Valley Metro Rail, Inc. Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011  VALLEY METRO RAIL, INC. Phoenix, Arizona Comprehensive Annual Financial Report For the fiscal year ended June 30, 2011 Prepared by: Finance & Administration Division LIGHT RAIL SYSTEM 2010 Facts and Figures Ridership Highest ridership days • 12.6 million total riders • • Increase of 11% over 2009 • • Exceeded projections by 51% • 40 • Feb. 4–Get Motivated Seminar Dec. 3–First Friday; Tempe Arts Festival; Phoenix Suns April 5–Arizona D’backs season home opener 39,335 60 • Sycamore/Main St • Montebello/19th Ave • University Dr/Rural • Veterans Way/College Ave • McDowell/Central Ave • 30 25 • 20 19,170 15 10 • 54,040 • 54,009 40 30 20 10 5 0 55,247 50 29,329 Riders (in Thousands) Top five busiest stations Riders (in Thousands) 35 • Weekday Saturday Sunday 0 Feb. 4 Dec. 3 April 5 Average Valley Metro Rail, Inc. (METRO) 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 12.6 million riders in 2010, exceeding the prior year by 11 percent and system projections by 51 percent. 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 trafåc 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 federal Congestion Mitigation and Air Quality funding 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 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 with signiåcant consideration given to 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 årst-come, årst-serve basis and, like the rest of the system, monitored using security cameras. continued LIGHT RAIL SYSTEM METRO has 50 vehicles in its æeet, each with a comfort capacity of 175 passengers. The vehicles are state-of-theart technology and, similar to the stations, customized for the desert climate and operating environment. Future Expansion METRO is responsible for building a 57-mile high-capacity transit system as deåned 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 deåned as light rail corridors: the Northwest and Central Mesa extensions. A 2.6-mile modern streetcar line will be built in central Tempe. The other three – Phoenix West, Glendale and Northeast Phoenix – have yet to determine a speciåc transit mode and route. Operations METRO operates 365 days a year, 20 hours a day, Sunday – Thursday, and almost 24 hours on Friday and Saturday. 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. 12-14-11 17 Thunderbird Rd Peoria Peoria Ave METRO Light Rail Line Phoenix 2026 2023 Glendale 101 Northern Ave Light Rail Extension 2031 Bethany Home Rd Light Rail Extension (Unfunded) 101 Streetcar 51 Streetcar Extension (Unfunded) Paradise Valley 2026 Future High Capacity / Light Rail Corridors for Further Study Note: Dates indicate calendar year openings Indian School Rd Scottsdale 2021 10 202 202 McKellips Rd Tolleson 17 Mesa 143 Broadway Rd Baseline Rd Southern Ave 60 Tempe Phoenix University Dr 2016 2016 Guadalupe Rd Gilbert 101 10 Warner Rd Chandler 202 Gilbert Rd 202 Val Vista Dr Mesa Dr Price Rd 56th St 40th St 24th St 19th Ave Central Ave 35th Ave 51st Ave 67th Ave Chandler Blvd Alma School Buckeye Rd Avondale Rural Rd McDowell Rd 83rd Ave For many, the METRO system provides 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. LEGEND Bell Rd 99th Ave 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 ofåcers regularly patrol the system and ask passengers at random for proof of payment. Fare evasion is cited with a åne that starts at $50, but can increase to $500. Germann Rd MetroLightRail.org 602-253-5000 Valley Metro Rail, Inc. Table of Contents Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Page Introductory Section Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Policy Organizational Chart List of Appointed Officials iii ix x xi Financial Section Independent Auditors' Report Management's Discussion and Analysis (Required Supplementary Information) Basic Financial Statements Statement of Net Assets Statement of Revenues, Expenses and Changes in Fund Net Assets Statement of Cash Flows Notes to the 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 Member Cities' Area Growth Top Employers in Maricopa County System Map - Initial 20-Mile Segment System Map - Northwest Extension System Map - Central Mesa System Map - Tempe Streetcar Operating Information Full-Time Equivalent Positions Pay Grades and Ranges Schedule of Insurance Coverage Design & Construction Milestones 1 3 26 27 28 29 30 31 32 33 34 35 37 39 41 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 December 21, 2011 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, 2011, 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, Heinfeld, Meech & Co., P.C., 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, 2011, 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, 2011, 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, 2011, 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. iii Valley Metro Rail, Inc. Letter of Transmittal (Continued) 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 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. Subsequent to the close of fiscal year 2010-2011, the City of Peoria withdrew membership effective July 1, 2011. During the fiscal year 2010-2011, 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-today management of the organization. LOCAL ECONOMIC CONDITION AND OUTLOOK METRO serves the cities of Chandler, Glendale, Mesa, Peoria, Phoenix, and Tempe that are centrally located in Maricopa County, Arizona. These cities have constituted a wellestablished growth area since 1945, and collectively encompass approximately 1,000 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 2.4 million residents in the year 2000 to 2.7 million residents in 2010, an increase of approximately 12.9% in the last ten years. The six cities’ population represents almost 70% 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 4.0 million in 2008 to 6.3 million in 2030. In 2007 and 2008, the region’s historically strong economic growth slowed and sales tax revenues fell with the nation-wide recession. In fiscal years 2009 and 2010 regional revenues fell 13.7% and 8.9% respectively. METRO responded to the times with staff reductions in 2009 and with service reductions in 2010. In fiscal year 2011 regional revenues have rebounded, growing by 3.4%. Due to the strong financial plan established for the 20 mile initial light rail system, the funding for 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 14.1 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 39,000 passengers versus the 26,000 riders planned. iv Valley Metro Rail, Inc. Letter of Transmittal (Continued) 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 or design stages which will continue to add capacity to the region’s transportation system in the years ahead. 