WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA PHOENIX, ARIZONA FINANCIAL STATEMENTS Year Ended June 30, 2009 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA FINANCIAL STATEMENTS Year Ended June 30, 2009 Table of Contents Independent Auditors’ Report ..................................................................................... 1 Management’s Discussion and Analysis ..................................................................... 2 Statement of Net Assets ............................................................................................. 5 Statement of Revenues, Expenses, and Changes in Fund Net Assets ........................................................................... 6 Statement of Cash Flows ............................................................................................ 7 Notes to Financial Statements .................................................................................... 8 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards.............................................................................................................. 22 Independent Auditors’ Report Board of Directors Water Infrastructure Finance Authority of Arizona Phoenix, Arizona We have audited the accompanying financial statements of the Water Infrastructure Finance Authority of Arizona, a discrete component unit of the State of Arizona, as of and for the year ended June 30, 2009, as listed in the table of contents. These financial statements are the responsibility of the Water Infrastructure Finance Authority of Arizona’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Water Infrastructure Finance Authority of Arizona, as of June 30, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The management’s discussion and analysis is not a required part of the financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. Casa Grande, Arizona September 25, 2009 www.henryandhorne.com MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2009 As management of the Water Infrastructure Finance Authority of Arizona (Authority), we offer readers of the Authority’s financial statements this narrative overview and analysis of the financial activities of the Authority for the fiscal year ended June 30, 2009. We encourage readers to consider the information presented here in conjunction with the Authority’s financial statements. HIGHLIGHTS – BUSINESS TYPE ACTIVITIES • In 2009, program loans increased by $94.8 million as compared to 2008. This demonstrates continued strong demand for the Authority’s services. USING THIS ANNUAL REPORT The financial statements included in this annual report are those of a corporate and politic body of the State of Arizona. The following statements are included: • • • Statement of net assets – reports the Authority’s current financial resources, noncurrent financial resources, current obligations, long-term obligations, and the resulting net assets. Statement of revenues, expenses and changes in fund net assets – reports the Authority’s program revenues, program expenses, nonprogram revenues, and capital contributions. Statement of cash flows – reports the Authority’s cash flows from operating activities, investing, and non-capital activities. STATEMENT OF NET ASSETS Years Ended June 30, Cash & Equivalents Investments Loans All Other Assets Total Assets Bonds Payable Interest Payable All Other Liabilities Total Liabilities Restricted Capitalization for Grants Unrestricted Total Net Assets 2009 2008 $85,989,140 97,118,345 992,641,348 22,488,843 1,198,237,676 $195,621,994 97,100,544 897,762,835 19,851,568 1,210,336,941 742,840,000 9,052,313 44,639,700 796,532,013 770,260,000 8,943,764 47,262,825 826,466,589 341,021,030 60,684,633 $401,705,663 321,576,107 62,294,245 $383,870,352 The Authority net assets increased to $401,705,663 during 2009, an increase of $17,835,311 over 2008. The increase in net assets was primarily the result of capital contributions and loan activities. 2 REVIEW OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS The following table shows the condensed statement of revenues, expenses and changes in net assets for the past two years. 2009 2008 Years Ended June 30, Program Revenues Program loan interest revenue Debt management fees Total program revenue $20,067,050 12,689,699 32,756,749 $14,694,820 9,892,657 24,587,477 Program Expenses Administrative expenses Technical/financial assistance Program loan interest expense Total program expenses 9,428,393 1,528,500 34,097,678 45,054,571 5,742,353 591,774 26,578,875 32,913,002 Program loss (12,297,822) (8,325,525) 10,667,770 12,026,714 Non-program revenues Income before contributions Capital contributions Change in net assets Beginning net assets Ending net assets (1,630,052) 19,465,363 17,835,311 383,870,352 $ 401,705,663 3,701,189 48,479,613 52,180,802 331,689,550 $ 383,870,352 Compared to 2008, total program revenue increased by $8 million. The increase was