VALLEY METRO RAIL, INC. Phoenix, AZ COMPREHENSIVE ANNUAL FINANCIAL REPORT Period Ended June 30, 2010 VALLEY METRO RAIL, INC. Phoenix, Arizona Comprehensive Annual Financial Report For the fiscal year ended June 30, 2010 Prepared by: Finance & Administration Division A METRO three-car train on the Tempe Town Lake Bridge METRO LIGHT RAIL SYSTEM 2009 Facts and Figures Ridership Highest ridership days • 11.3 million total riders • Dec. 31–New Year’s Eve Block Party • Exceeded projections by 45% • Oct. 2–First Friday; motivational seminar • Seeing increased ridership in 2010 • • 35 34,809 35 May 13–ASU’s commencement featuring President Obama 60 60 50 50 • 53,216 • Montebello/19th Ave • University Dr/Rural • Van Buren/Central and 1st Ave • Roosevelt/Central Ave 20 15 10 5 0 • 27,662 25 20 • 18,110 15 10 Riders (in Thousands) Sycamore/Main St 25 Riders (in Thousands) • Riders (in Thousands) Top five busiest stations 30 40 30 20 10 5 0 saturdaysaturday sunday sunday weekday weekday 0 Riders (in Thousands) • 30 50,562 • 50,011 40 30 20 10 0 Dec. 31 Dec. Oct. May 312 Oct. 2 13 May 13 Average Average Valley Metro Rail, Inc. (dba METRO light rail) is responsible for the development and operation of the region’s high-capacity transit system. The 20-mile light rail starter line opened December 2008 and served 11.3 million riders in 2009, exceeding all first-year projections by 45 percent. METRO continues to see ridership growth in 2010. Design and Construction System Overview • • • • • • • • • Number of miles: 20 Number of stations: 28 Number of vehicles: 50 Number of parking spaces: 3,500 Total travel time: 65 minutes Opening date: Dec. 27, 2008 Cost to build: $1.4 billion Cost to operate: $33.2 million in FY11 Cost to ride: $1.75 per ride; $3.50 for all day METRO’s 20-mile light rail line is the longest starter line in federal New Starts grant history. It was built entirely in-street using a train-only trackway and traffic signals to allow trains to safely move through the cities of Phoenix, Tempe and Mesa, Arizona. The cost was $1.4 billion paid for using a $587 million federal New Starts grant, $59 million from a Congestion Mitigation and Air Quality grant and local tax dollars. The local funds are a mix of sales tax revenue from the cities of Phoenix and Tempe, General Fund from Mesa and a small amount from the county’s Proposition 400 half-cent sales tax. There are 28 stations, primarily located in the center of the roadway, and designed using a kit-of-parts infrastructure and in consideration of the desert heat. Artwork is an integral part of the system and incorporated into each station area. The art pieces were designed using community input and several local as well as national artists. Eight park-and-rides feed the system where free parking can be enjoyed by riders. The more than 3,500 spaces are available on a first-come, first-serve basis and, like the rest of the system, monitored using security cameras. continued METRO LIGHT RAIL SYSTEM METRO has 50 vehicles in its fleet, each with a comfort capacity of 175. The vehicles are at the top of current innovation and, similar to the stations, customized for the desert climate and operating environment. Future Expansion METRO is responsible for building a 57-mile highcapacity transit system as defined in the Regional Transportation Plan by 2031. Planning, and design in some cases, has begun on the six extensions that make up the remainder of the 37 miles yet to be built. Two have been defined as light rail corridors: the Northwest and Central Mesa extensions. The other four – Tempe South, Phoenix West, Glendale and Northeast Phoenix – have yet to determine a specific transit mode and route. Operations METRO operates 365 days a year, 20 hours a day Sunday – Thursday, and almost 24 hours on weekends. Trains arrive every 12 minutes during the weekday peak period; every 15 minutes during the Saturday peak; and every 20 minutes during all other hours, Sundays and holidays. 10-14-10 ��� ��������������������� ������� �������������������� �� �������� ��� ������������ ������������������������������� ������� ���� �� ���� ������ ���������� ���� ��������������� ���������� �������� �� �������� ���� ��������� ��� ��� ���� �� ����������� ���� ����������� ���� ��� ������������ �� ����� ������� ������� ��� �� ������������� ���������� ������������ ������� ���������� ����������� �������� ������� ������� ������� ����������� �������� �������� ��� �������� ������������ ��������� �������� �������� ������������ ������������� ��� �������� ���������� ������������������������������������������� ������������ ���������������� ����������� ���������������������������� �������������������������������� �������� ������ ���� �������� For many, the METRO system provides a connection to work, school and play. There are several sports and entertainment venues, arts and culture organizations and restaurants and bars that attract riders to the line. METRO also connects to Phoenix Sky Harbor International Airport with a shuttle bus accessible from the 44th Street/ Washington transit center. ������ ������������ �������� Light rail service is coordinated with bus service to provide a seamless network for customers. An all-day pass or greater is good for both rail and bus. Passes can be purchased at fare vending machines located at each station, online or from retail outlets Valleywide. Security officers regularly patrol the system and ask passengers at random for proof of payment. Fare evasion is cited with a fine that starts at $50, but can increase to $500. MetroLightRail.org 602-253-5000 Valley Metro Rail, Inc. Table of Contents Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2010 Page Introductory Section Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Policy Organizational Chart List of Appointed Officials Financial Section Independent Auditors' Report Management's Discussion and Analysis Basic Financial Statements Statement of Net Assets Statement of Revenues, Expenses and Changes in Fund Net Assets Statement of Cash Flows Notes to the Basic Financial Statements 9 10 11 12 Other Supplementary Information Schedule of Operations - Budget and Actual 24 Statistical Section Financial Trends Net Assets by Component Changes in Net Assets Demographic and Economic Information Growth in Regional Transit Usage – Bus and Rail Boardings by Fiscal Year Member Cities' Area Growth Top Employers in Maricopa County System Map - Initial 20-Mile Segment System Map - Northwest Extension System Map – Central Mesa Operating Information Full-Time Equivalent Positions Pay Grades and Ranges Schedule of Insurance Coverage Design & Construction Milestones iii ix x xi 1 3 26 27 28 29 30 31 32 33 34 36 38 40 INTRODUCTORY SECTION The Introductory Section includes METRO’s transmittal letter, policy organizational chart, and list of appointed officials Train at Central/Washington Station 101 North 1st Avenue Suite 1300 Phoenix, AZ 85003 November 24, 2010 To Chairman and Members of the Valley Metro Rail, Inc. Board of Directors: The comprehensive annual financial report of Valley Metro Rail, Inc. (METRO) for the fiscal year ended June 30, 2010, is hereby submitted in accordance with the requirements of the Bylaws and Board directives. Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with management. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner that presents fairly the financial position, results of operations and cash flows of METRO. All disclosures necessary to enable the reader to gain an understanding of METRO’s activities have been included. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for local governments as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants (AICPA). The independent auditors, Larson Allen LLP, whose report is included herein, have examined the basic financial statements and related notes. As stated in the independent auditors’ report, the goal of the independent audit was to provide reasonable assurance that the basic financial statements of METRO as of and for the fiscal year ended June 30, 2010, are free from material misstatement. The independent audit involved examining, on a test basis; evidence supporting the amounts and disclosures in the financial statements; assessing accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditors concluded, based upon their audit, that there was a reasonable basis for rendering an unqualified opinion that the basic financial statements of METRO for the fiscal year ended June 30, 2010, are fairly presented, in all material respects, in conformity with GAAP. The independent auditors’ report is presented as the first component of the financial section of this report. Additionally, METRO is required to have an independent audit of expenditures of federal awards received (Single Audit) by METRO directly from federal agencies, or passed through to METRO by other governmental entities during the fiscal year. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on METRO’s internal controls and compliance with legal requirements having a direct and material impact on major programs, with special emphasis on internal controls and compliance requirements involving the administration of major federal awards. The results of METRO’s Single Audit for the fiscal year ended June 30, 2010, found no instances of material weakness in the internal control structure or significant violations of applicable laws and regulations with respect to major programs. The auditors’ reports on internal controls and compliance with applicable laws and regulations are included in a separately issued Single Audit Report. The financial statements are prepared and presented in conformity with accounting principles generally accepted in the United States of America. More information about the presentation can be found in Management’s Discussion and Analysis (MD&A) beginning on page 3 and also iii Valley Metro Rail, Inc. Letter of Transmittal (Continued) discussed in the notes to the financial statements beginning on page 12. This transmittal letter is designed to complement MD&A and should be read in conjunction with it. THE FINANCIAL REPORTING ENTITY METRO was established in October 2002 as a public nonprofit corporation formed by the cities of Glendale, Mesa, Phoenix, and Tempe to manage design, construction, and operation of the Light Rail Transit (LRT) System within the Metropolitan Area. The cities of Chandler and Peoria became contributing member cities in 2007. The City of Scottsdale joined in April of 2008 and withdrew membership effective July 1, 2009. During the fiscal year 2009-2010, a six member Board of Directors governed METRO, consisting of the mayors or their designated representatives from each member city. The Board of Directors establishes overall policies for management and administration of the LRT System, provides oversight over the design, construction and operation of light rail, and receives and disburses funds and grants from federal, state, local, and other funding sources. A Chief Executive Officer, appointed by the Board of Directors, is responsible for the day-to-day management of the organization. LOCAL ECONOMIC CONDITION AND OUTLOOK METRO serves the cities of Chandler, Glendale, Mesa, Peoria, Phoenix, Scottsdale, and Tempe that are centrally located in Maricopa County, Arizona. These cities have constituted a wellestablished growth area since 1945, and collectively encompass approximately 1,200 square miles. Together they form a significant portion of the greater metropolitan Phoenix area, which is the economic, political, and population center of Arizona. The combined six cities have grown from 2.5 million residents in 1990 to 3.1 million residents in 2009, an increase of approximately 20% in the last ten years. The six cities’ population represents almost 77% of the total Maricopa County population. According to the Greater Phoenix Economic Council, population in the region is projected to grow at more than twice the national rate for the next few decades, growing from 3.6 million in 2007 to 6.3 million in 2030. In 2007 and 2008, the region’s historically strong economic growth slowed and sales tax revenues fell to 2006 year levels. The economic decline continued in 2009 and 