STATE OF ARIZONA COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2006 Janet Napolitano GOVERNOR PREPARED BY ARIZONA DEPARTMENT OF ADMINISTRATION FINANCIAL SERVICES DIVISION GENERAL ACCOUNTING OFFICE STATE OF ARIZONA COMPREHENSIVE ANNUAL FINANCIAL REPORT TABLE OF CONTENTS INTRODUCTORY SECTION (Not Covered by the Independent Auditors’ Report) Letter of Transmittal ........................................................................................................................................................... Arizona State Government Organization ............................................................................................................................ Principal State Officials ...................................................................................................................................................... Page 1 10 11 FINANCIAL SECTION INDEPENDENT AUDITORS' REPORT....................................................................................................................... 17 MANAGEMENT’S DISCUSSION AND ANALYSIS................................................................................................... 23 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements: Statement of Net Assets ........................................................................................................................................... Universities - Affiliated Component Units – Statement of Financial Position ....................................................... Statement of Activities ............................................................................................................................................. Universities - Affiliated Component Units – Statement of Activities ..................................................................... Governmental Fund Financial Statements: Balance Sheet ........................................................................................................................................................... Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets ..................................... Statement of Revenues, Expenditures and Changes in Fund Balances.................................................................... Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities............................................................................................... 38 40 42 44 45 46 47 48 Proprietary Fund Financial Statements: Statement of Net Assets ........................................................................................................................................... Statement of Revenues, Expenses and Changes in Fund Net Assets ....................................................................... Statement of Cash Flows.......................................................................................................................................... 50 54 56 Fiduciary Fund Financial Statements: Statement of Fiduciary Net Assets ........................................................................................................................... Statement of Changes in Fiduciary Net Assets ........................................................................................................ 60 61 Component Unit Financial Statements: Combining Statement of Net Assets ........................................................................................................................ Combining Statement of Revenues, Expenses and Changes in Fund Net Assets .................................................... 62 63 Universities – Affiliated Component Unit Financial Statements: Combining Statement of Financial Position............................................................................................................. Combining Statement of Activities .......................................................................................................................... 64 65 Notes to the Financial Statements .............................................................................................................................. 66 REQUIRED SUPPLEMENTARY INFORMATION Budgetary Comparison Schedule, Expenditures – General Fund.................................................................................. Budgetary Comparison Schedule, Expenditures – Transportation and Aviation Planning, Highway Maintenance and Safety Fund ..................................................................................................................................... Notes to Required Supplementary Information – Budgetary Comparison Schedules................................................... Infrastructure Assets ...................................................................................................................................................... Agent Retirement Plans’ Funding Progress................................................................................................................... i 129 146 148 151 156 STATE OF ARIZONA COMPREHENSIVE ANNUAL FINANCIAL REPORT TABLE OF CONTENTS (CONTINUED) FINANCIAL SECTION - CONCLUDED COMBINING FINANCIAL STATEMENTS AND SCHEDULES Page Non-major Governmental Funds: Combining Balance Sheet ........................................................................................................................................ Combining Statement of Revenues, Expenditures and Changes in Fund Balances ................................................. 160 161 Non-major Special Revenue Funds: Combining Balance Sheet ................................................................................................................................. Combining Statement of Revenues, Expenditures and Changes in Fund Balances.......................................... Budgetary Comparison Schedule, Expenditures – Non-Major Special Revenue Funds .................................. 164 166 168 Non-major Debt Service Funds: Combining Balance Sheet ................................................................................................................................. Combining Statement of Revenues, Expenditures and Changes in Fund Balances.......................................... 180 182 Non-major Capital Projects Funds: Combining Balance Sheet ................................................................................................................................. Combining Statement of Revenues, Expenditures and Changes in Fund Balances.......................................... 186 187 Non-major Proprietary Funds: Non-major Enterprise Funds: Combining Statement of Net Assets ................................................................................................................. Combining Statement of Revenues, Expenses and Changes in Fund Net Assets ............................................. Combining Statement of Cash Flows................................................................................................................ 