primarily due to an increase in loan repayments. WIFA relied on significant federal capital contributions and bond proceeds to fund loans in 2009 and drew contributions from multiple open federal capitalization grants. BUDGETARY HIGHLIGHTS The Authority’s Board of Directors adopted an operating budget of $1,850,050 for the period July 1, 2008 through June 30, 2009. Budget Line Item Salaries & Benefits Professional & Outside Services In State Travel Out of State Travel Other Operating Equipment Indirect Cost Total Amount $1,207,770 201,130 22,550 22,340 315,120 31,140 50,000 $1,850,050 3 CAPITAL ASSETS The Authority’s capital assets consist primarily of computer equipment. In 2009, the Authority purchased $11,116 of new equipment, none of which was capitalized. DEBT OUTSTANDING Years Ended June 30, Beginning balance $ 2009 770,260,000 2008 $ 557,450,000 Refunded Bonds - - Refunding Bonds - - Additions - Payments Ending balance (27,420,000) $ 742,840,000 238,710,000 (25,900,000) $770,260,000 ECONOMIC AND OTHER FACTORS Anticipated Bond Sales Early in the 2010 fiscal year the Authority is planning to conduct another bond sale. The Authority is looking for approximately $150 million in new funding and $40 million to be used for refunding of prior issues. Authority Automation Efforts The Authority brought its comprehensive database on line in 2009. Efforts are ongoing to develop and implement additional fiscal related applications to automate financial activity. American Recovery and Reinvestment Act The Authority received $55 million for Drinking Water and $26 million for Clean Water as part of the federal stimulus act. The Authority anticipates that it will continue to receive yearly federal capitalization grants independent of the ARRA grants. FINANCIAL CONTACT The Authority’s financial statements present users with a general overview of the Authority’s finances and demonstrate the Authority’s accountability. If you have any questions about the report or require additional financial information, please contact Don States, Controller, Water Infrastructure Finance Authority of Arizona, 1110 West Washington, Suite 290, Phoenix, Arizona 85007 or by phone at (602) 364-1324 or toll-free at (877) 298-0425. 4 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA STATEMENT OF NET ASSETS PROPRIETARY FUNDS June 30, 2009 Business-type Activities-Enterprise Funds ASSETS Clean Water Drinking Water Hardship Current assets Revolving Fund Revolving Fund Grant Fund Cash and cash equivalents Cash with treasurer $ 40,163,447 $ 43,218,572 $ Cash with trustee 2,199,774 407,347 Total cash and cash equivalents 42,363,221 43,625,919 Receivables, net of uncollectibles Debt management 3,831,818 1,959,145 Interest 8,605,730 3,838,541 Internal balances (20,592,331) 20,592,331 Total current assets 34,208,438 70,015,936 Noncurrent assets Investments 77,453,460 19,664,885 Program loans 681,425,828 311,215,520 Deferred bond costs 3,069,640 1,183,969 Total noncurrent assets 761,948,928 332,064,374 Total assets 796,157,366 402,080,310 LIABILITIES Current liabilities Accrued payroll Compensated absences Interest payable Bonds payable-current Total current liabilities Noncurrent liabilities Loan reserve Commitments and contingencies Unamortized bond premiums Deferred amount on retirement of bonds Bonds payable Total noncurrent liabilities Total liabilities NET ASSETS Restricted for capitalization grants Unrestricted Total net assets See accompanying notes. Total $ 83,382,019 2,607,121 85,989,140 5,790,963 12,444,271 104,224,374 97,118,345 992,641,348 4,253,609 1,094,013,302 1,198,237,676 3,520 32,545 6,508,746 19,751,280 26,296,091 3,520 32,545 2,543,567 9,343,720 11,923,352 - 7,040 65,090 9,052,313 29,095,000 38,219,443 302,335 32,987,574 2,033,912 15,615,488 - 2,336,247 48,603,062 (4,122,345) 509,505,471 538,673,035 564,969,126 (2,249,394) 204,239,529 219,639,535 231,562,887 - (6,371,739) 713,745,000 758,312,570 796,532,013 192,000,593 39,187,647 $ 231,188,240 149,020,437 21,496,986 $ 170,517,423 $ - 341,021,030 60,684,633 $ 401,705,663 5 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS Year Ended June 30, 2009 Business-type Activities-Enterprise Funds Clean Water Drinking Water Hardship Revolving Fund Revolving Fund Grant Fund Total Program revenues Program loan interest revenue Debt management fees Total program revenues $ 13,408,061 8,182,461 21,590,522 Program expenses Administrative expenses Technical assistance Program loan interest expense ARRA expense Hardship costs Total program expenses 4,517,988 214,241 24,580,888 887,248 30,200,365 4,910,405 397,763 9,516,790 14,824,958 29,248 29,248 9,428,393 612,004 34,097,678 887,248 29,248 45,054,571 (8,609,843) (3,658,731) (29,248) (12,297,822) 181,720 5,441,987 5,623,707 2,922,405 2,121,658 5,044,063 - 3,104,125 7,563,645 10,667,770 (2,986,136) 1,385,332 (29,248) (1,630,052) 5,381,671 2,395,535 14,063,252 15,448,584 20,440 (8,808) 19,465,363 17,835,311 Total net assets-beginning