2010 with tax revenues falling to levels dating back to the year 2000. METRO responded to the times with staff reductions in 2009 and with service reductions in 2010. Due to the strong financial plan established for the 20 mile initial light rail system, the funding for construction and operation of the system is secure. Despite the recent downturn, increases in population and new home construction have led to increased demands for quality public transportation and improved air quality. Over the last five years, public transportation ridership grew by 14.2 percent in the region. With the commencement of rail passenger operations in December 2008, the LRT System added new capacity to the regional transportation system. Since opening, the METRO light rail line has experienced strong passenger growth with average weekday ridership exceeding 40,000 passengers versus the 26,000 riders planned. With the passage of Proposition 400, and the creation of the Public Transportation Fund, light rail extensions in Mesa, Phoenix, and Tempe are in the planning stages which will continue to add capacity to the region’s transportation system in the years ahead. iv Valley Metro Rail, Inc. Letter of Transmittal (Continued) FINANCIAL CONTROLS Accounting and Administrative Controls As previously noted, METRO’s management is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of METRO are protected from loss, theft or misuse and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. METRO’s internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. As a sub-recipient of federal financial assistance, METRO is also responsible for ensuring that an adequate internal control structure is in place to ensure and document compliance with applicable laws and regulations related to these programs. This internal control structure is subject to periodic evaluation by management and by METRO’s independent auditor. As part of METRO’s Single Audit, tests were made of the internal control structure and of its compliance with applicable laws and regulations, including those related to federal awards. Although this testing is limited in scope and is not sufficient to support an opinion on METRO’s internal control system or its compliance with laws and regulations, the audit for the year ended June 30, 2010, disclosed no material internal control weaknesses or material violations of laws and regulations. The audit of METRO’s compliance with requirements applicable to each major program and internal control over compliance resulted in an unqualified opinion of compliance and noted no material weaknesses in internal controls. Budgetary Systems and Controls The objective of the budgetary controls maintained by METRO is to ensure compliance with legal provisions embodied in the annual appropriated budget approved by the Board of Directors. The by-laws require a balanced budget to be adopted by the METRO Board each fiscal year. The level of budgetary control, i.e., the level at which expenditures cannot legally exceed appropriations, is the total operating budget. METRO maintains budgetary control by conducting quarterly evaluations of expenditures against appropriations and through close monitoring of revenues. Encumbrance accounting is not utilized and all appropriations lapse at year-end. As demonstrated by the statements included in the financial section of this report, METRO continues to meet its responsibility for sound financial management. In addition to the annual budget, METRO also prepares a Five-Year Capital Program and Operating Forecast and the Transit Life Cycle Plan (TLCP) update. The five-year forecast starts with the annual budget information and extends it an additional four years to provide information about the anticipated schedule, costs, and revenues. The TLCP gives a longer term perspective by outlining the sources and uses of funds for specific capital projects and the corresponding costs and funding to operate each project out through fiscal year 2025. For each major capital project, METRO regularly reports the project budget status to the Board showing by project element the engineering baseline cost estimate (BCE) or Full Funding Grant Agreement (FFGA) budget amount versus commitments, actual expenditures, and forecasted cost at completion. METRO evaluates project contractual costs and estimates the cost at completion as part of the regular project reporting process. Should anticipated contractual costs appear to exceed the Board approved contingency, METRO staff will seek Board action to allocate additional contingency to the contract either by transfer from the project reserve or by transfer from other project elements where the work to be contracted is currently budgeted within the baseline cost v Valley Metro Rail, Inc. Letter of Transmittal (Continued) estimate. Significant issues impacting cost versus budget are addressed in the narrative reports included in the monthly project progress report submitted to the Board in advance of each regular board meeting. With the commencement of passenger operations in December 2008, METRO has continued to refine detailed cost estimates for manpower, contracted costs, utilities and insurance to construct the annual operations budget. Analysis and comparisons of METRO’s planned costs to peer city light rail systems have been conducted. Actual costs are tracked against budget and reported to Member Cites on a monthly basis with significant variances analyzed and communicated. Member Cities fund the cost of the operations based upon the ratio of route miles in operation within each jurisdiction. In the first eighteen months of operations, METRO has successfully operated within budget while achieving on-time and reliability performance targets. With respect to fare revenues, METRO has engaged an armored car service contractor to pick up fare payments deposited by customers in the fare vending machines. The armored car service deposits daily collections into the City of Phoenix regional fare revenue depository. METRO works in collaboration with the City of Phoenix to compute and distribute fare revenues to the Member Cities. In the first eighteen months, METRO’s fare revenues have exceeded budget. MAJOR INITIATIVES Design and Construction of Light Rail METRO successfully completed construction of the Central Phoenix/East Valley Light Rail Transit (CP/EV LRT) Project, funded by Section 5309 New Starts program. The Northwest Extension, the first planned LRT extension has completed the design phase and is wrapping up real estate procurement. Due to the economic downturn, the Northwest Extension project construction activities have been suspended pending availability of funds from the City of Phoenix. The Central Mesa Extension has completed the planning phase and is commencing design work for an anticipated line opening in 2016. Central Phoenix/East Valley Light Rail Transit (CP/EV LRT) Project The CP/EV LRT project is a 19.6 mile LRT System that connects north central Phoenix, Tempe, and Mesa. The Project was identified as the Minimum Operable Segment of the Locally Preferred Alternative selected in the Central Phoenix/East Valley Major Investment Study completed in 1998. As the initial starter segment, the CP/EV LRT project extends from 19th Avenue and Bethany Home Road in Phoenix to Main and Sycamore Road in Mesa. Phoenix, Tempe, and Mesa share responsibility for funding the non-federal share of capital costs and the on-going operations and maintenance (O&M) costs of the project. The CP/EV LRT project complements existing and proposed bus services to be implemented by Phoenix, Tempe, and Mesa. Construction of the project began in FY 2005 and was completed on-time with passenger operations commencing on December 27th 2008. The capital project is currently in close-out phase. Major activities include management of warranty, settlement of contractor milestone payments and change order issues, satisfaction of Federal Transit Administration requirements and collection of final federal grant payments. In August 2010, METRO received the final FTA grant installment completing the $587.2 million federal contract. Revenue operations commenced January 1 st 2009 providing service from 5AM to 11PM seven days a week. Weekday riders have access to trains every 12 minutes from 7AM to 7PM. Weekend and off-peak weekday service frequencies range from 15 to 20 minutes. vi Valley Metro Rail, Inc. Letter of Transmittal (Continued) Northwest Extension LRT Project The Northwest Extension is a 4.6 mile light rail project starting at the northwest termination point of the Central Phoenix/East Valley Light Rail project. The project follows 19th Avenue to Dunlap Avenue, then west on Dunlap Avenue to 25th Avenue and then runs on 25th Avenue to Mountain View Road. In March 2007 the Phoenix City Council approved an initial 3.2 mile phase to be locally funded, without federal funding support. With the economic downturn, construction of the first phase, which includes the 19th Avenue to Dunlap portion of the project, has been suspended pending availability of funding. Real estate acquisition for the project is continuing in preparation for future construction. During FY 2007 advanced conceptual engineering was completed and a draft Environmental Impact Statement (EIS) was prepared. In July of 2007, an engineering services consultant was secured by METRO and a notice to proceed was issued to commence final design. In September 2007 a construction manager commenced work on pre-construction activities to maximize designbuild coordination. During FY 2007-2008, the City of Phoenix commenced acquisition of real property for the 3.2 mile alignment. During FY 2008-2009, real estate acquisition continued and design work was completed. In fiscal years 2010 and 2011, real estate acquisition is continuing. Central Mesa Light Rail Extension Project In March, 2010, the Mesa City Council approved a 3 mile extension of the LRT system and in August 2010, the Federal Transit Administration approved the alignment for project development as the next step toward federal funding. The extension begins at the eastern limits of METRO’s existing light rail system (Sycamore) and extends east on Main Street to Mesa Drive. The entire extension is within the City of Mesa. There are four stations on Main Street including a station at Alma School Road, Country Club Drive, Center Street, and Mesa Drive. (See page 33 for System Map) The extension is planned to open in 2016 with ridership estimated at approximately 4,750 riders per day. The total capital cost of the project is $198.5 million to be funded with a combination of federal and regional funds. Funding Milestones On November 2, 2004, the voters of Maricopa County approved Proposition 400, the continuation of the transportation tax, for a twenty year period, beginning in calendar year 2006. The approximate total vote in favor was 57.5%. This is a major milestone in transportation funding and service in the region. The Proposition had unanimous support from the Mayors of all of the cities in the region and the Maricopa County Board of Supervisors, the Maricopa Association of Governments Regional Council, and the Arizona Department of Transportation. This initiative is forecasted to generate $1.7 billion (Year of expenditure) in revenue over the 20 year period to fund construction of an additional 15 miles of light rail extensions. On January 24, 2005, the Federal Transit Administration awarded the $587 million Full Funding Grant Agreement (FFGA) to the City of Phoenix for the 20 mile CP/EV LRT Project. In November 2005, the Phoenix City Council approved a Grant Pass-thru Agreement whereby METRO is the Subrecipient for the $587 million FFGA. In 2009, under the American Recovery and Reinvestment Act (ARRA), METRO received and dispersed $36.0 million of the FFGA 5309 funding, bringing the total funding received to $526.0 million. In August 2010, the FTA funded the final $61.2 million to fully complete the Full Funding Grant payment schedule. vii ix ASU students boarding train VALLEY METRO RAIL, INC. Policy Organizational Chart Fiscal Year Ended June 30, 2010 x VALLEY METRO RAIL, INC. List of Appointed Officials Fiscal Year Ended June 30, 2010 Board of Directors Board Chairman Vice Chairman Board Member Board Member Board Member Councilman Tom Simplot, Phoenix Vice Mayor Kyle Jones, Mesa Mayor Bob Barrett, Peoria Councilman Rick Heumann, Chandler Mayor Elaine Scruggs, Glendale Executive Management Team Chief Executive Officer Chief Operations Officer Director, Community and Government Relations Director, Planning and Development Chief of Safety and Security General Counsel Director, Finance & Administration xi Stephen R. Banta Raymond Abraham John Farry Wulf Grote Jay Harper Mike Ladino John McCormack FINANCIAL SECTION The Financial Section includes the independent auditor’s report, Management’s Discussion and Analysis (MD&A), the basic financial statements, notes to the basic financial statements and other financial schedules. Super Motor Cross Event at Chase Field INDEPENDENT AUDITORS’ REPORT To the Members of the Board of Directors Valley Metro Rail, Inc. We have audited the accompanying financial statements of the business-type activities of Valley Metro Rail, Inc. (METRO) as of and for the year ended June 30, 2010, as listed in the table of contents. These financial statements are the responsibility of Valley Metro Rail, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 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 opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities of the Valley Metro Rail, Inc., as of June 30, 2010, and the respective changes in financial position and cash flows, where applicable, thereof 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 November 24, 2010 on our consideration of Valley Metro Rail, Inc.’s internal control over financial reporting and 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. 