customers (enterprise funds) or other State agencies and other governments (internal service funds). Proprietary Funds provide the same type of information as the government-wide financial statements, but in more detail. The proprietary fund financial statements provide separate information for the Lottery, Unemployment Insurance Trust Fund and the Delaware Department of Transportation (DelDOT), all of which are considered to be major funds of the State. The basic proprietary fund financial statements can be found on pages 26 - 28 of this report. - Fiduciary Funds The State acts as a fiduciary to account for resources held for the benefit of parties outside the government. Fiduciary Funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the State of Delaware's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. These funds are used where the State holds assets in trust or as an agent for others, including the pension trust funds and agency funds. The basic fiduciary fund financial statements can be found on pages 29 - 30 of this report. The combining fiduciary and agency fund statements can be found on pages 139 - 143. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 33 - 119 of this report. Required Supplementary Information In addition to the basic financial statements and accompanying notes, this report presents certain Required Supplementary Information (RSI) concerning the status of the State's legally adopted budget, the maintenance of the State's infrastructure and additional schedules related to funding status and progress, annual pension costs and actuarial methods and assumptions for the State's pension and OPEB trusts. The RSI can be found on pages 121 - 137 of this report. Statewide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government's financial position. The State's assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $3,650.9 million at the close of the most recent fiscal year. The largest portion of the State's net position of 142.7% reflects its investment in capital assets (e.g., land, buildings, vehicles, and equipment) less any related outstanding debt used to acquire those assets. The State uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the State's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to 7 State of Delaware Management's Discussion and Analysis, June 30, 2015 liquidate these liabilities. Restricted net position, comprising 26.3% of total net position, represents resources that are subject to external restrictions, constitutional provisions, or enabling legislation on how they can be used. The remaining portion of the State's net position represents the unrestricted deficit net position (69.0%). Condensed Financial Information - Primary Government As of June 30, 2015 (Expressed in Thousands) Assets: Non-capital Assets Capital Assets $ Governmental Activities 2015 2014 Business-type Activities 2015 2014 2,902,212 3,716,412 2,793,638 3,752,433 489,973 4,321,292 $ $ 507,395 4,272,307 Total 2015 $ 3,392,185 8,037,704 2014 $ 3,301,033 8,024,740 Total Assets 6,618,624 6,546,071 4,811,265 4,779,702 11,429,889 11,325,773 Deferred Outflows of Resources 191,069 - 29,645 22,823 220,714 22,823 5,183,775 913,974 4,318,891 885,076 1,078,635 218,128 1,142,790 276,318 6,262,410 1,132,102 5,461,681 1,161,394 Total Liabilities 6,097,749 5,203,967 1,296,763 1,419,108 7,394,512 6,623,075 Deferred Inflows of Resources 562,296 17,995 42,911 19,574 605,207 37,569 Liabilities: Long-term Liabilities Outstanding Other Liabilities Net Position: Net Investment in Capital Assets Restricted Unrestricted Deficit Total Net Position * $ 1,764,526 745,852 (2,360,730) 149,648 1,808,658 728,406 (1,212,955) $ 1,324,109 3,445,879 212,681 (157,324) $ 3,501,236 3,267,409 161,483 (65,049) $ 3,363,843 5,210,405 958,533 (2,518,054) $ 3,650,884 $ 5,076,067 889,889 (1,278,004) 4,687,952 The State implemented GASB Statement No. 68 during fiscal 2015. The provisions of GASB Statement No. 68 required the State to record its net pension liability (asset) and deferred outflows of resources and deferred inflows of resources related to the pension liability. The net pension liability in excess of the deferred contributions was expensed resulting in the restatement of the State's net position as of July 1, 2014. In addition, there was a correction of an error for a prior period understatement of the tax refund liability in the Unemployment Insurance Fund. Fiscal 2014 amounts for governmental and business-type activities reported above have not been restated to reflect this change in accordance