of year 228,792,705 Total net assets-end of year $ 231,188,240 155,068,839 $ 170,517,423 Program loss Nonprogram revenues Administrative grants Investment earnings Total nonprogram revenues Income before contributions and transfers Capital contributions-federal Capital contributions-state Change in net assets See accompanying notes. $ 6,658,989 4,507,238 11,166,227 $ $ - 8,808 - $ 20,067,050 12,689,699 32,756,749 383,870,352 $ 401,705,663 6 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS Year Ended June 30, 2009 Business-type Activities-Enterprise Funds CASH FLOWS FROM OPERATING Clean Water Drinking Water Hardship ACTIVITIES Revolving Fund Revolving Fund Grant Fund Receipt of program loans $ 59,277,649 $ 19,435,167 $ Loans made to borrowers (128,709,113) (27,763,380) Receipt of debt management fees 7,620,539 4,279,648 Receipt (use) of loan reserves (5,713) 20,960 Payment of administrative costs (4,516,077) (4,908,494) Payment of technical assistance costs (214,241) (397,763) Payment of ARRA expense (887,248) Payment of hardship costs (29,248) Payment of program loan costs (26,081,194) (10,237,526) Net cash used by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Principal paid on bonds Interfund receipts (payments) Receipt of administrative grants Capital contributions Net cash provided (used) by noncapital financing activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments Interest received on investments Net cash provided by investing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes. Total $ 78,712,816 (156,472,493) 11,900,187 15,247 (9,424,571) (612,004) (887,248) (29,248) (36,318,720) (93,515,398) (19,571,388) (29,248) (113,116,034) (20,409,305) 21,779,808 181,720 5,381,671 (7,010,695) (21,779,808) 2,922,405 14,063,252 20,440 (27,420,000) 3,104,125 19,465,363 6,933,894 (11,804,846) 20,440 (4,850,512) (10,597) 5,906,325 (7,204) 2,445,168 - (17,801) 8,351,493 5,895,728 2,437,964 - 8,333,692 (80,685,776) (28,938,270) (8,808) (109,632,854) 123,048,997 72,564,189 8,808 195,621,994 $ 42,363,221 $ 43,625,919 - $ 85,989,140 $ Business-type Activities-Enterprise Funds Clean Water Drinking Water Hardship Revolving Fund Revolving Fund Grant Fund Reconciliation of program loss to net cash used by operating activities Program loss Adjustments to reconcile program loss to net cash used by operating activities: Amortization of bond related costs (Increase) decrease in Program loans Debt management receivable Interest receivable Increase (decrease) in Accrued payroll Compensated absences Interest payable Loan reserve Total adjustments Net cash used by operating activities NONCASH INVESTING ACTIVITIES Amortization of deferred bond costs Amortization of bond premiums Amortization of deferred amount on retirement of bonds $ (8,609,843) $ (3,658,731) (1,520,923) (808,668) - (2,329,591) (80,700,904) (561,922) (2,138,621) (14,177,609) (227,590) (809,593) - (94,878,513) (789,512) (2,948,214) 1,884 27 20,617 (5,713) (84,905,555) 1,884 27 87,932 20,960 (15,912,657) - 3,768 54 108,549 15,247 (100,818,212) $(93,515,398) $(19,571,388) $ (29,248) $(113,116,034) $ $ $ $ 229,182 381,202 2,131,307 83,421 173,030 1,065,119 $ (29,248) Total - $ (12,297,822) 312,603 554,232 3,196,426 7 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The Water Infrastructure Finance Authority of Arizona (WIFA) is a political body and a component unit of the State of Arizona (State). WIFA’s financial information is discretely presented in the Comprehensive Annual Financial Report of the State of Arizona. It is authorized to administer the Clean Water Revolving Fund and The Drinking Water Revolving Fund (Funds). WIFA is governed by a twelve-member board of directors. The day-to-day administrative functions of WIFA are overseen by WIFA’s Executive Director and other staff employed by WIFA. The Clean Water Revolving Fund was created pursuant to the Federal Water Pollution Control Act of 1972, as amended by the Water Quality Act of 1987 (Clean Water Act), which required the State of Arizona to establish the Fund to accept federal capitalization grants for publicly owned wastewater treatment projects. The purpose of the fund is to provide financial assistance, including loans to political subdivisions and Indian tribes to finance construction, acquisition, restoration or rebuilding of wastewater treatment facilities. WIFA has an agreement with the Environmental Protection Agency to administer the Drinking Water Revolving Fund pursuant to the Safe Drinking Water Act. The fund was established to provide water facility loans including forgivable principal to political subdivisions of this state, Indian Tribes and other eligible entities as determined by the board pursuant to the Safe Drinking Water Act, make drinking water facility loans, purchase or refinance debt obligations of drinking water facilities, assist in purchasing insurance for local drinking water facility bond obligations, pay the costs to administer the fund, fund