Detroit: The Case of Bankruptcy of a City Government

Reviewthe attached case study.

• Describe and discuss five major factors that have led to the city's bankruptcy.
• How are the problems specifically related to our class contents?
• How much total liabilities did the city have before and after the bankruptcy? What are the major types of liabilities?
• Both the governmental funds and enterprise funds have deficits (the difference between assets and liabilities is negative). How can you explain this, and what has the city done to improve these cumulative deficits?
• Did Detroit show any internal service funds and were they accounted for in the general or governmental funds? Did any of the internal service funds report significant operating surpluses or deficits for the year?
• Are there other observations and comments for the city that you would like to present?

Submita 525-word summary of the findings.

City of Detroit, Michigan For the Fiscal Year Ended June 30, 2012 Dave Bing, Mayor Jack Martin, Chief Financial Officer \"We hope for better things.\" \"It shall rise again from the ashes.\"\" FOUNDED 1701 INCORPORATED 1806 AREA (Square Miles) 137.9 POPULATION 713,777 City of Detroit Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2012 Dave Bing, Mayor TABLE OF CONTENTS Page I. INTRODUCTORY SECTION LETTER OF TRANSMITTAL AUDITOR GENERAL'S LETTER GFOA CERTIFICATE OF ACHEIVMENT LIST OF CITY OF DETROIT PRINCIPAL OFFICIALS CITY OF DETROIT ORGANIZATION CHART II. FINANCIAL SECTION INDEPENDENT AUDITOR'S REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) (UNAUDITED) BASIC FINANCIAL STATEMENTS: A. GOVERNMENT-WIDE FINANCIAL STATEMENTS: Statement of Net Assets Statement of Activities B. FUND FINANCIAL STATEMENTS: Governmental Funds Financial Statements: Balance Sheet Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Statement of Revenues, Expenditures, and Changes in Fund Balances Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Proprietary Funds Financial Statements: Statement of Net Assets Statement of Revenues, Expenses, and Changes in Fund Net Assets Statement of Cash Flows Fiduciary Funds Financial Statements: Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets Component Units Financial Statements: Combining Statement of Net Assets Combining Statement of Activities C. NOTES TO BASIC FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION: A. BUDGET TO ACTUAL COMPARISON - GENERAL FUND: Notes to Budget to Actual Comparison Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund B. EMPLOYER CONTRIBUTIONS AND FUNDING PROGRESS: Schedules of Funding Progress Schedules of Employer Contributions i I-1 I-4 I-5 I-6 I-9 2 7 41 42 44 46 47 48 50 54 56 60 61 62 64 68 139 140 145 146 TABLE OF CONTENTS Page OTHER SUPPLEMENTARY INFORMATION SECTION: A. COMBINING NON-MAJOR GOVERNMENTAL FUNDS FINANCIAL STATEMENTS: Other Governmental Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Special Revenue Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Street Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Permanent Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures, and Changes in Fund Balances B. OTHER GOVERNMENTAL FUNDS BUDGETARY COMPARISON SCHEDULES: Special Revenue Funds Debt Service Fund Capital Projects Fund C. FIDUCIARY FUNDS: Combining Statement of Fiduciary Net Assets Combining Statement of Changes in Fiduciary Net Assets D. AGENCY FUNDS: Combining Statement of Assets and Liabilities Combining Statement of Changes in Assets and Liabilities 181 182 III. STATISTICAL SECTION (UNAUDITED) Description of Statistical Section Schedule 1 - Net Assets by Component, Last Ten Fiscal Years Schedule 2 - Changes in Net Assets, Last Ten Fiscal Years Schedule 3 - Fund Balances, Governmental Funds, Last Ten Fiscal Years Schedule 4 - Changes in Fund Balances of Governmental Funds, Last Ten Fiscal Years Schedule 5 - Assessed and Actual Value of Taxable Property, Last Ten Fiscal Years Schedule 6 - Direct and Overlapping Property Tax Rates, Last Ten Fiscal Years Schedule 7 - Principal Property Tax Payers, Current Year and Nine Years Ago Schedule 8 - Property Tax Levies and Collections, Last Ten Fiscal Years Schedule 9 - Ratios of Outstanding Debt by Type, Last Ten Fiscal Years Schedule 10 - Ratios of General Bonded Debt Outstanding, Last Ten Fiscal Years Schedule 11 - Direct and Overlapping Governmental Activities Debt as of June 30, 2012 Schedule 12 - Legal Debt Margin Information, Last Ten Fiscal Years Schedule 13 - Pledged Revenue Coverage, Last Ten Fiscal Years Schedule 14 - Demographic and Economic Statistics, Last Ten Calendar Years Schedule 15 - Principal Employers, Current Year and Nine Years Ago Schedule 16 - Full-time Equivalent City Government Employees by Function/Program, Last Ten Fiscal Years Schedule 17 - Miscellaneous Operating Indicators by Function/Program, Last Ten Fiscal Years 185 186 188 192 194 196 198 200 202 204 206 209 210 213 215 216 219 220 PHOTO CREDITS All photographs courtesy of City of Detroit - Communications and Creative Services Department ii 152 153 154 156 158 159 160 161 162 174 175 178 180 City of Detroit OFFICE OF THE AUDITOR GENERAL 2 WOODWARD AVENUE, SUITE 208 Detroit, Michigan 48226 PHONE: (313) 224-3101 FAX: (313) 224-4091 www.dctroitmi.!lov Mark W. Lockridge DEPUTY AUDITOR GENERAL AUDITOR GENERAL'S LETTER December 28, 2012 The Honorable Mayor Dave Bing And Members of the City Council City of Detroit, Michigan The basic financial statements included in the City's Comprehensive Annual Financial , under contract Report for the fiscal year ended June 30, 2012, were audited by KPMG LLP., with the City of Detroit's, Office of the Auditor General. The audit of these financial statements and the resulting Auditors' opinion satisfies the requirements of the City Charter under Section 4-205. Mark W. Lockridge Deputy Auditor General I-4 Certificate of Achievement for Excellence in Financial Reporting Presented to City of Detroit Michigan For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2011 A Certificate of Achievement for Excellence in Financial Rep01ting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual fmancial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. -w ~ ~ ~ J .F) _J-~~ #4 ~rr~~ /J.IJ. ... I . President Executive Director I-5 PRINCIPAL OFFICIALS OF THE CITY OF DETROIT, MICHIGAN Executive (Elected) Mayor DAVE BING Legislative (Elected) City Council CHARLES PUGH President GARY BROWN President Pro Tem ANDRE SPIVEY SAUNTEEL JENKINS JAMES TATE KENNETH V. COCKREL JR. KWAME KENYETTA I-6 BRENDA JONES JOANN WATSON PRINCIPAL OFFICIALS OF THE CITY OF DETROIT, MICHIGAN Legislative (Elected) City Clerk JANICE WINFREY Other Executive Officials (Appointed) JACK MARTIN Chief Financial Officer I-7 CHERYL R. JOHNSON Finance Director Project 14 Mayor Bing showcases one of the beautiful homes that is part of the Project 14 program that provides Detroit police officers and firefighters with funds to acquire and rehabilitate homes in the city. Comprehensive Annual Financial Report City of Detroit, Michigan Organization of City of Detroit Agencies The People of the City of Detroit City Clerk Legislative Agencies City Council Election Commission 36th District Court Auditor General City Planning Board of Ethics Historical Designation Advisory Board Ombudsperson Detroit Public Library Zoning Appeals