1 An independent member of Nexia International To the Members of the Board of Directors Valley Metro Rail, Inc. The management's discussion and analysis on pages 3-8 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise METRO’s basic financial statements. The introductory section, other supplementary information and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The other supplementary information has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken 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 express no opinion on them. LarsonAllen LLP Mesa, Arizona November 24, 2010 2 Valley Metro Rail, Inc. Management’s Discussion and Analysis As management of Valley Metro Rail, Inc. (METRO), we offer this narrative overview and analysis of the financial activities of METRO for the fiscal year ended June 30, 2010. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages iii – viii of this report. This discussion and analysis is designed to (1) assist the reader in focusing on significant financial issues, (2) provide an overview of METRO’s financial activity, (3) identify changes in METRO’s financial position, (4) identify any material deviations from the financial plan (adopted annual budget), and (5) identify other issues or concerns. Financial Highlights  METRO’s total net assets decreased $9.1 million in FY 2010. Total net assets for METRO were $1.179 million at June 30, 2010.  With the commencement of rail passenger operations, METRO's primary organizational focus has transformed from construction activities to transportation operation activities. With a break in the flow of new construction costs and the commencement of depreciation charges to support the 20 mile LRT line, total net assets are expected to decrease over the coming years until capital construction resumes on the planned LRT extensions.  The financial statement presentation in fiscal year 2010 reflects this change, with capital construction revenues and expenses now reporting to non-operating activities. In consideration of the fact that the newly completed light rail construction project ($1.4 billion) was one of the largest in Arizona state history, it is to be expected that operational revenues and expenses will drop sharply with the cessation of construction and the commencement of passenger service delivery.  METRO’s operating revenues for FY 2010 were $35.5 million, an increase of approximately $18.6 million from the prior period. With the mid-year grand opening in December 2008, the fiscal year 2009 reported six months of passenger service operations (January through June 2009). In contrast, Fiscal Year 2010 reported a full 12 months. Operating revenues consisted of contributions from METRO member cities ($26.0 million) and passenger fares ($9.3 million).  Non-Operating expenses: This year's non-operating activities report a net $101.3 million decrease in net assets, primarily distributions to Member Cities to reimburse construction expenditures.  Capital contributions totaled $138.8 million, a decrease of approximately $12.1 million from the prior period. Capital contributions consisted of Member City Contributions of $31.2 million, Public Transportation Funds of $45.0 and Federal Transit Administration Capital Grants totaling $62.6 million. OVERVIEW OF THE FINANCIAL STATEMENTS METRO’s financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires that the financial statements be accompanied by a narrative introduction and analytical overview of the government’s financial activities in the form of “Management’s Discussion and Analysis” (MD&A). The financial section of the Comprehensive Annual Financial Report (CAFR) for METRO consists of this discussion and analysis and the basic financial statements. This report also contains other supplementary schedules presented after the basic financial statements. METRO’s basic financial statements 3 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) include a statement of net assets; a statement of revenues, expenses and changes in net assets; a statement of cash flows; and the notes to the financial statements. METRO’s financial statements are prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America promulgated by the Governmental Accounting Standards Board (GASB). Fund Financial Statements – METRO is presented as an enterprise fund. Enterprise funds are used for activities that primarily serve customers outside the governmental unit. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or conditions. Funds are used to ensure and demonstrate compliance with finance-related legal requirements as well as for managerial control to demonstrate fiduciary responsibility over the assets of METRO. The statement of net assets presents information on all of METRO’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of METRO is improving or deteriorating. The statement of revenues, expenses and changes in fund net assets presents information showing how the agency’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected grant revenues). Notes to the Financial Statements – The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the financial statements and should be read with the financial statements. The notes can be found beginning on page 12. Enterprise Operations – METRO was formed in October 2002 by the cities of Glendale, Mesa, Phoenix and Tempe as a public nonprofit corporation to manage design, construction and operation of the Light Rail Transit (LRT) System within the Metropolitan Area. The cities of Chandler and Peoria became the fifth and sixth contributing member cities in April and July of 2007 respectively. The member cities pay for their share of METRO’s operating expenses based on expense allocation methods approved in the by-laws of METRO. See Note 1 for a summary of METRO’s significant accounting policies. 4 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) FINANCIAL ANALYSIS OF METRO The following tables and analysis discuss the financial position and changes to the financial position for METRO as a whole as of and for the year ended June 30, 2010, with comparative information for the previous period. Net Assets – Net assets may serve over time as a useful indicator of METRO’s financial position. The following table reflects the condensed Statement of Net Assets as of June 30, 2010, compared to the prior period. VMR's Condensed Statement of Net Assets As of June 30, 2010 and 2009 Current assets Noncurrent assets Total assets Current Liabilities Noncurrent Liabilities Total liabilities Invested in Capital Assets, net of related debt Unrestricted Total Net Assets Change (56,339,593) (7,527,979) (63,867,572) Percent Change -35.4% -0.6% -4.6% 148,135,746 44,408,973 192,544,719 (49,169,924) (5,573,510) (54,743,434) -33.2% -12.6% -28.4% 1,172,536,114 6,196,414 1,181,254,415 6,602,251 (8,718,301) (405,837) -0.7% -6.1% $ 1,178,732,528 $ 1,187,856,666 (9,124,138) -0.8% 2010 $ 102,712,169 1,213,821,644 1,316,533,813 2009 $ 159,051,762 1,221,349,623 1,380,401,385 98,965,822 38,835,463 137,801,285 $ $ Total net assets represent the sum of METRO’s unrestricted net assets plus investment in capital assets net of accumulated depreciation. The largest portions of the investment are capital assets for the Central Phoenix /East Valley Light Rail Transit Project (CP/EV LRT). In December 2008, METRO placed these capital assets into service for operation of the light rail transit system and in day-to-day operations of METRO. It is not METRO’s intention to sell these assets and they are therefore not available for future spending. Net assets decreased $9.1 million largely due to the annual charge for depreciation on the completed 20 mile system. 5 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) Changes in Net Assets Total operating revenues, which consist of Contributions from Member Cities, Fare Revenues, and Other Revenues (advertising), increased $18.6 million: Member City contributions were increased 12.5 million and Passenger Fares increased by $5.9 million. This revenue increase is directly related to funding a full year passenger service in FY2010 versus the half year in FY 2009. The initial 20mile LRT line commenced passenger operating service in January 2009. Operating expenses increased by $38.8 million to $82.2 million: The twelve months of Passenger Operations generated $33.0 million in new expenditures. Administrative expenditures totaled $9.5 million compared with $5.3 million in the prior year. With the deployment of the LRT system for a full year depreciation, expense increased by $17.2 million over the prior period. Capital contributions, which consist of Member City Contributions, FTA capital grants and Public Transportation Funds, decreased $12.1 million. The following table compares the revenues and expenses of METRO for the current fiscal year and the previous period. VMR's Changes in Net Assets Fiscal year ended June 30, 2010 and 2009 2010 Operating revenues: Contributions from Member Cities Passenger Fares FTA Operating Grants Other Revenues Operating revenues Operating expenses: Administrative Passenger Operations Service Depreciation Operating expenses Operating income (loss) Non-operating revenues (expense) Deficiency before Capital Contributions Capital Contributions Increase (Decrease) in Net Assets Net assets, July 1 Net assets, June 30 $ 2009 25,964,781 9,256,913 222,519 103,410 35,547,623 $ 13,490,504 3,371,104 40,000 16,901,608 Change $ Percent Change 12,474,277 5,885,809 222,519 63,410 18,646,015 92.5% 174.6% 100.0% 158.5% 110.3% 9,540,355 32,964,701 39,685,152 82,190,208 5,278,901 15,678,389 22,437,891 43,395,181 4,261,454 17,286,312 17,247,261 38,795,027 80.7% 110.3% 76.9% 89.4% (46,642,585) (26,493,573) (20,149,012) 76.1% (101,267,750) (147,910,335) (20,085,202) (46,578,775) (81,182,548) (101,331,560) 404.2% 217.5% 138,786,197 (9,124,138) 150,873,598 104,294,823 (12,087,401) (113,418,961) -8.0% -108.7% 1,187,856,666 1,083,561,843 $ 1,178,732,528 $ 1,187,856,666 6 104,294,823 $ (9,124,138) 9.6% -0.8% Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) CAPITAL ASSETS AND LONG TERM DEBT Capital Assets: The following table provides a breakdown of capital assets of METRO at June 30, 2010, with comparative information for the previous period. Additional information on METRO’s capital assets may be found in Note 6. VMR's Capital Assets, Net of Depreciation As of June 30, 2010 and 2009 Buildings Guideway Bridges Operation Control Center Passenger Stations & Facilities