HIGHWAY EXPANSION AND EXTENSION LOAN PROGRAM FUND FINANCIAL STATEMENTS Fiscal year ended June 30, 2002 Deloitte & Touche LLP Suite 1200 2901 North Central Avenue Phoenix, Arizona 85012-2799 Tel: (602) 234-5100 Fax: (602) 234-5186 www.us.deloitte.com INDEPENDENT AUDITORS' REPORT The Honorable Jane Dee Hull Governor of the State of Arizona, and Members of the Legislature We have audited the accompanying financial statements of the Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund (the .'Fund") as of and for the year ended June 30, 2002, as listed in the table of contents. These financial statements are the responsibility of the Arizona Department of Transportation's (the "Department") management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note lA, the financial statements present only the Fund and do not purport to, and do not, present fairly the financial position of the Department as of June 30, 2002, the changes in its financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund of the Department as of June 30, 2002, the changes in financial position and cash flows thereof for the year ended in conformity with accounting principles generally accepted in the United States of America. As described in Note 4 to the financial statements, in fiscal year 2002, the Fund adopted Governmental Accounting Standards Board ("GASB") Statement No.34, Basic Financial Statements-and Managemellt's Discussion and Allalysis-for State alld Local Govemmellts, GASB Statement No.37 , Basic Finallcial Statements-and Mallagement's Discussioll and Analysis-for State and Local Govemmellts: Omnibus, and GASB Statement No.38, Certail: Financial Statement Note Disclosures. The Management Discussion and Analysis on page 2 is a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. November 15, 2002 Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund June 30, 2002 Management's Discussion and Analysis Financial Highlights z The assets of the Highway Expansion and Extension Loan Program Fund (HELP) exceeded its liabilities by $83,292,829 at the end of year 2002. All of this amount may be used to meet HELP' s ongoing obligations. z HELP's total net assets increased by $2,502,278. The majority of the changes are attributable to an increase in the interest on loan receivables. z Twenty new loans totaling over $172 million were approved from July 1, 2001, to June 30, 2002. Ten of the 20 loans were made to local governments, and the remaining ten made to accelerate ADOT projects. z HELP continues to be among the most active State Infrastructure Banks in the nation. Fund financial statements Fund accounting. The operations of the Fund are accounted for with a separate set of self balancing accounts that comprise its assets, liabilities, fund balance, revenues, and expenses. Government resources are allocated to and accounted for based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The various transactions are accounted for in one fund type as follows: Proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. An enterprise fund is used by the Arizona Department of Transportation (Department) to account for the HELP operation. The Department's proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. Notes to the financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the fund financial statements. The notes to the financial statements can be found on pages 6-11 of this report. Requests for information. This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with an overview of the Fund's finances. Questions concerning any of the information provided in this report or request for additional financial information should be addressed to the Controller, Arizona Department of Transportation, 206 S. 17th A venue, Phoenix, Arizona, 85007 or by visiting our website at http://www .dot.state.az.us/ ABOUT/fms/helQlink.htm. Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Statement of Net Assets For the fiscal year ended June 30, 2002 2002 Assets Current assets: Restricted cash on deposit with the State Treasurer (Note 1) Receivables: Accrued interest Loans (Note 3A) Due from other Arizona Department of Transportation funds Due from other state agencies Total current assets Noncurrent assets: Receivables: Loans (Note 3A) Total noncurrent assets Total assets Liabilities Current liabilities: Accrued payroll and other accrued expenses Compensated absences Total current liabilities $ 141,334,598 666,035 51,019 947 571,451 158,953 193,750,984 55,099,529 55,099,529 248,850,513 3,905 17,313 21,218 Noncurrent liabilities: Advances from other Arizona Department of Transportation funds (Note 3B) Notes payable (Note 3C) Total noncurrent liabilities Total liabilities 20,000,000 145,536,466 165,536,466 165,557,684 Net assets Restricted for loans and other financial assistance Total net assets 83,292,829 $ 83,292,829 The notes to the financial statements are an integral part of this statement. Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Statement of Activities For the fiscal year ended June 30, 2002 2002 Operating revenues: Interest on loans receivables Total operating revenues Operating expenses: Salaries and related benefits Supplies Professional and outside services Travel Interest on notes payable Other Total operating expenses Operating Non-operating revenues: Interest on investments Total non-operating revenues Changes in net assets Total net assets -July 1 Total net assets – June 30 The notes to the financial statements are an integral part of this statement. 2,226,502 2,226,502 251,220 1,043 139,498 6,126 4,821,052 45,783 5,264,722 <3,038,220> 5,540,498 5,540,498 2,502,278 80,790,551 $ 83,292,829 Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Statement of Cash Flows For the fiscal year ended June 30, 2002 2002 Cash flows from operating activities: Receipts from customers Receipts from other funds Receipts from other agencies Payments to suppliers Payments to employees Payments to other funds Payments to other agencies Other Net cash by operating activities Cash flows from noncapital financing activities: Transfer from other agencies Net cash provided by noncapital financing activities Cash flows from investing activities: Interest on investments Net cash provided by investing activities Net in cash Restricted Cash - July 1 Restricted Cash - June 30 Reconciliation of operating income to net cash by operating activities: Operating Adjustment to reconcile operation income to net cash by operating activities Net charges in assets and liabilities: Receivables Due from other Arizona Department of Transportation funds Due form other state agencies Accrued payroll and other accrued expenses Compensated absences Notes payable Net cash by operating activities The notes to the financial statements are an integral part of this statement. $ 2,048,346 9,689,351 3,417,773 <26,863> <244,291> <75,507,164> <7,037,504> <45,785> <67,706,137> 40,000,000 40,000,000 5,625,847 5,625,847 <22,080,290> 163,414,888 $ 141,334,598 $ <3,038,220> <69,323,867> 330,150> 151,994 <4,259> 17,313 4,821,052 $ <67,706,137> Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Notes to Financial Statements June 30, 2002 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICES A. Reporting Entity The Arizona Department of Transportation (Department) was authorized in 1996 to administer a State Infrastructure Bank under a cooperative agreement with the Federal Highway Administration (FHWA), pursuant to Section 350 of the National Highway System Designation Act of 1995. The Highway Extension and Expansion Loan Program (HELP) was authorized to be established as Arizona's State Infrastructure Bank under Arizona Revised Statutes, Title 28, Chapter 21, Article 5. The HELP Fund (Fund) was initially capitalized with grants from FHWA and State matching funds. The HELP is administered by a seven-member advisory committee. The members serve staggered four-year terms and serve no more than two consecutive terms. The committee is charged with reviewing requests for loans and financial assistance, making recommendations to the Transportation Board of the State of Arizona Department of Transportation (Transportation Board) and submitting an annual report to the Governor and State Legislature. Qualified borrowers, which include any political subdivision, the State or its agencies or Indian tribes, may submit loan applications to HELP for eligible projects. The Transportation Board may make loans or provide other financial assistance to qualified borrowers, including the Department, from monies in the Fund for eligible projects, enter into loan repayment agreements with recipients, apply for, accept and administer grants and other financial assistance from the United States and from other public and private sources that are made for deposit in the Fund. HELP does not increase the Transportation Board's bonding authority. The Department is a department of the State of Arizona and is not legally separate. The Department has no component units. The Director of the Department serves as the Chief Administrative Officer and is directly responsible to the Governor. The Governor appoints the seven-member Transportation Board, which has responsibility for establishing a complete system of State highway routes and distributing monies for local airport facilities' projects through a grant program. Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Notes to Financial Statements (continued) June 30, 2002 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - Continued The financial statements present only the funds comprising the Fund and are not intended to present fairly the financial position or results of operations of the Department. The accounting policies of the Department conform to generally accepted accounting principles in the United States of America (GAAP) as applicable to governmental units. The following is a summary of the more significant policies: B. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The economic resources measurement focus and the accrual basis of accounting are followed for reporting purposes. Under the 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. Federal grants and reimbursements, State match and interest are recognized as revenues as soon as all eligibility requirements imposed by the provider have been met. The Department uses an enterprise fund to account for the Fund and for its loan distribution operation. The Fund receives monies from the FHWA along with applicable State matching funds, State Transportation Board Funding Obligations, direct State appropriations and other lawfully available sources. The Transportation Board may use monies in the Fund to make eligible project loans or provide other financial assistance to qualified borrowers, subsidize interest rates, provide other forms and methods of financial assistance, and pay the costs to administer the Fund. Transactions that would be treated as revenues or expenses if they involved organizations external to the governmental unit are accounted for as revenues or expenses in the funds involved. Transactions which constitute reimbursements of a fund for expenses initially made from that fund, which are properly applicable to another fund, are recorded as expenses in the reimbursing fund and as reductions of the expenses in the fund that is reimbursed. The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. C. Assets, Liabilities, and Net Assets Deposits and investments The cash balance is on deposit with the State Treasurer for pooled investment purposes and is not evidenced by securities that exist in physical or book entry form in the Fund's name. All investments are carried in the name of the State of Arizona. State statutes require the State Treasurer to invest these pooled funds in collateralized time certificates of deposit, repurchase agreements, or obligations of the U.S. Government. All investments are carried at cost, which approximates fair value. Restricted Assets Resources of the Fund are classified as restricted assets on the balance sheet because they are maintained in separate bank accounts and their use is limited by State statutes. Compensated absences It is the Department's policy to permit employees to accumulate earned but unused sick leave and vacation benefits. There is no liability for unpaid accumulated sick leave. All vacation pay is accrued when incurred in the proprietary fund financial statements. A liability for these amounts is reported as current liabilities. Effective July 1, 1998, State employees are eligible to receive payment for an accumulated sick leave balance of 500 hours or more with a maximum of 1,500 hours, upon retirement directly from State service. The benefit value is calculated by taking the State hourly rate of pay at the retirement date, multiplied by the number of sick hours at the retirement date, times the eligibility percentage. The eligibility percentage varies based upon the number of accumulated sick hours from 25 percent for 500 hours to a maximum of 50 percent for 1,500 hours. The maximum benefit value is $30,000. The benefit is paid out in annual installments over three years. The Retiree Accumulated Sick Leave Fund is accounted for on the State's financial statements as an Internal Service Fund. Employees are allowed to accumulate up to 240 hours of vacation leave (320 hours for exempt employees) which is paid when vacation is taken or upon termination of employment at the individual's then current rate of pay. For the proprietary funds, all of the outstanding vacation at June 30 is recorded as a current liability. NOTE 2-STEW ARDSHIP, COMPLIANCE, AND ACCOUNTING ABILITY The expenses of the Fund are not governed by appropriations of the State legislature and therefore are not subject to the limitations of a legally adopted budget. Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Notes to Financial Statements (continued) June 30, 2002 NOTE 3-DET AILED NOTES A. Loans Receivables Loans receivables represent loans made pursuant to Loan Repayment Agreements. Thirty-six loans have balances outstanding or are pending as of June 30, 2002, as follows: PROJECT SPONSOR LOAN DATE INTEREST RATE Town Of Chino Valley 03/17/2000 450% ADOT City Of Sierra Vista ADOT Santa Cruz County ADOT Town Of Taylor ADOT Town Of Payson ADOT Town Of Miami City Of Yuma City Of Yuma Town Of Mammoth Yavapai County ADOT ADOT ADOT ADOT Gila County Gila County Gila County ADOT 05/19/2000 07/21/2000 01/19/2001 01/19/2001 03/16/2001 05/18/2001 05/18/2001 06/15/2001 09/21/2001 01/18/2002 04/20/2001 06/15/2001 12/14/2001 03/15/2002 03/15/2002 03/15/2002 03/15/2002 03/15/2002 04/19/2002 04/19/2002 04/19/2002 05/17/2002 3.46% 4.00% 2.93% 3.11% 3.32% 3.42% 2.85% 3.56% 1.76% 2.20% * * * * * * * * * * * * City Of Lake Havasu City 06/21/2002 * ADOT Yavapai County City Of Mesa 06/21/2002 06/21/2002 03/20/1998 ADOT / City Of Phoenix ADOT ADOT City Of Tucson Pima County Pima County ADOT ADOT AUTHORIZED LOAN AMOUNT $ FINAL MATURITY DRAWS TO DATE 300,000 Jan-05 5,707,000 1,970,000 8,400,000 1,150,000 1,000,000 1,000,000 41,900,000 1,100,000 3,216,000 80,000 1,000,000 2,000,000 334,800 4,500,000 13,855,000 500,000 9,900,000 4,000,000 1,237,500 600,000 487,500 5,000,000 Mar-04 Jun-03 Jan-03 Jan-05 Jun-04 Jun-05 Jul-05 Jul-06 Aug-03 Jun-05 Jul-06 Jul-06 Jun-05 Jun-05 Jun-04 Jan-05 Jun-04 Oct-04 Jun-08 Jun-08 Jun-08 Jun-06 789,508 Jul-04 * * 4.41% 650,000 4,500,000 24,000,000 Nov-06 Jun-06 Dec-02 24,000,000 22,610,949 11/17/2000 2.48% 22,500,000 Jun-05 21,297,194 21,297,195 09/21/2001 05/19/2000 06/15/2001 12/14/2001 12/14/2001 09/21/2001 03/15/2002 3.30% 1.77% 2.91% 3.23% 3.23% * * 50,000,000 5,285,000 4,500,000 1,400,000 3,700,000 62,500,000 5,500,000 Dec-06 Jun-05 Jan-06 Jul-07 Jul-07 Jan-06 Jun-03 22,000,000 5,285,000 4,500,000 1,400,000 3,700,000 - 22,000,000 4,672,857 3,700,000 1,400,000 3,700,000 - 3,672,857 740,000 300,000 800,000 - $112,222,174 $106,119,476 $51,019,947 4,496,851 1,970,000 6,038,856 643,827 340,214 1,000,000 12,243,017 1,100,000 1,827,215 80,000 - $ 175,000 DUE WITHIN ONE YEAR 300,000 Total $294,562,308 * Interest Rate will be determined on the date of the first draw. $ OUTSTANDING LOAN BALANCE 4,105,995 745,000 4,882,412 643,827 340,214 700,000 12,243,017 995,795 1,827,215 80,000 - $ 55,000 2,346,283 745,000 4,882,412 130,000 340,214 300,000 12,243,017 1,827,215 27,000 22,610,949 - Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Notes to Financial Statements (continued) June 30, 2002 NOTE 3-DET AILED NOTES - Continued B. Advances Laws 1999, Chapter 2 (SB 1002) authorized the transfer of $20,000,000 from the State Highway Fund in fiscal year 2000. This amount is shown as Advances to other Arizona Department of Transportation funds in the State Highway Fund and Advances from other Arizona Department of Transportation funds in the Fund. The advance is due no later than December 31, 2008. C. Notes Payable Laws 1999, Chapter 189 (SB 1201) authorized a Board Funding Obligation (BFO) of $100,000,000 to the Fund in fiscal year 2000. Interest accrued to date is $5,429,814. The total amount of the BFO and interest is shown as Notes Payable. Both of the principal and interest of the BFO are due on March 14,2004 ($43,115,200) and June 27, 2004 ($62,314,614) respectively. Laws 2001, Chapter 238 (HB 2636) authorized a Board Funding Obligation (BFO) of $40,000,000 to the Fund in fiscal year 2002. Interest accrued to date is $106,652. The total amount of the BFO and interest is shown as Notes Payable. Both of the principal and interest of the BFO are due no later than May 30, 2004. D. Contingent Liabilities Amounts received or receivable from grant agencies are subject to audit and adjustment by grantor agencies, principally the Federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenses which may be disallowed by the grantor cannot be determined at this time although the Fund expects such amounts, if any, to be immaterial. NOTES - ACCOUNTING CHANGES AND RESTATEMENTS During fiscal year 2001-2002, the Department implemented several new accounting standards issued by GASB : Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, No.37 , Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments: Omnibus, and No. 38, Certain Financial Statement Note Disclosures. Arizona Department of Transportation Highway Expansion and Extension Loan Program Fund Notes to Financial Statements (continued) June 30, 2002 NOTE 4-ACCOUNTING CHANGES AND RESTATEMENTS - Continued Statement No.34, as amended by Statement No.37 , establishes new financial reporting standards for state and local governments. This statement's requirements represent a significant change in the financial reporting model used by state governments, including statement formats and changes in fund types and account groups. As a result, fund reclassifications and adjustments to the fund equities reported in the prior financial statement balances were required. Statement No.38 requires certain note disclosures when Statement No.34 is implemented. The implementation of these standards did not have a significant impact on the net assets of the Fund. In fiscal year 2002, the HELP fund changed from Governmental Fund - Special Revenue Fund to Proprietary Fund - Enterprise Fund. The management concluded that during the course of operation of the Fund, it resembled more of a business type fund than governmental fund.