Board Arts Charles H. Wright Museum Detroit Building Authority Downtown Development Authority Economic Development Corporation Greater Detroit Resource Recovery Authority Historical Zoological Institute Airport Civic Center Executive Agencies Detroit Transportation Corporation Mayor's Office Cable Commission Administrative, Information and Strategic Services Municipal Services Public Lighting General Services Homeland Security** Human Resources* Information Technology Services Buildings & Safety Environmental* Law* Workforce Development Recreation Dept. of Public Works Transportation Human Rights Municipal Parking Economic Development Water & Sewerage Public Safety Planning & Development* Dept. of Admin. Hearings Fire Health & Wellness Promotion Financial Services Budget* Finance* * Charter-mandated staff department ** Does not have departmental status I-9 Human Services Police Ford Auditorium Demolition After years of remaining vacant in the heart of downtown, Ford Auditorium was demolished in July 2011, making way for greater public use of this prime location adjacent to Hart Plaza. Comprehensive Annual Financial Report City of Detroit, Michigan City of Detroit, Michigan COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2012 FINANCIAL The Financial Section Contains: Independent Auditors' Report Management's Discussion and Analysis Basic Financial Statements Notes to Basic Financial Statements Required Supplementary Information City of Detroit, Michigan COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2012 THIS PAGE LEFT BLANK INTENTIONALLY City of Detroit, Michigan COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2012 INDEPENDENT AUDITOR'S REPORT 1 KPMG LLP Suite 1900 150 West Jefferson Detroit, MI 48226 Independent Auditors' Report The Honorable Mayor Dave Bing and the Honorable Members of the City Council City of Detroit, Michigan: We have audited the accompanying financial statements 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 City of Detroit, Michigan (the City) as of and for the year ended June 30, 2012, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the discretely presented component units listed in note I(a), which represent 100% of the assets and expenses of the aggregate discretely presented component units. We also did not audit the financial statements of the General Retirement System, the Police and Fire Retirement System (together, the Retirement Systems), and the Detroit Building Authority, which represent 95% and 49% of the assets and expenses/expenditures/deductions, respectively, of the aggregate remaining fund information. Those financial statements were audited by other auditors whose reports thereon were furnished to us, and our opinions, insofar as they relate to the amounts included in the aggregate discretely presented component units and aggregate remaining fund information, are based on the reports of the other auditors. 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 of material misstatement. The financial statements of the Retirement Systems and certain discretely presented component units identified in note I(a) were not audited in accordance with Government Auditing Standards. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our 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 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 City of Detroit, Michigan as of June 30, 2012, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with U.S. generally accepted accounting principles. The City has an accumulated unassigned deficit in the General Fund of $326.6 million as of June 30, 2012, which has resulted from operating deficits over the last several years. The deficits raise significant liquidity KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (\"KPMG International\"), a Swiss entity. risks regarding the City's ability to meet its financial obligations as they come due without raising revenues, cutting costs of services provided, and effectuating financial restructuring. The liquidity risks and management's plans are disclosed in note II(a). As explained in note IX(b), the financial statements of the General Retirement System and the Police and Fire Retirement System include investments valued at $691,000,000 and $750,000,000, respectively, as of June 30, 2012 whose fair values have been estimated by management in the absence of readily determinable fair values. Management's estimates are based on various methods, which may include information provided by investment managers, general partners, real estate advisors, and other means. In accordance with Government Auditing Standards, we have also issued our report dated December 28, 2012 on our consideration of the City'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 results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. U.S. generally accepted accounting principles require that the management's discussion and analysis and required supplementary information, listed in the accompanying table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Detroit's basic financial statements. The introductory section, other supplementary information section, and statistical section listed in the accompanying table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information 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. The other supplementary information has been subjected to the auditing procedures applied by us and other auditors 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 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 reports of other auditors, the other supplementary information is fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory and statistical sections are presented for the purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied by us or the other auditors in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Detroit, Michigan December 28, 2012 2 Metro Detroit Youth Day More than 37,000 youth attended the 29th Annual Metro Detroit Youth Day on Belle Isle on July 11, 2011. The energetic event engaged youth in such activities as sports clinics, games and contests. Comprehensive Annual Financial Report City of Detroit, Michigan City of Detroit, Michigan COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2012 MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) (UNAUDITED) 5 Detroit Venture Partners Mayor Bing joins Magic Johnson, Detroit Venture Partners CEO Josh Linkner, and General Partners Dan Gilbert and Brian Hermelin, at the announcement that Johnson was joining Detroit Venture Partners as a general partner on July 21, 2011. Detroit Venture Partners invests in seed and early stage technology companies primarily located in downtown Detroit. Comprehensive Annual Financial Report City of Detroit, Michigan City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) The following Management's Discussion and Analysis is a required supplement to the City of Detroit's (the City) financial statements. It describes and analyzes the financial position of the City, providing an overview of the City's activities for the year ended June 30, 2012. We encourage readers to consider the information we present here in conjunction with the information presented in the City's financial statements and notes, which follow this section. FINANCIAL HIGHLIGHTS The Unassigned