Howard county Meryland Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2012 1-Does the government have revenue bonds outstanding that are related to business-type activities? If so, for what activities? 2-Do the financial statements include a statement of cash flows for proprietary funds? In how many categories are the cash flows presented? Is the statement on a direct or an indirect basis. 3-Do the notes to the financial statements indicate the component units and other related entities that are included within the reporting entity? Do they indicate any units that are not included? Do they explain why these units are included or excluded?

Howard County, Maryland Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2012 Howard County, Maryland 3430 Court House Drive Ellicott City, Maryland 21043 Telephone (410) 313-2195 Fax (410) 313-4433 www.howardcountymd.gov County Executive Ken Ulman Certain Appointed Officials Lonnie Robbins Chief Administrative Officer Stanley J. Milesky Director of Finance James M. Irvin Director of Public Works Margaret A. Nolan County Solicitor Marsha S. McLaughlin Director of Planning and Zoning Raymond S. Wacks Budget Administrator Craig Glendenning County Auditor County Council Jennifer Terrasa Chairperson Mary Kay Sigaty Vice Chairperson Financial Advisor Public Financial Management, Inc. Two Logan Square, Suite 1600 18th and Arch Street Philadelphia, PA 19103 Telephone (215) 567-6100 Fax (215) 567-4180 www.pfm.com Calvin Ball Council Member Bond Counsel McKennon Shelton & Henn LLP 401 East Pratt Street, Suite 2315 Baltimore, Maryland 21202 Telephone (410) 843-3500 Fax (410) 843-3501 www.mshllp.com Greg Fox Council Member Independent Auditor CohnReznick 500 East Pratt Street, Suite 200 Baltimore, Maryland 21202-3100 Telephone (410) 783-4900 Fax (410) 727-0460 www.cohnreznick.com Courtney Watson Council Member Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2012 Prepared by the Department of Finance Howard County, Maryland Table of Contents Introductory Section Listing of County Officials County Executive and Council Title Page Table of Contents Organizational Chart Letter of Transmittal Certificate of County Auditor Certificate of Achievement for Excellence in Financial Reporting i ii iii xi xiii Financial Section Independent Auditors' Report Management's Discussion and Analysis - Required Supplementary Information 1 3 Basic Financial Statements Government-wide Financial Statements Statement of Net Assets Statement of Activities Fund Financial Statements Balance Sheet - Governmental Funds Reconciliation of the Balance Sheet of Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds Reconciliation of Revenues, Expenditures and Changes in Fund Balances-Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances - Budgetary Basis - General Fund Statement of Revenues, Expenditures and Changes in Fund Balance - Budgetary Basis - Agricultural Land Preservation Fund Statement of Net Assets - Proprietary Funds Statement of Revenues, Expenses and Changes in Net Assets - Proprietary Funds Statement of Cash Flows - Proprietary Funds Statement of Fiduciary Net Assets - Pension and Other Post Employment Benefits Trust Funds and Agency Funds Statement of Changes in Fiduciary Net Assets - Pension and Other Post Employment Benefits Trust Funds Combining Statement of Net Assets - Component Units Statement of Activities - Component Units Notes to the Financial Statements Notes to Basic Financial Statements - Index Notes to Basic Financial Statements 15 16 17 18 19 20 Combining Balance Sheet - Non-major Capital Projects Funds Combining Statement of Revenues, Expenditures and Change in Fund Balances - Non-major Capital Project Funds 85 86 Internal Service Funds Combining Statement of Net Assets Combining Statement of Revenues, Expenses and Changes in Net Assets Combining Statement of Cash Flows 87 88 89 Fiduciary Funds Combining Statement of Net Assets - Pension and Other Post Employment Benefits Trust Funds Combining Statement of Changes in Net Assets - Pension and Other Post Employment Benefits Trust Funds Combining Statement of Assets and Liabilities - Agency Funds Combining Statement of Changes in Assets and Liabilities - Agency Funds 91 92 93 94 21 Capital Assets Used in the Operation of Governmental Funds Schedule by Function and Activity Schedule of Changes By Function and Activity 95 96 22 23 Capital Assets Used in the Operation of Enterprise Funds Schedule of Capital Assets and Depreciation 97 24 25 Long Term Debt Schedule of General Long-Term Debt - General County Bonds - Long Term Obligations Schedule of Changes in Long-Term Debt - Long Term Obligations Schedule of Bonded and Other Long-Term Debt - Enterprise Fund Schedule of Changes in Bonded Long-Term Debt - Enterprise Fund 99 101 102 103 Audit Report 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 105 26 27 28 29 31 32 Required Supplementary Information Pension Trust Funds Other Post Employment Benefits Fund 63 64 Combining and Individual Fund Statements and Schedules - Supplementary Information General Fund Schedules of Revenues and Appropriations from Fund Balances - Budgetary Basis Schedule of Expenditures and Encumbrances - Budgetary Basis Non-major Governmental Funds Combining Balance Sheet - Non-major Governmental Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Non-major Governmental Funds Combining Balance Sheet - Non-major Special Revenue Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Non-major Special Revenue Funds Schedule of Revenues, Expenditures and Changes in Fund Balance - Budgetary Basis - Non-major Special Revenue Funds Community Renewal Program Fund Environmental Services Fund Forest Conservation Fund Fire and Rescue Reserve Fund Grants Fund Health Department Fund Recreation Program Fund Speed Enforcement Fund 65 67 73 74 75 76 Statistical Section Index Net Assets by Category Changes in Net Assets Fund Balances, Governmental Funds Changes in Fund Balances of Governmental Funds Assessed and Estimated Actual Value of Taxable Property Direct and Overlapping Property Tax Rates Principal Property Tax Payers Property Tax Levies and Collections Ratios of Outstanding Debt by Type Ratios for General Bonded Debt Outstanding Legal Debt Margin Pledged-Revenue Coverage Demographic and Economic Statistics Principal Employers County Government Employees by Function Operating Indicators by Function Capital Assets Statistics by Function 109 111 112 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 77 78 79 80 81 82 83 84 i HOWARD COUNTY GOVERNMENT ORGANIZATIONAL CHART Judicial Executive Circuit Court District Court Orphan's Court Legislative Economic Development Authority County Executive County Council Appeals Boards Board of Appeals County Auditor Tax Appeals Board Personnel Board State's Attorney Department of Recreation and Parks Department of Fire and Rescue Sheriff Department of County Administration Office of Law Department of Citizen Services Planning Board Department of Technology and Communication Services Department of Inspections, Licenses and Permits Police Department Department of Corrections Department of Planning