190 192 194 Internal Service Funds: Combining Statement of Net Assets ................................................................................................................. Combining Statement of Revenues, Expenses and Changes in Fund Net Assets ............................................. Combining Statement of Cash Flows................................................................................................................ 198 200 202 Fiduciary Funds: Pension Trust Funds: Combining Statement of Fiduciary Net Assets ................................................................................................. Combining Statement of Changes in Fiduciary Net Assets .............................................................................. 206 207 Investment Trust Funds: Combining Statement of Fiduciary Net Assets ................................................................................................. Combining Statement of Changes in Fiduciary Net Assets .............................................................................. 210 211 Agency Funds: Combining Statement of Assets and Liabilities ................................................................................................ Combining Statement of Changes in Assets and Liabilities ............................................................................. 215 216 Non-major Universities – Affiliated Component Units: Combining Statement of Financial Position...................................................................................................... Combining Statement of Activities ................................................................................................................... 220 222 ii STATE OF ARIZONA COMPREHENSIVE ANNUAL FINANCIAL REPORT TABLE OF CONTENTS (CONCLUDED) STATISTICAL SECTION (Not Covered by the Independent Auditors' Report) Page Financial Trends: Schedule 1 – Net Assets by Component for the Last Five Fiscal Years .................................................................. Schedule 2 – Changes in Net Assets for the Last Five Fiscal Years ........................................................................ Schedule 3 – Fund Balances, Governmental Funds for the Last Five Fiscal Years................................................. Schedule 4 – Changes in Fund Balances, Governmental Funds for the Last Five Fiscal Years ............................. 228 229 231 232 Revenue Capacity: Schedule 5 – Net Taxable Sales by Classification for the Last Ten Fiscal Years .................................................... Schedule 6 – Sales Tax Revenue Payers by Classification, Current Year and Nine Years Ago.............................. 234 237 Debt Capacity: Schedule 7 – Ratios of Outstanding Debt by Type for the Last Ten Fiscal Years ................................................. Schedule 8 – Legal Debt Margin Information, Arizona Transportation Board Highway Revenue Bonds for the Last Ten Fiscal Years .......................................................................................................... Schedule 9 – Pledged-Revenue Coverage, Arizona Transportation Board Highway Revenue Bonds for the Last Ten Fiscal Years .......................................................................................................... Schedule 10 – Pledged-Revenue Coverage, Arizona Transportation Board Transportation Excise Tax Revenue Bonds for the Last Ten Fiscal Years ................................................................................ Schedule 11 – Pledged-Revenue Coverage, School Facilities Board State School Improvement Revenue Bonds for the Last Five Fiscal Years ......................................................................................................... Schedule 12 – Pledged-Revenue Coverage, School Facilities Board State School Trust Revenue Bonds for the Last Three Fiscal Years ....................................................................................................... Schedule 13 – Pledged-Revenue Coverage, Arizona State University Revenue Bonds for the Last Ten Fiscal Years .......................................................................................................... Schedule 14 – Pledged-Revenue Coverage, University of Arizona Revenue Bonds for the Last Ten Fiscal Years .......................................................................................................... Schedule 15 – Pledged-Revenue Coverage, Northern Arizona University Revenue Bonds for the Last Ten Fiscal Years .......................................................................................................... 238 240 241 241 242 242 243 244 244 Demographic and Economic Information: Schedule 16 – Demographic and Economic Statistics for the Last Ten Calendar Years ......................................... Schedule 17 – Principal Employers, Current Year and Nine Years Ago ................................................................. 245 245 Operating Information: Schedule 18 – State Employees by Function for the Last Three Fiscal Years ......................................................... Schedule 19 – Operating Indicators by Function for the Last Ten Fiscal Years...................................................... Schedule 20 – Capital Asset Statistics by Function for the Last Ten Fiscal Years .................................................. 247 248 250 iii INTRODUCTORY SECTION INTRODUCTORY SECTION WILLIAM BELL JANET NAPOLITANO GOVERNOR DIRECTOR ARIZONA DEPARTMENT OF ADMINISTRATION OFFICE OF THE DIRECTOR 100 NORTH 15th AVENUE • SUITE 401 PHOENIX, ARIZONA 85007 Phone: (602) 542-1500 May 25, 2007 The Honorable Janet Napolitano, Governor of the State of Arizona; Members of the Legislature; Chief Justice of the Supreme Court; and Citizens and Taxpayers of the State of Arizona Ladies and Gentlemen: It is our pleasure to transmit to you the Comprehensive Annual Financial Report (CAFR) of the State of Arizona for the fiscal year ended June 30, 2006. Responsibility for the accuracy of data, as well as the completeness and fairness of presentation, including all disclosures, rests with the State's management. The data presented in this report, to the best of our knowledge and belief, is accurate in all material respects and is reported in a manner which fairly presents the financial position and results of operations of the major and non-major funds of the State. All disclosures needed for the reader to gain a reasonable understanding of the State's financial activities have been included. The report is presented in three sections: Introductory, Financial, and Statistical. The Introductory Section includes this Letter of Transmittal, the State's organizational chart and a list of principal State officials. The Financial Section includes the State Auditor General's Independent Auditors’ Report, Management’s Discussion and Analysis (MD&A) and the basic financial statements (which include the government-wide financial statements, the fund financial statements and the notes to the financial statements). The financial section also includes Required Supplementary Information (RSI), which includes budgetary comparison schedules, infrastructure condition and maintenance data, and agent retirement plans’ funding progress. In addition, the financial section includes other supplemental financial data, which includes combining financial statements. The Statistical Section includes five categories of information: Demographic and Economic Information, and Operating Information. Financial Trends, Revenue Capacity, Debt Capacity, U.S. generally accepted accounting principles (GAAP) require that management provides a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of the MD&A. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The State’s MD&A can be found immediately following the Independent Auditors’ Report. INTERNAL CONTROLS The State is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the State 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 U.S. GAAP. Internal accounting controls are 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. In the opinion of management, the State's internal controls are adequate to provide reasonable assurance that these objectives are met. -1- INDEPENDENT AUDIT In compliance with State statute, an annual financial audit of the State Entity is completed each year by the State of Arizona, Office of the Auditor General in conjunction with other audit firms. Their audit was conducted in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Their report on the basic financial statements has been included in the financial section of this report. In addition, ARS §41-1279.03 requires at least a biennial single audit by the Office of the Auditor General. The Single Audit will be issued as a separate report at a later date. PROFILE OF THE GOVERNMENT The State of Arizona was admitted to the Union as the 48th state in 1912. Arizona is the sixth largest state, with 113,998 square miles. Arizona is known for the Grand Canyon, one of the Seven Wonders of the World, and its cacti and other desert landscape. A number of national forests, three national parks, eighteen national monuments, and Indian reservations are located in Arizona. The State has three branches of government, Executive, Legislative, and Judicial. The Executive branch is headed by a governor elected for a four-year term. Arizona’s Legislative branch is bicameral, consisting of a thirty-member Senate and a sixty-member House of Representatives. Legislators are elected for two-year terms. The Judicial branch consists of the Arizona Supreme Court, Court of Appeals (with two divisions), superior courts, justice of the peace courts and municipal courts. The superior courts, justice of the peace courts, and municipal courts are excluded from the State’s reporting entity. The Supreme Court is the highest court in the State and is an appellate court comprised of five justices. The services provided by the State are administered through various agencies, departments, boards, commissions, councils, administrations, offices and institutions of higher learning. These services include: (1) General Government, (2) Health and Welfare, (3) Inspection and Regulation, (4) Education, (5) Protection and Safety, (6) Transportation and (7) Natural Resources. FINANCIAL REPORTING ENTITY The accompanying CAFR includes all funds of the State of Arizona (primary government), as well as its component units. Blended component units, although legally separate entities, are in substance part of a government’s operations. Therefore, data from these units is combined with data of the primary government. Discretely presented component units are shown separately to emphasize that they are legally separate from the primary government and to differentiate their financial position and results of operations from those of the primary government. Discretely presented component units prepared in accordance with the Governmental Accounting Standards Board (GASB) are reported in a separate column in the government-wide financial statements. Discretely presented component units prepared in accordance with the Financial Accounting Standards Board are presented as separate financial statements immediately following the government-wide financial statements to emphasize that they are prepared in accordance with accounting standards other than those promulgated by the GASB. The criteria for inclusion in the reporting entity and presentation are defined by the Codification of Governmental Accounting and Financial Reporting Standards, issued by the GASB, (Section 2100). Note 1 of the Notes to the Financial Statements explains which component units are included in the Financial Reporting Entity of the State. BUDGETARY CONTROLS Budgetary control is maintained through legislative appropriation and the executive branch allotment process. The Governor is required to submit an annual budget to the Legislature. The budget is legally required to be adopted through passage of appropriation bills by the Legislature and approval by the Governor. The appropriated funds are controlled by the executive branch through an allotment process. This process generally allocates the appropriation into quarterly allotments by legal appropriation level. The State also maintains an encumbrance accounting system to further enhance budgetary control. Encumbered amounts generally lapse as of the end of the fiscal year, with the exception of capital outlay and other continuing appropriations. These appropriations and their encumbrances continue from year to year. The State's budgetary policies are explained in detail in the RSI. -2- GENERAL FUND BALANCE Graph 1 details the General Fund revenues and expenditures for the last five fiscal years. This graph does not include transfer amounts relating to other fund types and other financing sources (uses), which affect the ending fund balance. Graph 1 General Fund Revenues and Expenditures for last 5 fiscal years (Dollars in billions) $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 2002 2003 2004 Revenues 2005 2006 Expenditures The General Fund ended the June 30, 2006, fiscal year with $1.4 billion in unreserved fund balance and a $831.332 million reserved fund balance for a total fund balance of $2.3 billion. This compares to the previous year’s total fund balance of $1.3 billion. Included in the $831.332 million reserved fund balance