General Fund Balance (page 43) had a $326.6 million cumulative deficit at June 30, 2012, a $130.0 million increase from the $196.6 million deficit at the end of fiscal year 2011. Due to the declining financial condition of the City, on December 6, 2011, the State of Michigan's Treasurer commenced a preliminary review of the City's finances in accordance with Public Act 4 of 2011 (Local Government and School District Fiscal Accountability Act). Public Act 4 authorized the State Treasurer to intervene in municipalities or school districts that experience severe financial stress or financial emergencies. The State Treasurer cited the City's liquidity risk and large debt including unfunded retiree health care costs to justify a preliminary financial review. On December 21, 2011, the Treasurer, after completing his preliminary review, issued a report to the Governor in which he made a determination that the City was in a state of \"probable financial stress\" under Public Act 4. On December 27, 2011, the Governor appointed a 10-member financial review team to undertake a more extensive financial review of the City. On March 26, 2012, the financial review team completed its review and reported to the Governor that the City was under a \"financial emergency\" and that no consent agreement between the City and State had been adopted. In its March 26, 2012, letter to the Governor, the financial review team stated that they preferred to see the City and State enter into a consent agreement. On April 4, 2012, the City entered into a Financial Stability Agreement with the State, under which a Financial Advisory Board was set up to oversee City finances. The validity of the Financial Stability Agreement has been challenged unsuccessfully in court. A petition to repeal Public Act 4 was filed with the Michigan Secretary of State on February 29, 2012. The Michigan Supreme Court on August 3, 2012 held that the referendum petition was valid and directed the Board of State Canvassers to certify the petition. The referendum petition was certified by the Board of State Canvassers on August 8, 2012, thereby suspending Act 4 until the results of the November 2012 election. On November 6, 2012, the voters did not approve Proposal 1, which effectively repealed Public Act 4. The City expects challenges to the Financial Stability Agreement due to the repeal of Public Act 4. The Governor of the State of Michigan and Mayor of the City have taken the position that the repeal of Public Act 4 does not invalidate the Financial Stability Agreement. The City plans on continuing the reforms undertaken in accordance with the Financial Stability Agreement. The State of Michigan's Attorney General has determined that the old emergency manager law Public Act 72 of 1990 has been reinstated with the repeal of Public Act 4 and this has been upheld by the Michigan Court of Appeals. The Court of Appeals ruling has been appealed to the State Supreme Court where it currently is pending. 7 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) In the event of a material breach of the Financial Stability Agreement, the State Treasurer is authorized under Public Act 72 to recommend that the Governor appoint an emergency financial manager. An emergency financial manager acting under Public Act 72 has less authority than an emergency manager under Public Act 4. If, in the judgment of an emergency financial manager, no reasonable alternative to rectifying the financial emergency exists, then they may institute proceedings under Chapter 9 of the United States Bankruptcy Code. The effect of instituting bankruptcy proceedings would be to make the City a debtor under the United States Bankruptcy Code. Under the Financial Stability Agreement, the City and State, acting through the State Treasurer, agree to jointly exercise powers relating to the financial affairs of the City, including but not limited to, public finance, budgeting and certain administrative matters. The Financial Advisory Board was established to administer and execute the Financial Stability Agreement. The Mayor and City Council continue to exercise all powers, privileges and authorities as granted under the City Charter. The Financial Stability Agreement Annex B includes reform actions required to be taken by the City to improve its financial condition. Phase I reforms include 21 separate items to assure effective delivery of essential government services and efficient financial operations. The initiative focuses on: (1) public lighting, safety, and transportation improvements; (2) system upgrades and process improvements; (3) employee benefits rationalization and labor reform; (4) improvements to permitting, planning, and development; and (5) restructuring long-term liabilities. Following the implementation of the Phase I reform actions, the City intends to implement a number of additional actions known as Phase II reforms. These actions include: (1) further consolidation and restructuring of City departments; (2) grants management restructuring; (3) property management review; and (4) implementation of \"best practices\" with respect to the City's pension and other post-employment benefits. In addition, the Financial Advisory Board approved the inclusion of four reform actions to Annex B of the Financial Stability Agreement: (1) revenue cycle initiative to review each revenue source to improve cash flow; (2) asset initiative to reduce asset ownership costs, improve efficiency, and identify asset sale opportunities; (3) review of all City departments to improve efficiency and reduce net cost; and (4) recreation initiative to create a recreation authority to improve service to citizens and reduce net cost. 8 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) The Financial Stability Agreement required that the City have new collective bargaining agreements in place by July 16, 2012. On July 12, 2012 the Financial Advisory Board approved City Employment Terms (CET) for employees in certain unions and non-union employees. These terms included 10% wage reductions, elimination of merit and step increases, vacation accrual cap, elimination of swing holidays and election day holiday, capping of sick leave banks at 300 hours, elimination of supplemental pay for Jury Duty, reduction of pension multiplier to 1.5 and escalator eliminated, elimination of supplemental unemployment benefit, elimination of daily overtime, reduction of holiday premium rate from double time to time and one-half, elimination of annual longevity pay, and changes to health care coverage. The terms will be implemented throughout the 2012-13 fiscal year with some terms effective as of July 17, 2012. As of the date of this report, the City has been unable to achieve collective bargaining agreements with the City unions and has imposed the City Employment Terms on union employees whose contracts have expired and on non-union employees. The Financial Stability Agreement suspends the Mayor's obligation to bargain thereby providing the Mayor with the authority to impose changes to the collective bargaining agreements once they have expired. On July 18, 2012, the City's Chief Financial Officer issued a directive titled \"Reduction in Force Activities\" to achieve the fiscal year 2012-13 budget of 10,437 employees. The fiscal year 2011-12 fiscal year