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, 2011, 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 construction project, METRO regularly reports the project budget status to the Board showing by project element the 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 v Valley Metro Rail, Inc. Letter of Transmittal (Continued) regular project reporting process. Should anticipated contractual costs appear to exceed the Board approved project budget, METRO staff will seek Board action to adjust project scope or approve additional funding. During construction, significant issues are addressed in narrative reports included in the project progress report submitted to the Board on a quarterly basis. 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 thirty 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 thirty months, METRO’s fare revenues have exceeded budget. MAJOR INITIATIVES Design and Construction of Light Rail and Modern Streetcar 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 will be phased pending availability of funds from the City of Phoenix. The Central Mesa Light Rail Extension has completed the preliminary engineering phase and is commencing final design, real estate acquisition and utility relocation work for an anticipated line opening in 2015. In Tempe, a 2.6 mile modern streetcar alignment has completed the planning phase and anticipated to commence design and construction for a line opening in 2016. In Phoenix, planning for the 11 mile Phoenix West Light Rail Extension along the Interstate 10 corridor is nearing completion, with an expected locally preferred alternative route to be selected in the coming year. (See pages 31-34 for system maps) 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. 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 27, 2008. Revenue operations commenced January 1, 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, will be phased based upon availability of funding. Real estate acquisition and private utility relocation 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. During FY 2007-2008, the City of Phoenix commenced acquisition of real property for the 3.2 mile alignment. In fiscal years 2010 and 2011, real estate acquisition continued, private utility lines were relocated and neighborhood mitigation improvements were made to prepare for light rail construction. Central Mesa Light Rail Extension Project In March, 2010, the Mesa City Council approved a 3.1 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. The extension is planned to open in 2015 with ridership estimated at approximately 4,750 riders per day. The total capital cost of the project is $199.0 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. 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 $1.3 billion (in year of expenditure dollars) in revenue over the 20 year period to fund construction of an additional 14 miles of light rail extension and 2.6 miles of modern streetcar. 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 August 2010, the FTA funded the final $61.2 million to fully complete the Full Funding Grant payment schedule. In March 2006, METRO began to receive funds from the Public Transportation Fund. Initial funds were used for the relocation of non-prior rights utilities impacted by LRT construction. In vii ix Arizona State University students boarding train VALLEY METRO RAIL, INC. Policy Organizational Chart Fiscal Year Ended June 30, 2011 x VALLEY METRO RAIL, INC. List of Appointed Officials Fiscal Year Ended June 30, 2011 Board of Directors Board Chairman Vice Chairman Board Member Board Member Board Member Board Member Councilman Tom Simplot, Phoenix Councilmember Dennis Kavanaugh, Mesa Mayor Bob Barrett, Peoria Councilmember Shana Ellis, Tempe Councilmember Rick Heumann, Chandler Mayor Elaine M. Scruggs, Glendale Executive Management Team Chief Executive Officer Chief Operations Officer Director, Community and Government Relations Director, Planning and Development Chief, 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 Auditors’ Report, Management’s Discussion and Analysis (MD&A), the basic financial statements, and notes to the financial statements. 1 1 22 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, 2011. 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 x METRO’s total net assets decreased $20.4 million in FY 2011. The decrease was caused by scheduled depreciation charges, which exceeded new capital asset growth. Total net assets for METRO were $1.158 billion at June 30, 2011. x METRO’s operating revenues for FY 2011 were $30.8 million, a decrease of approximately $4.7 million from the prior period. Operating revenues consisted of contributions from METRO member cities ($19.4 million), passenger fares ($10.2 million) and other revenues ($1.1 million). In response to economic conditions, METRO cut operating costs reducing contributions from Member Cities by $6.5 million. x Non-Operating expenses: This year's non-operating revenue and expense activities report a net $33.3 million decrease in net assets, composed primarily of distributions to Member Cities to reimburse construction expenditures. x Capital contributions totaled $59.5 million, a decrease of approximately $79.3 million from the prior period. Capital contributions consisted of Member City Contributions of $2.7 million, Public Transportation Funds of $49.6 and Federal Transit Administration Capital Grants totaling $7.3 million. The large decrease in Federal and Member City capital funding reflects the completion of the 20 mile CPEV project, offset by the commencement of capital funding for the 3.1 mile Central Mesa Light Rail Extension. 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 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 3 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Continued) 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 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. August Light Rail Ridership Comparison 2009 / 2010 / 2011 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, 2011, 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, 2011, compared to the prior period. VMR's Condensed Statement of Net Assets As of June 30, 2011 and 2010 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 (61,891,105) (28,737,642) (90,628,747) Percent Change -60.3% -2.4% -6.9% 98,965,822 38,835,463 137,801,285 (62,353,021) (7,915,835) (70,268,856) -63.0% -20.4% -51.0% 1,153,352,954 5,019,683 1,172,536,114 6,196,414 (19,183,160) (1,176,731) -1.6% -19.0% $ 1,158,372,637 $ 1,178,732,528 (20,359,891) -1.7% 2011 $ 40,821,064 1,185,084,002 1,225,905,066 2010 $ 102,712,169 1,213,821,644 1,316,533,813 36,612,801 30,919,628 67,532,429 $ $ 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 $20.4 