other programs pursuant to the Safe Drinking Water Act and provide linked deposit guarantees through third party lenders with recourse against deposit if payments are not made when due. The Funds are authorized to be capitalized through ( i ) moneys, if any, appropriated by the State Legislature, ( ii ) federal capitalization grants and other federal moneys received by WIFA to fund the Fund, ( iii ) proceeds of WIFA's bonds, including bonds issued to provide matching State moneys as required by the Clean Water Act, ( iv ) moneys received from political subdivisions or Indian tribes as repayment of loans from the Fund, including interest and penalties thereon, ( v ) interest and other income received from investing moneys of the Fund, and ( vi ) gifts, grants and donations received from any public or private source. In order to receive federal capitalization grants, the State must provide matching funds in a ratio of $1 of State matching funds for every $5 of federal capitalization grants. The State began appropriating money for deposit into the Funds in 1998. Previously the State matching funds were provided from proceeds of the WIFA's capitalization bonds. The accompanying financial statements present the Clean Water Revolving Fund, Drinking Water Revolving Fund and the Hardship Grant Fund, which includes all of the revenues and the administrative expenses of WIFA. 8 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fund Type WIFA plans to maintain the federal capitalization grants as the fund’s restricted net assets. Therefore, the periodic determination of revenues earned, expenses incurred, and changes in net assets are appropriate for capital maintenance, public policy, management control, accountability and other purposes. As a result, the accounting records are maintained as an enterprise fund. Only earnings from the administrative grants, debt management fees and interest earned on accumulated excess administrative income can be expended for expenses or utilized to match federal grants. WIFA distinguishes program revenues and expenses from non-program items. Program revenues and expenses generally result from providing services in connection with financing and administering moneys for the Clean and Drinking Water Revolving Funds. The principal program revenues of WIFA are program loan interest and management fees. WIFA’s program expenses are administrative, program loan costs and grant related expenses. All revenues and expenses not meeting this definition are reported as non-program revenues and expenses. Measurement Focus and Basis of Accounting The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. WIFA’s financial statements are reported using the economic resources measurement focus. WIFA's accounting records are maintained on the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when they are earned and expenses are recognized when they are incurred. Pursuant to Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that use Proprietary Fund Accounting, the WIFA follows GASB guidance as applicable to proprietary funds, and Financial Accounting Standards Boards Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989 that do not conflict with or contradict GASB Pronouncements. Investments WIFA has adopted provisions of Statement No. 31 of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. This standard requires certain investments to be reported at fair value rather than at cost. Investments in Guaranteed Investment Contracts are stated at cost, since they are non-participating contracts. The investment of excess revenue in the 2001 Master Trust Indenture is stated at fair value, which approximates cost. 9 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash Equivalents WIFA considers all highly liquid debt instruments purchased with maturities of three months or less at acquisition date to be cash equivalents. Cash equivalents are stated at cost, which approximates market. Capital Assets Capital assets acquired by the Funds are stated at cost. The capitalization threshold has been set at $5,000. Depreciation has been allocated using the straight-line method over the following estimated useful lives: Computer and Peripheral Equipment 3 - 5 years Compensated Absences WIFA employees accrue vested annual leave at a variable rate based on years of service. Employees forfeit accumulated annual leave in excess of 320 hours at the end of a calendar year. Any employee who separates from WIFA service is paid for all unused and unforfeited annual leave at the employee’s rate of pay at the time of separation. Sick leave includes any approved period of paid absence granted an employee due to illness, injury or disability. Employees accrue sick leave at the rate of eight hours per month without an accumulation limit. Because sick leave benefits do not vest with employees, a liability for sick leave is not accrued in the financial statements. Long-term Obligations Long-term debt is reported as fund liabilities in the applicable fund’s statement of net assets. Bond premiums, bond issuance costs and loss on retirement of bonds are deferred and amortized over the life of the bonds using the straight-line method. Net Assets WIFA restricts amounts received from the federal and state government for the purpose of providing financial assistance for publicly owned wastewater treatment and drinking water facilities. Grants Grants restricted for program loans are recorded as contributions. Grants that are used for operating purposes are recorded as revenue. Federal grants for project related expenses may not be drawn until qualifying expenditures are incurred. 