budget had 12,664 positions or 2,227 more than the fiscal year 201213 budget. Most of the 2,227 positions had been vacated in fiscal year 2011-12 through layoffs, retirement, and other attrition such as personnel obtaining work elsewhere. The City will use the same strategy to achieve the budget number for fiscal year 2012-13. Also, the directive restricted the hiring of new personnel and established accountability for Departments to stay within their budgets. In August 2012, 10% wage reductions were imposed on Police and Fire uniform personnel and other union employees with expired contracts. City non-union personnel had their wages reduced 10% in fiscal year 2011-12. As discussed in the Financial Stability Agreement, the City, on August 23, 2012, at a premium of $9.1 million, issued $129.5 million of limited tax general obligation bonds with maturities extending to November 2032, with the assistance of the State of Michigan through the Michigan Finance Authority. The $138.6 million in bond proceeds were used to defease the $76.5 million remaining of the $80.0 million of short-term debt issued in March 2012, pay $1.6 million of issuance costs, and the remainder totaling $60.5 million was set aside with a trustee bank in an escrow account to provide funds for the City reforms and provide liquidity in fiscal year 2012-13. On November 13, 2012, the City and State of Michigan entered into a Memorandum of Understanding, which established conditions and due dates the City has to meet before it can draw funds from the escrow account. The first $30.0 million drawn on the escrow account by the City is conditioned upon the following: 9 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) Hiring a restructuring firm to advise the City's Program Management Office on and implement the City's reform programs to include: (1) the City's five-year outlook, given the constraints and opportunities the likely circumstances will present and (2) the means by which sustainability might be achieved, including considerations regarding long-term liabilities. Hiring an operational assistance firm to review the management and operations of the Property Tax and Assessors Office, Law Department, Police and Fire Departments, Public Lighting and Transportation Departments as well as the Income Tax function, Real Estate lease function, and Purchasing function. The firm will advise and recommend to the City a comprehensive operational improvement plan for each reviewed department including the estimated cost of the firm's efforts and the actions needed by the City to remove operating constraints. Select and retain a Workers' Compensation firm to advise the City on savings, efficiencies, and workplace safety improvements which may be achieved with the City's risk management system. Embark on process improvements in the Purchasing function to reduce the time required to complete contracts. The Administration and the City Council are required to cooperatively develop and City Council to vote on a revised Purchasing Ordinance, Privatization Ordinance, and any related regulations. City Council to vote on pending contracts for outside legal counsel and financial consultants to support the reform programs. Complete a review of the City's cashiering operations. Issuing and executing a contract for the City's medical benefit dependent audit. Issuing and executing a contract for payroll outsourcing. Completion of a plan regarding the City's Planning and Development Department that satisfies all necessary requirements for approval by the U.S. Department of Housing and Urban Development. The Memorandum of Understanding further requires that the City maintain a minimum balance of $50.0 million at all times in the escrow account set aside with the Trustee Bank. Any additional future draws will be contingent upon the following accomplished by the City: Streamlining the abandoned structure demolition process. Meeting timelines and metrics on its cashiering, property tax and assessing, payroll, and planning and development initiatives, with the planning and development initiatives providing for the reorganized delivery of services more efficiently and effectively with approval for continued funding by the U.S. Department of Housing and Urban Development. 10 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) Meeting timelines and metrics on the Income Tax, Police, Fire, DDOT, and PLD initiatives. Implementing restructuring of the Departments of Health and Wellness Promotion, Workforce Development, and Human Services. Make satisfactory progress to the State Treasury Department on the restructuring of Detroit Department of Transportation. Completing medical benefit dependent audit. Obtained approval of revisions to the Purchasing function as detailed previously. The City of Detroit, the Detroit Workforce Development Board (DWDD), and the Detroit Employment Solutions Corporation (DESC) became partners to a governance agreement dated June 28, 2012; wherein, DESC (a Michigan non-profit corporation) became the depository, primary administrative and fiscal agent effective July 1, 2012 for DWDD funds available to the Board and the City of Detroit. The City's administration determined that moving the City's workforce development operations and oversight to an external corporation would best serve the citizens of Detroit by improving service delivery and reducing costs. In addition, the non-profit entity has the ability to leverage corporate and philanthropic resources to sustain programs and supplement public funding. DWDD was accounted for in a Special Revenue Fund and primarily supported by federal and state grants. DWDD expenditures for the year ended June 30, 2012 were $52.4 million. DWDD owed the City's General Fund $1.9 million on June 30, 2012 for interagency billings such as central staff services and fringe benefits. As of July 1, 2012, the Department of Human Services (DHS) Headstart programs have been transitioned to independent agencies. The remaining DHS operations are planned to be transitioned to independent agencies in January 2013. The City's administration determined that moving DHS operations and oversight to external agencies would best serve the citizens of Detroit by improving service delivery and reducing costs. DHS programs included Head Start and Community Services Block Grant (CSBG). DHS operations were accounted for in a Special Revenue Fund and were primarily supported by federal and state grant. DHS expenditures for the year ended June 30, 2012 were $68.6 million. DHS owed the City's General Fund $6.1 million on June 30, 2012 for loans from the General Fund, interagency billings, and fringe benefits. On October 1, 2012, the state grant funded programs of the Department of Health and Wellness Promotion (DHWP) were transitioned to the Institute for Population Health, an independent agency. The City's administration, in conjunction with the state of Michigan, determined that moving the DHWP operations and oversight to the Institute for Population Health would best serve the citizens of Detroit by improving service delivery and reducing costs. DHWP operations were accounted for as a General Fund department. It is primarily supported by federal and state grants. It also received significant General Fund support. DHWP expenditures for the year ended June 30, 2012 were $73.0 million of which $13.1 million were incurred by the General Fund. 11 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) On January 1, 2012, management of the Detroit Department of Transportation (DDOT) was contracted out to a private corporation. The new management team was tasked with reducing DDOT costs and improving service. On March 3, 2012, service changes were implemented. The 24-hour service was discontinued, select weekday and weekend routes and services were pared down or eliminated to reduce costs for the department. As a result, the bus fleet was right-sized reducing maintenance and fuel costs. Service enhancements were realized with the implementation of the \"4-15 Plan.