is $651.020 million for the Budget Stabilization Fund. The Budget Stabilization Fund is a form of Rainy Day Fund established by the Legislature in 1991. Graph 2 details the General Fund Balance for the last five fiscal years: Graph 2 General Fund Balance for last 5 fiscal years (Dollars in millions) $2,500 $2,000 $1,500 $1,000 $500 $0 2002 2003 2004 -3- 2005 2006 RISK MANAGEMENT The State purchases property and liability coverage whenever available on reasonable terms. The State is insured by an approved property insurer for claims in excess of $3.500 million, but less than $450.000 million, and liability claims in excess of $2.000 million for the Universities and the School for the Deaf and Blind and $7.000 million for all other state agencies, but less than $100.000 million. The State also maintains first dollar aircraft liability, hull, and airport liability coverage up to $200.000 million. Other purchased coverages include fidelity, foreign liability, medical malpractice (limited to the University of Arizona’s medical professional staff), nuclear property, nuclear liability, and employment practices. The State's self-insurance fund provides property and liability coverage for claims less than or in excess of this coverage, or whenever coverage, such as workers’ compensation and medical malpractice for non-University of Arizona professional staff, is unavailable on reasonable terms. The State pays self-insurance losses, defense costs, premiums and administrative costs from an appropriated fund which all of the State’s agencies participate in. Total costs (excluding the cost of administering the program) have risen from approximately $15.300 million in fiscal year 1988 to approximately $79.900 million in fiscal year 2006. Yearly appropriations have also increased from approximately $27.700 million in fiscal year 1988 to approximately $85.700 million in fiscal year 2006 to meet rising losses and claims-related expenses. Annual funding is established for expected paid claims. The accrued insurance losses are not considered when determining funding for each fiscal year. ECONOMIC CONDITION AND OUTLOOK The following economic summary is excerpted from the Arizona Department of Economic Security’s Arizona’s Workforce, released on August 31, 2006. Arizona’s economy is projected to grow at a faster rate than the nation in 2006 and 2007, according to the forecast update of the Arizona Department of Economic Security, Research Administration. Nonfarm jobs in the Grand Canyon State are forecast to increase at a rate of 4.90% in 2006 and then slow to 4.00% in 2007. Over the two-year period, nonfarm job growth is projected to add nearly 228,000 jobs in Arizona. Meanwhile, according to the most recent figures by Global Insight, the U.S. economy is forecast to have a slower pace of employment expansion, growing at a rate of 1.40% in 2006 and 1.10% in 2007. Nonfarm payroll job data for July 2006, reported by the Bureau of Labor Statistics, showed Arizona as the second fastest growing state (4.80%) over the previous 12 months. Additionally, this report showed Arizona was ranked fourth in terms of the number of jobs added since July 2005. Population growth is a strong contributor to the State’s faster-than-national pace of expansion. In this updated forecast, job growth is projected in ten of eleven major industry groups, with information as the only industry slipping back into continuing job losses. The top five industries with the largest projected job gains are professional and business services, construction, trade, transportation and utilities, educational and health services, and leisure and hospitality. Among Arizona’s major industries, natural resources and mining is projected to have the fastest percentage growth at 28.50% in the forecast period. Professional and business services will grow at 15.20% during the same time period and will add over 58,000 jobs. Construction is forecast to continue its expansion by growing 17.60% in 2006 and 2007. Financial activities (growing at 8.80%) and education and health services (8.20%) round out Arizona’s top five expanding industries during the forecast period. Arizona factories are projected to add 6,400 jobs for a growth rate of 3.50% over the forecast period. Recent declines in the number of orders for new manufactured goods at the national level contributed to the downward revision of manufacturing job growth in the state. For example, the slowdown in the housing market has been impacting manufacturing orders. Construction, one of the most rapidly growing industries, is forecast to increase employment by more than 40,000 jobs. Even with a cooling housing market, nonresidential construction continues to add jobs. However, higher costs and fewer projects are expected to slow the industry to a 6.50% rate of expansion in 2007. Natural resources and mining, unlike all other industry groups, is projected to accelerate as new Arizona based mining operations are completed and existing facilities are expanded. Industrial output across the globe, including East Asia, North America and Europe, has increased the demand for many mined nonmetallic and metallic ores including copper. The rising demand and price has provided the incentive to many Arizona mining firms to increase their capacity to extract and process copper and other metallic ores. Publicly stated employment announcements by Arizona employers in the industry account for most of the increase for this industry. For 2006, this industry is forecast to add 1,600 jobs and 1,000 jobs in 2007. Trade, transportation and utilities is forecast to have an increase of almost 40,000 jobs. Slower growth in consumer spending, due mostly from higher energy costs and sustained higher interest rates, will dampen job growth in this industry. In addition, heightened concerns over safety and costs are expected to weaken the air transportation sector. -4- Information is projected to lose slightly more than 1,000 jobs. Projected job losses are the result of continuing consolidation, outsourcing and automation. Financial activities is forecast to add almost 16,000 jobs. Due to higher interest rates on mortgages and other customer and business loan products, growth is anticipated, although at a lower rate. This industry is nevertheless forecast to grow at 5.00% in 2006 and 3.80% in 2007. Professional and business services sectors is forecast to have strong labor demand over the next two years, growing by 8.10% in 2006 and 7.10% in 2007. Since this industry is a major resource for the rest of the economy, it will follow the overall economic trend. Education and health services is projected to show an increase of 23,000 jobs. Arizona’s population is expected to grow at more than 2.5 times the rate of population growth for the rest of the U.S. for the same period, providing strength in this