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, Passenger Fares, and Other Revenues (advertising and MAG planning funds), decreased by $4.7 million. Member City contributions decreased $6.5 million and were favorably impacted by increases in Passenger Fares, advertising revenues and federal operating grants. In addition, METRO’s initiatives to reduce operating costs reduced funding requirements from member cities. Operating expenses decreased by $4.8 million to $77.4 million: Administrative expenditures were reduced by $2.3 million due to the scaling back of planning activities as the Central Mesa LRT project moved from the planning phase into the capital design phase. Passenger Operations Service expenses were reduced by $1.9 million due to cost savings initiatives adopted in response to current economic conditions. Depreciation expense reduced from $39.7 million to $39.2 million for the year. In fiscal year 2011, Non Operating expenses were down by $68.0 million, primarily caused by reductions in distributions to Member Cities due to the phasing out of federal funds reimbursements for the CPEV 20 mile project. Capital contributions totaling $59.5 million consist of Member City Contributions ($2.7 million), FTA capital grants ($7.3 million) and Public Transportation Funds ($49.6 million). With the completion of the CPEV 20 mile project being the largest factor, Member City Contributions decreased by $28.5 million and Federal Capital Grants were decreased by $55.3 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, 2011 and 2010 2011 Operating revenues: Contributions from Member Cities Passenger Fares FTA Operating Grants Other Revenues Operating revenues Operating expenses: Administrative Passenger Operations Service Depreciation Operating expenses $ 2010 19,430,008 10,238,281 240,000 908,728 30,817,017 $ 25,964,781 9,256,913 222,519 103,410 35,547,623 Change $ Percent Change (6,534,773) 981,368 17,481 805,318 (4,730,606) -25.2% 10.6% 7.9% 778.8% -13.3% (2,326,549) (1,944,590) (508,415) (4,779,554) -24.4% -5.9% -1.3% -5.8% 7,213,806 31,020,111 39,176,737 77,410,654 9,540,355 32,964,701 39,685,152 82,190,208 Operating income (loss) (46,593,637) (46,642,585) 48,948 -0.1% Non-operating revenues (expense) Deficiency before Capital Contributions (33,259,151) (79,852,788) (101,267,750) (147,910,335) 68,008,599 68,057,547 -67.2% -46.0% Capital Contributions Increase (Decrease) in Net Assets 59,492,897 (20,359,891) 138,786,197 (9,124,138) (79,293,300) (11,235,753) -57.1% 123.1% Net assets, July 1 Net assets, June 30 1,178,732,528 1,187,856,666 (9,124,138) -0.8% $ 1,158,372,637 $ 1,178,732,528 $ (20,359,891) -1.7% 6 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, 2011, 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, 2011 and 2010 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 $ 2011 92,484,544 537,014,911 56,390,023 10,754,123 93,454,131 33,909,949 79,858,902 42,495,843 209,121 $ 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 $ Change (2,563,301) (11,203,468) (2,050,546) (391,058) (2,842,471) 1,405,604 (3,554,742) (2,428,334) (179,859) (160,989) 195,412,137 204,806,824 (9,394,687) Non-Revenue Vehicles Equipment 1,056,448 9,131,945 733,227 9,993,522 323,221 (861,577) Construction in Progress 32,911,926 27,747,360 $ 1,185,084,002 $ 1,213,821,644 Net Capital Assets 5,164,566 $ (28,737,642) As of June 30, 2011, METRO had $1,185 million invested in capital assets, net of accumulated depreciation. There was a net decrease in capital assets, net of accumulated depreciation, of $28.7 million from June 30, 2010; primarily resulting from a depreciation charge of $39.2 million for the Light Rail System infrastructure offset by continuing capital expenditures for the wrap up of the 20 mile LRT construction project and by Construction in Progress design expenses for the Central Mesa 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 the payments due from METRO commencing in 2011. In June of 2011, METRO made the first $10.0 million scheduled payment under the lease. The capital lease obligation at June 30, 2011 includes $32,186,000 of remaining principal and $8,334,013 accrued interest totaling $40,520,013. 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 2012 total operating and capital budget is $87.7 million, down $2.3 million from fiscal year 2011’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 Project (down $14.2 million). Offsetting this reduction are increases to the capital budgets for the LRT extensions: (NW Extension up $2.8 million, Central 7 Valley Metro Rail, Inc. Management’s Discussion and Analysis (Concluded) Mesa extension up $6.2 million and Tempe Streetcar up $4.3 million). On the operating side, METRO’s FY12 budget is $44.3 million, down $0.1 million versus fiscal year 2011. Revenue Operations costs are programmed to increase with the increasing maintenance activities required to maintain a state of good repair. Future project development costs are reducing by $1.5 million with the completion of the Tempe Streetcar planning work. Comparison of Annual Expenditure Budgets Fiscal Year 2012 vs. 2011 FY 2012 Adopted ($,000) Uses of Funds 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 Streetcar CNPAs - 20-Mile Initial Segment ARRA - Phoenix P& R Improvements ARRA - RPTA Ariz Avenue BRT Systemwide Improvements Subtotal Capital before Debt Service Capital Project Debt Service: Debt Service - Interest Debt Service - Principal Total Uses of Funds FY 2011 Amended ($,000) Change ($,000) 35,086 8,146 1,083 44,315 33,721 9,619 1,012 44,352 1,365 (1,473) 71 (37) 5,301 8,573 2,639 19,503 5,798 246 16,525 4,262 675 37,975 10,277 2,461 3,113 347 1,171 42,916 (14,202) 2,775 2,393 6,248 4,262 (2,461) (3,113) (347) (496) (4,941) 2,750 2,664 2,750 - 2,664 87,704 90,018 (2,314) In fiscal year 2012 METRO will commence design work on the Tempe Streetcar Extension. Expenses during the year are anticipated to reach $4.3 million pending necessary approvals from federal funding sources to enter preliminary 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, 2011 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 $ 15,271,127 188,049 11,037,334 13,330,817 454,952 538,785 40,821,064 32,911,926 1,152,172,076 1,185,084,002 1,225,905,066 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 Total Current Liabilities Noncurrent Liabilities: Compensated Absences Capital Lease Obligation Accrued Interest Payable 10,673,109 21,903 237,889 385,397 10,000,000 306,764 6,566,964 1,210,711 7,210,064 36,612,801 399,615 22,186,000 8,334,013 Total Liabilities 67,532,429 Net Assets Invested in Capital Assets, Net of Related Debt Unrestricted Total Net Assets 1,153,352,954 5,019,683 $ 1,158,372,637 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, 2011 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 