\" This initiative included the four most traveled routes (representing approximately 34% of the daily ridership), with the goal of providing a coach every 15 minutes. An upgrade was made to the Automatic Vehicle Locator (AVL) GPS system. Tablets were provided to road supervisors with access to AVL which allows them to actively monitor on-time performance for schedule adherence. On September 4, 2012, the \"TextMyBus\" service was launched. This is a text messaging alert system that provides realtime bus arrival information in the City of Detroit and addresses public safety and quality of life issues for customers reliant on public transportation. In November 2012, the City contracted to transition most of its human resources, payroll, and benefit operations to a private contractor. The transition is expected to be completed in March 2014. The City currently has two payroll systems: Payroll Personnel System (PPS) and Oracle Human Resources Management System (HRMS). These systems were not fully integrated and required intensive manual efforts to produce payrolls and benefit payments. The new system is expected to reduce technology, payroll, and personnel costs and improve accounting and reporting for payroll and benefits. In addition, approximately 50 police officers currently performing payroll timekeeping functions will be redeployed to perform police duties. On December 11, 2012, the City's Financial Advisory Board requested the State of Michigan to begin a review of the City's finances due in part to the City's deteriorating liquidity. If the State's review team determines a serious financial problem exists, then the State Treasurer can recommend the appointment of an emergency financial manager. If, in the judgment of an emergency financial manager, no reasonable alternative to rectifying the financial emergency exists, then they may institute proceedings under Chapter 9 of the United States Bankruptcy Code. The Mayor of the City of Detroit has stated that \"Until the State makes a final determination, I will continue to implement my Restructuring Plan on behalf of the citizens of Detroit.\" At June 30, 2012, the General Fund had a total fund balance deficit of $269.5 million, an increase of $121.4 million from the prior year. The fund balance deficit and unassigned fund balance deficit differs due to the other fund balance classifications (e.g., nonspendable, restricted, assigned, and committed, which are described below) which totaled $57.1 million at June 30, 2012. Adversely impacting the City's deficit reduction efforts were the: (1) $66.6 million decline in State revenue sharing due to State budget cuts, (2) $34.9 million decrease in property taxes from the prior year, (3) $12.9 million decrease in other revenue from the prior year mainly due to the $20.0 million receipt in 2010-11 of one-time revenues such as from the Greater Detroit Resource Recovery Authority (GDRRA), (4) $21.7 million liability for the Department of Transportation's default on employee benefit obligations, and (5) $5.5 million subsidy to the Construction Code Fund to offset a deficit in the fund. 12 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) General Fund deficit reduction efforts resulted in the following positive results when compared to the year ended June 30, 2011: (1) $20.0 million reduction in salaries for the year ended June 30, 2012 due to 10% pay cuts, attrition, and layoffs, (2) $31.5 million reduction in pension costs due primarily to improved market performance, which lowered the Police and Fire Retirement System contribution rate by 12.2%, and negotiated changes to the contribution requirements such as increased smoothing (increase in number of years to spread out changes in the pension fund for funding), multiplier reductions and elimination of the cost of living, and (3) $17.5 million reduction in litigation costs mainly due to the reduction of large payouts and high risk cases. The failure to negotiate satisfactory contracts with the City's unions and achieve personnel reductions to reduce salaries and benefit costs during the last half of the fiscal year adversely impacted the City's deficit reduction efforts in 2012. The General Fund had liquidity problems at June 30, 2012. The budgetary challenges, economic uncertainties, accumulated deficit in the General Fund, and debt ratings below investment grade affected the City's ability to access credit markets as the City needed the State's assistance to borrow. On March 29, 2012, the City borrowed $80.0 million with assistance of the State of Michigan through the Michigan Finance Authority. The proceeds were used to pay $36.9 million of debt service on the City's limited tax self-insurance bonds due in April and May 2012 with the remainder set aside to pay for the City's self-insurance claims such as litigation and workers' compensation costs. In addition, the City's General Fund borrowed a total of $92.2 million from other City funds such as the Risk Management, Solid Waste, and Street funds to provide additional liquidity for the year ended June 30, 2012. Also, due to lack of cash, the General Fund owed the General Retirement System $8.6 million, Police and Fire Retirement System $51.9 million, and Benefits Fund $37.7 million at June 30, 2012. On August 23, 2012, the City issued $129.5 million of limited tax general obligation bonds, at a premium of $9.1 million, with maturities extending to November 2032, again with the assistance of the State through the Michigan Finance Authority (see details above). The General Fund's cash and investments totaled $59.8 million at June 30, 2012 compared to $73.7 million at June 30, 2011. The City's cash position declined because of continuing deficits in annual operations. The General Fund Public Lighting Department revenue increased $14.5 million in 2012 from 2011 due to the collection of $15.2 million from the Detroit Public Schools which mainly were delinquent collections, some of which were reserved as uncollectible in 2011. This also had a positive impact on the adjustment for the allowance for uncollectible receivables due to the collection of prior year receivables. For the year ended June 30, 2012, the City recorded $84.0 million in liabilities due to Wayne County for estimated chargebacks/recoveries of uncollectible delinquent property taxes. Wayne County has been providing the City with payments for the purchase of current year delinquent taxes every year since 2004. In the current year, the County will chargeback to the City prior year taxes purchased that it determines to be uncollectible. For the year ended June 30, 2011, the liability totaled $88.4 million. The $4.4 million decrease in the liability for the year ended June 30, 2012 was due to improvements in county collections. 