industry. Faster than national population growth in Arizona is driving the expansion in this industry. Leisure and hospitality is projected to add almost 21,000 jobs over the 2006-07 period. Growth in this industry will be sustained by a growing economy. Sustained high fuel prices and greater air travel restrictions are expected to dampen some related tourist demand. Arizona activity is expected to be supported by domestic (local and U.S.) demand as an option to consumers traveling abroad. Other services is forecast to follow the general trend of the overall economy and add almost 8,000 jobs. Government is forecast to maintain its previously projected rate and have a gain of almost 16,000 jobs. Arizona’s forecast update shows continued, yet slowing, growth through 2006-07. Nevertheless, Arizona’s job growth is expected to outpace the nation. This update includes an expectation of a slower second half of 2006, with further slowing in 2007. Ten of eleven major industries are predicted to add jobs in both 2006 and 2007. The greatest number of jobs will be added in professional and business services, while the fastest pace of growth among industries is expected in natural resources and mining. Arizona’s economy remains generally strong, but the weakness forecast in job growth for 2006-07 is expected to be most evident in sectors closely associated with consumer spending and in housing. MAJOR INITIATIVES The Governor’s fiscal year 2006st Budget establishes key principles for nurturing the State’s fiscal and human resources so that it is possible to compete in the 21 century economy. It recognizes that; (1) children are better able to develop and succeed if they are healthy; (2) families are strengthened when the children of working parents are in safe daytime environments; (3) Arizona must have a superior education system that offers each child the best chance to determine his or her path to growth and achievement; (4) our natural resources are not only a State treasure; they also contribute to a vibrant educational system and economy; and (5) public safety must be strengthened by recruiting and retaining the highest quality law enforcement and correctional officers. Effectively managed and maximized through targeted initiatives, these factors will combine to produce a world-class economy in Arizona for years to come. Strengthening Families Department of Economic Security. The FY 2006 Budget provided $11.200 million for the Day Care Subsidy for child care caseload growth. This amount was sufficient to fund the new priority of ensuring that there was no need to institute a waiting list for child care services for the entire fiscal year. Child care subsidies are available for low-income families, families on cash assistance, families leaving cash assistance, and families in the Child Protective Services (CPS) system. Healthy Families. The FY 2006 Budget provided $13.750 million for the Healthy Families Program. In order to continue the advances made by the CPS since 2003, an additional $8.800 million is provided to fund 173.9 caseworkers for families with children in need. Healthcare Arizona Health Care Cost Containment System (AHCCCS). The FY 2006 Budget included $12.200 million to increase inpatient reimbursement rates for qualifying rural hospitals. It also shortens the redetermination period from twelve to six months for most AHCCCS clients. This change was expected to reduce the AHCCCS client rolls, as many clients will no longer qualify for the program. -5- Education Full Day Kindergarten. The FY 2006 Budget provided $17.000 million for the expansion of voluntary full day kindergarten from 136 schools to 282 schools serving approximately 24,000 students. AIMS Intervention. High school students are required to pass the AIMS test in order to graduate beginning FY 2006. In order to best prepare these students; the FY 2006 Budget includes $5.000 million for expanded AIMS tutoring. Community Colleges. The FY 2006 Budget fully funded the Operating, Capital Outlay, and Equalization Aid funding formulas. Arizona’s two year community colleges provide high school graduates with a variety of educational opportunities needed to allow these graduates to participate in Arizona’s and the nation’s new economy. Universities. ƒ A top-notch university system allows each person and business in Arizona to be a world-class competitor. Recognizing this, the FY 2006 Budget provides approximately $22.000 million to fund the FY 2006 enrollment growth at the three State universities. Additionally, Arizona State University received $1.000 million to create the Department of Biomedical Informatics. Finally, the University of Arizona received $6.000 million for the Phoenix Medical Campus. ƒ The University of Arizona and Arizona State University began staffing and renovations for the new Phoenix Medical Campus, including the new Phoenix Campus of the University of Arizona Medical School. The first students are expected in July 2007. Also, during FY 2006, ASU became the largest University in the country. Land and Water Management Environmental stewardship is necessary for maintaining Arizona’s natural beauty and for enhancing the State’s economic development. Water. The FY 2006 Budget includes an increase of $1.900 million to restore budget cuts made to the Department of Water Resources in previous budget years. The approved budget also provides an additional $1.400 million for Rural Water Studies to assess local water use needs and to develop plans for sustainable future water supplies in rural areas outside the state’s Active Management Areas. Forest Fires. The drought has been a contributing factor in the forest fires that ravaged parts of the State in recent years. One response to those fires was to use crews of properly supervised inmates to help with fuel treatment and fire suppression in and around communities at risk. The FY 2005 Budget increased to 12 the number of crews, and this year’s budget provides for three additional inmate fire crews consisting of 75 people. Additionally, the Budget provides an increase of $1.200 million for firefighting training for the 15 inmate crews. Trust Lands. Finally, a direct link can be drawn between the activities of the Land Department and the beneficiaries of the State Land Trust, particularly as it pertains to K-12 education. To maximize the earnings from the sale and lease of State lands, the Land Department needs sufficient resources for planning and other preparatory work. The FY 2006 Budget provides $3.000 million for the Land Department to carry out this mission. Economic Development Arizona 21st Century Competitive Initiative Fund. The FY 2006 Budget established the 21st Century Competitive Initiative Fund and provided $35.000 million from the General Fund in seed money for this program. Under the Commerce and Economic Development