and Zoning Department of Finance Department of Public Works Department of Housing & Community Development Fire Board Departments under state law partially or wholly funded by County appropriations Soil Conservation Services ii Board of Elections Department of Health Cooperative Extension Services Department of Libraries Department of Social Services Board of Education Community College HOWARD COUNTY DEPARTMENT OF FINANCE 3430 Court House Drive Ellicott City, Maryland 21043 Stanley J. Milesky, Director smilesky@howardcountymd.gov 410-313-2195 FAX 410-313-4433 TDD 410-313-2323 January 11, 2013 Honorable County Executive, Honorable Members of the County Council and Citizens of Howard County Ladies and Gentlemen: FORMAL TRANSMITTAL OF THE CAFR The audited Comprehensive Annual Financial Report (CAFR) of Howard County, Maryland (the County) prepared by the Department of Finance for the fiscal year ended June 30, 2012, is hereby submitted in compliance with Howard County Charter, Section 212 and includes the independent auditors' opinion issued by the independent public accounting firm of CohnReznick LLP, hired by the County Council. The annual report was prepared by the Howard County Department of Finance in cooperation with the finance departments of the County's component units. Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. CohnReznick LLP licensed certified public accountants performed an independent audit and issued an unqualified (\"clean\") opinion on the County's financial statements for the fiscal year ended June 30, 2012. The Independent Auditors' Report is presented as the first element of the Financial Section of this report. Management's Discussion and Analysis (MD&A) immediately follows the independent auditor's report and provides a narrative introduction, overview, and analysis to accompany the basic financial statements. MD&A is designed to complement this letter of transmittal and should be read in conjunction with it. PROFILE OF THE GOVERNMENT Howard County, Maryland was formed in 1851 and was named for the fifth Governor of Maryland, Colonel John Eager Howard. Under a home rule charter adopted in 1968, the County's executive functions are vested in the elected County Executive. The County Council consists of five members elected by district. Located directly between Baltimore, Maryland and Washington, D.C. and at its closest point is less than four miles from the former and 13 miles from the latter, the County is 251 square miles Letter of Transmittal iii in area. The County was predominantly agricultural in character until 1966, when construction began on the planned community of Columbia. Columbia is unique for its purposeful goal to be an integrated community at a time before the Fair Housing Act of 1968 made it illegal to discriminate in housing based on race, color, national origin or religion. Howard County is home to approximately 287,085 residents based on estimates by the Department of Planning and Zoning. According to the U.S. Census Bureau, American Community Survey, 2011, Howard County again had the third highest median income in the nation. Howard County was ranked the healthiest Maryland county in 2010 by the Robert Wood Johnson Foundation and the University of Wisconsin Population Health Institute. The Ellicott City/Columbia area ranked 2nd on the 2010 \"Best Places to Live in America\" list by Money Magazine. According to the National Center for Transit Research at the University of South Florida, Howard County is one of the Best Workplaces for Commuters. Howard County was ranked the 9th most digital county in the nation by the Center for Digital Government and the National Association of Counties. Howard County, MD Median Household Income $105,000 $100,000 $95,000 $90,000 $85,000 2005 2006 2007 2008 2009 2010 2011 Source: United States Department of Commerce, Bureau of the Census, State and County QuickFacts COMPONENT UNITS The County government provides all the local government services as there are no incorporated cities or towns in Howard County. Services provided by the County include police, fire and rescue, sheriff, corrections, public works, planning and zoning, landfill, water and sewer, public housing, and recreation and parks. In addition to general government activities, the governing body has financial accountability for the Howard County Public School System, the Howard Community College, the Howard County Public Library, and the Howard County Housing Commission. Therefore, the activities of these entities are included in this annual report. Additional information on all four of these legally separate entities can be found in Note 1A in the Notes to the Basic Financial Statements. The financial activities of the Howard County Economic Development Authority, which is also a component unit of the County, are excluded due to immateriality. The Volunteer Fire Districts do not meet the established criteria for inclusion in the reporting entity and, accordingly, are excluded from this report. iv Letter of Transmittal BUDGET The Howard County budget is a comprehensive plan of all funds spent by County departments and agencies. As required by county law, the budget consists of the current operating expense and revenue budget (with five years spending projections), the capital budget and capital program, and the budget message. The annual budget includes all revenues, all expenditures and the projected surplus or deficit in the general fund and all other funds. Funds in the operating budget include appropriations for the following functional areas: education, public safety, public works, community services, general government, legislative and judicial, and capital, debt and reserves. The capital budget includes funds to construct major government facilities such as roads, bridges, schools, libraries, water and sewer infrastructure and fire stations. Capital projects usually take more than a year to complete, unlike the operating budget which covers only one year. The budget process begins each fall when the County Executive appoints a Spending Affordability Advisory Committee. The committee advises the Executive and provides guidelines for setting debt affordability levels for the upcoming year. County departments and agencies submit budget requests to the Executive in late January or early February. After a public process that involves two public hearings, and a thorough review of departmental requests, the County Executive submits a proposed capital budget not later than ninety days prior to the end of the fiscal year. The Executive must submit a proposed operating budget to the County Council not later than seventy days prior to the end of the fiscal year. The County Council then conducts a series of public hearings and work sessions in April and May to review the Executive's proposed budget. The County Council cannot change the form of the budget as submitted by the Executive to alter the revenue estimates or to increase any expenditure recommended by the Executive for current or capital purposes, unless expressly provided in state law or to correct mathematical errors. The County