13 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) The City's General Fund had an additional $21.7 million liability because of the Detroit Department of Transportation's (DDOT) inability to pay its employee benefit costs. Due to DDOT's cash flow problems for the year ended June 30, 2012, it was unable to pay its employee benefit costs. The General Fund had to provide an additional subsidy of $21.7 million to pay DDOT's benefit liability for the year ended June 30, 2012. This allowed DDOT to have a net assets surplus of $4.5 million for the year ended June 30, 2012. Without the additional subsidy, DDOT would have had a $17.2 million deficit. The City's pension obligations, retiree benefits, debt service, and derivatives associated with the pension obligation certificates (POCs), present a substantial financial challenge for the City and were a contributing factor in the State's decision to order a preliminary review of the City's finances. A total of $439.3 million of the negative fair value of derivatives are interest rate swaps associated with the City's POCs. The POCs totaling $1.5 billion were issued during the year ended June 30, 2005 to provide full funding for the City's two pension plans' obligations. The City has a $1.5 billion long-term obligation at June 30, 2012 for the POCs. The City's two pension plans' obligations for retiree pensions total $7.5 billion at June 30, 2011 (the most recent valuation date) of which $643.8 million was unfunded. In addition, the City had a $5.7 billion unfunded obligation for other postemployment benefits at June 30, 2011 (the most recent valuation date). The primary government's pension, retiree benefits, and other pension related costs totaled $546.0 million for the year ended June 30, 2012. The 2011-12 hospitalization, dental, vision, and life insurance benefits costs for the General Fund were $207.7 million up $0.2 million from the $207.5 million for 2010-11. The retiree share for 2011-12 was $146.4 million or 70.5% of the entire hospitalization, vision, dental, and life insurance benefit costs. Active employees costs were $61.3 million or 29.5%. This is one of the biggest challenges for the City and a major contributor to the structural deficit. The retiree share grew $10.6 million from the $135.8 million in 2010-11, while the active share decreased $10.4 million. The City's retirements were up in 2011-12 due to the changes in pension and benefits. The number of retirees exceeds the number of active employees by nearly two to one. The City's business-type activities had net assets of $308.4 million at June 30, 2012, a decrease of $200.7 million from the $509.1 million for the year ended June 30, 2011. The business-type activities cumulative unrestricted net assets was a deficit totaling $1.2 billion, a $971.0 million decrease from the $230.1 million deficit at June 30, 2011. The Sewage Disposal Fund's net assets decreased by $89.9 million, to $157.5 million and the Water Fund's net assets decreased by $113.6 million, to $9.9 million for the year ended June 30, 2012. Losses from the liquidation of the Water and Sewage Disposal Funds non-POC swap obligations in 2011-12 was the primary reason for the decrease in net assets. The Water and Sewage Disposal Funds paid $225.6 million and $321.6 million, respectively, to liquidate the non-POC swaps, which was financed by the issuance of new debt. 14 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) The City's total bonded debt increased by $772.0 million during the fiscal year ended June 30, 2012. This was primarily due to the issuance of $1.2 billion in new debt by the Water and Sewerage departments. The Governmental Funds retired $76.1 million of general obligation bonds. The Sewage Disposal, Water, and Parking Funds retired $192.3 million, $139.8 million, and $1.1 million, respectively, of revenue bonds for the year ended June 30, 2012. Total primary government long-term obligations were $9.4 billion for the fiscal year ended June 30, 2012, an increase of $0.7 billion from the $8.7 billion for the fiscal year ended June 30, 2011. The long-term obligations increased mainly due to the $1.2 billion issuance of revenue bonds by the Water and Sewage departments. In addition, a $177.8 million increase in the other postemployment benefits liability also contributed to the increase in long-term obligations. The POC long-term obligation decreased $16.9 million from the $1.5 billion at June 30, 2011 due to retirement of debt. Also, legal claims were down $22.4 million from the prior year. On March 27, 2012, Standard and Poor's downgraded the City's Unlimited General Tax Obligation (UGTO) Bonds rating from \"BB\" to \"B\". On March 20, 2012, Moody's downgraded the ratings of the City's UGTO debt from "Ba3" to "B2". On March 22, 2012, Fitch downgraded the City's UGTO ratings to "B" from "BB-". On June 12, 2012, Fitch downgraded the City's UGTO ratings from \"B\" to \"CCC\". In June 2012, Moody's Investors Service downgraded the City's UGTO ratings from \"B2\" to \"B3\". On November 29, 2012, Moody's further downgraded the City's UGTO ratings to \"Caa1\". The downgrades in the City's credit ratings to a level below investment grade status limits the City's access to capital, including borrowing for cash flow purposes. The risk of the amended POC Swap Agreement termination arose with the credit ratings downgrade below \"Ba3\" and equivalent. The amount of swap termination payments would be based upon a variety of factors such as the various Swap Counterparties' financial pricing models, underlying variable debt, index or reference rates, and the point of pricing. Any termination payments would be allocated based on the notional allocation percentage of the affected POCs, between the governmental and business-type activities as of the point of liability accrual. If the Termination Events are not cured, there presently exists significant risk in connection with the City's ability to meet the cash demands under the terms of the amended Swap Agreements. As of this report date, the City is negotiating with the counterparties to come up with an acceptable course of action due to the credit rating downgrade. At June 30, 2012, the fair value of the POC swap liabilities was $354.7 million for the governmental activities and totaled $439.3 million for the primary government (see Note VIII (f) for more details). OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is an introduction to the City's basic financial statements, which comprise three components: 1) government-wide financial statements, 2) fund financial 15 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) statements, and 3) notes to the basic financial statements. This report also contains other required supplementary information in addition to the basic financial statements. Government-wide Financial Statements Government-wide financial statements (pages 39-41) are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private sector business. The financial statements include the Statement of Net Assets and the Statement of Activities. These statements are prepared using the economic resources measurement focus and accrual basis of