Park and Ride Facilities Electric Power Substations Signal and Communication System Computers & software Furniture & fixtures Revenue Vehicles / Support Service Vehicles Non-Revenue Vehicles Equipment 2010 95,047,845 548,218,379 58,440,569 11,145,181 96,296,602 32,504,345 83,413,644 44,924,177 179,859 370,110 204,806,824 733,227 9,993,522 $ Construction in Progress Net Capital Assets $ $ 2009 97,611,148 545,989,800 60,491,115 11,536,240 96,272,225 34,769,334 86,707,115 45,202,398 574,791 531,100 204,714,997 958,053 8,214,895 27,747,360 27,776,412 1,213,821,644 $ 1,221,349,623 $ Change (2,563,303) 2,228,579 (2,050,546) (391,059) 24,377 (2,264,989) (3,293,471) (278,221) (394,932) (160,990) 91,827 (224,826) 1,778,627 (29,052) $ (7,527,979) As of June 30, 2010, METRO had $1,214 million invested in capital assets, net of accumulated depreciation. There was a net decrease in capital assets, net of accumulated depreciation, of $7.5 million from June 30, 2009; primarily resulting from a depreciation charge of $39.7 million for the Light Rail System infrastructure offset by continuing capital expenditures for the wrap up of the 20 mile LRT construction project and design expenses for the Northwest Extension LRT Project. Long Term Debt: During fiscal year 2009, METRO (as Lessee) completed the process of formally accepting 14 Light Rail Vehicles (LRV’s) under the terms of a Master Lease/Purchase Financing Agreement dated March 3, 2006, with the City of Phoenix (as Lessor). Under the agreement, the City financed the purchase of the vehicles with payments due from METRO commencing in 2011. The capital lease obligation at June 30, 2010 includes $42,186,000 principal and $6,250,510 accrued interest totaling $48,436,510. Refer to Note 9 on page 19 for more information regarding the lease. ECONOMIC FACTORS AND NEXT YEAR’S BUDGET METRO’s adopted fiscal year 2011 total operating and capital budget is $88.8 million, down $48.4 million from fiscal year 2010’s amended Budget. The primary cause for the decrease is within the capital budget, due to the planned reduction of construction activities and expenditures for the 20 mile CPEV LRT Project (METRO Initial Segment). On the operating side, METRO’s FY11 budget is $43.8 million, down $3.9 million versus fiscal year 2010. In response to sales tax shortfalls facing the Member Cities, METRO’s FY 11 budget reduces passenger operating costs by $511,000. In addition, the budget for future project development is reducing by $3.1 million with the completion of the Central Mesa Extension planning work. 7 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) Comparison of Annual Expenditure Budgets Fiscal Year 2011 vs. 2010 Uses of Funds FY 2011 Adopted ($,000) Operating Activities: Revenue Operations Future Project Development Agency Operating Budget Capital Projects: 20-Mile METRO Initial Segment Northwest Extension Non-Prior Rights Utilities Relocations Other Capital Projects: Central Mesa Extension South Tempe Extension Phoenix West Extension CNPAs - 20-Mile Initial Segment ARRA - Phoenix P& R Improvements ARRA - RPTA Ariz Avenue BRT Systemwide Improvements Total Uses of Funds FY 2010 Amended ($,000) Change ($,000) 33,222 9,565 1,016 43,803 33,733 12,685 1,254 47,672 (511) (3,120) (238) (3,869) 18,272 5,125 2,806 41,274 31,924 5,250 14,001 45 2,167 2,261 350 45,027 826 59 91 3,775 3,900 250 2,229 89,578 (23,002) (26,799) (2,444) 13,175 (59) (46) (1,608) (1,639) (250) (1,879) (44,551) 88,830 137,250 (48,420) Due to current economic conditions, sales tax revenue collections are down causing funding limitations for the Northwest Extension capital project. In July 2009, the Phoenix City Council acted to suspend construction funding for the Northwest Extension project pending availability of funds. METRO worked with the Member Cities to reduce the FY 2010 capital expenditure and funding budgets in accord with the reduction of construction activities. In FY11 METRO will commence design work on the Central Mesa LRT Extension. Expenditures during the year are anticipated to reach 14.0 million pending contractor progress and necessary approvals from federal funding sources to enter final engineering activities. FINANCIAL CONTACT The financial report is designed to provide a general overview of METRO’s finances and to demonstrate accountability for the use of public funds. Questions about any of the information provided in this report, or requests for additional financial information should be addressed to METRO’s Director of Finance and Administration, Valley Metro Rail, 101 North 1st Avenue, Suite 1300, Phoenix, Arizona 85003. 8 BASIC FINANCIAL STATEMENTS Valley Metro Rail, Inc. Statement of Net Assets June 30, 2010 Assets Current Assets Cash and Investments Receivables, Net Due from Other Governments Inventory Restricted Assets Other Assets Total Current Assets Noncurrent Assets Capital Assets, Not Being Depreciated Capital Assets, Net of Accumulated Depreciation Total Noncurrent Assets Total Assets and Other Debits $ 8,979,664 447,397 79,913,525 11,779,728 900,470 691,385 102,712,169 27,747,360 1,186,074,284 1,213,821,644 1,316,533,813 Liabilities Current Liabilities: Accounts Payable Labor Compliance Withholding Other Accrued Expenses Compensated Absences Capital Lease Obligation - Current portion Reserve for General Liability Claims Due to Other Governments Unearned Revenue Member Cities Deposits 19,681,796 18,557 380,635 356,822 10,000,000 501,000 32,417 1,226,435 66,768,160 98,965,822 Noncurrent Liabilities: Compensated Absences Capital Lease Obligation Interest Payable 398,953 32,186,000 6,250,510 Total Liabilities and Other Credits 137,801,285 Net Assets Invested in Capital Assets, Net of Related Debt Unrestricted Total Net Assets 1,172,536,114 6,196,414 $ 1,178,732,528 The accompanying notes to the financial statements are an integral part of this statement. 9 Valley Metro Rail, Inc. Statement of Revenues, Expenses, and Changes in Fund Net Assets Fiscal Year Ended June 30, 2010 Operating Revenues: Contributions from Member Cities Passenger Fares Receipts from Federal Operating Grants Other Revenues Total Operating Revenues $ Operating Expenses: Administrative Passenger Operations Service Depreciation Total Operating Expenses 25,964,781 9,256,913 222,519 103,410 35,547,623 9,540,355 32,964,701 39,685,152 82,190,208 Operating Loss (46,642,585) Non-Operating Revenue / ( Expense ): Federal Transit Administration Operating Grants Public Transportation Funds Distributions to Member Cities Private Utilities Relocations Interest on Capital Lease Obligation Other Non-Operating Income Interest Income Total Non-Operating Revenue / ( Expense ): 2,557,861 5,484,246 (106,249,903) 965,013 (4,167,007) 142,025 15 (101,267,750) Deficiency Revenues under Expenses (147,910,335) Capital Contributions: Capital Contributions from Member Cities Public Transportation Funds Capital Federal Transit Administration Capital Grants Total Capital Contributions: 31,156,572 45,043,704 62,585,921 138,786,197 Changes in Net Assets (9,124,138) Net Assets, Beginning of Period 1,187,856,666 Net Assets, End of Period $ 1,178,732,528 The accompanying notes to the financial statements are an integral part of this statement. 10 Valley Metro Rail, Inc. Statement of Cash Flows Fiscal Year Ended June 30, 2010 Cash Flows from Operating Activities Receipts from Member Cities Receipts from Federal Operating Grants Receipts from Fare Revenues Other Revenues Payments to Suppliers Net Cash Used in Operating Activities $ 24,593,915 222,519 9,256,913 103,410 (41,311,959) (7,135,202) Cash Flows from Non-Capital Financing Activities Receipts from FTA Non-Capital Grants Receipts from Regional Public Transit Authority Other Non-Operating Income Payments for Private Utility Relocations 2,557,861 6,709,354 142,040 965,013 Net Cash Provided by Non-Capital Financing Activities 10,374,268 Cash Flows from Capital and Related Financing Activities Capital Contributions from Member Cities Distributions to Member Cities Receipts from FTA Capital Grants Receipts from Regional PTF for Capital Payments for Inventory Payments for Capital Assets Net Cash Provided by Capital and Related Financing Activities 30,533,019 (191,137,218) 133,204,951 57,932,267 (821,088) (30,966,851) (1,254,920) Net Increase in Cash and Cash Equivalents 1,984,146 Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 6,995,518 8,979,664 $ Reconciliation of Operating Income to Net Cash Provided by Operating Activities Operating Income $ Adjustments to Reconcile Operating Income to Net Cash Used in Operating Activities: Depreciation (Increase) Decrease in Assets: Accounts Receivable Due from Other Governments Other Assets Increase (Decrease) in Liabilities: Accounts Payable Compensated Absences Other Accrued Expenses Due to Other Governments Reserve for General Liability Claims Unearned Revenue Member Cities' Deposits Net Cash Used in Operating Activities $ (46,642,585) 39,685,152 (1,720,821) 349,954 51,860 87,977 22,535 380,998 (341,743) 501,000 (355,039) 845,510 (7,135,202) The accompanying notes to the financial statements are an integral part of this statement. 11 Valley Metro Rail, Inc. Notes to the Financial Statements Fiscal Year Ended June 30, 2010 1. Summary of Significant Accounting Policies The accounting policies of Valley Metro Rail, Inc. (METRO) conform to accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standardsetting body for establishing governmental accounting and financial reporting principles. a. Financial Reporting Entity In October 2002, the city councils of Glendale, Mesa, Phoenix and Tempe approved the formation of a government entity with a nonprofit status by the name of Valley Metro Rail, Inc. The nonprofit corporation was organized under A.R.S. 11-952 and 40-1152. The initial members entered into a Joint Powers Agreement which provides that this Corporation be organized as the instrumentality to plan, design, construct, and operate the Light Rail Transit Project (“LRT”). Prior to October 2002, the Regional Public Transportation Authority (RPTA) performed these roles. METRO contracts with the RPTA for certain administrative functions, including personnel, HR administration, and computer support services. All METRO staff is hired and employed by RPTA but works solely under the direction of Valley Metro Rail, Inc., and it’s Board of Directors, through a contractual arrangement with RPTA. The Board of Directors of METRO is solely responsible for the governance of LRT and METRO is not a component unit of RPTA; economic resources received by METRO are entirely for the direct benefit of METRO, and RPTA is not entitled to and has no ability to otherwise access any of the economic resources received or held by METRO. b. Basic Financial Statements These financial statements are presented in accordance with GASB Statement No. 34 – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments (GASB No. 34). METRO is engaged only in business-type activities and is required to present the financial statements required for enterprise funds which are part of proprietary funds. METRO does not report any component units. c. Basis of Presentation Proprietary funds account for activities of METRO similar to those found in the private sector, where cost recovery and the determination of net income is useful or necessary for sound fiscal management. The focus of proprietary fund measurement is upon the determination of operating income, changes in net assets, financial position and cash flows. Currently, enterprise funds are the only type of proprietary fund that METRO uses. d. Measurement Focus and Basis of Accounting The Statement of net assets and statement of revenues, expenses and changes in fund net assets are reported using the flow of economic resources measurement focus and accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Such revenue is subject to review by the funding agency, which may result in disallowance in subsequent periods. 