Council can reduce the Executive's budget, but not increase it, except in the case of the Department of Education School Board's budget. The County Council may restore funds back to the level requested by the School Board. After its review, the County Council finalizes the entire budget and sets tax rates, fees and charges needed to generate enough revenue to balance the budget. The Annual Budget must be adopted by the County Council by the first day of the last month of the fiscal year currently ending. Expenditure authority for the operating budget is at the fund and department level in major categories including personnel costs, various operating expenses, and capital costs. Appropriations in the capital budget are determined at the project level on an annual basis. Once the budget is approved, the County Council can only amend it at the request of the County Executive. The operating budget is amended during the year through the use of supplemental budget appropriation ordinances (SAOs). The County Executive may request at any time during the fiscal year the approval of an SAO by transferring funds from the County's budgeted contingency reserves. The capital budget may be amended through the use of Transfer Appropriation Ordinances (TAOs). The County Executive may request, at any time during the fiscal year that a TAO be approved by transferring funds from one capital project to another. At no time may the bottom line of the capital budget be increased. The County maintains an encumbrance system for budgetary control. All unencumbered appropriations of the operating budget lapse at year-end. Unencumbered capital appropriations continue until the specific capital project is closed. Letter of Transmittal v ECONOMIC CONDITION AND OUTLOOK Howard County continues to have a diverse economic base, taking advantage of a friendly business climate, a highly educated workforce and superb quality of life. It is located in the heart of the corridor between Washington, D.C. and Baltimore, which combined comprise the fourth largest market in the United States. Employment is expected to remain stable and the unemployment rate should continue to remain below the state (7.2%) and national (8.2%) levels as evidenced by the June 2012 rate of 5.5%. Unemployment Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Dec 07 Jun08 Dec 08 Jun09 Howard County Dec 09 Jun10 Maryland Dec 10 Jun11 Dec 11 Jun12 United States Source: United States Department of Labor, Bureau of Labor Statistics. LOCAL ECONOMY Because of Howard County's ideal geographic location, substantial growth in a wide variety of industries has resulted. Over 9,160 businesses in Howard County employ 154,504 workers in industries such as technology, telecommunications, biotechnology, research and development, wholesale distribution, manufacturing and multinational corporations. The service sector is the largest industry in the County, employing three-quarters of the workforce. In the service industry, government contracts are generating new business opportunities for startups providing technical labor through the much anticipated Base Realignment & Closure (BRAC) program. Fort George Meade is less than two miles outside the County border and 5,800 highly skilled positions were transferred there directly under BRAC. In addition, it is estimated that through 2015 another 21,000 new jobs will be created due to expansion at Fort Meade including the activation of the United States Cyber Command on May 21, 2010. Commercial real estate vacancy rates continued to decline despite an increase of over 14 million square feet of space in the past 5 years to accommodate Fort Meade related growth. The average rental rate per square foot has continued to rebound to within 25 cents of pre-recession rates. The September 2011 vacancy rate was 10.2% which is approximately 1% less than the vacancy rate 5 years ago. vi Letter of Transmittal Fiscal Year 2012 property tax collections increased 1.0% above the previous fiscal year. In its FY 2013 budget Howard County projected a 1.76% increase in property tax collections. Onethird of property in the County is assessed each year, with increases in assessed values phased in over 3 years. This triennial assessment of property, the phasing in of assessment increases, and the County's 5% Homestead Property Tax Credit rate help to stabilize the tax base and tax revenues. Local income tax is the County's other main revenue source. Income tax collection increased by 13.3% when compared to the actual for Fiscal Year 2011. Due to increases in the number of employed residents and median incomes, the FY 2013 projection for income tax collections represents a 4.4% increase from FY 2012 budgeted revenues. County revenues related to housing activity remained sluggish in FY 2012. The decline in the real estate market that began in FY 2006 continued to have an effect in FY 2012. Recordation tax, a leading indicator of the health of the local real estate market, increased 9.2% from the previous year but was still 41.3% below the FY 2006 level. The FY 2013 budget projected no change in recordation tax collections compared to FY 2012. Another indicator of the continued struggling economy is investment income. Revenue from this source decreased 19.5% in FY 2012 and is still 89.2% below FY 2008 revenue. The FY 2013 budget anticipated no increase in interest rates resulting in level investment income earnings. Howard County, Maryland Median Sale Price Median Home Sale Price and Number of Home Sales Trend Number of Sales $450,000 500 $400,000 450 400 $350,000 350 $300,000 300 $250,000 250 $200,000 200 $150,000 150 $100,000 100 $50,000 50 0 $ 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Metropolitan Regional Information Systems Inc. and Coastal Association of REALTORS Letter of Transmittal vii Looking forward, overall economic performance is not expected to improve significantly in FY 2013. In the face of declining revenues, Howard County developed a FY 2013 budget that allows it to absorb the anticipated reduction in revenues. The County took the necessary steps to deal with the situation while adding to its Rainy Day Fund, by focusing on opportunities to reduce spending and increase efficiencies. It is anticipated that the FY 2013 gross assessable base of Howard County will decrease by 2.4%. However, the taxable assessments will continue to increase slightly each year. This is because the homestead tax credit limits taxable increases on homeowner occupied properties to 5% per year, and despite the decrease in home values most residential properties are still phasing in the pre-2006 housing market increases. About 80% of homeowner occupied properties in Howard County receive this credit. The demand for real estate is up somewhat in Howard County, especially in the residential resale market, where the average time that homes are on the market declined from 93 to 83 days between September 2011 and 2012. MAJOR INITIATIVES The County will continue the strong fiscal management policies which have led to Triple-A ratings from all three credit rating agencies. The County will take