19,430,008 10,238,281 240,000 908,728 30,817,017 7,213,806 31,020,111 39,176,737 77,410,654 Operating Income / (Loss) (46,593,637) 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 ) 2,118,259 8,678,822 (38,400,636) (3,732,886) (2,083,503) 160,757 36 (33,259,151) Deficiency Revenues under Expenses (79,852,788) Capital Contributions: Capital Contributions from Member Cities Public Transportation Funds Capital Federal Transit Administration Capital Grants Total Capital Contributions 2,651,494 49,586,095 7,255,308 59,492,897 Changes in Net Assets (20,359,891) Net Assets, Beginning of Period 1,178,732,528 Net Assets, End of Period $ 1,158,372,637 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, 2011 Cash Flows from Operating Activities Receipts from Member Cities Receipts from Federal Operating Grants Receipts from Fare Revenues Other Revenues Payments for Payroll Related Expenses Payments to Suppliers Net Cash Used in Operating Activities $ Cash Flows from Non-Capital Financing Activities Receipts from FTA Non-Capital Grants Receipts from Regional Public Transit Authority Payments for Private Utility Relocations 21,331,719 240,000 10,238,281 1,054,388 (7,124,424) (26,866,936) (1,126,972) 1,043,568 6,766,263 (511,060) Net Cash Provided by Non-Capital Financing Activities 7,298,771 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 14,403,457 (99,650,539) 63,814,522 53,248,257 (546,188) (21,149,845) 119,664 Net Increase in Cash and Cash Equivalents 6,291,463 Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 8,979,664 $ 15,271,127 Reconciliation of Operating Income / (Loss) to Net Cash Used in Operating Activities Operating Income / (Loss) $ Adjustments to Reconcile Operating Income / (Loss) to Net Cash Used in Operating Activities: Depreciation (Increase) Decrease in Assets: Accounts Receivable Due from Other Governments Inventory 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 $ (46,593,637) 39,176,737 259,348 2,646,312 (1,004,901) 152,600 1,810,105 29,237 (139,400) (30,681) (194,236) (15,724) 2,777,268 (1,126,972) 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, 2011 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 its 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, 2011 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, certificates of deposit, and the Local Government Investment Pool. 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. Prepaid Expenses Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. The prepaid items are included in Other Assets under Current Assets on the Statement of Net Assets. i. 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. 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. 13 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 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, Rail Operations, and the initial planning costs of additional extensions are recorded as annual operating expenses. 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 j. 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 for the 20 mile Central Phoenix East Valley Light Rail System 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. 14 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 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. Design and construction costs for future LRT extensions are funded based upon Design and Construction Agreements which are executed in accordance with the adopted Transit Life Cycle Plan. 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. Passenger Operations Service Expenses are funded by the Member Cities according to the ratio of LRT route mileage currently in service. Member Cities also contribute amounts to fund local security costs related to fare inspection, on-board security and park and ride security within their respective jurisdictions. k. 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 expenses during the reporting financial period. Actual results could differ from these estimates. l. 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, 2011 3. Cash and Investments Cash deposits and investments at June 30, 2011, consisted of the following: Cash on hand Insurance Trust Fund Total cash and investments $ 14,968,574 302,553 $ 15,271,127 METRO has deployed Ticket Vending Machines (TVM’s) which contain coin and bill vaults to accommodate the purchase of fares. At June 30, 2011, the total cash contained in the coin and bill vaults totaled $137,314. METRO's bank deposits at June 30, 2011, had a carrying value of $14,831,260 and the bank ledger balance was $15,057,050. The difference of $225,790 represents deposits in transit and outstanding checks. The Self Insurance Reserve Trust Account totaling $302,553 was covered by collateral held by the pledging financial institution in METRO’s name. Custodial Credit Risk – Custodial credit risk is the risk that in the event of bank failure METRO’s deposits may not be returned. METRO does not have a deposit policy for custodial credit risk. All of METRO’s bank deposits are in non-interest bearing accounts. At year end, all of METRO’s bank deposits were covered under the FDIC. 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 2011 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, 2011, METRO maintains all available cash in these accounts. 16 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 4. Accounts Receivable and Due From Other Governments All receivable balances at June 30, 2011 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 ($5.7 million) due from the City of Phoenix as Grantee of Federal Funds, PTF receivable ($4.9 million) due from Regional Public Transportation Authority (RPTA), and miscellaneous receivables ($ 0.4 million). City of Phoenix (Grantee of Federal Funds) Public Transportation Funding City of Mesa City of Phoenix City of Tempe Maricopa Association of Governments Regional Public Transportation Authority Total Due from Other Governments $ 5,720,519 4,855,355 12,742 245,068 61,937 100,184 41,530 $ 11,037,334 Public Transportation Funding is discussed more fully in Note 17. The amount due from Regional Public Transportation Authority is related to the Local Government Investment Pool as discussed more fully in Note 14. 5. Restricted Assets Certain assets of Valley Metro Rail, Inc. are set aside for repayment due to outside restrictions imposed on those funds. Unspent capital lease proceeds in the amount of $454,952 are set-aside for use in the upcoming fiscal year for the acquisition of parts and accessories for fourteen light rail vehicles which are financed under the lease. The Capital Lease Obligation is discussed in Note 9. 