Commission of the Department of Commerce, the 21st Century Competitive Initiative Fund will work to build, strengthen and promote medical, scientific and engineering research programs and infrastructure in areas of greatest strategic value to Arizona’s competitiveness in the global economy with an emphasis in bioscience. The funds are to be used to attract world-class researchers to Arizona and support research into new products and technologies that can be commercialized and brought to the market. -6- (This page intentionally left blank) ARIZONA STATE GOVERNMENT ORGANIZATION ELECTORATE LEGISLATIVE BRANCH STATE HOUSE OF REPRESENTATIVES* STATE SENATE* LEGISLATIVE COUNCIL AUDITOR GENERAL JOINT LEGISLATIVE BUDGET COMM. BD. OF LIBRARY, ARCHIVES AND PUBLIC RECORDS SECRETARY OF STATE* JUDICIAL BRANCH EXECUTIVE BRANCH ATTORNEY GENERAL* GOVERNOR* SUPREME COURT COURT OF APPEALS SUPERIOR COURTS MUNICIPAL COURTS JUSTICE OF THE PEACE COURTS* SUPERINTENDENT OF PUBLIC INSTRUCTION* STATE TREASURER* DEPARTMENT OF LAW CORPORATION COMMISSION* STATE MINE INSPECTOR* DEPARTMENT OF EDUCATION DEPARTMENT OF ADMINISTRATION DEPARTMENT OF CORRECTIONS DEPARTMENT OF TRANSPORTATION AHCCCS DEPARTMENT OF REVENUE DEPARTMENT OF PUBLIC SAFETY DEPARTMENT OF HEALTH SERVICES DEPARTMENT OF ECONOMIC SECURITY OTHER BOARDS, COMMISSIONS, AND AGENCIES BOARD OF REGENTS ARIZONA STATE UNIVERSITY NORTHERN ARIZONA UNIVERSITY * ELECTED OFFICIALS - 10 - UNIVERSITY OF ARIZONA STATE OF ARIZONA PRINCIPAL STATE OFFICIALS JUNE 30, 2006 ELECTED OFFICIALS Janet Napolitano, Governor Tom Horne, Superintendent of Public Instruction Senator Tim Bee, President of the Senate Mike Gleason, Chairman - Corporation Commission Representative James P. Weiers, Speaker of the House William A. Mundell, Commissioner - Corporation Commission Janice K. Brewer, Secretary of State Kristin K. Mayes, Commissioner - Corporation Commission Terry Goddard, Attorney General Jeff Hatch-Miller, Commissioner - Corporation Commission Joe Hart, State Mine Inspector Gary Pierce, Commissioner - Corporation Commission Dean Martin, State Treasurer APPOINTED OFFICIALS Executive Officials Legislative Officials William Bell, Director – Department of Administration Michael E. Braun, Executive Director - Legislative Council Dora B. Schriro, Director - Department of Corrections Richard Stavneak, Director - Joint Legislative Budget Committee Tracy L. Wareing, Director - Department of Economic Security Debra K. Davenport, CPA, Auditor General - Office of the Auditor General Gale Garriott, Director - Department of Revenue Gladys Ann Wells, Director - Board of Library, Archives and Public Records Roger Vanderpool, Director - Department of Public Safety University Officials Susan Gerard, Director - Department of Health Services Michael M. Crow, President - Arizona State University Anthony D. Rodgers, Director - Arizona Health Care Cost Containment System Dr. John D. Haeger, President - Northern Arizona University Victor Mendez, Director - Department of Transportation Robert Shelton - University of Arizona Judicial Officials Ruth V. McGregor, Chief Justice - Supreme Court - 11 - FINANCIAL SECTION FINANCIAL SECTION INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT STATE OF ARIZONA OFFICE OF THE AUDITOR GENERAL DEBRA K. DAVENPORT, CPA AUDITOR GENERAL WILLIAM THOMSON DEPUTY AUDITOR GENERAL Independent Auditors’ Report The Honorable Janet Napolitano, Governor State of Arizona The Honorable Tim Bee, President Arizona State Senate The Honorable James P. Weiers, Speaker Arizona House of Representatives The Honorable Ruth V. McGregor, Chief Justice Arizona Supreme Court We have audited the accompanying financial statements of the governmental activities, business-type activities, aggregate discretely presented component units, each major fund, and aggregate remaining fund information of the State of Arizona as of and for the year ended June 30, 2006, which collectively comprise the State’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the State’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of certain departments and the component units, which account for the following percentages of the assets and revenues of the opinion units affected: Opinion Unit/Department Government-Wide Statements Governmental activities: Arizona Health Care Cost Containment System Department of Transportation Business-type activities: Lottery Department Arizona Health Care Cost Containment System Department of Transportation Aggregate discretely presented component units: Component Units Universities—Affiliated Component Units 2910 NORTH 44 th Assets Revenues 1.99% 62.77% 15.51% 13.59% 1.31% 12.62% .26% 4.30% 1.37% .40% 100.00% 100.00% 100.00% 100.00% STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051 Opinion Unit/Department Fund Statements General Fund: Arizona Health Care Cost Containment System Transportation and Aviation Planning, Highway Maintenance and Safety Fund: Department of Transportation Lottery Fund: Lottery Department Aggregate Remaining Fund Information: Arizona Health Care Cost Containment System Department of Transportation Arizona State Retirement System Public Safety Personnel Retirement System Corrections Officer Retirement Plan Elected Officials' Retirement Plan Assets Revenues 11.62% 17.75% 100.00% 100.00% 100.00% 100.00% .11% .73% 66.09% 13.05% 2.24% .90% 2.78% 7.33% 43.54% 7.21% 1.55% .53% Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audit in accordance with U.S. generally accepted auditing standards 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. The financial statements of the discretely presented component units (except for the Water Infrastructure Finance Authority) and the fiduciary fund financial statements of the Arizona State Retirement System, Public Safety Personnel Retirement System, Corrections Officer Retirement Plan, and Elected Officials’ Retirement Plan were not audited by the other auditors in accordance with Government Auditing Standards. 