advantage of opportunities to expand the diverse local economy created by the location of the U.S. Cyber Command at nearby Fort Meade through the new Entrepreneurial Center, operated by the Howard County Economic Development Authority. In order to maintain our highly educated workforce, the County continues to invest in our top-ranked school system. Recognizing our responsibility to the environment and the health of the Chesapeake Bay, the County has created a program to create partnerships with residents, businesses, and institutions to address storm water pollution on a County-wide basis. LONG TERM FINANCIAL PLANNING Rainy Day Fund County voters approved an amendment to the County Charter to establish a budget stabilization account, also known as a Rainy Day Fund, to provide a financial safety net for the County effective December 3, 1992. The amendment requires all surplus funds in the County be placed in this fund until it reaches 7% of the prior year's audited expenditures. The funds may be used if an emergency exists pursuant to the County Charter, or if the County Executive determines that actual revenues will be substantially below the revenues budgeted and reasonable expenditure reduction will not offset the anticipated loss. See Note 1M in the Notes to the Basic Financial Statements for a discussion of the status of the Rainy Day Fund. The Rainy Day Fund's balance is currently at the target level. Capital Projects and Debt Administration The County funds its capital program based on the requirements of the General Plan and supporting master plans for schools, recreation and parks, human services, water and sewer, solid waste, libraries, fire stations and public facilities. viii Letter of Transmittal The County plans long and short-term debt issuance to finance its capital budget based on cash flow needs, sources of revenue, capital construction periods, available financing instruments and market conditions. The County finances its capital needs on a regular basis dictated by its capital spending pattern. External financial specialists assist the County in developing a bond issuance strategy, preparing bond documents, and marketing bonds to investors. Bonds issued by the County mature over a term that does not exceed the economic life of the improvements that they finance. The County consolidates general County improvements into Consolidated Public Improvement bonds with a term of up to 20 years and water and sewer improvements into Metropolitan District Bonds with a term of up to 30 years. Debt obligations are generally issued through a competitive sale. However, the County may use a negotiated sale process when it will provide significant savings and/or if the terms of the offering are sufficiently complex that the bond issue might be compromised in a competitive sale. Spending Affordability Advisory Committee The Spending Affordability Advisory Committee was established by Executive Order in 1987 to provide recommendations and projections for the upcoming budget year. Specifically, the Committee is charged to review in detail the status and projections of revenues and expenditures for the County for the next budget year and subsequent five years; to evaluate future County revenue levels and consider the impact of economic indicators such as changes in personal income, assessable base growth; and to evaluate expenditure levels with consideration of the long-term obligations facing the County and the best way to pay for them. The Committee recommends revenue projections and the amount of new County debt authorization for the upcoming fiscal year. The Committee report includes the effect its recommendations will have on future budgets. It is also the task of this Committee to assess the County's ability to repay bond debt and the Committee issues an annual report defining debt capacity of the County. FINANCIAL POLICIES The financial policies and management practices of Howard County were recognized by all three major rating agencies with a continued Triple-A credit rating, the highest possible rating. Debt Management Policy The County adopted an updated debt management policy on October 7, 2009 that establishes the processes employed to manage its debt. The policy sets the parameters for issuing debt and managing outstanding debt. It provides guidance to decision makers regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, method of sale that may be used and structural features that may be incorporated. By establishing a debt policy, the County has recognized the binding commitment to full and timely repayment of all debt. The policy ensures that the County maintains a sound debt position and that credit quality is protected. ix Letter of Transmittal Investment Policy The County's investment policy provides for the safety and liquidity of public funds by minimizing credit and market risk while maintaining a competitive yield on the investment portfolio. All deposits at June 30, 2012 were either insured by federal depository insurance or collateralized with the collateral held by an independent third party in the County's name. Investment activities are governed by State laws and, accordingly, the County invests in certificates of deposit (Maryland State banks only), repurchase agreements, bankers acceptances, U.S. Government and Federal agency obligations, Treasury and government mutual funds, and the State investment pool. Repurchase agreements and certificates of deposit are subject to the County's collateralization policy. The investment policy for the two Howard County retirement plans establishes asset allocation targets, investment manager selection, and investment performance guidelines. AWARDS AND ACKNOWLEDGMENTS The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to Howard County, Maryland for its Comprehensive Annual Financial Report for the fiscal year ended June 30, 2011. This was the thirty-sixth consecutive year that the County received this prestigious award. In order to be awarded a Certificate of Achievement, the County published an easily readable and efficiently organized CAFR. This report satisfied both Generally Accepted Accounting Principles (GAAP) and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current CAFR continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. In addition, the County also received the GFOA's Distinguished Budget Presentation Award for its annual budget document dated July 1, 2012. This was the nineteenth consecutive year the County has received this award. In order to qualify for the Distinguished Budget Presentation Award, the County's budget document was judged as proficient in several categories, including as a policy document, a financial plan, an operations guide, and a communications device. A very special thank you to Thompson Betts, Lori Buchman, Sarah Flaig, Paul German, Silvia Gould, Verda Hall, Michelle Harrod, Nicole Hogue, Sean Hollywood, Yusef Ibrahim, Rafiu Ighile, Angela Price, Jennifer Skiratko, and Sima Taghavi for their efforts in preparing and publishing this document. Credit also must be given to the County Executive and the County