12 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 All of METRO's activities are accounted for in a single proprietary or business-type fund. Proprietary funds distinguish operating revenues and expenses from non-operating items and capital contributions. Operating revenues and expenses generally result from providing services and producing and delivering goods in connecting with a proprietary fund's principal ongoing operations. Revenues and expenses not meeting this definition are reported as either non-operating revenues and expenses or capital contributions. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989 generally are followed in the proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments have the option of following subsequent private-sector guidance for the business-type activities, subject to this same limitation. METRO has elected not to follow subsequent private-sector guidance. e. Cash and Investments State statutes authorize METRO to invest in obligations of the U.S. Treasury and any of its agencies, corporations or instrumentalities, collateralized repurchase agreements, and certificates of deposit. METRO’s investments are stated at fair value. Fair value is based on quoted market prices as of the valuation date. METRO considers short-term investments in mutual fund-money markets, U.S. Treasury bills and notes with maturities of three months or less at acquisition date to be cash equivalents. f. Receivables Management analyzes receivables periodically to determine the adequacy of the allowance for doubtful accounts. There is no current provision required for possible bad debts. g. Inventory Inventories consist of expendable supplies held for consumption. Inventories are valued at cost using the average cost method. Inventories are expensed when the resources are used. h. Capital Assets Capital assets are defined as assets with an initial, individual cost of more than $5,000 and an estimated useful life greater than one year. METRO changed its individual asset capitalization threshold from $1,000 to $5,000 as of July 1, 2005. Capital assets are recorded at cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at the estimated fair value at the date of donation. METRO capitalizes all costs incurred in connection with the construction of the Central Phoenix/East Valley (CP/EV) 20-mile alignment. The costs for the non-federal agency operating and the initial planning costs of additional extensions are recorded as annual operating expenses. 13 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 METRO is not the legal owner of any land. The land required for the LRT system is acquired and owned by the Member Cities and is the subject of a long-term use agreement between each City and METRO. Land, subject to the above agreement, is recorded on the books of member cities. The costs included as construction in progress consist primarily of project administration, engineering, construction management, utilities relocation, facility construction, equipment procurement, and other costs related to construction. No depreciation is provided on construction in progress until construction is completed and the assets are placed in service. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major improvements are capitalized and depreciated over the remaining useful lives of the related capital assets. Capital assets are depreciated using the straight-line method over the following estimated useful lives: Assets Buildings Guideway Bridges Operation Control Center Passenger Stations Park and Ride Facilities Electric Power Substations Signal Substations Revenue Vehicles Equipment Furniture and fixtures Pooled vehicles Computers and software i. Useful Life (Years) 40 50 30 30 30 15 25 20 25 7-15 7-15 4 3 Allocation of Costs to Member Cities Design and construction costs to be paid during the fiscal year are allocated to the member cities as follows: i) Regional design and construction costs are allocated based upon the Design and Construction Miles percentage method as stated in the bylaws of the corporation. The components of the LRT that are currently classified as “regional” are light rail vehicles, the maintenance and storage facility, operations control center, bridge structures, and regional park and ride lots. ii) Local design and construction costs are allocated to the member cities within whose boundaries the LRT Component designed or constructed will be located. Design and construction costs that are not classified as regional are deemed to be local. iii) Under the Design and Construction project agreements, the Member Cities provide project funding to METRO as expenditures are incurred. As federal and regional funding for the capital project is received by METRO, the members receive cash distributions to reimburse the prior expenditures. 14 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 If a member city’s share of the LRT costs for a fiscal year is determined to be less than $50,000, such member city’s share of the LRT costs shall be $50,000. The purpose of the Minimum Cost is so that all member cities will contribute to payment of the overhead expense of the Corporation for matters such as the cost of meetings of the Board of Directors, administrative support to the Board of Directors, and support to member cities by the Rail Program Staff. j. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenditures during the reporting financial period. Actual results could differ from these estimates. k. Net Assets METRO’s net assets consist of unrestricted net assets and net assets invested in capital assets, net of related debt. 2. Budgetary Basis of Accounting An annual budget of revenues and expenses is prepared and adopted by the Board of Directors each fiscal year. The legal level of budgetary control is the total annual appropriated budget. The annual budget is adopted on the modified accrual basis. Encumbrance accounting is not used and all appropriations lapse at year end. Depreciation expense is not included in the annual budget. Prior to final adoption, a proposed budget is presented to the Board of Directors for review and public comment is received. Final adoption of the budget must be on or before June 30 of each year. During the fiscal year, the Board of Directors modified the original budget. A schedule of actual operating revenues and expenses versus original budget and final budget is presented as supplementary information. See Page 24. 15 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 3. Cash and Investments Cash deposits and investments at June 30, 2010, consisted of the following: Cash on hand Self-Insurance Trust Fund Total cash and investments $ $ 8,729,648 250,016 8,979,664 METRO has deployed Ticket Vending Machines (TVM’s) which contain coin and bill vaults to accommodate the purchase of fares. At June 30, 2010, the total cash contained in the coin and bill vaults totaled $153,232. METRO's bank deposits at June 30, 2010, had a carrying value of $8,576,416 and the bank ledger balance was $8,780,166. The difference of $203,750 represents deposits in transit and outstanding checks. Of the bank balance, $250,000 is covered by federal depository insurance and $8,530,166 was covered by securities held by the pledging financial institution in METRO’s name. The Self Insurance Reserve Trust Account totaling $250,016 was covered by collateral held by the pledging financial institution in METRO’s name. Interest Rate Risk. METRO’s formal investment policy limits type of investment as a means of managing its exposure to fair value losses arising from increasing interest rates. During FY 2010 all investment durations were shorter than 90 days. Credit Risk. State Statutes and METRO’s Investment Policy authorize METRO to invest in bank demand deposit accounts and obligations of the U.S. Treasury. Concentration of Credit Risk. METRO’s Investment Policy limits the total investments by type of account including, General Operating, Imprest Fund, Self-Insurance Reserve and TVM Credit Card. At June 30, 2010, METRO maintains all available cash in these accounts. 16 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 4. Accounts Receivable and Due From Other Governments All receivable balances at June 30, 2010 are displayed on the financial statements and are expected to be collected in full; therefore, an allowance for uncollectibles has not been recorded. Due from other governments consists of Federal receivables ($61.2 million) due from the City of Phoenix as Grantee of Federal Funds, PTF receivable ($1.8 million) due from Regional Public Transportation Authority (RPTA), unbilled member cities’ contributions ($16.6 million), and miscellaneous receivables ($ .24 million). City of Phoenix (Grantee of Federal Funds) Public Transportation Funding City of Mesa City of Phoenix City of Tempe City of Glendale Maricopa Association of Governments Regional Public Transportation Authority $ $ 61,249,903 1,830,830 583,095 14,681,517 1,326,333 3,779 141,147 96,921 79,913,525 Public Transportation Funding is discussed more fully in Note 16. The amount due from Regional Public Transportation Authority is composed of a project expenditure receivable of $55,392 and a receivable related to the Local Government Investment Pool as discussed more fully in Note 13. 5. Restricted Assets Certain assets of Valley Metro Rail, Inc. are restrictions imposed on those funds. Unspent $900,470 are set-aside for use in the upcoming accessories for fourteen light rail vehicles which Lease Obligation is discussed in Note 9. 17 set aside for repayment due to outside capital lease proceeds in the amount of fiscal year for the acquisition of spare part are financed under the lease. The Capital Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 6. Capital Assets Capital asset and construction in progress activity for the year ended June 30, 2010 were as follows: Balances, July 1, 2009 Nondepreciable assets: Construction in progress Depreciable assets: Buildings Guideway Bridges Operation Control Center Passenger Stations & Facilities Park & Ride Facilities Electric Power Substations Signal & Communication System Computers & software Furniture & fixtures Revenue Vehicles Support/Service Vehicles Non-Revenue Vehicles Equipment Total depreciable assets at historical cost Less accumulated depreciation for: Buildings Guideway Bridges Operation Control Center Passenger Stations & Facilities Park & Ride Facilities Electric Power Substations Signal & Communication System Computers & software Furniture & fixtures Revenue Vehicles Support/Service Vehicles Non-Revenue Vehicles Equipment Total accumulated depreciation Total capital assets being deptreciated Business-type activities capital assets, net $ $ Increases 27,776,412 $ 32,393,435 Balances, June 30, 2010 Decreases $ (32,422,487) $ 27,747,360 102,532,106 551,504,848 61,516,388 11,731,770 97,903,958 35,968,277 88,476,648 46,361,434 1,262,341 1,126,927 210,678,174 719,709 1,151,194 9,032,211 13,668,738 3,460,882 147,662 261,271 2,205,244 34,682 9,125,031 76,803 3,205,912 - 102,532,106 565,173,586 61,516,388 11,731,770 101,364,840 36,115,939 88,737,919 48,566,678 1,297,023 1,126,927 219,803,205 719,709 1,227,997 12,238,123 1,219,965,985 32,186,225 - 1,252,152,210 (4,920,958) (5,515,048) (1,025,273) (195,530) (1,631,733) (1,198,943) (1,769,533) (1,159,036) (687,550) (595,827) (6,551,073) (131,813) (193,141) (817,316) (26,392,774) 1,193,573,211 (2,563,303) (11,440,159) (2,050,546) (391,059) (3,436,505) (2,412,651) (3,554,742) (2,483,465) (429,614) (160,990) (8,974,629) (58,575) (301,629) (1,427,285) (39,685,152) (7,498,927) - (7,484,261) (16,955,207) (3,075,819) (586,589) (5,068,238) (3,611,594) (5,324,275) (3,642,501) (1,117,164) (756,817) (15,525,702) (190,388) (494,770) (2,244,601) (66,077,926) 1,186,074,284 1,221,349,623 $ 24,894,508 $ (32,422,487) $ 1,213,821,644 7. Member Cities’ Deposits The member cities advance monies to cover the federal share and local share of project costs. In addition, unpaid project expenses fundable by member cash deposit contributions are accrued for each city. A summary of member cities’ deposits at June 30, 2010 follows: City of Chandler City of Mesa City of Peoria City of Phoenix City of Tempe $ $ 18 74,195 3,321,025 64,005 45,317,420 17,991,515 66,768,160 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 8. Operating Leases METRO leases office space under various operating lease agreements. Total rent expenditures for these leases were $1,198,321 for the fiscal year ended June 30, 2010. Future minimum lease payments under non-cancelable operating leases are: Operating Leases as of 6-30-10 Year Ending June 30 2011 2012 2013 2014 2015 2016 $ $ 1,213,297 1,184,841 1,205,548 1,229,845 1,255,552 1,282,657 7,371,740 9. Capital Lease Obligation: During fiscal year 2009, METRO (as Lessee) completed the process of formally accepting 14 Light Rail Vehicles (LRVs) under the terms of a Master Lease/Purchase Financing Agreement dated March 3, 2006, with the City of Phoenix (as Lessor). The assets acquired through the capital lease are as follows: Asset: Unspent Lease Proceeds Revenue Vehicles Less Accumulated Depreciation Total $ 900,470 40,095,208 (2,405,712) $ 38,589,966 Amortization expense on the capital lease is included in depreciation expense. The following table presents the changes in the capital lease obligation for fiscal year 2010: June 30, 2009 Capital Lease Obligation $ 42,186,000 Increases $ - Decreases June 30, 2010 Amount Due in One Year $ $ $ 10,000,000 - 42,186,000 Acceptance of the LRVs commenced the term of this agreement and obligated rent payments totaling approximately $56,300,000, beginning with the first $10,000,000 payment due on June 1, 2011. 