10 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fund Administration Employees of WIFA perform administration of the Funds. Expenses relating to the administration are funded from the capital facility grant (up to a maximum of 4 percent of the capital facility grant) and fees charged to loan recipients (see Note 8). Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events Policy In preparing these financial statements, the Authority has evaluated events and transactions for potential recognition or disclosure through September 25, 2009, the date the financial statements were available to be issued. NOTE 2 CASH AND INVESTMENTS Cash Deposits Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, an entity will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. At June 30, 2009, the carrying amount of WIFA’s cash with treasurer totaled $83,382,019 of which $83,269,217 was invested in the State Agency’s pool number 3. A copy of the audited financial statements may be obtained by contacting the Office of the State Treasurer. At June 30, 2009, the carrying amount of WIFA’s cash with trustee totaled $2,607,121 and was invested in money market funds. WIFA maintains their cash held by trustee in an irrevocable trust account in the name of WIFA held by the trust department of a financial institution located in Phoenix, Arizona (separate from all other funds and investments of the trustee). These balances are directed by the State Treasurer to be invested in a full faith and credit money market fund that is not insured by the Federal Deposit Insurance Corporation or collateralized by the trustee. 11 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 2 CASH AND INVESTMENTS (Continued) Investments The State Treasurer directs WIFA’s investments. ARS 35-312 and ARS 35-313 require the State Treasurer to invest in obligations of the U.S. or its agencies including sponsored agencies, corporations, sponsored corporations or instrumentalities, collateralized repurchase agreements, bonds or other evidence of indebtedness of the State of Arizona or its political subdivisions, commercial paper, bankers acceptances, certificates of deposit, interest-bearing savings accounts and bonds, debentures, notes and other evidences of indebtedness issued by U.S. corporations meeting certain rating criteria. WIFA’s investments at June 30, 2009, consisted of collateralized guaranteed investment contracts. The guaranteed investment contracts are not insured by the Federal Deposit Insurance Corporation. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. Information about the sensitivity of the fair values of WIFA’s investments to market interest rate fluctuations is provided by the following table that shows the distribution of WIFA’s investments by maturity: Investment Type State Investment Pool Money Market Funds Guaranteed Investment Contracts Federal Home Ln Notes 83,269,217 2,607,121 12 Months or Less $ 83,269,217 2,607,121 80,892,838 16,225,507 $ 182,994,683 16,225,507 $ 102,101,845 $ Remaining Maturity (In Months) 13 to 24 25 to 60 Months Months $ $ $ - More Than 60 Months $ - $ - 80,892,838 $ 80,892,838 Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the Standard & Poor’s rating as of year-end for each investment type. Investment Type State Investment Pool Money Market Funds Guaranteed Investment Contracts Federal Home Ln Notes AAA $ 83,269,217 2,607,121 80,892,838 16,225,507 $ 182,994,683 $ $ 80,892,838 16,225,507 97,118,345 $ Ratings as of Year-End AA A $ - $ - $ $ - Unrated 83,269,217 2,607,121 - $ 85,876,338 12 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 2 CASH AND INVESTMENTS (Continued) If any of the bank’s credit rating falls below levels defined in the investment contracts, the State Treasurer may direct the bank to enter into a repurchase agreement with the Trustee pursuant to which the bank shall sell and deliver to the Trustee certain U.S. government obligations in a principal amount equal to invested moneys and accrued interest. If the rating falls below "A" the Trustee shall have the right to withdraw all amounts invested and accrued interest. Concentration of Credit Risk The investment policy of WIFA contains no limitations on the amount that can be invested in any one issuer. Investments in any one issuer are as