Council for their unwavering support for maintaining the highest standards of professionalism in the management of Howard County's finances. Respectfully submitted, Stanley J. Milesky Director of Finance x Letter of Transmittal Certificate of County Auditor xi The Department of Citizen Services employees work to enhance the quality of life for all county residents. The Department's programs, services and employees touch the lives of children and youth, their parents, people with disabilities, individuals in crisis, older adults and consumers who have complaints about a business. Seniors get help filling out a Senior Tax Credit form (above); and over 4,000 visitors attend the annual 50+EXPO, sponsored by the Department. Financial Section Basic Financial Statements Notes to Financial Statements Combining and Individual Fund Statements and Schedules Independent Auditor's Report County Council Howard County, Maryland 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 Howard County, Maryland (the County), 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 County'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 Howard County Public School System, Howard Community College, or the Howard County Housing Commission, which represent 36 percent, 59 percent and 44 percent, respectively, of the assets, net assets, and revenues of the total governmental activities, the businesstype activities, and the aggregate discretely presented component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based on the report 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 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 Howard County, Maryland, as of June 30, 2012, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund and the Agricultural Land Preservation Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated January 11, 2013, on our consideration of Howard County, Maryland's internal control over financial reporting and on our tests of its compliance with certain Independent Auditor's Report 1 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 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. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, required supplemental schedules of funding progress for Pension Trust funds and Other Post Employment Benefit (OPEB) Trust and required schedule of employer contributions for OPEB Trust Fund on pages 3 through 13 and 63 through 64 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. As fully described in note 18 to the financial statements, certain errors were noted which resulted in the restatement of prior year balances. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise Howard County, Maryland's financial statements as a whole. The introductory section, combining and individual nonmajor fund financial statements, and statistical section are presented for purposes of additional analysis and are not a required part of the financial statements. The combining and individual nonmajor fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the 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, the information is fairly stated in all material respects in relation to the financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Baltimore, Maryland January 11, 2013 2 Independent Auditor's Report Management's Discussion and Analysis As management of Howard County, Maryland (the County), we offer readers of the County's financial statements this narrative overview and analysis of the financial activities of the County for the fiscal year ended June 30, 2012. We encourage readers to consider the information presented here in conjunction with additional information furnished in our letter of transmittal (found on pages iii to x of this report). The discussion focuses on the County's primary government and, unless otherwise noted, does not include component units reported separately from the primary government. Financial Highlights The assets of the County exceeded its liabilities at the close of the most recent fiscal year by $844.7 million. That amount is net of a $525.3 million unrestricted deficit. The unrestricted deficit occurs because the County issues debt to fund construction costs for the Public School System and the Community College, two of its component units but does not own the corresponding assets. Debt outstanding for education projects is $420.3 million and for college projects is $68.2 million. Ownership of the buildings owned by the Public School System transfers to the County if the assets are no longer needed for educational purposes. The current net value of the Public School System's buildings and improvements and construction in progress is $927.9 million. The $54.4 million increase in the government's total net assets is primarily due to an increase in the local income tax revenue of $27.0 million and $21.0 million in contributed capital. The County's local income tax revenues increased this year by $27.0 million or 8.2% this due to increases in the number of employed residents and the median income. Approximately 60.5% of the total governmental fund balance, $148.5 million, is available to meet the County's current and future needs as mandated by the appropriate level of authority within the County and are properly designated as committed, assigned and unassigned. Available fund balance for the General Fund was $111.9 million, or 13.3% of total General Fund expenditures. At the end of the current fiscal year, the County's governmental funds reported combined ending fund balances of $245.6 million, an increase of about $45.5 million in comparison with the prior year. Specifically, the fund balance of the General Fund increased by $19.2 million due to an increase in income tax revenue of $42.0 million. In addition, the fund balance of the General Capital Projects Fund increased by $16.8 million primarily due to recognizing grant revenue of $31.8 million and $15.6 million for expenditures on the Inter-County Broadband Network capital project and various capital projects for the Community College such as the Allied Health Services building. The reserve for the budget stabilization account balance is $56.3 million, a decrease of $0.5 million or 6.5% of fiscal year 2012 general fund expenditures. That balance meets the target set by the County Charter (7% of fiscal year 2010 expenditures). We have reached that target and assigned $2.2 million for subsequent years' budget stabilization. The County is committed to meeting this mandated target in future years. The County's total long-term debt increased by $91.2 million (8.3%) during the current fiscal year. The major factors in this increase were the issuance of $219.4 million in Consolidated Public Improvement (CPI) Project Bonds, $56.2 million in Metropolitan (Metro) District Project Bonds, $5.4 million in Special Facility Revenue Bonds, and a $0.5 million draw on the State Water Quality Revolving Loan Fund. The County refunded $120.3 million in CPI bonds, $17.7 million in Metro bonds, and $5.8 million in Special Facility Revenue bonds, and retired $56.6, $7.7, and $4.1 million of CPI, Metro, and Water Quality