19 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 Schedule of Capital Lease Payable as of 6-30-10 Year ending June 30 Principal 2011 2012 2013 2015 $10,000,000 10,000,000 10,000,000 12,186,000 $42,186,000 Interest $ $ 2,083,503 2,827,876 1,954,759 1,013,886 7,880,024 For Fiscal Year 2010, Capital Lease Interest expense totaling $4,167,007 was accrued under the Master Lease Agreement. The Capital Lease obligation at June 30, 2010 includes $42,186,000 principal and $6,250,510 accrued interest totaling $48,436,510. 10. Compensated Absences The following presents the changes in compensated absences for the fiscal year ended June 30, 2010: July 1, 2009 Compensated absences $ 733,240 Increases $ 178,090 Decreases $ (155,555) June 30, 2010 $ 755,775 The portion of compensated absences payable within one year is $356,822. 11. Contractual and Other Commitments METRO has entered into various contractual agreements for engineering services, project management, construction administration, light rail vehicles, construction, operations services, legal services and artists. At June 30, 2010, METRO had outstanding contractual commitments for these services aggregating approximately $58.0 million. These commitments have not been recorded in the accompanying financial statements. Only the currently payable portions of these contracts have been included in accounts payable in the accompanying financial statements. Subsequent to June 30, 2010, METRO entered into approximately $14.0 million additional contractual commitments. Contractor Parson Brinckerhoffer - Prelim Engineering PB Americas, Inc. - Final Design / DSDC HDR/S.R. Beard - Program Management PBS&J/PGH Wong - Construction Mgmt Various - Facilities Construction Various - System Elements Various - Public Art Program Various - Owner Furnished Materials Various - Operations & Maintenance Various - Misc. Construction & Services Various - Future Extensions Sundt - NW Ext AE Com - NW Ext Hunter - ARRA Commitment $ 25,169,700 112,660,009 54,933,430 62,923,298 357,692,068 235,605,747 6,238,207 34,032,595 61,177,507 22,500,062 30,710,715 3,762,854 15,881,499 3,499,000 1,026,786,691 $ 20 Spent-to-date $ $ 25,169,700 112,396,440 54,578,670 62,862,007 353,861,890 231,432,070 5,995,000 34,032,595 35,929,121 15,377,748 18,118,671 3,752,068 14,283,036 1,030,106 968,819,122 Remaining $ $ 263,569 354,760 61,291 3,830,178 4,173,677 243,207 25,248,386 7,122,314 12,592,044 10,786 1,598,463 2,468,894 57,967,569 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 12. Risk Management METRO is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to contracted labor; and natural disasters. These risks are covered by commercial insurance purchased from independent third parties. METRO purchases insurance coverage for property, general liability, excess liability, automobile liability, umbrella liability, public entity employment practices liability, public entity management liability, boiler and machinery, crime, inland marine, owner’s protective professional indemnity, environmental site protection, contractor’s environmental protection and excess liability. In addition, the RPTA purchases workers’ compensation, employee life insurance, health and dental insurance coverage for all LRT full-time employees. Settled claims for these risks have never exceeded commercial insurance limits. See schedule of insurance on page 38. METRO has received notice of general liability claims related to its operations. METRO’s commercial insurance policies provide coverage against losses rising from the claims subject to policy deductible amounts. Such claims are evaluated and specific reserves are established to cover METRO’s contingent risk of loss pending settlement with the parties involved. At June 30, 2010 the Reserve for General Liability Claims totaled $501,000. 13. Contingencies o In December 2008, METRO received a claim from one of its Line Section contractors (Herzog Contracting Corporation “HCC”.) in the amount of $18,682,126 for delays and disruptions to the project allegedly caused by METRO in the period between July 1, 2006 and April 30, 2008. On August 24, 2010 METRO and HCC reached a settlement agreement to resolve the claim. Under the agreement, METRO will pay $9,700,000 to settle the claim. METRO has accrued the settlement liability in the June 30, 2010 financial statements. o As a subrecipient of federal grant monies, amounts passed through or receivable from other agencies are subject to audit and adjustment by grantor agencies. Any disallowed claims, including amounts already collected, may constitute a liability. The amount, if any, of expenditures which may be disallowed by the grantor cannot be determined at this time although METRO expects such amounts, if any, to be immaterial. o Prior to the incorporation of METRO in October 2002, the RPTA made investment decisions on behalf of METRO. On November 22, 2002, the Arizona State Treasurer’s Office informed participants in the Local Government Investment Pool (LGIP) that it currently holds asset-backed securities administered by National Century Financial Enterprises (NCFE). These securities, which total approximately $131 million of the total $4 billion in the LGIP, are backed by payments from Medicare/Medicaid and other creditworthy issuers. RPTA’s proportional share of the $131 million was $223,150, of which $88,791 is invested on behalf of METRO. NCFE has filed bankruptcy and is under investigation by the Federal Bureau of Investigation and the Securities and Exchange Commission. RPTA has joined in a lawsuit with 93 other Arizona governmental entities and 90 other plaintiffs against several parties in an effort to recover the investment. No collections were received from the NCFE receivable during fiscal year ended June 30, 2010. The $41,529 receivable is recorded as due from other governments with an offsetting reserve of ($41,529) recorded to due to other governments. 21 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 14. Related Party Transactions The six members of METRO’s Board of Directors are also members of the fourteen-member RPTA Board of Directors. METRO has entered into contracts with the RPTA for certain administrative functions, including personnel, administration, financial and accounting services, purchasing, and computer support services. All METRO staff is hired and employed by RPTA but works solely under the direction of the METRO and it’s Board of Directors, through a contractual arrangement with RPTA. For the period July 1, 2009 through June 30, 2010, METRO incurred costs of $8,432,862 for services provided by RPTA. In September 2010, the METRO Board authorized the Chief Executive Officer (CEO) to enter into a sublease with the Regional Public Transportation Authority (RPTA) for a portion of the office space currently leased and occupied by METRO. Commencing in December 2010 and ending in June 2016, office space lease costs that METRO pays monthly to the landlord will be prorated and charged to RPTA based on square footage used by RPTA. The total sublease over the 66-month period is estimated to equal $3,167,304. 15. Arizona State Retirement System Plan Description – METRO contributes to a cost-sharing multiple-employer defined benefit pension plan administered by the Arizona State Retirement System. Benefits are established by state statute and generally provide retirement, death, long-term disability, survivor, and health insurance premium benefits. The system is governed by the Arizona State Retirement System Board according to the provisions of A.R.S. Title 38, Chapter 5, Article 2. The System issues a comprehensive annual financial report that includes financial statements and required supplementary information. The most recent report may be obtained by writing the System, 3300 North Central Avenue, P.O. Box 33910, Phoenix, AZ 85067-3910 or by calling (602) 240-2000 or (800) 621-3778. Funding Policy - The Arizona State Legislature establishes and may amend active plan members' and the METRO’s contribution rate. For the year ended June 30, 2010, active plan members and METRO were each required by statute to contribute at the actuarially determined rate of 9.40 percent (8.34 percent retirement, .66 percent health plan, and 0.40 percent long-term disability) of the members' annual covered payroll. METRO’s contribution to the System for the year ended June 30, 2010 and 2009 was $541,110 and $542,466 respectively, which was equal to the required contributions for the year. Schedule of Retirement and Long Term Disability Benefits Accrued Years ended June 30, 2010 2009 2008 Retirement Fund $ 480,091 454,638 346,320 Health Benefit Supplement Fund $ 37,993 59,126 45,172 22 Long-Term Disability Fund $ 23,026 28,702 21,511 Total Benefits $ 541,110 542,466 413,003 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2010 16. Public Transportation Funding In November 2004, the voters of Maricopa County approved Proposition 400, the continuation of the transportation tax, for a twenty year period beginning in calendar year 2006. On August 14, 2006, METRO and RPTA executed an intergovernmental agreement (IGA) that formally designated METRO as Lead Agency to plan, design, and construct the light rail transit (LRT) program. Among other things, the IGA specifies that RPTA will reimburse METRO, from the Public Transportation Fund, for eligible incurred expenses. Valley Metro Rail began receiving Public Transportation Funding (PTF) in March 2006. These monies are used to reimburse private utility companies for costs incurred in the relocation of non-prior rights utilities, to reimburse Member Cities for their share of local costs incurred in connection with the acquisition of certain regional transportation assets, and to fund the local share of future light rail extensions as designated in the Regional Transportation Plan. The components of the LRT system that are currently classified as “regional transportation assets” are light rail vehicles, the maintenance and storage facility, the operations and control center, bridge structures, and regional park and rides. Public Transportation Fund Cash Expenditures (LRT Portion) Fiscal Year ended June 30, 2010 LRT PTF Expenditures: Non Prior Rights Utility Relocations: 20 Mile Initial Segment Northwest Extension Phase I Regional Asset Reimbursements: CPEV - 20 Mile Initial Segment Phoenix Tempe Mesa Project Development and Planning Debt Service (Interest) Total LRT PTF Cash Expenditures $ In Millions 2.75 0.75 38.83 16.23 2.83 4.84 2.70 68.93 In June 2009, the Regional Public Transportation Authority (RPTA) issued Transportation Excise Tax Revenue Bonds in the amount of $100,075,000. A portion of the bonds will pay or reimburse LRT capital expenditures as designated in the Regional Transportation Plan. 23 OTHER SUPPLEMENTARY INFORMATION This Section includes the Schedule of Operations – Budget and Actual. Price and 101 Riders Purchasing Tickets Valley Metro Rail, Inc. Schedule