17 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 6. Capital Assets Capital asset and construction in progress activity for the year ended June 30, 2011 were as follows: Balances, June 30, 2010 Nondepreciable assets: Construction in progress Depreciable assets: 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 Non-Revenue Vehicles $ Increases 27,747,360 $ 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 1,126,926 219,803,204 1,947,704 Equipment Total depreciable assets at historical cost Less accumulated depreciation for: Buildings Guideway Bridges Operation Control Center Passenger Stations Park and Ride Facilities Electric Power Substations Signal Substations Computers & software Furniture & fixtures Revenue Vehicles Non-Revenue Vehicles Equipment Total accumulated depreciation Total capital assets being depreciated Business-type activities capital assets, net Decreases 10,231,874 (5,067,308) 105,268 585,110 3,900,000 46,064 103,515 12,238,126 547,378 1,252,152,210 5,287,335 (7,484,260) (16,955,208) (3,075,819) (586,589) (5,068,237) (3,611,594) (5,324,275) (3,642,501) (1,117,164) (756,815) (15,598,939) (611,921) (2,244,604) (66,077,926) 1,186,074,284 (2,563,303) (11,308,736) (2,050,546) (391,058) (3,427,582) (2,494,396) (3,554,742) (2,428,334) (225,923) (160,990) (8,792,128) (370,044) (1,408,956) (39,176,737) (33,889,402) $ 1,213,821,644 $ $ (23,657,528) (27,940) Balances, June 30, 2011 $ 32,911,926 102,532,106 565,278,854 61,516,388 11,731,770 101,949,950 40,015,939 88,737,919 48,566,678 1,343,087 1,126,926 219,803,204 2,023,279 12,785,505 (27,940) 15,134 15,134 (12,806) $ (5,080,114) 1,257,411,605 (10,047,563) (28,263,943) (5,126,365) (977,647) (8,495,820) (6,105,990) (8,879,017) (6,070,835) (1,343,087) (917,805) (24,391,067) (966,831) (3,653,560) (105,239,529) 1,152,172,076 $ 1,185,084,002 7. Member Cities’ Deposits The member cities advance monies to cover the cost of operations plus the federal and local share of project costs. In addition, unpaid expenses to be funded by member contributions are accrued for each city. A summary of member cities’ deposits at June 30, 2011 follows: City City City City City City of Chandler of Glendale of Mesa of Peoria of Phoenix of Tempe $ $ 18 102,192 24,508 259,221 92,292 5,182,864 1,548,987 7,210,064 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 8. Operating Leases METRO leases office space and small office equipment under various operating lease agreements. Total rent expenditures for these leases were $1,227,901 for the fiscal year ended June 30, 2011. Future minimum lease payments under non-cancelable operating leases are as follows: Year Ending June 30, 2011 2012 2013 2014 2015 2016 $ 1,289,818 1,255,119 1,242,611 1,255,552 1,282,658 $ 6,325,758 9. Capital Lease Obligation METRO leases 14 Light Rail Vehicles (LRVs) under the terms of a Master Lease/Purchase Financing Agreement, with the City of Phoenix (as Lessor). The assets acquired through the capital lease are as follows: Asset: Unspent Lease Proceeds Spare Parts Revenue Vehicles Less Accumulated Depreciation Total $ 454,952 1,635,840 40,095,208 (4,009,521) $ 38,176,479 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 2011: June 30, 2010 Capital Lease Obligation $ 42,186,000 Increases $ - Decreases June 30, 2011 Amount Due in One Year $ (10,000,000) $ 32,186,000 $ 10,000,000 Acceptance of the LRVs commenced the term of this agreement and obligated rent payments totaling approximately $56,300,000. The first $10,000,000 payment was made June 1, 2011, with succeeding payments due per the following schedule: 19 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 Schedule of Capital Lease Payable as of June 30, 2011 Year ending June 30 2011 2012 2013 2014 Principal Payments $ 10,000,000 10,000,000 10,000,000 12,186,000 $ 42,186,000 Principal Remaining $ 32,186,000 22,186,000 12,186,000 - $ $ Interest 8,334,013 * 2,827,876 1,954,759 1,013,886 14,130,534 * Total Obligation $ 40,520,013 * Interest shown is accrued to date and future amounts payable For Fiscal Year 2011, Capital Lease interest expense totaling $2,083,503 was accrued under the Master Lease Agreement generating a total accrued interest to date of $8,334,013. The Capital Lease obligation at June 30, 2011 includes $32,186,000 principal and $8,334,013 accrued interest for a total of $40,520,013. 10. Compensated Absences The following presents the changes in compensated absences for the fiscal year ended June 30, 2011: Compensated absences July 1, 2010 Increases Decreases June 30, 2011 $ $ $ $ 755,775 137,067 (107,830) 785,012 The portion of compensated absences payable within one year is $385,397. 11. Due to Other Governments METRO receives employee services as well as Public Transportation Funds for capital project planning, design and construction from RPTA. As of June 30, 2011 METRO owed $760,053 for payroll and fringe benefits; $41,530 for an investment reserve (see Note 14); and $5,765,381 for Federal grants reimbursable to RPTA for expenditures funded by the Public Transportation Fund. Payroll and Fringe Benefits NCFE reserve Federal Grant Reimbursements Total Due to RPTA $ $ 760,053 41,530 5,765,381 6,566,964 12. 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, 2011, METRO had remaining contractual commitments for these services aggregating approximately $55.9 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, 2011, METRO entered into approximately $6.8 million additional contractual commitments. 20 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 Contractor Kinkisharyo Int'l - Vehicle Procurement Scheidt Bachmann - Fare Collection System Various - Public Art Program Alternative Concepts - Transportation Operations Kinkisharyo Int'l - Vehicle Maintenance Various - Operations & Maintenance Various - Misc. Construction and Services Various - Future Extensions AE Com - NWExt Jacobs - Central Mesa Extension Design Various - Central Mesa Ext. Program Management $ $ Commitment 117,691,301 8,564,192 7,298,208 45,900,288 27,347,507 9,536,621 22,654,742 29,930,436 15,881,499 12,499,655 580,852 297,885,301 Spent-to-date $ 117,294,330 7,958,900 6,089,678 26,365,784 18,572,129 7,165,017 18,916,384 20,691,996 15,003,869 3,740,835 168,955 $ 241,967,878 $ $ Remaining 396,971 605,292 1,208,530 19,534,504 8,775,378 2,371,604 3,738,358 9,238,440 877,630 8,758,820 411,897 55,917,424 13. 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 39 and Note 15-Related Party Transactions. 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, 2011 the Reserve for General Liability Claims totaled $306,764. 14. Contingencies 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. 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 assetbacked 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. No collections were received from the NCFE receivable during fiscal year ended June 30, 2011. The $41,530 receivable is recorded as due from other governments with an offsetting reserve of ($41,530) recorded to due to other governments. 