Bonds, respectively. The County also retired $555,000 of Special Facility Revenue bonds. Management's Discussion and Analysis 3 Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to Howard County, Maryland's basic financial statements that include: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide financial statements. The government-wide financial statements provide readers with a broad overview of the County's finances, in a manner similar to a private-sector business. The two government-wide statements are on a full accrual accounting basis, including the elimination and/or reclassification of internal activities. The first government-wide statement is the Statement of Net Assets. This is the Countywide position presenting information that includes all County assets and liabilities, with the difference reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. Evaluations of the overall health of the County would extend to other non-financial factors such as diversification of the taxpayer base or the condition of County infrastructure in addition to the financial information provided in this report. The second government-wide statement is the Statement of Activities, which presents information showing how the government's net assets changed during the current fiscal year. All current year revenues and expenses are included regardless of when cash is received or disbursed. An important purpose of the Statement of Activities is to show the financial reliance of the County's distinct activities or functions on revenues provided by the County's taxpayers. Both government-wide financial statements distinguish functions of the County 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 County include general government, public safety, public works (roads, trash collection and disposal, planning and zoning, inspections and permits), legislative and judicial, education, community services (health, housing, aging, and consumer protection), recreation and parks and state highways. The business-type activities of the County include the operations of water and sewer services and a public golf course. Fiduciary activities, such as employee pension plans, are not included in the government-wide statements since these assets are not available to fund County programs. The government-wide financial statements include not only the County, the primary government, but also a legally separate school system, community college, library system, and housing commission for which the County is financially accountable. Financial information for these component units is reported separately from the financial information presented for the primary government itself. The government-wide financial statements can be found on pages 15-16 of this report. Fund financial statements. A fund is an accountability unit used to maintain control over resources that have been segregated for specific activities or objectives. State and local governments use fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the County can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Within the basic financial statements, fund financial statements focus on the County's most significant funds rather than the County as a whole. Major funds are separately reported while all others are combined into a single, aggregate presentation. Individual fund data for nonmajor funds is provided in the form of combining statements in a later section of this report. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, the focus is very different with fund statements focusing on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-term financing requirements. Since the government-wide focus includes the long-term view and the fund focus includes the short-term view, comparisons between these two perspectives may provide insight into the long-term impact of short-term financing decisions. By doing so, readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and government-wide activities. 4 Management's Discussion and Analysis The County maintains sixteen individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statements of revenues, expenditures, and changes in fund balances for the general, agricultural land preservation, highway capital projects, and general capital projects funds, all of which are major funds. Data from the other twelve non-major governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. The County adopts an annual appropriated budget for its non-capital governmental funds. Budgetary comparison statements are provided for the general and agricultural land preservation funds to demonstrate compliance with this budget. Budgetary statements for non-major special revenue funds are provided in the combining section of this report. The basic governmental fund financial statements can be found on pages 17-22 of this report. Proprietary funds are reported in the fund financial statements and generally report services for which the County charges customers a fee. The County maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The County uses enterprise funds to account for its water and sewer infrastructure and operations and for the operations of its public golf course. Internal service funds are an accounting structure used to accumulate and allocate costs internally among the County's various functions. The County uses internal service funds to account for its fleet of vehicles, technology and communications systems, risk management self-insurance program, and employee benefits self-insurance. Because the internal service funds' services predominately benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. Proprietary funds provide both long and short-term financial information consistent with the focus provided by the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the water and sewer operations and for the public golf course, both of which are major funds of the County. Conversely, all internal service funds are combined into a single, aggregate presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report. The basic proprietary funds financial statements can be found on pages 23-25 of this report. Fiduciary funds are used 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 County's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The basic fiduciary funds financial statements can be found on pages 26-27 of this report. The Component Unit financial statements can be found on pages 28-29 of this report. Notes to the financial statements. The notes provide additional information 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 immediately after the Basic Financial Statements on pages 31-62. Other information. In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning management's discussion and analysis and the County's progress in funding its obligation to provide pension and other post employment benefits to its employees. Required supplementary information can be found on page 63-64 of this report. The combining statements referred to earlier in connection with the general fund, non-major governmental funds, internal service funds, and fiduciary