with the standard. The capital assets of the governmental activities decreased by $36.0 million (1.0%) since June 30, 2015. The decrease is the result of completing or discontinuing prior year construction projects in process with limited new construction projects begun, along with the current year depreciation expense. The increase in governmental activities non-capital assets is due to an increase in cash and investments with increased collections of personal and corporate income tax revenues. The increase in governmental activities long-term liabilities outstanding of $864.9 million (20.0%) is primarily due to the recording of the net pension liability of $703.3 million and an increase in the other post-employment benefits liability and general obligation bonds. The State implemented GASB 68 which required recording the net pension liability, which is the difference between the pension assets and the actuarially determined liability. At June 30, 2015, 8 State of Delaware Management's Discussion and Analysis, June 30, 2015 the long-term obligation for OPEB was $2,058.2 million, an increase of $176.1 million (9.4%) from fiscal year 2014. The OPEB obligation will increase each year as the State continues to defer full funding of its annual required contribution. The implementation of GASB 68 also required recording deferred outflows of resources and deferred inflows of resources related to the pension liability. Deferred outflows of resources were recorded in the amount of $200.3 million, largely for the pension contributions made subsequent to the measurement date of June 30, 2014. Deferred inflows of resources were recorded in the amount of $566.3 million mostly for the differences between the projected and actual investment earnings on the pension plan assets. In addition, the general obligation long term debt increased by $50.0 million (2.7%) from fiscal year 2014. The State's debt as a percentage of the State's personal income was 7.1% in fiscal year 2014 and 6.8% in fiscal year 2015. The State's debt burden reflects its centralized role in financing facilities, such as schools and prisons. The following condensed financial information is derived from the government-wide Statement of Activities and reflects the changes in net position during the fiscal year: Changes in Net Position - Primary Government For Year End June 30, 2015 (Expressed in Thousands) Governmental Activities 2015 2014 Revenues: Program Revenues: Charges for Services Operating Grants and Contributions Capital Grants and Contributions General Revenues: Taxes: Personal Income Taxes Business Taxes Real Estate Taxes Other Taxes Investment Income (Loss) Miscellaneous Total Revenues Expenses: General Government Health and Children's Services Judicial and Public Safety Natural Resources and Environmental Control Labor Education Interest Expense Lottery Transportation/DelDOT Unemployment Total Expenses Increase (Decrease) in Net Position Before Transfers Transfers Increase (Decrease) in Net Position Net Position - Beginning of Year As Restated Net Position - End of Year $ 534,246 $ $ 537,503 $ 1,245,535 $ Total Primary Government 2015 2014 1,201,749 $ 1,779,781 $ 1,739,252 2,076,241 1,953,254 234,092 43,760 2,310,333 1,997,014 - - - 210,985 - 210,985 1,140,248 2,291,067 552,215 224,842 10,511 13,654 6,843,024 1,040,341 2,061,007 537,395 232,017 14,192 28,878 6,404,587 2,213 1,481,840 2,375 1,458,869 1,140,248 2,291,067 552,215 224,842 12,724 13,654 8,324,864 1,040,341 2,061,007 537,395 232,017 16,567 28,878 7,863,456 572,708 683,643 - - 572,708 683,643 3,007,367 718,645 2,850,068 705,218 - - 3,007,367 718,645 2,850,068 705,218 172,886 73,155 2,612,590 60,557 7,217,908 134,294 68,997 2,482,569 59,747 6,984,536 358,907 624,452 68,699 1,052,058 344,389 606,738 110,063 1,061,190 172,886 73,155 2,612,590 60,557 358,907 624,452 68,699 8,269,966 134,294 68,997 2,482,569 59,747 344,389 606,738 110,063 8,045,726 (374,884) 249,896 (124,988) * Business-type Activities 2015 2014 274,636 149,648 (579,949) 215,006 (364,943) $ 1,689,052 1,324,109 429,782 (249,896) 179,886 $ 3,321,350 3,501,236 397,679 (215,006) 182,673 $ 3,181,170 3,363,843 54,898 54,898 $ 3,595,986 3,650,884 (182,270) (182,270) $ 4,870,222 4,687,952 The State implemented GASB Statement No. 68 during fiscal 2015. The provisions of GASB Statement No. 68 required the State to record its net pension liability (asset) and deferred outflows of resources and deferred inflows of resources related to the pension liability. The net pension liability in excess of the deferred contributions was expensed resulting in the restatement of the State's net position as of July 1, 2014. In addition, there was a correction of an error for a prior year understatement of the tax refund liability in the Unemployment Insurance Fund. Fiscal 2014 amounts for governmental and business-type activities reported above have not been restated to reflect this change in accordance with the standard. 