accounting. They take into account all revenues and expenses connected with the fiscal year, regardless of when the City received or paid the cash. The Statement of Net Assets and the Statement of Activities are two financial statements that report information about the City, as a whole, and about its activities that should help answer this question: How has the City's financial position, as a whole, changed as a result of this year's activities? These statements include all non-fiduciary assets and liabilities. The Statement of Net Assets (page 39) presents all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases and decreases in net assets measure whether the City's financial position is improving or eroding. The Statement of Activities (pages 40 and 41) presents information showing how the City's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying events giving rise to the change occur, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in these statements 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 statements report three activities: Governmental Activities - Most of the City's basic services such as public protection (police) and public works are reported under this category. Taxes and intergovernmental revenues generally fund these services. Business-type Activities - The City charges fees to customers to help it cover all or most of the cost of services it provides such as water and transportation. Discretely Presented Component Units - Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. There are 10 legally separate organizations including the Economic Development Corporation and the Museum of African American History that are reported as discretely presented component units of the City. Fund Financial Statements The fund financial statements begin on page 42 and provide detailed information about the major individual funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts 16 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) that the City uses to keep track of specific sources of funding and spending for a particular purpose. The City's funds are divided into three categories - governmental, proprietary, and fiduciary - and use different accounting approaches. Governmental funds - Most of the City's basic services are reported in the governmental funds, which focus on how money flows into and out of those funds and the balances left at year end that are available for future spending. The governmental fund financial statements provide a detailed short-term view of the City's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. These funds are reported using modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. Governmental funds include the General Fund, General Retirement System Service Corporation, Police and Fire Retirement System Corporation, and Other Governmental Funds. Proprietary funds - When the City charges customers for services it provides, whether to outside customers or to other agencies within the City, these services are generally reported in proprietary funds. Proprietary (e.g., Enterprise) funds utilize accrual accounting, the same method used by private sector businesses. Enterprise funds report activities that provide supplies and services to the general public (e.g., Transportation Fund). Fiduciary funds - The City acts as a trustee or fiduciary for its employee pension plans. It is also responsible for other assets that, because of a trust arrangement, can be used only for the trust beneficiaries. The City's fiduciary activities are reported in the Statements of Fiduciary Net Assets and Changes in Fiduciary Net Assets (pages 58 and 59). These funds, which include pension (and other employee benefit) and agency funds, are reported using accrual accounting. The government-wide statements exclude fiduciary fund activities and balances because these assets are restricted in purpose and do not represent discretionary assets of the City to finance its operations. Notes to the Basic Financial Statements The Notes to the Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes can be found beginning on page 65 of the report. Additional Required Supplementary Information The Required Supplementary Information that follows the basic financial statements further explains and supports the information in the financial statements. 17 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) FINANCIAL ANALYSIS OF THE CITY AS A WHOLE Government-wide Net Assets Net assets (assets less liabilities) serve as a useful indicator of a government's financial position. The City's liabilities exceeded assets by $372.0 million at June 30, 2012. The net assets decreased $343.0 million from the deficit of $29.0 million for the fiscal year ended June 30, 2011. Summary of Net Assets June 30, 2012 and 2011 (In Thousands) Governmental Activities 2012 2011 Current and other noncurrent assets and deferred outflows of resources Capital assets Total assets and deferred outflows of resources $ Current and other liabilities Long-term obligations Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted (deficit) Total net assets (deficit) $ 1,830,577 1,480,001 $ Business-type Activities 2012 2011 Total Primary Government 2012 2011 1,769,406 $ 1,464,566 1,638,711 $ 5,361,908 1,408,188 $ 5,387,953 3,310,578 3,233,972 7,000,619 6,796,141 10,311,197 10,030,113 871,310 3,119,669 3,990,979 653,526 3,118,517 3,772,043 392,871 6,299,321 6,692,192 725,157 5,561,921 6,287,078 1,264,181 9,418,990 10,683,171 1,378,683 8,680,438 10,059,121 1,851,248 535,759 (2,758,981) (371,974) $ 1,147,949 413,460 (1,590,417) (29,008) 803,654 73,786 (1,557,841) (680,401) $ 711,987 110,224 (1,360,282) (538,071) $ 1,047,594 461,973 (1,201,140) 308,427 $ 435,962 303,236 (230,135) 509,063 $ 3,469,288 $ 6,841,909 3,177,594 6,852,519 Total Primary Government The City's net assets investment in capital assets (e.g., land, buildings, equipment, infrastructure, and others), net of any related debt outstanding that was needed to acquire or construct the assets at June 30, 2012 was $1.9 billion and $703.3 million greater than the $1.1 billion at June 30, 2011. The City uses capital assets to provide services to citizens; consequently, these assets are not available for future spending. Restricted net assets totaling $535.8 million are resources subject to external restrictions, constitutional provisions, or enabling legislation on how they can be used. The City presents restricted net assets in 2011-12 for Highway and Street Improvement ($36.4 million), Capital Projects and Acquisitions ($5.9 million), Debt Service ($491.8 million), and Endowments and Trusts ($1.7 million). The restricted net assets increased by $122.3 million from the prior year mainly due to an increase in the net assets restricted for debt service in the Water and Sewage Disposal Funds. 