21 Valley Metro Rail, Inc. Notes to the Financial Statements (Continued) Fiscal Year Ended June 30, 2011 15. Related Party Transactions All of the six member cities of METRO’s Board of Directors are also member cities of the sixteen-member RPTA Board of Directors. The Board members of the cities of Tempe and Glendale represent their cities on both Boards. 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. Any payroll related liabilities including Compensated Absences are obligations of METRO due to RPTA. For the period July 1, 2010 through June 30, 2011, METRO incurred costs of $7,153,661 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. As of June 30, 2011, the remaining lease payments under the sublease agreement total $2,897,746. 16. 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, 2011, active plan members and METRO were each required by statute to contribute at the actuarially determined rate of 9.85 percent (9.01 percent retirement, 0.59 percent health plan, and 0.25 percent long-term disability) of the members' annual covered payroll. METRO’s contribution to the System for the year ended June 30, 2011 and 2010 was $542,211 and $541,110 respectively, which was equal to the required contributions for the year. Schedule of Retirement and Long Term Disability Benefits Accrued Years ended June 30, 2011 2010 2009 Retirement Fund $ 495,971 480,091 454,638 Health Benefit Supplement Fund $ 32,478 37,993 59,126 22 Long-Term Disability Fund $ 13,762 23,026 28,702 Total Benefits $ 542,211 541,110 542,466 Valley Metro Rail, Inc. Notes to the Financial Statements (Concluded) Fiscal Year Ended June 30, 2011 17. 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. Cash outlays for LRT Public Transportation Fund expenses during fiscal year 2011 totaled $63,639,292 as summarized in the table below. Public Transportation Fund Cash Expenditures (LRT Portion) Fiscal Year ended June 30, 2011 LRT PTF Expenditures: $ In Millions Regional Transportation Plan Projects: Central Mesa LRT Extension Systemwide Improvements 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 Total LRT PTF Cash Expenditures 4.55 10.29 -0.19 0.71 24.16 12.66 1.58 6.26 3.62 63.64 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. As of June 30, 2011, bond expenditures to date for the LRT portion of the program totaled $ 43,475,920. 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, 2011 Original 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 Construction administration consultants Planning and environmental consultants Facilities Construction Administrative Equipment Purchases Real estate/ROW Acquisition Light Rail Vehicles Private Utilities Relocation Finance Costs Rail Operations Expense Total operating expenses $ (58,966,299) 9,097,839 76,661,200 60,786,782 1,000,000 250,000 88,829,521 Final $ 7,373,753 325,000 7,523,450 10,785,916 6,958,190 758,025 10,836,239 1,500,000 25,000 9,522,000 33,221,948 88,829,521 (56,610,092) 9,497,839 75,151,436 60,728,550 1,000,000 250,000 90,017,733 8,252,759 270,953 5,196,450 16,397,961 7,641,391 920,400 9,506,239 1,102,184 1,241,930 5,766,597 33,720,869 90,017,733 Actual Amounts (Budgetary Basis) Variance with Final Budget Over (Under) $ $ (70,161,408) 10,238,281 70,864,107 57,752,197 1,012,720 389,982 70,095,879 4,480,747 258,953 2,951,220 3,110,110 6,357,295 485,611 9,246,401 610,385 3,732,886 7,842,160 31,020,111 70,095,879 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 Acquisition of Capital 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) RPTA PTF Bond Interest (budgeted expenses not recorded for GAAP basis) Capital Lease Interest (budgeted expenses recorded nonoperating expense for GAAP basis) Private Utilities Relocations (budgeted expenses recorded nonoperating expense for GAAP basis) All Other Adjustments Depreciation (GAAP expenses not included in budgetary basis) Total Reconciling Items (13,551,317) 740,442 (4,287,329) (2,976,353) 12,720 139,982 (19,921,854) (3,772,012) (12,000) (2,245,230) (13,287,851) (1,284,096) (434,789) (259,838) (491,799) 2,490,956 2,075,563 (2,700,758) (19,921,854) $ $ $ $ 70,095,879 77,410,654 (7,314,775) 10,985,155 3,011,096 9,246,401 2,747,561 2,083,503 3,732,886 55,360 (39,176,737) (7,314,775) 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 $77.4 million, or $7.3 million less than the budgetary basis costs of $70.1 million. The primary differences between these two bases of reporting are: 1.) Capital project costs that are included in budgeted costs but added to Capital and Inventory Assets for GAAP purposes ($11.0 million); 2.) Finance and real estate/ROW acquisition costs that are budgeted but not booked for GAAP purposes ($3.0 and $9.2 million); 3.) RPTA Bond Interest Expense that is included in the budget but not recorded on a GAAP basis ($2.7 million); 4.) Capital Lease Interest and Private Utility Relocations that are recorded as non operating expenses ($2.1 and $3.7 million) and 5.) Depreciation included for GAAP but not budget ($-39.2 million). 24 Interior of 2010 holiday train 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. Statistical Section Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 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 source of operating revenues are contributions from Member Cities. With repect to capital projects, METRO receives federal grants and utilizes Public Transportation Funds administered by the Regional Public Transportation Authority (RPTA). (Refer to Note 17 in the Notes to the Financial Statements section.) N/A Debt Capacity METRO has no current bond indebtedness. See Notes to the Financial Statements; refer to Note number 17, Public Transportation Funding for information regarding revenue bonds issued by RPTA which provide funding for LRT capital expenditures. Refer to Note number 9, Capital Lease Obligation for information related to METRO's current debt obligations. 