funds are presented immediately following the required supplementary information on pensions and is considered to be supplementary information. Combining and individual fund statements and schedules start on page 65 of this report. Detailed capital asset schedules for governmental and proprietary funds appear on pages 95-97. Schedules providing additional long-term debt detail start on page 99. The Statistical Section begins on page 111. Management's Discussion and Analysis 5 Government-Wide Financial Analysis Over time, changes in net assets serve as a useful indicator of a government's financial position. Howard County's assets exceeded liabilities by $844.7 million at the close of the most recent fiscal year. The largest portion of the County's net assets reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment) less any related debt used to acquire or construct those assets that is still outstanding. The County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the County's investment in its 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 liquidate these liabilities. It is important to note that although counties in the State of Maryland issue debt for the construction of schools, school buildings are owned by each county's Public School System. Ownership reverts to the County if the local board determines a building is no longer needed. The County also funds projects for the Howard Community College and for intersection improvements to State owned roads. As of June 30, 2012, debt outstanding for education projects is $420.3 million and for college projects is $68.2 million. Therefore, while the County's financial statements include this outstanding debt, they do not include the capital assets funded by the debt. The negative unrestricted governmental activities net assets of $616.5 million reflects the imbalance of liabilities without corresponding assets as well as the County's Net OPEB Obligation of $262.0 million. An additional portion of the County's net assets ($143.7 million or 17.0%) represents resources subject to external restrictions on their usage. S ummary of Net Assets Governmental activities 2012 2011 * Current and other assets Capital assets Total assets Long-term liabilities outstanding Other liabilities Total liabilities Net assets: Invested in capital assets net of related debt Restricted Unrestricted Total net assets $ Business-type activities 2012 Total 2011 ** 2012 2011 505,166,494 1,251,579,487 1,756,745,981 443,070,170 1,160,265,322 1,603,335,492 194,514,606 663,099,053 857,613,659 177,926,066 619,618,427 797,544,493 699,681,100 1,914,678,540 2,614,359,640 620,996,236 1,779,883,749 2,400,879,985 1,320,866,201 172,581,835 1,493,448,036 1,188,722,944 170,674,733 1,359,397,677 259,452,989 16,712,923 276,165,912 234,584,071 16,567,220 251,151,291 1,580,319,190 189,294,758 1,769,613,948 1,423,307,015 187,241,953 1,610,548,968 429,005,565 61,315,957 91,126,225 581,447,747 412,443,596 132,071,680 1,877,926 546,393,202 1,226,347,090 143,748,141 (525,349,539) 844,745,692 1,192,517,819 215,542,163 (617,728,965) 790,331,017 797,341,525 82,432,184 (616,475,764) $ 263,297,945 780,074,223 83,470,483 (619,606,891) 243,937,815 * Restated by ($15,195,173) to correct construction-in-progress, and $4,622,000 to correct the landfill closure obligation, for a net total of ($10,573,173). ** Restated by ($320,685) to correct the accounting of connection fees from revenue to liability. At the end of the current fiscal year, the County is able to report positive balances in two of the three categories of net assets for the government as a whole, as well as for its separate governmental activities. Business-type activities show positive balances in all three categories. The County's net assets increased by $54.4 million during the current fiscal year as the result of a $19.4 million increase in governmental activities and a $35.1 million increase in business-type activities. The governmental activities increase is primarily due to a $27.0 million increase in income tax revenue. The business-type activities increase is due to $10.0 million in contributed capital and the accumulation of ad valorem revenues to fund future capital projects. The deficit in unrestricted net assets for governmental activities decreased by $3.1 million this year because of the following factors: The outstanding debt for School capital projects (see discussion above) decreased by $12.7 million. Revenue from other governments which comprises local income, transfer, recordation, building excise, hotel/motel, admission, county development, and mobile home taxes increased overall by $33.9 million. The County's net OPEB obligation increased by $42.2 million. 6 Management's Discussion and Analysis Changes in Net Assets Governmental activities 2012 2011 * Business-type activities 2012 2011 ** 2012 2011 124,679,085 46,323,888 68,472,451 97,594,321 26,559,373 24,715,975 52,864,646 29,880,497 21,109,099 50,662,802 30,884,327 24,010,348 177,543,731 76,204,385 89,581,550 148,257,123 57,443,700 48,726,323 General revenues Property taxes Local Income taxes Other taxes Other Total revenues 504,771,008 358,356,561 54,343,807 11,633,238 1,168,580,038 504,884,233 331,334,252 47,446,303 3,707,021 1,036,241,478 170,617 104,024,859 196,349 105,753,826 504,771,008 358,356,561 54,343,807 11,803,855 1,272,604,897 504,884,233 331,334,252 47,446,303 3,903,370 1,141,995,304 Expenses General government Public safety Public works Recreation and parks Legislative and judicial Community services State highways Education Interest on long term debt Water & Sewer Golf course Total expenses 84,025,615 184,324,533 115,231,452 29,974,257 22,248,551 45,302,315 2,900,053 610,774,387 53,851,903 1,148,633,066 35,202,457 173,962,616 114,387,280 28,954,639 21,684,449 44,622,516 1,917,170 605,271,207 37,102,195 1,063,104,529 67,635,638 1,921,518 69,557,156 66,636,363 1,762,425 68,398,788 84,025,615 184,324,533 115,231,452 29,974,257 22,248,551 45,302,315 2,900,053 610,774,387 53,851,903 67,635,638 1,921,518 1,218,190,222 35,202,457 173,962,616 114,387,280 28,954,639 21,684,449 44,622,516 1,917,170 605,271,207 37,102,195 66,636,363 1,762,425 1,131,503,317 34,467,703 586,842 35,054,545 546,393,202 581,447,747 37,355,038 (2,995,034) 34,360,004 512,033,198 546,393,202 54,414,675 54,414,675 790,331,017 844,745,692 10,491,987 10,491,987 779,839,030 790,331,017 Revenues Program revenues Charges for services Operating grants and contributions Capital grants and contributions Increase (decrease) in net assets Transfers Increase (decrease) in net assets Net assets beginning Net assets ending $ $ 19,946,972 (26,863,051) (586,842) 2,995,034 19,360,130 (23,868,017) 243,937,815 267,805,832 263,297,945 $ 243,937,815 Total * Restated by ($15,195,173) to correct construction-in-progress, and $4,622,000 to correct the landfill closure obligation, for a net total of ($10,573,173). ** Restated by ($320,685) to correct the accounting of connection fees from revenue to liability. Governmental activities. Governmental activities increased the County's net assets by $19.4 million. Key elements of this