follows: Issuer State Investment Pool First American US Treasury Money Market Bayerische Landesbank AIG Matched Funding Corp. Royal Bank of Canada Federal Home Loan Mortgage Corporation NOTE 3 Investment Type State Investment Pool Money Market Guaranteed Investment Contract Guaranteed Investment Contract Guaranteed Investment Contract FHL Bank Notes Reported Amount $ 83,269,217 2,607,121 40,585,506 25,152,511 15,154,821 16,225,507 $ 182,994,683 PROGRAM LOANS The Funds have made loans to local governments and others in Arizona to finance various projects pursuant to the requirements of the Clean Water and Safe Drinking Water Acts. The loans are generally payable in semiannual installments due January 1 and July 1 of each year, including interest. However, several loans are payable monthly or quarterly. Changes in the program loans are as follows: Clean Water Fund Drinking Water Fund July 1, 2008 $ 600,724,924 Increases $ 128,709,113 Decreases $ (48,008,209) June 30, 2009 $ 681,425,828 297,037,911 27,763,380 (13,585,771) 311,215,520 $ 897,762,835 $ 156,472,493 $ (61,593,980) $ 992,641,348 Repayment of these loans will be made from pledged property taxes, net revenues from the systems, transaction privilege taxes or from special assessments. Most loans have a .3 to 4.0 percent annual administrative fee. Some program loans require a monthly or quarterly payment into a debt service reserve to assure payments of the loans. The debt service reserve is a liability of WIFA to the borrowers and interest on the reserve accrues to the borrowers. 13 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 4 COMPENSATED ABSENCES The compensated absences activity for June 30, 2009 was as follows: Compensated Absences for: Clean Water Drinking Water July 1, 2008 $ 32,518 32,518 Total $ NOTE 5 65,036 $ Additions 37,010 37,010 $ 74,020 June 30, Reductions 2009 $ (36,983) $ 32,545 (36,983) 32,545 Estimated Current Portion $ 32,545 32,545 $ $ (73,966) $ 65,090 65,090 RETIREMENT AND PENSION PLAN Arizona State Retirement Plan Plan Description. The Arizona State Retirement System (ASRS) administers a cost sharing multiple-employer defined benefit pension plan that covers employees of WIFA. The ASRS is governed by the Arizona State Retirement System Board according to the provisions of A.R.S. Title 38, Chapter 5, Article 2. Benefits are established by state statute and generally provide retirement, death, long-term disability, survivor, and health insurance premium benefits. ASRS issues a publicly available report that includes financial statements and required supplementary information. The report may be obtained in writing at ASRS, 3300 N. Central Avenue, P.O. Box 33910, Phoenix, Arizona 85067-3910 or by calling 602-240-2200 or 1-800-621-3778. Funding Policy. The Arizona State Legislature has the authority to establish and amend benefits provisions and contributions for active plan members. For the years ended June 30, 2009, 2008 and 2007, active ASRS members and the District were each required by statute to contribute at the actuarially determined rate of 9.45, 9.60 and 9.10 percent (rate includes .50 for long-term disability), respectively, of the members’ annual covered payroll. WIFA’s contributions to ASRS for the years ended June 30, 2009, 2008 and 2007 were $84,647, $74,768 and $69,640, respectively. NOTE 6 INTERNAL BALANCES At June 30, 2009, the Clean Water Fund owed the Drinking Water Fund $20,592,331 which was the result of short-term borrowing for loan draws. Funds will be repaid from the July 2009 debt issue. 14 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 7 BONDS PAYABLE Bonds payable at June 30, 2009 are summarized below. The bonds are callable and interest is payable semiannually. The bonds are special obligations of WIFA payable solely from and secured by the Fund's assets. The obligations are not obligations, general, specific or otherwise, of the State of Arizona or any other political subdivision thereof other than WIFA. $3,270,000 Financial Assistance Revenue Bonds, Series 1995, due in annual principal installments ranging from $225,000 to $410,000, plus semiannual interest ranging from 4.40% to 5.50% through July 1, 2009. $410,000 $9,730,000 Financial Assistance Revenue Bonds, Series 1996A, due in annual principal installments ranging from $360,000 to $1,870,000, plus semiannual interest ranging from 3.70% to 5.50% through July 1, 2012. 4,140,000 $64,000,000 Water Quality Revenue Refunding Bonds, Series 1999, due in annual principal installments ranging from $2,330,000 to $8,190,000, plus semiannual interest ranging from 4.0% to 5.625% through October 1, 2017. 41,120,000 $110,000,000 Water Quality Revenue Bonds, Series 2001A, due in annual principal installments ranging from $3,780,000 to $8,075,000, plus semiannual interest ranging from 4.0% to 5.375% through October 1, 2011. $195,980,000 Water Quality Revenue Bonds, Series 2004, due in annual principal installments ranging from $5,500,000 to $15,080,000, plus semi annual interest ranging from 2.0% to 5.0% through October 1, 2024. 