9 State of Delaware D Mana agement's D Discussion an nd Analysis,, June 30, 2015 Governm mental Activ vities Since fisscal year 20 014, the net position fo or governmeental activitiies has decrreased by $125.0 million. A compariso on of the cost of servicees by functioon for the Sttate's governnmental activvities is shown n in the follo owing chart,, along with the revenuees used to ccover the nett expenses oof the governm mental activiities. Key elements e off the decreease in the State's neet position from governm mental activitiies are as folllows: Total gen neral revenu ues of goverrnmental acctivities increeased overaall by $318.77 million (88.1%) relating to t increases in personal income taxees of $99.9 million (9.66%), increasee in business and other tax xes of $230.1 1 million (11 1.2%), and in ncreases in rreal estate taaxes of $14.8 million (2.8%). The increease in personal incomee tax revenu ues was attriibutable to inncreased taxxable wages with increasess in statewid de employm ment and the increase inn business taaxes was duue to increasses in corporatee tax and lim mited partnership collecttions with c ontinued im mprovements in the econnomy. The incrrease in real estate tax revenues is the resultt of increaseed millage rates along with increased d assessmentts from new construction n due to new w developmeents. Program revenues in ncreased by $119.7 milliion (4.8%) ffrom the prior year due to an increaase in operating g grants of $123.0 million (6.3%). Health andd Childrens Services recceived addittional funding of o $136.9 miillion (8.9%)) due largely y to increaseed Medicaid funds. Educcation chargees for services increased $6 63.6 million n while the General G Govvernment chharges for seervices decreeased by $60.4 4 million wh hich was thee result of a shift in the revenues too Education. The remaaining increase in Education n resulted frrom increaseed tuition annd fees relateed to the Delaware Techhnical and Com mmunity Colllege. Revenuees by Sourcee - Governm mental Activvities Operatting Grants and d Co ontributions 30.3% Investment Earrning .2% Misscellaneous .2% Perssonal Income TTax 16.7% Oth her Taxes 3.3% Charges for Ser C rvices 7.8% Real Estate Taaxes 8.1% Business Taxes 33.4% Expen nses for gov vernmental activities, not n includingg interest oon long-term m debt, increeased during fiscal yearr 2015 by $2 232.6 millio on (3.4%). T The increase in governm mental activitties is 10 State of Delaware Management's Discussion and Analysis, June 30, 2015 due to the increased spending of $130.0 million (5.2%) for Education, $157.3 million (5.5%) for Health and Children's Services and $38.6 million (28.7%) for Department of Natural Resources and Environmental Control. Expenses decreased for General Government by $110.9 million (16.2%). Health and Children's Services increased as a result of a general increase in the population served and rising health care costs. Education increased due to additional costs for salaries and benefits with the rising student population, DNREC increased due to additional projects and personnel costs, and General Government expenses decreased as a result of cost containment measures implemented during fiscal year 2015. Expenses and Program Revenues- Governmental Activities (Expressed in Thousands) $3,500,000 Expenses 2015 $3,000,000 Expenses 2014 $2,500,000 Program Revenues 2015 Program Revenues 2014 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 General Government Health and Children's Services Judicial and Public Safety Natural Resources and Environmental Control Labor Education Interest on Long-Term Debt Business-type Activities The net position for business-type activities increased by $179.9 million (5.4%) in fiscal year 2015. This increase is comprised of a $115.2 million (3.5%) increase in net position for DelDOT plus a $64.7 million increase in the Unemployment Insurance Trust Fund. The increase of $64.7 million in fiscal year 2015 compared to an increase of $31.7 million in fiscal year 2014, as restated for the Delaware Unemployment Insurance Trust Fund net position is due to a decreased demand for benefits paid by the Trust Fund. The operating revenues (charges for services and operating grants) increased by $18.4 million (16.4%) and operating expenses decreased by $39.8 million (36.7%) due to decreases in the federally funded unemployment benefits and as a result of improvements in the economy with less individuals unemployed and collecting benefits. DelDOT's net position at June 30, 2015 increased by $115.2 million from June 30, 2014. Change in net position decreased from $144.8 million in fiscal year 2014 to $115.2 million in fiscal year 2015. DelDOT's total operating revenues increased by $26.2 million (5.4%) while operating expenses increased by $32.8 million (5.8%). The change in revenue is primarily attributable to an increase in toll revenues and an increase in motor vehicle fees a result of continued strong auto sales. The increase in operating expenditures is primarily a result of increases in professional fees and materials and supplies. Total capital assets (net 11 State of Delaware D Mana agement's D Discussion an nd Analysis,, June 30, 2015 of depreciation n) increased d $49.0 milllion to $4,321.3 millioon during ffiscal year 2015 prim marily due to o the compleetion of the SR-1/I-95 S innterchange nnear the Chriistiana Mall. Theere was no change c in thee Lottery's net n position. By law, the Lottery's neet position caannot excceed $1.0 miillion. The overall o lotterry revenue ffor fiscal 2015 saw a slight increasee over 201 14 by $1.0 million m or leess than 1%. The videoo net proceedds showed a $5.9 millioon, or 1.6%, decline from f 2014 to t 2015. Th he table gam mes also show w a decline in revenue from 201 14 to 2015 of o $1.0 milliion. The deeclines weree offset by ccontinued inccreases in innstant gam mes sales rep porting anoth her record saales year. Thee Lottery traansferred $2 243.0 million n in gamingg revenues tto the State, a decrease from fisccal year 2014 4 of $13.5 million m (5.3% %). The totaal costs of gaames and prizes increaseed by $14 4.8 million (4 4.5%) over the t previous year due to a cost sharee increase forr lottery venndors. Revenuees by Sourcee - Businesss-type Activvities Ope erating and Capiital Gran nts and Contributtions 15.9% C Charges for Serv vices 84.1% Expenses and Program P Reevenues - Bu usiness-typee Activities $800,000 Expenses 2015 5 $700,000 Expenses 2014 4 Program Reven nues 2015 $600,000 Program Reven nues 2014 $500,000 $400,000 $300,000 $200,000 $100,000 $0 DelDOT Unemploymentt Lottery 12 State of Delaware Management's Discussion and Analysis, June 30, 2015 Financial Analysis of the State's Funds As noted earlier, the State uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental Funds The focus of the State's governmental funds is to provide information on near-term inflows, outflows, and balances of available resources. Such information is useful in assessing the State's financing requirements. Unassigned fund balances may serve as a useful measure of a government's net resources at the end of the fiscal year. Fund balance classifications comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in the governmental funds. This is further described in note 1 and note 17 of the basic financial statements. As of the end of the current fiscal year, the State's governmental funds reported combined ending fund balances of $1,975.0 million, an increase of $63.0 million over the prior year fund balance. Of this amount, $281.3 million is nonspendable (14.2%), either due to its form or legal constraints, $654.5 million (33.1%) is restricted for specific programs by external constraints and $193.0 million (9.8%) is committed for specific purposes pursuant to constraints imposed by a formal action of the Delaware Legislature. An additional $83.0 million (4.2%) has been assigned to specific purposes by management. The remaining $763.2 million (38.7%) of fund balance is unassigned. General Fund The General Fund accounts for the operation and administration of the State. The fund balance increased by $11.4 million for the fiscal year. Total General Fund revenues increased by $349.5 million (8.8%) which was primarily due to several factors. Personal income and business taxes increased by $99.9 million and $229.1 million, respectively, which was due to increased enforcement efforts, increased taxable wages and an increase in business profits. These increases were offset by a decrease in other revenue of $32.0 million. Total General Fund expenditures increased by $107.9 million (2.4%). This was primarily due to increases Health and Children's Services of $47.2 million and Education of $23.9 million. The inc