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 01/02 through FY 10/11(1) Business-type activities Invested in capital assets (2) 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 (3) Support/Service Vehicles (4) Non-Revenue Vehicles Equipment Construction in Progress Subtotal Invested in Capital Assets Restricted Unrestricted Total business-type activities net assets FY 01/02 $ FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 $ 76,160 153,797 22,168 3,018 $ 255,143 $ 203,648 134,029 10,488 4,202 56,989,473 $ 57,341,840 $ 171,226 113,186 188 2,754 235,618,498 $ 235,905,852 $ 108,076 739,880 188 497,319 459,034,837 $ 460,380,300 $ 68,855,662 949,273 844,591 3,246,541 706,809 995,075 698,209,539 $ 773,807,490 $ 67,108,795 852,789 692,090 116,875,456 646,471 209,605 1,222,755 895,953,882 $ 1,083,561,843 $ 97,611,148 545,989,800 60,491,115 11,536,240 96,272,225 34,769,334 86,707,115 45,202,398 574,791 531,100 164,031,893 587,896 958,053 8,214,895 27,776,412 $ 1,181,254,415 $ $ 67,247 915 28,981 97,143 95,047,845 548,218,379 58,440,569 11,145,181 96,296,602 32,504,345 83,413,644 44,924,177 179,859 370,110 163,521,294 733,227 9,993,522 27,747,360 $ 1,172,536,114 $ 92,484,543 537,014,911 56,390,023 10,754,123 93,454,131 33,909,949 79,858,902 42,495,843 209,121 163,681,089 1,056,448 9,131,945 32,911,926 $ 1,153,352,954 $ 97,143 $ 255,143 $ 57,341,840 $ 235,905,852 $ 460,380,300 $ 773,807,490 $ 1,083,561,843 6,602,251 $ 1,187,856,666 6,196,414 $ 1,178,732,528 5,019,683 $ 1,158,372,637 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. Prior to FY 04/05, these amounts were included in Administration and Planning Services. (3) Revenue Vehicles are shown net of depreciation and net of Capital Lease obligation. (4) In FY 09-10 Support Service Vehicles and Non-Revenue Vehicles were combined for presentation purposes. 26 Valley Metro Rail, Inc. Changes in Net Assets FY 01/02 through FY 10/11 (1) FY 01/02 Operating Revenues Contributions from Member Cities (2) Passenger Fares Federal Transit Administration Operating Grants (2) Sales Tax (RARF) Public Transportation Funds (2) Other Revenues Total operating revenues Operating Expenses Administration and Planning Services (3) Passenger Operations Service Private Utilities Relocations Depreciation Total operating expenses Operating income (loss) 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 (4) Increase in net assets FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 28,353,274 $ 14,141,126 $ 27,692,841 $ 75,672,696 $ 156,033,959 $ 143,276,140 11,437,481 - 6,237,102 - 48,497,109 - 74,819,942 - 150,717,452 11,700,029 146,442,055 57,160,186 953,877 58,315,376 16,761,389 34,590,376 62,638,235 102,512,783 238,090,177 359,636,200 202,545,393 16,725,821 34,398,920 5,434,775 1,001,016 1,829,944 5,709,157 5,396,474 39,765 16,765,586 (4,197) 63,436 34,462,356 128,020 117,706 5,552,481 57,085,754 136,944 1,137,960 101,374,823 11,700,029 186,644 13,716,617 224,373,560 39,212,754 1,389,987 46,311,898 313,324,302 15,750,886 2,231,538 23,378,898 179,166,495 $ 5,323,908 $ FY 02/03 $ FY 08/09 $ 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 FY 10/11 $ 19,430,008 10,238,281 240,000 908,728 30,817,017 5,278,901 15,678,389 9,540,355 32,964,701 7,213,806 31,020,111 22,437,891 43,395,181 (26,493,573) 39,685,152 82,190,208 (46,642,585) 39,176,737 77,410,654 (46,593,637) 650,492 10,945,204 2,118,259 8,678,822 160,757 36 (38,400,636) (3,732,886) (2,083,503) 45,490 29,980 943 80,162 100,888 102,888 91,519 (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) (33,259,151) - - - - - - 62,585,921 31,156,572 45,043,704 - 7,255,308 2,651,494 49,586,095 - 41,293 $ 158,000 $ 57,086,697 - 77,109,027 $ 178,564,012 - - 130,496,339 - - - 72,863,699 25,381,955 52,627,944 - $ 309,754,353 $ 104,294,823 $ 224,474,448 $ 313,427,190 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 08/09, CP/EV local, federal and regional project funding was recorded as operating revenue. (3) 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. (4) 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 $ (9,124,138) $ (20,359,891) Valley Metro Rail, Inc. Growth in Regional Transit Usage Last Ten Fiscal Years Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Boardings 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 67,607,530 Change 12.73% 11.56% 7.34% 4.34% 5.14% -2.08% 6.63% 15.17% -4.99% -0.13% Valley Metro Regional Bus and Rail Boardings by Fiscal Year Fixed Route System Five Year Growth rate 14.1% 75,000,000 70,000,000 67,607,530 Total Rail Boardings Total Bus Boardings 65,000,000 59,253,904 60,000,000 Annual Rides 55,000,000 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 2002 2003 2004 2005 2006 2007 Fiscal Year Source: Regional Public Transportation Authority 28 2008 2009 2010 2011 Valley Metro Rail, Inc. Member Cities’ Area Growth (Square Miles) Last Ten Fiscal Years Year Chandler Glendale Mesa Peoria Phoenix Tempe 2001 189,498 218,812 420,525 115,432 1,352,394 158,625 2002 201,263 227,614 431,874 122,655 1,375,906 159,425 2003 211,984 231,288 434,585 126,815 1,455,440 159,426 2004 224,644 233,000 445,354 132,805 1,492,420 159,615 2005 238,930 235,987 451,223 137,045 1,525,400 160,820 2006 241,910 235,987 455,151 145,125 1,560,380 165,796 2007 247,100 246,382 460,155 158,227 1,595,260 166,625 2008 247,100 248,731 463,397 158,227 1,630,340 167,458 2009 244,376 248,435 459,682 155,560 1,561,485 172,641 2010 236,123 226,721 439,041 154,065 1,445,632 161,719 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 2001 2002 2003 Chandler 2004 2005 2006 2007 For the Years 2001 through 2010 Glendale Mesa Source: Maricopa Association of Governments 29 Peoria 2008 Phoenix 2009 Tempe 2010 Valley Metro Rail, Inc. Top Employers in Maricopa County For the Fiscal Year ended June 30, 2010 and June 30, 2001 Employer Employees State of Arizona Wal-Mart Stores, Inc. Banner Health Systems City of Phoenix Wells Fargo & Company Maricopa County Apollo Group Inc. Arizona State University Honeywell Aerospace Bank of America Motorola The Kroger Co. US Postal Service - Arizona District Raytheon Missile Systems 52,420 31,280 27,431 16,375 14,000 12,996 12,299 12,043 10,145 10,000 Total for Principal Employers 2010 Rank % of Total 1 2 3 4 5 6 7 8 9 10 3.06% 1.97% 1.39% 1.03% 0.84% 0.84% 0.78% 0.76% 0.63% 0.63% 198,989 Total Employment in Maricopa Cty As of June 30 2001 Rank % of Total 59,348 13,800 13,973 12,917 1 6 4 7 3.82% 0.89% 0.90% 0.83% 13,860 5 0.89% 17,500 2 1.13% 15,500 9,837 9,756 9,700 3 8 9 10 1.00% 0.63% 0.63% 0.62% Employees 11.93% 1,628,700 176,191 11.34% 1,552,400 2010 - Employees (000s) 12.0 12.3 10.1 10.0 52.4 13.0 27.4 14.0 31.3 14.4 State of Arizona Wal-Mart Banner Health Systems City of Phoenix Wells Fargo Maricopa County Apollo Group Inc. Arizona State University Honeywell Aerospace Bank of America Source: Maricopa County Phoenix Business Journal Book of Lists Workforce Informer Arizona at www.workforce.az.gov for total employed in Maricopa Cty 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 Rail, Inc. Central Mesa LRT Extension Central Mesa Light Rail Extension Source: Valley Metro Rail, Inc Project Development Division 33 Valley Metro Rail, Inc. Tempe Streetcar Tempe Streetcar Source: Valley Metro Rail, Inc Project Development Division 34 Valley Metro Rail, Inc Full-Time Equivalent Positions Source: Valley Metro Rail, Inc Finance and Administration Division Grade RPTA Position Titles FY 2008 Authorized FTEs FY 2009 FY 2010 FY 2011 III Administrative Support Assistant 1 1 1 1 IV Accounting Technician Administrative Assistant Materials Handler 1 6 0 1 6 1 1 6 1 1 6 1 VI Paralegal Track Maintainer 1 0 1 6 