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 and the reports of the other auditors provide a reasonable basis for our opinions. In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, business-type activities, aggregate discretely presented component units, each major fund, and aggregate remaining fund information of the State of Arizona as of June 30, 2006, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with U.S. generally accepted accounting principles. The financial statements of the Healthcare Group of Arizona, a nonmajor enterprise fund, are included as part of the State’s business-type activities and aggregate remaining fund information. As discussed in Note 8, the Healthcare Group of Arizona has incurred operating losses and has a net fund deficit of $3.696 million at June 30, 2006, that raise substantial doubt about its ability to continue operations. Management’s plans in regard to these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Management’s Discussion and Analysis on pages 23 through 34, the Budgetary Comparison Schedules on pages 129 through 150, the Infrastructure Assets information on pages 151 through 155, and the Schedule of Agent Retirement Plans’ Funding Progress on page 156 are not required parts of the basic financial statements, but are supplementary information required by the Governmental Accounting Standards Board. We and the other auditors 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 and the other auditors did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the State’s basic financial statements. The introductory section, combining financial statements and schedules, and statistical section listed in the table of contents are presented for purposes of additional analysis and are not required parts of the basic financial statements. The combining financial statements and schedules have been subjected to the auditing procedures applied by us and the other auditors in the audit of the basic financial statements and, in our opinion, based on our audit and the reports of the other auditors, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. In accordance with Government Auditing Standards, we will also issue our report on our consideration of the State’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters at a future date. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Debbie Davenport Auditor General May 25, 2007 MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS The following is a discussion and analysis of the State of Arizona’s (the State’s) financial performance, providing an overview of the activities for the fiscal year ended June 30, 2006. Please read it in conjunction with the transmittal letter at the front of this report and with the State’s financial statements, which follow this section. The completeness and fairness of the following information is the responsibility of the State’s officials and management. FINANCIAL HIGHLIGHTS Government-Wide: • The assets of the State exceeded liabilities at the close of the fiscal year by $20.0 billion (reported as net assets). Of this amount, $985.535 million is unrestricted, $5.0 billion is restricted for specific purposes (restricted net assets), and $14.0 billion is invested in capital assets, net of related debt. • The State’s total net assets increased in fiscal year 2006 by $3.1 billion. Net assets of governmental activities increased by $2.9 billion, while net assets of the business-type activities increased by $241.135 million. Fund Level: • As of the close of the fiscal year, the State’s governmental funds reported combined ending fund balances of $5.6 billion, an increase of $1.4 billion from the beginning of the year. Approximately 38% of the combined fund balances, or $2.1 billion, is available to meet the State’s current and future needs (unreserved fund balance). • As of the close of the fiscal year, unreserved fund balance for the General Fund was $1.4 billion, or 8%, of total General Fund expenditures. • The enterprise funds reported net assets at year end of $2.8 billion, an increase of $258.185 million during the year. • The Land Endowments Fund reported fund balance at year end of $2.0 billion, an increase of $326.494 million during the year. The Land Endowments Fund is used to help finance public education within the State as required by the federal government and the State’s Constitution. Long-term Debt: • The State’s total long-term primary government debt decreased during the fiscal year to $5.7 billion, a slight decrease of $10.864 million (less than 1%). Changes during the year included the addition of revenue bonds and certificates of participation of $782.880 million and $175.027 million, respectively. Also, the State retired $812.425 million of revenue bonds, $38.540 million of grant anticipation notes, and $122.887 million of certificates of participation. More detailed information regarding the government-wide financial statements, fund level financial statements and long-term debt activity can be found beginning on page 26. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is an introduction to the State’s basic financial statements, which are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. Required Supplementary Information and other supplementary information are included in addition to the basic financial statements. Government-Wide Statements (Reporting the State as a Whole) The government-wide financial statements provide a broad overview of the State of Arizona’s finances in a manner similar to private sector business. The financial statements report information about the State, as a whole, and about its activities that should help answer this question: Is the State, as a whole, better or worse off as a result of this year’s activities? These statements include all non-fiduciary assets and liabilities using the accrual basis of accounting. The current year’s revenues and expenses are taken into account regardless of when cash is received or paid. The government-wide financial statements include the following: - 23 - The Statement of Net Assets and the Statement of Financial Position (pages 38-40) present all of the State’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases and decreases in net assets measure whether the State’s financial position is improving or deteriorating. The Statements of Activities (pages 42-44) present information showing how the State’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying events giving rise to the change occur, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in these statements for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned, but unused vacation leave). Both government-wide statements report three activities: • Governmental Activities – Most of the State’s basic services are reported under this category. Taxes and intergovernmental revenues generally fund these services. The Legislature, the Judiciary, and the general operations of the Executive departments fall within the governmental activities. • Business-type Activities – The State charges fees to customers to help it cover all or most of the cost of certain services it provides. Lottery tickets, the State’s unemployment compensation services, Industrial Commission rehabilitation services, and the State’s three universities are examples of business-type activities. • Discretely Presented Component Units – Component units are legally separate organizations for which the elected officials of the State are financially accountable. The University Medical Center, the Arizona Power Authority, and the Water Infrastructure Finance Authority are discretely presented component units reported by the State. Based on GASB Statement No. 39, the