increase are as follows: Program Revenues increased overall by $90.6 million (60.9%). The County recognized $38.4 million in federal grant monies related to expenses funding the Inter-County Broadband Network (ICBN) project. In addition, the County recognized $15.1 million of revenue in expected contributions from other local governments participating in the ICBN. Furthermore, $15.6 million of grant revenue was recognized for several Community College capital projects which are nearing completion. Local income taxes increased by $27.0 million or 8.2% this year due to an increase in the number of employed residents and the median income. Expenses increased by $42.2 million for additional Net OPEB Obligation. Expenses increased by $43.2 million for expenses incurred on behalf of the other local government jurisdictions participating in the ICBN project. Per the memorandum of understanding, each local government capitalizes assets built within their jurisdiction. Management's Discussion and Analysis 7 Expenses and Program Revenues - Governmental Activities 700,000 600,000 500,000 400,000 300,000 200,000 Expenses Interest-long term debt Education Community Services Legislative & Judicial Recreation & Parks Public Works (Thousands) Public Safety - General Government 100,000 Revenues Revenues by Source - Governmental Activities Capital grants and contributions 6% Other 1% Operating grants and contributions 4% Charges for services 11% Property taxes 43% Other local taxes 35% 8 Management's Discussion and Analysis Business-type activities. Business-type activities increased the County's net assets by $35.1 million. The components of this increase are as follows: Charges for services increased by $2.2 million due to a 9% rate increase for water and sewer usage. Operating grants and contributions which totaled $29.9 million represent an annual ad valorem fee levied on all properties within the water and sewer service district. This charge is primarily used to fund debt service payments and pay-as-you-go funding on capital projects. Capital grants and contributions mainly consisted of the receipt of $11.0 million in grant funding from the State of Maryland to fund improvements to reduce nitrogen discharge in the reclaimed water system. In addition, $10.0 million was received in capital contributions. This revenue includes the value of water and sewer lines constructed by developers and donated at no cost to the County. The County pays for additional water and sewer lines built by developers through a rebate process. Capital contributions also include front foot revenues assessed to properties connected to the water and sewer system. These front foot revenues fund the debt issued to pay developer rebates. Effective July 1, 2004, the County has not entered into any new rebate contracts. Developers pay for those improvements and are still required to donate the assets to the County. Overall, capital grants and contributions decreased by $3.2 million from fiscal year 2011. Business-type activities are shown comparing costs to revenues generated by related services. Both water and sewer and the golf course activities are self-supporting. Expenses and Program Revenues - Business-type Activities 120,000 100,000 (Thousands) 80,000 Expenses 60,000 Revenues 40,000 20,000 Water & Sewer Management's Discussion and Analysis Golf Course 9 Revenues by Source - Business-type Activities Capital grants and contributions 20% Charges for services 50% Operating grants and contributions 29% Other 1% Financial Analysis of the County's Funds As noted earlier, the County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of Howard County's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the County's financing requirements. In particular, unreserved fund balances may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the County's governmental funds reported combined ending fund balances of $245.6 million, an increase of $45.5 million in comparison with the prior year. Of this fund balance, $14.6 million is nonspendable, $82.4 million is restricted by enabling legislation, $102.8 million is committed by the County at the highest level of authority, $117.8 million is assigned, and ($72.0) million is deficit unassigned fund balance. The general fund is the chief operating fund of the County. At the end of the current fiscal year, total fund balance of the general fund is $111.9 million, $19.2 million or 20.7% more than the prior year, due to a $42.0 million increase in local income tax revenue. The $77.0 million total fund balance of the Agricultural Land Preservation Fund is a $4.5 million increase from the prior year. The increase is the result of increases in fair value of US Treasury Strips investments. The general capital projects fund is used to track the construction of general county buildings. The fund balance is a negative $56.5 million. This is a timing issue due to capital project expenditures occurring before revenues are recognized. The highway capital projects fund is used to track the construction of bridges, roads, sidewalks, and intersections. The fund balance is $48.6 million of which $43.3 million represents funds restricted for public road facilities. Proprietary funds. The County's proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. All assets in the Water and Sewer Proprietary Fund and the Special Recreation Facility Fund (golf course), except those available to fund current liabilities, are considered restricted because a change in the charter is required to allow these assets to be used for other purposes. Net assets of the water and sewer operations at the end of the year amounted to 10 Management's Discussion and Analysis $574.1 million, and those for the golf course operation were $5.3 million. The total increase in net assets in each fund was $34.0 million and $0.9 million, respectively. Other factors concerning the finances of these two funds have already been addressed in the discussion of the County's business-type activities. General Fund Budgetary Highlights The original general fund expenditure and revenue budgets did not change in total during the current fiscal year. Due to uncertainty surrounding the economy at the beginning of the fiscal year, the County held back on expenditures and spent $9.0 million less than the budget. The County collected $31.9 million more in local income taxes than budgeted due to recovery in the local jobs market. As a result, operating transfers in that were budgeted to be transferred from several other funds were not completed. Total debt service final budget amounts compared to expenditures and encumbrances for the period show a favorable variance of $5.6 million. Likewise, interest on investments fell short of budgeted revenue by $4.8 million. This occurred because interest income and expenses on variable rate debt, commercial paper, are budgeted high to allow for increases in interest rates during the year. Capital Assets and Debt Administration Capital assets. The County's investment in capital assets for its governmental and business type activities as of June 30, 2012 is $1.9 billion