1 6 1 6 VII Accountant I Executive Assistant Network Support Analyst Planner I Procurement Specialist Signal & Comm Systems Maintainer Utility Relocation Specialist 1 3 0 1 1 0 1 1 2 1 0 0 6 1 2 2 0 0 0 6 1 2 2 0 0 0 6 1 VIII Lead Document Control Clerk Engineering Technician Executive Administrative Coordinator Information Technology Systems Specialist Maintenance Scheduling Materials/Warranty Coordinator Sr Communications Specialist Signal & Communications Syst Tech Traction Power Systems Technician 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 1 1 1 1 0 2 0 4 10 IX Accountant II Area Coordinator Budget Analyst Contract Administrator Network Systems Engineer Planner II Supervisor, Facility Maintenance Supervisor, Track Maintenance 1 2 1 2 1 2 1 0 1 0 0 1 1 2 1 1 1 1 1 1 1 0 2 1 1 1 1 1 1 Engineer (Civil) Lead Technician Planner III Program Control Specialist Senior Contract Administrator Signals/Communications Maintenance Supervisor TES Supervisor 0 1 0 1 2 0 0 0 1 0 1 2 1 1 1 0 2 1 2 1 2 1 0 2 1 2 1 2 X 35 Valley Metro Rail, Inc Full-Time Equivalent Positions Source: Valley Metro Rail, Inc Finance and Administration Division Grade RPTA Position Titles FY 2008 Authorized FTEs FY 2009 FY 2010 FY 2011 XI Accountant III Public Arts Administrator Public Information Officer Rail DBE Program Manager 0 1 0 1 0 1 1 1 0 1 1 0 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 1 1 1 1 0 0 1 0 1 1 1 1 0 0 1 0 0 1 0 0 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 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 1 0 1 0 1 0 0 1 1 0 XIV Rail O & M Startup/Activation Manager Rail Safety and Security Chief Chief Maintenance Engineer Chief System Engineering Officer Chief Transportation Officer 1 0 0 1 0 1 0 0 1 0 0 0 0 1 1 0 1 1 1 0 XV Rail Chief Operations Officer Rail Community & Government Relations Director Rail Finance & Administration Director Rail Safety, Security, and Quality Director 0 1 1 1 0 1 1 1 0 1 1 1 1 1 1 0 XVI Rail Design & Construction Director Rail General Counsel Rail Operations & Maintenance Director Rail Project Development Director 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 1 ED Rail Chief Executive Officer 1 57 1 91 1 85 1 84 36 Valley Metro Rail, Inc. Schedule of FY 2011 Adopted Pay Grades and Ranges For the Fiscal Year Ended June 30, 2011 Grade Pay Range RPTA Position Titles III Administrative Support Assistant $27,626 - $41,439 IV Accounting Technician Administrative Assistant Lead Document Control Clerk Materials Handler $30,696 $30,696 $30,696 $30,696 - $46,043 $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 Signal/Comm 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 Lead Document Control Clerk Engineering Technician Executive Administrative Coordinator Information Technology Systems Specialist Maintenance Scheduling Materials/Warranty Coordinator Signal/Comm Systems 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 Budget Analyst 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 $49,435 - $74,154 $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 Source: Valley Metro Rail, Inc Finance and Administration Division 37 Valley Metro Rail, Inc. Schedule of FY 2011 Adopted Pay Grades and Ranges For the Fiscal Year Ended June 30, 2011 Grade Pay Range RPTA Position Titles XI Accountant III Public Arts Administrator Public Information Officer Rail DBE Program Manager $59,818 $59,818 $59,818 $59,818 - $89,726 $89,726 $89,726 $89,726 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 & Government Relations Director Rail Finance & Administration Director Rail Safety, Security, and Quality Director $100,202 $100,202 $106,589 - $150,304 $150,304 $143,874 XVI Rail Design & Construction Director Rail Operations & Maintenance Director Rail Project Development Director $112,627 $117,246 $112,627 - $168,941 $165,355 $168,941 GC Rail General Counsel $117,246 - $175,870 ED Chief Executive Officer Salary Negotiated Source: Valley Metro Rail, Inc Finance and Administration Division 38 Valley Metro Rail, Inc. Schedule of Insurance Coverage For the Fiscal Year Ended June 30, 2011 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: Coverage Policy # KTKCMB2700C768610 Commercial Property Limits 131,687,981 TIV 10,000 Deductible 25,000,000 Flood & EQ 100,000 Flood & EQ Deductible 150,660,000 Limit 100,000 Deductible 22,581,224 TIV 5,000,000 Flood & EQ 100,000 Deductible 15,000,000 per Occurrence x/o 5,000,000 underlying Policy Term 12/1/2010-11 Premium $102,713 Carrier Travelers Indemnity Co. 12/1/2010-11 $165,726 12/1/2010-11 $30,711 Travelers P&C Insurance Co. Travelers P&C Insurance Co. 12/1/2010-11 $35,932 ACE Fire Underwriters Insurance Co. Commercial Crime 1,000,000 Limit 10,000 Deductible 12/1/2010-11 $2,281 BA1153P23309CAG Auto Liability and Physical Damage 300,000 CSL 12/1/2010-11 2,000 Comp & Coll Deductible except 5,000 Deductible for Brandt and 2009 International $47,736 Crime Fidelity & Deposit Co. of Maryland Commercial Auto Charter Oak Fire Insurance Co. (Travelers) N1A3RL0000066-01 Primary Excess Liability 10,000,000 x/o 250,000 SIR 12/1/2010-11 $375,777 71P30000014-101 Excess Liability 10,000,000 x/o 10,000,000 12/1/2010-11 $78,371 03051169 Excess Liability 15,000,000 x/o 20,000,000 12/1/2010-11 $57,472 EAU736241/01/2010 Excess Liability 25,000,000 x/o 35,000,000 12/1/2010-11 $101,794 QT6605833B340TIL10 Inland Marine - Rolling Stock QT6605833B352TIL10 Inland Marine - Town Lake Bridge I21112951004 CCP006379805 DIC - Excess Flood and EQ for Town Lake Bridge 39 Princeton Excess & Surplus Lines Insurance Co. Everest National Insurance Co. Allied World National Assurance Co. AXIS Surplus Insurance Co. Valley Metro Rail, Inc. Schedule of Insurance Coverage (Concluded) For the Fiscal Year Ended June 30, 2011 Source: Valley Metro Rail, Inc Contracts and Procurement Division Policy # G24100868002 Coverage Excess Liability Limits 15,000,000 x/o 85,000,000 Policy Term 12/1/2010-11 Premium $31,500 UXP003631401 Excess Liability 25,000,000 x/o 60,000,000 12/1/2010-11 $79,980 Workers Comp & Employers Liability WC - Statutory EL - 1,000,000 3/1/2010-11 - Pollution Legal Liability (Fixed-site coverage) 12/1/07-12 $31,278 181623 37312354 5,000,000 each Pollution Incident 5,000,000 Aggregate 25,000 Deductible 40 Carrier Westchester Surplus Lines Insurance Co. Arch Insurance Co. SCF Premier (SCF of Arizona); Standard Fire Insurance Co. (Travelers) 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 March 2010 - Mesa City Council approves a 3.1 mile extension of the LRT system. August 2010 - FTA approves Central Mesa LRT alignment for project development as the next step toward federal funding. October 2010 - Tempe City Council approves Mill Avenue Alignment for modern streetcar Source: Valley Metro Rail, Inc. Finance and Administration Division 41