150,800,000 $97,100,000 Water Quality Revenue Refunding Bonds, Series 2004, due in annual principal installments ranging from $125,000 to $4,825,000, plus semi annual interest ranging from 2.0% to 5.0% through October 1, 2021. 93,600,000 $205,400,000 Water Quality Revenue Bonds, Series 2006, due in annual principal installments ranging from $2,875,000 to $16,750,000, plus semi annual interest ranging from 3.75% to 5.0% through October 1, 2026. 198,775,000 $238,710,000 Water Quality Revenue Bonds, Series 2008A, due in annual principal installments ranging from $615,405 to $14,464,740, plus semi annual interest ranging from 3.00% to 5.0% through October 1, 2028. 238,710,000 15,285,000 $ 742,840,000 15 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 7 BONDS PAYABLE (Continued) A summary of changes in bonds payable is set forth below: July 1, 2008 Financial Assistance Revenue $ 820,000 Bonds Series 1995 Financial Assistance Revenue 5,215,000 Bonds Series 1996A Financial Assistance Revenue 1,370,000 Bonds Series 1997A Financial Assistance Revenue 1,990,000 Bonds Series 1998A Water Quality Refunding 44,740,000 Bonds Series 1999 Water Quality Revenue 20,015,000 Bonds Series 2001A Water Quality Revenue 160,450,000 Bonds Series 2004A Water Quality Refunding 94,425,000 Bonds Series 2004A Water Quality Revenue 202,525,000 Bonds Series 2006A Water Quality Revenue 238,710,000 Bond Series 2008A $770,260,000 Issued $ $ Bonds by Fund are as follows: Arizona Clean Water Revolving Fund Arizona Drinking Water Revolving Fund - Retired $ June 30, 2009 410,000 $ 410,000 - 1,075,000 4,140,000 - 1,370,000 - - 1,990,000 - - 3,620,000 41,120,000 - 4,730,000 15,285,000 - 9,650,000 150,800,000 - 825,000 93,600,000 - 3,750,000 198,775,000 - $ 27,420,000 238,710,000 $742,840,000 $ 529,256,751 213,583,249 $ 742,840,000 The Clean Water Fund’s bond debt service requirements to maturity, including interest, are as follows: Year Ending June 30, 2010 2011 2012 2013 2014 2015-2019 2020-2024 2025-2029 Total Long-Term Debt Less Current Portion Noncurrent Portion $ $ Clean Water Principal Interest 19,751,280 $ 25,349,688 $ 21,294,282 24,429,360 28,088,002 23,276,534 27,009,833 21,946,663 27,922,811 20,609,869 155,794,071 80,570,862 163,016,943 41,184,283 86,379,529 7,576,436 529,256,751 244,943,695 (19,751,280) (25,349,688) 509,505,471 $ 219,594,007 $ Total 45,100,968 45,723,642 51,364,536 48,956,496 48,532,680 236,364,933 204,201,226 93,955,965 774,200,446 (45,100,968) 729,099,478 16 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 7 BONDS PAYABLE (Continued) The Drinking Water Fund’s bond debt service requirements to maturity, including interest, are as follows: Year Ending June 30, 2010 2011 2012 2013 2014 2015-2019 2020-2024 2025-2029 Total Long-Term Debt Less Current Portion Noncurrent Portion $ $ Principal 9,343,720 $ 10,225,718 11,366,998 10,050,167 10,697,189 59,165,929 70,298,057 32,435,471 213,583,249 (9,343,720) 204,239,529 $ Drinking Water Interest 9,977,330 $ 9,565,350 9,109,742 8,628,315 8,136,706 32,451,604 16,366,809 3,085,656 97,321,512 (9,977,330) 87,344,182 $ Total 19,321,050 19,791,068 20,476,740 18,678,482 18,833,895 91,617,533 86,664,866 35,521,127 310,904,761 (19,321,050) 291,583,711 WIFA’s total bond debt service requirements to maturity, including interest, are as follows: Year Ending June 30, 2010 2011 2012 2013 2014 2015-2019 2020-2024 2025-2029 Total Long-Term Debt Less Current Portion Noncurrent Portion $ $ Total Clean and Drinking Water Principal Interest Total 29,095,000 $ 35,327,018 $ 64,422,018 31,520,000 33,994,710 65,514,710 39,455,000 32,386,276 71,841,276 37,060,000 30,574,978 67,634,978 38,620,000 28,746,575 67,366,575 214,960,000 113,022,466 327,982,466 233,315,000 57,551,092 290,866,092 118,815,000 10,662,092 129,477,092 742,840,000 342,265,207 1,085,105,207 (29,095,000) (35,327,018) (64,422,018) 713,745,000 $ 306,938,189 $ 1,020,683,189 On April 7, 2004, WIFA issued $97,100,000 of Water Quality Refunding Bonds to do an advance refunding on part of the 1992, 1997A, 1998A and 2001 bonds. Under the terms of the refunding issue, sufficient assets to pay all principal and interest on the refunded bond issues have been placed in irrevocable trust accounts at commercial banks and invested in U.S. Government Securities which, together with interest earned thereon, will provide amounts sufficient for future payment of principal and interest of the issues refunded. The amount outstanding on those bonds as of June 30, 2009 is $62,995,000. These bonds have been fully defeased. 