of Operations - Budget and Actual Fiscal Year Ended June 30, 2010 Operating Revenues: Net Distributions to member cities Passenger fares Federal Transit Administration grants Public Transportation Funds MAG/RPTA Grants Contributions from Others Total operating revenues Operating Expenses: Engineering and design consultants Project management consultants Construction administration consultants Art design consultants Planning and environmental consultants Facilities Construction Administrative Capital Outlay Real estate/ROW Acquisition Light Rail Vehicles LRT Startup Private Utilities Relocation Finance Costs Rail Operations Expense Total operating expenses $ Budgeted Amounts Original Final Actual Amounts (Budgetary Basis) (31,773,539) 8,985,159 134,368,000 79,631,294 1,000,000 350,000 192,560,914 $ 2,973,350 1,705,000 826,051 12,072,000 65,895,000 8,786,454 1,130,628 17,500,000 7,385,840 10,615,750 29,937,672 33,733,169 192,560,914 $ (90,290,476) 8,985,159 138,959,999 78,245,288 1,000,000 350,000 137,249,970 1,879,084 1,705,000 15,000 9,211,000 12,704,000 9,276,523 618,028 31,100,000 5,135,840 1,000,000 2,512,000 28,360,326 33,733,169 137,249,970 (82,220,687) 9,256,913 130,998,398 66,038,243 827,049 103,526 125,003,442 Variance with Final Budget Over (Under) $ 2,533,188 60,236 1,357,524 63,860 4,099,909 22,244,871 9,024,964 64,539 21,881,919 8,278,585 (10,797) (965,013) 23,404,956 32,964,701 125,003,442 Explanation of Differences between Budgetary Basis and GAAP Basis Total Operating Expenses - Budgetary Basis Total Operating Expenses - GAAP Basis Budgetary Operating Expenses in Excess of GAAP Operating Expenses Change in Net Assets (capitalized on a GAAP basis and expensed on a budgetary basis) Member funded finance costs (budgeted expenses not included in GAAP basis) Member-owned real estate/ROW acquisitions (budgeted expenses not included in GAAP basis) Concurrent Non-Project Activities (budgeted expenses not included in GAAP basis) City of Phoenix - Expenditures for 14 Light Rail Vehicles (budgeted expenses not included in GAAP basis) Private Utilities Relocations (budgeted expenses recorded as non-operating expenses for GAAP basis) All Other Adjustments Depreciation (GAAP expenses not included in budgetary basis) Total Reconciling Items 8,069,789 271,754 (7,961,601) (12,207,045) (172,951) (246,474) (12,246,528) 654,104 60,236 (347,476) 48,860 (5,111,091) 9,540,871 (251,559) (553,489) (9,218,081) 3,142,745 (1,010,797) (3,477,013) (4,955,370) (768,468) (12,246,528) $ $ $ 125,003,442 82,190,208 42,813,234 $ 32,428,886 23,404,956 21,881,919 4,256,245 1,429,576 (965,013) 61,817 (39,685,152) 42,813,234 $ This schedule is prepared on a budgetary basis for the operating accounts of the proprietary fund and as such does not present the results of operations on the basis of generally accepted accounting principles, but is presented for supplemental information. In the current year, GAAP basis operating costs are $82.2 million, or $42.8 million less than the budgetary basis costs of $125.0 million. The primary differences between these two bases of reporting are: 1.) Capital project costs that are included in budgeted costs but added to construction-in-progress for GAAP purposes ($32.4 million); 2.) Finance and real estate/ROW acquisition costs that are budgeted but not booked for GAAP purposes ($23.4 and $21.9 million); 3.) Concurrent non-project activities and Expenditures by Phoenix for 14 Light Rail Vehicles that are included in the budget but not on a GAAP basis ($4.3 and $1.4 million); 4.) Private Utility Relocations that are recorded as non operating expenses and 5.) Depreciation included for GAAP but not budget ($-39.7 million). 24 Interior of Vehicle with Riders STATISTICAL SECTION The Statistical Section includes selected financial and demographic information regarding METRO, including financial trends, revenue capacity, demographic and economic information, and operating information. Train at Sycamore and Main Station in Mesa, AZ Statistical Section Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2010 This part of METRO's comprehensive financial report presents information as a context for understanding what the information in the financial statements, footnotes, and supplementary information says about METRO's overall financial condition. METRO's prinicipal activities consist of planning, designing, constructing and operating the light rail transit system in Maricopa County, Arizona. Contents Page Financial Trends These schedules contain trend information to help the reader understand how METRO's financial performance and well-being have changed over time. 26 Revenue Capacity METRO's principal revenue source is contributions from Member Cities. N/A Debt Capacity METRO has no current bond indebtedness. N/A Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which METRO's financial activities take place. 28 Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in METRO's financial report relates to the services METRO provides and the activities it performs. 34 Sources: Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports for the relevant year. METRO's first financial reporting as a separate entity was for the intial period ended June 30, 2003. 25 Valley Metro Rail, Inc. Net Assets by Component FY 00/01 through FY 09/10 (1) FY 00/01 Business-type activities Invested in capital assets, net of related debt (2) Restricted Unrestricted Total business-type activities net assets $ $ 55,850 55,850 FY 01/02 $ $ 97,143 97,143 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 $ 255,143 $ 255,143 $ 57,341,840 $ 57,341,840 $ 235,905,852 $ 235,905,852 $ 460,380,300 $ 460,380,300 $ 773,807,490 $ 773,807,490 $ 1,083,561,843 $ 1,083,561,843 $ 1,181,254,415 6,602,251 $ 1,187,856,666 $ 1,172,536,114 6,196,414 $ 1,178,732,528 Source: Valley Metro Rail, Inc. Finance Division (1) Valley Metro Rail, Inc. was established in October 2002. All light rail activities prior to October 2002 were recorded in the financial records of the Regional Public Transporation Authority (RPTA). The amounts shown here for FY 02/03 were reported in both the RPTA and METRO financial records and were combined to show the complete rail transit amount. (2) CP/EV LRT project costs incurred prior to July 1, 2004, for project preliminary engineering and project management totaling $77.1 million paid for by member cities or federal grants were contributed to METRO during the fiscal year ended June 30, 2005. Pripr to FY 04/05, these amounts were included in Administration and Planning Services. 26 Valley Metro Rail, Inc. Changes in Net Assets FY 00/01through FY 09/10 (1) Operating Revenues Contributions from Member Cities Passenger Fares Federal Transit Administration Operating Grants Public Transportation Funds Other Revenues Total operating revenues Operating Expenses Administration and Planning Services (2) Passenger Operations Service Private Utilities Relocations Depreciation Total operating expenses Operating income (loss) FY 00/01 FY 01/02 $ 3,739,531 8,177,395 11,916,926 $ 5,323,908 11,437,481 16,761,389 11,916,926 11,916,926 - Non-Operating Revenues (Expense) Federal Transit Administration Operating Grants Public Transportation Funds Other Non-Operating Income Interest on Investments Distributions to Member Cities Private Utilities Relocations Interest on Capital Lease obligation Total non-operating revenues (expense) Capital Contributions Federal Transit Administration Capital Grants Contributions from Member Cities Public Transportation Funds Capital Donated Engineering (3) Increase (Decrease) in net assets $ FY 02/03 $ 16,725,821 39,765 16,765,586 (4,197) FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 28,353,274 6,237,102 34,590,376 $ 14,141,126 48,497,109 62,638,235 $ 27,692,841 74,819,942 102,512,783 $ 75,672,696 150,717,452 11,700,029 238,090,177 $ 156,033,959 146,442,055 57,160,186 359,636,200 $ 143,276,140 953,877 58,315,376 202,545,393 34,398,920 63,436 34,462,356 128,020 5,434,775 117,706 5,552,481 57,085,754 1,001,016 136,944 1,137,960 101,374,823 1,829,944 11,700,029 186,644 13,716,617 224,373,560 5,709,157 39,212,754 1,389,987 46,311,898 313,324,302 5,396,474 15,750,886 2,231,538 23,378,898 179,166,495 5,278,901 15,678,389 22,437,891 43,395,181 (26,493,573) 9,540,355 32,964,701 39,685,152 82,190,208 (46,642,585) $ 13,490,504 3,371,104 40,000 16,901,608 FY 09/10 $ 25,964,781 9,256,913 222,519 103,410 35,547,623 - 45,490 - 29,980 - 943 - 80,162 - 100,888 - 102,888 - 91,519 - 650,492 10,945,204 (20,078,532) (9,518,863) (2,083,503) 2,557,861 5,484,246 142,025 15 (106,249,903) 965,013 (4,167,007) - 45,490 29,980 943 80,162 100,888 102,888 91,519 (20,085,202) (101,267,750) 55,850 - - - 130,496,339 - 72,863,699 25,381,955 52,627,944 - 62,585,921 31,156,572 45,043,704 - $ 309,754,353 $ 104,294,823 55,850 $ 41,293 $ 158,000 $ 57,086,697 77,109,027 $ 178,564,012 $ 224,474,448 $ 313,427,190 $ (9,124,138) Source: Valley Metro Rail, Inc Finance Division (1) Valley Metro Rail, Inc. was established in October 2002. All light rail activities prior to October 2002 were recorded in the financial records of the Regional Public Transportation Authority (RPTA). The amounts shown here for FY 02/03 were reported in both RPTA and METRO financial records and were combined to show the complete transit amount. (2) Prior to FY 04/05, all CP/EV project costs, except for the cost of computers, equipment, and certain other capital assets, were recorded as operating expenses. (3) CP/EV LRT project costs incurred prior to FY 04/05 for project preliminary engineering and project management were contributed to METRO during FY 04/05. These costs, totaling $77.1 million, were originally paid for by member cities or federal grants and were included in Administration and Planning Services expenses for the year incurred. 27 Valley Metro Rail, Inc. Growth in Regional Transit Usage Last Ten Fiscal Years Fiscal Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Boardings 40,011,099 45,103,085 50,319,003 54,013,410 56,358,335 59,253,904 58,020,189 61,866,819 71,251,664 67,693,003 Source: Regional Public Transportation Authority 28 Change 6.71% 12.73% 11.56% 7.34% 4.34% 5.14% -2.08% 6.63% 15.17% -4.99% Valley Metro Rail, Inc. Member Cities’ Area Growth (Square Miles) Last Ten Fiscal Years Glendale Mesa Peoria Phoenix Scottsdale Tempe 2000 Year Chandler 176,581 213,235 410,797 108,364 1,289,125 202,495 161,995 2001 189,498 218,812 420,525 115,432 1,352,394 211,280 158,625 2002 201,263 227,614 431,874 122,655 1,375,906 215,320 159,425 2003 211,984 231,288 434,585 126,815 1,455,440 218,940 159,426 2004 224,644 233,000 445,354 132,805 1,492,420 222,880 159,615 2005 238,930 235,987 451,223 137,045 1,525,400 225,680 160,820 2006 241,910 235,987 455,151 145,125 1,560,380 237,510 165,796 2007 2008 2009 247,100 247,100 244,376 246,382 248,731 248,435 460,155 463,397 459,682 158,227 158,227 155,560 1,595,260 1,630,340 1,561,485 240,410 242,790 242,337 166,625 167,458 172,641 Valley Metro Rail, Inc. Member Cities' Population Growth 1,800,000 1,600,000 1,400,000 Population 1,200,000 1,000,000 800,000 600,000 400,000 200,000 2000 2001 2002 Chandler 2003 2004 2005 2006 For the Years 2000 through 2009 Glendale Mesa Source: Maricopa Association of Governments Note: Information for 2010 was not available. 29 Peoria Phoenix 2007 Scottsdale 2008 Tempe 2009 Valley Metro Rail, Inc. Top Employers in Maricopa County For the Fiscal Year Ended June 30, 2010 Employer Employees State of Arizona Wal-Mart Banner Health Systems City of Phoenix Maricopa County Wells Fargo Arizona State University Honeywell Aerospace US Postal Service Bashas' Inc. Motorola, Inc. Banc One Corp American Express Allied Signal 50,936 32,814 23,100 17,068 14,014 14,000 13,005 12,600 10,545 10,460 2009 Rank % of Total 1 2 3 4 5 6 7 8 9 8 2.44% 1.47% 0.83% 0.70% 0.69% 0.68% 0.62% 0.52% 0.54% 0.57% 2000 Rank % of Total 63,961 11,900 9,000 13,300 12,963 1 5 7 3 4 4.19% 0.78% 0.59% 0.87% 0.85% 10,772 6 0.71% 18,500 9,000 9,000 9,000 2 7 7 7 1.21% 0.59% 0.59% 0.62% Employees 2009 - Employees (000s) 10.5 12.6 10.5 50.9 13.0 14.0 14.0 32.8 14.4 23.1 State of Arizona Wal-Mart Banner Health Systems City of Phoenix Maricopa County Wells Fargo Arizona State University Honeywell Aerospace US Postal Service Fry's Food & Drug Source: Phoenix Business Journal Book of Lists; Greater Phoenix Economic Council; Arizona Department of Economic Security. Note: Information for 2010 was not available. 