18 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) The remaining balance is an unrestricted accumulated deficit of $2.8 billion. A deficit represents a shortage of assets available to meet all the City's obligations if they were immediately due and payable. The unrestricted accumulated deficit increased by $1.2 billion from the $1.6 billion at June 30, 2011. The increased deficit is primarily attributable to the losses from the Sewage Disposal and Water Funds liquidation of their non-POC swap obligations. Governmental Activities At June 30, 2012, the City's governmental activities had a net assets deficit (liabilities exceeded assets) of $680.4 million, an increase of $142.3 million from the deficit at June 30, 2011. Other postemployment benefits payable accounted for $138.5 million of the governmental activities increases in the net assets deficit. In addition, the weak economy in 2011-12 and resulting high unemployment and depressed property values slowed revenue growth and contributed to the increase in the deficit. Expenses were down $72.7 million due to the 10% pay cut, attrition and layoffs, and less pension contributions. However, revenues, mainly shared taxes ($66.0 million decrease) and grants ($64.0 million decrease) were down even more by $140.4 million from the prior year. Net assets invested in capital assets totaled $803.7 million, an increase of $91.7 million from the prior fiscal year. Restricted net assets totaled $73.8 million. The remaining unrestricted net assets deficit totaled $1.6 billion at June 30, 2012, a $197.6 million increase from the $1.4 billion deficit at June 30, 2011. Business-type Activities The business-type activities had net assets totaling $308.4 million at June 30, 2012, a decrease of $200.7 million from the $509.1 million surplus at June 30, 2011. The unrestricted net assets deficit increased $971.0 million to $1.2 billion at June 30, 2012 from the $230.1 million deficit at June 30, 2011. As mentioned previously, the increase in the deficit of business-type activities net assets was mainly attributable to the Water and Sewage Disposal Funds' losses from the liquidation of their non-POC swap obligations. The Water and Sewage Disposal Funds had net assets of $9.9 million and $157.5 million, respectively, at June 30, 2012. The Transportation Fund had $65.3 million in net assets at June 30, 2012. 19 City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) Government-wide Changes in Net Assets The following condensed financial information was derived from the government-wide Statement of Activities and reflects how the City's net assets changed during the fiscal year: Summary of Changes in Net Assets June 30, 2012 and 2011 (In Thousands) Governmental Activities 2012 Revenues: Program Revenues: Charges for Services Operating Grants and Contributions Capital Grants and Contributions General Revenues: Property Taxes Municipal Income Tax Utility Users Tax Wagering Tax Other Local Taxes State Shared Taxes Investment Earnings (Losses) Miscellaneous $ Total Revenues Expenses: Public Protection Health Recreation and Culture Economic Development Educational Development Housing Supply and Conditions Physical Environment Transportation Facilitation Development and Management Interest on Long-term Debt Sewage Disposal Transportation Water Automobile Parking Airport Total Expenses Excess (Deficiency) Before Transfers and Special Item Transfers, Net Special Item 309,746 326,570 24,516 Business-type Activities 2011 $ 2012 300,767 370,730 44,339 216,932 233,036 39,828 181,575 16,528 173,292 8,367 6,843 235,857 228,304 44,640 177,046 17,374 239,342 8,607 10,623 1,537,233 $ 807,953 77,297 30,345 Total Primary Government 2012 2011 2011 $ 763,075 77,553 29,794 $ 1,117,699 403,867 54,861 $ (152,916) 2,300 9,837 (85,166) 1,677,629 764,979 795,093 2,302,212 2,472,722 800,229 142,584 30,112 73,600 51,975 4,432 130,992 33,697 195,168 129,098 - 816,929 170,235 31,398 87,938 58,840 6,329 125,325 33,721 201,032 132,827 - 456,113 212,857 370,558 11,643 2,120 517,645 215,881 345,181 11,305 2,393 800,229 142,584 30,112 73,600 51,975 4,432 130,992 33,697 195,168 129,098 456,113 212,857 370,558 11,643 2,120 816,929 170,235 31,398 87,938 58,840 6,329 125,325 33,721 201,032 132,827 517,645 215,881 345,181 11,305 2,393 1,591,887 1,664,574 1,053,291 1,092,405 2,645,178 2,756,979 (54,654) (87,676) - 216,932 233,036 39,828 181,575 16,528 173,292 (144,549) 9,143 1,063,842 448,283 74,133 235,857 228,304 44,640 177,046 17,374 239,342 18,444 (74,543) 13,055 (73,391) (9,866) (288,312) 87,676 - (297,312) 73,391 - (342,966) - (284,257) (9,866) Decrease in Net Assets (142,330) (70,202) (200,636) (223,921) (342,966) (294,123) Net Assets, July 1 (538,071) (467,869) 509,063 732,984 (29,008) 265,115 (680,401) $ (538,071) $ 308,427 Net Assets, June 30 $ 20 $ 509,063 $ (371,974) $ (29,008) City of Detroit, Michigan MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended June 30, 2012 (UNAUDITED) Total Primary Government Total revenues for the fiscal year ended June 30, 2012 were $2.3 billion; a decrease of $170.5 million from the prior fiscal year. Charges for services increased $53.9 million mainly due to water and sewer rate increases. Sewer and water revenues from customer charges for services increased $26.5 million and $18.2 million, respectively, from the prior year. Total tax revenues decreased by $15.3 million from the prior year mainly due to the $18.9 million decrease in property taxes. Income tax revenues were up $4.7 million in 2012 as the economy and employment slightly improved. Wagering tax revenues were up $4.5 million for the year ended June 30, 2012, due to a slight improvement in the economy. Utility user taxes were down $4.8 million due to the declining population and tax base in the City. Shared taxes decreased $66.0 million for the year ended June 30, 2012, as the State reduced the distribution of shared taxes and changed the methodology for receiving the taxes in 2012. Grant revenues decreased $63.7 million for the year ended June 30, 2012, as the American Recovery and Reinvestment Act (ARRA) funding decreased as well as other grant revenue. Investment return decreased $163.0 million mainly due to the liquidation of swap obligations (derivatives) by the Water and Sewage Disposal Funds. Miscellaneous revenues were up $83.7 million from the prior year, primarily due to a one-time significant loss on disposal of capital assets recorded in the previous year. Total expenses were $2.6 billion, a decrease of $111.8 million from the prior fiscal year. The decrease is mainly attributable to the reduction in public protection, health, development and management, transportation, and Sewage Disposal Fund costs. The Sewage Disposal Fund expenses were $61.5 million less for the year ended June 30, 2012 compared to the $517.6 million of the prior year. Lower pension (police and fire), litigation, and salaries and wage costs contributed to the reduction of expenses for the year ended June 30, 2012. The Water Fund expenses were $25.4 million higher for the year ended June 30, 2012, mainly due to an overall increase in operating expenses. The Transportation Fund expenses were $3.0 million less than the prior year mainly due to a decrease of $18.2 million in salaries and benefits due to layoffs and attrition offset by a $10.6 million impairment loss on its assets and $4.4 million increase in contractual costs. Public protection expenses decreased $16.7 million, primarily due to lower pension costs. Health expenses were down $27.7 million, mainly due to the $27.7 million reduction in Human Services grants and costs, specifically, the CDBG and weatherization programs. Economic development expenses were down $14.3 million for the year ended June 30, 2012, mainly due to less grant funding of demolitions in the City and other sti