17 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 7 BONDS PAYABLE (Continued) The net present value cash flow for savings on issuing the refunding bonds at a 3.213% bond yield was $3,120,247. The $6,371,739 deferred amount on retirement of bonds is being amortized over the lives of the defeased bonds on the straight-line basis. Annual amortization is $381,202 and $173,030 for Clean Water Revolving and Drinking Water Revolving Funds, respectively. Amortization has been offset against interest expense. NOTE 8 ADMINISTRATIVE REVENUES AND EXPENSES WIFA is authorized to utilize a portion of the facility grant as an administrative grant (not to exceed 4% of the net capital facility grant). These funds are deposited to an administrative grant account maintained by WIFA which is accounted for in a separate fund at the treasurer's office. WIFA also receives a loan origination fee on most loans and servicing fees assessed on the outstanding loan balance from each of the local borrowers (Debt Management Revenue). These fees are used to defray program administration expenses, and are collected and recorded by WIFA as separate funds at the treasurer’s office. The administrative expenses reported by WIFA for the year ended June 30, 2009 are as follows: EXPENSES: Personnel Benefits Contracts In State Travel Out of State Travel Other operating expenses Equipment Indirect cost Other program activities Fee transfers to ADEQ Subtotal Set aside to ADEQ Clean Water Fund $ 455,007 185,847 117,524 5,883 3,559 106,809 6,003 24,000 570,403 2,959,656 Drinking Water Fund $ 440,733 180,018 57,524 5,791 3,816 110,121 5,113 24,000 113,824 1,519,033 $ Total 895,740 365,865 175,048 11,674 7,375 216,930 11,116 48,000 684,227 4,478,689 4,434,691 2,459,973 6,894,664 83,297 2,450,432 2,533,729 $ 4,517,988 $ 4,910,405 $ 9,428,393 18 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 9 AMORTIZATION OF BOND COSTS AND BOND PREMIUMS WIFA has incurred costs for issuance of bonds, which were not passed on to the borrowers. Such costs are being amortized over the life of the bonds on the straightline basis. Amortization has been offset against interest expense. Annual amortization for the following bonds is $229,182 and $83,421 for Clean Water Revolving and Drinking Water Revolving Funds, respectively. The details follow: July 1, 2008 Clean Water Fund: 1996A Bonds 1997 Bonds 1999 Bonds 2001 Bonds 2004 Bonds 2006 Bonds 2008 Bonds Drinking Water Fund: 1998 Bonds 2001 Bonds 2004 Bonds 2006 Bonds 2008 Bonds $ 57,539 5,555 371,893 57,952 857,936 992,629 955,318 Additions $ 52,919 482,588 182,080 549,803 $ 4,566,212 - Amortization June 30, 2009 $ $ $ - $ (7,504) (5,555) (40,571) (20,792) (50,467) (55,922) (48,371) 50,035 331,322 37,160 807,469 936,707 906,947 (16,937) (28,388) (10,258) (27,838) 35,982 454,200 171,822 521,965 (312,603) $ 4,253,609 Bond premiums are being amortized over the life of the bonds. Annual amortization for the following bonds is $2,131,307 and $1,065,119 for Clean Water Revolving and Drinking Water Revolving Funds, respectively. The details follow: July 1, 2008 Clean Water Fund: 1999 Bonds 2001 Bonds 2004 Bonds 2006 Bonds 2008 Bonds Drinking Water Fund: 2001 Bonds 2004 Bonds 2006 Bonds 2008 Bonds $ 102,326 352,264 14,417,412 8,319,590 11,927,289 Additions $ 321,666 7,994,590 1,526,079 6,838,272 $51,799,488 $ - Amortization June 30, 2009 $ $ (11,164) (117,422) (905,918) (468,709) (628,094) 91,162 234,842 13,511,494 7,850,881 11,299,195 - (10,241) (503,200) (85,976) (465,702) 311,425 7,491,390 1,440,103 6,372,570 - $ (3,196,426) $ 48,603,062 19 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA NOTES TO FINANCIAL STATEMENTS June 30, 2009 NOTE 10 SUBSEQUENT EVENTS In July 2009, Water Infrastructure Finance Authority of Arizona issued $148,785,000 Water Quality Revenue Bonds, Series 2009A and $39,655,000 Water Quality Revenue Refunding Bonds, Series 2009A, due in annual principal installments ranging from $3,000,000 to $11,610,000, plus semi annual interest ranging from 2.00% to 5.0% through October 1, 2029. 20 WATER INFRASTRUCTURE FINANCE AUTHORITY OF ARIZONA PHOENIX, ARIZONA COMPLIANCE REPORT Year Ended June 30, 2009 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Water Infrastructure Finance Authority of Arizona Phoenix, Arizona We have audited the financial statements of the Water Infrastructure Finance Authority of Arizona (the “Authority”), as of and for the year ended June 30, 2009, and have issued our report thereon dated September 25, 2009. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Authority’s, internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Water Infrastructure Finance Authority of Arizona’s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Authority’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Authority’s financial statements that is more than inconsequential will not be prevented or detected by the Water Infrastructure Finance Authority of Arizona’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the Authority’s internal control. www.henryandhorne.com Board of Directors Water Infrastructure Finance Authority of Arizona Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Authority’s, management, federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Casa Grande, Arizona September 25, 2009 23