30 Valley Metro Rail, Inc. Initial 20-Mile Segment Initial 20-Mile Segment Source: Valley Metro Rail, Inc Project Development Division 31 Valley Metro Rail, Inc. Northwest Extension Northwest Extension Source: Valley Metro Rail, Inc Project Development Division 32 Valley Metro M Rail, In nc. Central Mesa M LRT Extension Centrral Mesa Light L Raiil Extensiion So ource: Valley Metro Rail,, Inc Project Developmen nt Division 33 3 Valley Metro Rail, Inc Full-Time Equivalent Positions Source: Valley Metro Rail, Inc Finance and Administration Division Grade RPTA Position Titles FY 2007 Authorized FTEs FY 2008 FY 2009 FY 2010 III Administrative Support Assistant 1 1 1 1 IV Accounting Technician Administrative Assistant Materials Handler 1 6 0 1 6 0 1 6 1 1 6 1 VI Paralegal Track Maintainer 1 0 1 0 1 6 1 6 VII Accountant I Executive Assistant Network Support Analyst Planner I Procurement Specialist Systems Electronic/Communications Maintainer Utility Relocation Specialist 1 3 0 1 1 0 0 1 3 0 1 1 0 1 1 2 1 0 0 6 1 2 2 0 0 0 6 1 VIII Document Control Supervisor Engineering Technician Executive Administrative Coordinator Information Technology Systems Specialist Maintenance Scheduling Materials/Warranty Coordinator Sr Communications Specialist Systems Electronic/Communications Technician Traction Power Systems Technician 1 0 0 0 0 1 1 0 0 1 0 0 1 0 1 1 0 0 1 0 1 1 1 2 1 4 9 1 1 1 1 1 2 0 4 10 IX Accountant II Area Coordinator Contract Administrator Network Systems Engineer Planner II Supervisor, Facility Maintenance Supervisor, Track Maintenance 1 1 1 0 1 0 0 1 2 1 0 1 0 0 1 2 1 1 2 1 1 1 2 1 1 1 1 1 X Engineer (Civil) Lead Technician Planner III Program Control Specialist Senior Contract Administrator Signals/Communications Maintenance Supervisor TES Supervisor 0 0 0 1 2 0 0 0 1 0 1 2 0 0 0 1 0 1 2 1 1 1 0 2 1 2 1 2 34 Valley Metro Rail, Inc Full-Time Equivalent Positions Source: Valley Metro Rail, Inc Finance and Administration Division Grade RPTA Position Titles FY 2007 Authorized FTEs FY 2008 FY 2009 FY 2010 XI Public Arts Administrator Public Information Officer Rail DBE Program Manager 1 0 1 1 0 1 1 1 1 1 1 0 XII Communications Manager Rail Marketing Manager Rail Public Involvement Manager Rail Real Estate Manager Rail Senior Engineer (PE) Rail Senior LRV Engineer (PE) Rail Senior Program Control Specialist Rail Utility Manager 1 0 1 1 1 1 1 1 1 1 1 1 1 0 0 1 0 1 1 1 1 0 0 1 0 0 1 0 0 0 0 1 XIII Contracts and Procurement Manager Finance and Budget Manager Rail Design & Construction Manager Manager, Systems and Facility Maintenance Rail Capital Project Schedule Manager Rail Maintenance Manager Rail Operations Manager Rail Project Manager, Facilities Engineer Rail Project Manager, Planning Rail Quality Assurance Manager 1 1 0 0 0 1 1 2 1 1 1 1 1 1 1 1 1 2 2 0 1 1 1 1 1 1 1 2 2 0 1 0 1 0 1 0 0 1 1 1 XIV Rail O & M Startup/Activation Manager Rail Safety and Security Chief Chief System Engineering Officer Chief Transportation Officer 1 1 1 1 0 1 1 0 1 0 0 1 1 XV Rail Community Relations Director Rail Finance & Administration Director Rail Safety, Security, and Quality Director 1 1 0 1 1 1 1 1 1 1 1 1 XVI Rail Design & Construction Director Rail General Counsel Rail Operations & Maintenance Director Rail Project Development Director 1 1 1 0 1 1 1 0 1 1 1 1 1 1 1 1 Rail Chief Executive Officer 1 51 1 57 1 91 1 85 ED 35 Valley Metro Rail, Inc. Schedule of FY 2010 Adopted Pay Grades and Ranges For the Fiscal Year Ended June 30, 2010 Grade Pay Range RPTA Position Titles III Administrative Support Assistant $27,626 - $41,439 IV Accounting Technician Administrative Assistant Materials Handler $30,696 $30,696 $30,696 - $46,043 $46,043 $46,043 VI Paralegal Track Maintainer $37,142 $37,142 - $55,712 $55,712 VII Accountant I Executive Assistant Network Support Anaylst Planner I Procurement Specialist Systems Electronic/Communications Maintainer Utility Relocation Specialist $40,856 $40,856 $40,856 $40,856 $40,856 $40,856 $40,856 - $61,284 $61,284 $61,284 $61,284 $61,284 $61,284 $61,284 VIII Document Control Supervisor Engineering Technician Executive Administrative Coordinator Information Technology Systems Specialist Maintenance Scheduling Materials/Warranty Coordinator Systems Electronic/Communications Technician Traction Power Systems Technician $44,942 $44,942 $44,942 $44,942 $44,942 $44,942 $44,942 $44,942 - $67,413 $67,413 $67,413 $67,413 $67,413 $67,413 $67,413 $67,413 IX Accountant II Area Coordinator Contract Administrator Network Systems Engineer Planner II Supervisor, Facility Maintenance Supervisor, Track Maintenance $49,435 $49,435 $49,435 $49,435 $49,435 $49,435 $49,435 - $74,154 $74,154 $74,154 $74,154 $74,154 $74,154 $74,154 X Engineer (Civil) Lead Technician Planner III Program Control Specialist Senior Contract Administrator Signals/Communications Maintenance Supervisor TES Supervisor $54,380 $54,380 $54,380 $54,380 $54,380 $54,380 $54,380 - $81,569 $81,569 $81,569 $81,569 $81,569 $81,569 $81,569 XI Public Arts Administrator Public Information Officer Rail DBE Program Manager $59,818 $59,818 $59,818 - $89,726 $89,726 $89,726 Source: Valley Metro Rail, Inc Finance and Administration Division 36 Valley Metro Rail, Inc. Schedule of FY 2010 Adopted Pay Grades and Ranges For the Fiscal Year Ended June 30, 2010 Grade Pay Range RPTA Position Titles XII Rail Marketing Manager Rail Public Involvement Manager Rail Real Estate Manager Rail Senior Engineer (PE) Rail Senior Program Control Specialist Rail Utility Manager $65,799 $65,799 $65,799 $65,799 $65,799 $65,799 - $98,698 $98,698 $98,698 $98,698 $98,698 $98,698 XIII Contracts and Procurement Manager Finance and Budget Manager Rail Design & Construction Manager Manager, Systems and Facility Maintenance Rail Capital Projects Schedule Manager Rail Maintenance Manager Rail Operations Manager Rail Project Manager, Facilities Engineer Rail Project Manager, Planning Rail Quality Assurance Manager $72,379 $72,379 $72,379 $72,379 $72,379 $72,379 $72,379 $72,379 $72,379 $72,379 - $108,568 $108,568 $108,568 $108,568 $108,568 $108,568 $108,568 $108,568 $108,568 $108,568 XIV Rail O & M Startup/Activation Manager Rail Safety and Security Chief Chief Systems Engineering Officer Chief Transportation Officer $81,992 $81,992 $81,992 $81,992 - $122,987 $122,987 $122,987 $122,987 XV Rail Community Relations Director Rail Finance & Administration Director Rail Safety, Security, and Quality Director $106,589 $106,589 $106,589 - $143,874 $143,874 $143,874 XVI Rail Design & Construction Director Rail General Counsel Rail Operations & Maintenance Director Rail Project Development Director $117,246 $117,246 $117,246 $117,246 - $165,355 $175,869 $165,355 $165,355 ED Chief Executive Officer Salary Negotiated Source: Valley Metro Rail, Inc Finance and Administration Division 37 Valley Metro Rail, Inc. Schedule of Insurance Coverage For the Fiscal Year Ended June 30, 2010 Source: Valley Metro Rail, Inc Contracts and Procurement Division Valley Metro Rail, Inc (METRO) employs the firm of Arthur J. Gallagher Risk Management Services, Inc. as its broker for the purchase of insurance. METRO's commercial insurance program consists of the following: Limits Policy Term Carrier Coverage Premium Policy # KTKCMB2700C68609 Commercial Propety 127,637,941 TIV 12/1/09 to $106,971 Travelers Indemnity Co. 10,000 Deductible 12/1/10 5,000,000 Flood & EQ 100,000 Deductible QT6605833B340TIL09 Inland Marine - Rolling Stock 150,660,000 TIV1 12/1/09 to $147,270 Travelers P&C 100,000 Deductible 12/1/10 Insurance Co. 12/1/09 to $30,711 Travelers P&C QT6605833B352TIL09 Inland Marine - Town Lake Bridge 22,581,224 TIV 12/1/10 Insurance Co. 5,000,000 Flood & EQ 100,000 Deductible 15,000,000 per 12/1/09 to $35,932 ACE Fire Underwriters 121112951003 DIC - Excess Flood and EQ Town Lake Bridge Occurrence x/o 5,000,000 12/1/10 Insurance Co. CCP0063798 Commercial Crime 1,000,000 Limit 10,000 Deductible 12/1/09 to 12/1/10 $3,233 BA1153P23309CAG Auto Liability and Physical Damage 12/1/09 to 12/1/10 $45,615 N1A3RL000006600 Primary Excess Liability 250,000 CSL 2,000 Comp & Coll Deductible 10,000,000 per Occurrence 10,000,000 Aggregate 250,000 SIR 10,000,000 per Occurrence 10,000,000 Aggregate part of 25,000,000 x/o 10,000,000 and SIR 15,000,000 per Occurrence 15,000,000 Aggregate part of 25,000,000 x/o 10,000,000 and SIR 12/1/09 to 12/1/10 $377,840 12/1/09 to 12/1/10 $85,725 Everest National Insurance Co. 12/1/09 to 12/1/10 $61,733 Allied World National Assurance Co. 71P3000014091 Excess Liability 03051169 Excess Liability 38 Crime Fidelity & Deposit Co. of Maryland Commercial Auto Charter Oak Fire Insurance Co. Princeton Excess & Surplus Lines Insurance Co. Continued Valley Metro Rail, Inc. Schedule of Insurance Coverage For the Fiscal Year Ended June 30, 2010 Policy # G24100868001 Coverage Excess Liability UXP003631400 Excess Liabiity 181623 37312354 Workers Comp & Employers Liabiilty Pollution Legal Liability (Fixed-site coverage) Source: Valley Metro Rail, Inc Contracts and Procurement Division Limits 25,000,000 per Occurrence 25,000,000 Aggregate part of 40,000,000 x/o 60,000,000 and SIR 15,000,000 per Occurrence 15,000,000 Aggregate part of 40,000,000 x/o 60,000,000 and SIR WC - Statutory EL - 1,000,000 5,000,000 each Pollution Incident 5,000,000 Aggregate 25,000 Deductible 39 Policy Term 12/1/10 to 12/1/10 12/1/09 to 12/1/10 Premium $79,481 $35,100 3/1/09/10 12/1/07-12 Carrier Westchester Surplus Lines Insurance Arch Insurance Co. SCF of Arizona $31,278 Chubb Custom Insurance Co. Valley Metro Rail, Inc. Design & Construction Milestones PRE-INCORPORATION ACTIVITIES November 2000 - Final light rail alignment approved February 2001 - Project opens community office for the public September 2001 - City of Phoenix purchases first property for the light rail system at Camelback Road and 3rd Avenue. December 2001 - Project receives first Recommended rating from the Federal Transit Administration (FTA) in its New Starts Report. October 2002 - Valley Metro Rail, inc. is incorporated. VALLEY METRO RAIL, INC. ACTIVITIES July 2003 - METRO receives formal approval from the FTA for the light rail project to enter the Final Design phase. The approval allows designers to finalize the construction plans during the coming months, begin utility relocation, and request early approval to begin purchasing light rail vehicles and construction materials. August 2004 - The METRO board approves the METRO Business Outreach Plan to help minimize the impacts of light rail construction on businesses located along the light rail transit alignment. November 2004 - A groundbreaking ceremony is held for the reconstruction of an access bridge over the Grand Canal at 48th Street that leads to the light rail Maintenance and Storage Facility. January 2005 - Full Funding Grant Agreement signed for the Central Phoenix East Valley (CPEV) Light Rail Project. (20 mile initial operating segment) April 2005 - METRO Max program launched, business support program encouraging residents to patronize businesses impacted by light rail construction. May 2005 - First embedded track in downtown Phoenix is placed at Central and Van Buren. August 2006 - Tempe Town lake Bridge completed. March 2007 - Operations and Maintenance Center completed. Testing, training and Light Rail Vehicle final assembly activities commence. March 2007 - Structural steel is erected on the first METRO station at Van Buren Street and First Avenue. March 2007 - Phoenix City Council approves funding for Northwest Extension December 2008 - Central Phoenix East Valley Light Rail Project (Initial 20 Mile Segment) construction completes on-time and within budget. January 2009 - Rail Passenger Operations commence; Ridership planned for 26,000 passengers per day reaches over 40,000 daily passengers in April 2009. June 2009 - Award to METRO CPEV Light Rail Project: Public Works Project of the Year – American Public Works Association, Arizona Chapter Source: Valley Metro Rail, Inc. Finance and Administration Division 40