State has added university foundations and financing authorities whose financial statements are prepared in conformity with U.S. generally accepted accounting principles as adopted by the Financial Accounting Standards Board. These organizations include the ASU Foundation, Arizona Capital Facilities Finance Corporation, the U of A Foundation, and other non-major foundations and financing authorities. Financial statements for these organizations are presented immediately following the government-wide statements to emphasize that they are prepared in accordance with accounting standards other than those promulgated by GASB, and include a statement of financial position (page 40) and a statement of activities (page 44). See pages 67-69 and 114-126 for more information on discretely presented component units. Fund Financial Statements (Reporting the State’s Major Funds) The fund financial statements begin on page 45 and provide detailed information about the major individual funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the State uses to keep track of specific sources of funding and spending for a particular purpose. In addition to the major funds, page 160 begins the individual fund data for the non-major funds. The State’s funds are divided into three categories – governmental, proprietary, and fiduciary – each category uses different accounting approaches. • Governmental funds – Most of the State’s basic services are reported in the governmental funds, which focus on how money flows into and out of those funds and the balances left at year end that are available for future spending. The governmental fund financial statements provide a detailed short-term view of the State’s general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the State’s programs. These funds are reported using modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. Governmental funds include the general, special revenue, capital projects, debt service, and permanent funds. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. This report includes two schedules (pages 46 and 48-49) that reconcile the amounts reported on the governmental fund financial statements (modified accrual accounting) with governmental activities (accrual accounting) reported on the appropriate government-wide statement. Governmental fund financial statements can be found on pages 45 and 47 of this report. - 24 - • Proprietary funds – When the State charges customers for the services it provides, whether to outside customers or to other agencies within the State, these services are generally reported in proprietary funds. Proprietary funds (enterprise and internal service) utilize accrual accounting; the same method used by private sector businesses. Enterprise funds report activities that provide supplies and services to the general public – such as the State Lottery Fund and Universities. Internal service funds report activities that provide supplies and services for the State’s other programs and activities – such as the State’s Risk Management Fund. Internal service fund operations primarily benefit governmental funds and are reported as governmental activities on the government-wide statements. The reconciliation between the government-wide financial statement business-type activities and the proprietary fund financial statements is presented at the end of the financial statements on pages 52-55. Proprietary fund financial statements can be found on pages 50-59 of this report. • Fiduciary funds – The State acts as a trustee or fiduciary for its employee pension plans. It is also responsible for other assets that, because of a trust arrangement, can be used only for the trust beneficiaries. The State’s fiduciary activities are reported in separate Statements of Fiduciary Net Assets and Changes in Fiduciary Net Assets beginning on page 60. These funds, which include pension trust, investment trust, and agency funds are reported using accrual accounting. The government-wide statements exclude fiduciary fund activities and balances because these assets are restricted in purpose and do not represent discretionary assets of the State to finance its operations. Fiduciary fund financial statements can be found on pages 60-61 of this report. 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 government-wide and fund financial statements. The notes can be found beginning on page 67 of this report. Required Supplementary Information Following the basic financial statements is additional Required Supplementary Information that further explains and supports the information in the financial statements. The Required Supplementary Information includes budgetary comparison schedules for the general fund and each major special revenue fund and a reconciliation of the schedules of statutory and U.S. GAAP expenditures for the fiscal year. This section also includes schedules of condition and maintenance data regarding certain portions of the State’s infrastructure and agent retirement plans’ funding progress schedules. Required supplementary information begins on page 129 of this report. Other Supplementary Information Other supplementary information includes combining financial statements for non-major governmental, non-major enterprise, all internal service funds, all fiduciary funds, and non-major universities – affiliated component units. These funds are added together, by fund type, and presented in single columns in the basic financial statements, but are not reported individually, as are major funds on the governmental funds and proprietary funds financial statements. A budgetary expenditure comparison schedule for the non-major special revenue funds is also included. Other supplementary information begins on page 160 of this report. - 25 - GOVERNMENT-WIDE FINANCIAL ANALYSIS The State’s overall financial position and operations for the past year for the primary government are summarized, as follows, based on the information included in the government-wide financial statements. State of Arizona-Primary Government Net Assets as of June 30, 2006 and 2005 (expressed in thousands) Current assets Capital assets Other non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Business-type Activities Primary Government Total Governmental Activities 2006 2005 2006 2005 2006 2005 $ 4,723,241 $ 3,503,360 $ 1,804,687 $ 1,516,254 $ 6,527,928 $ 5,019,614 14,989,475 14,012,830 2,884,950 2,677,802 17,874,425 16,690,632 3,555,772 2,955,282 937,469 1,063,599 4,493,241 4,018,881 23,268,488 20,471,472 5,627,106 5,257,655 28,895,594 25,729,127 2,157,620 3,887,329 6,044,949 2,069,865 4,049,808 6,119,673 539,784 2,341,478 2,881,262 484,636 2,268,310 2,752,946 2,697,404 6,228,807 8,926,211 2,554,501 6,318,118 8,872,619 Net assets: Invested in capital assets, net of related debt 12,878,151 11,825,961 1,144,374 1,166,954 14,022,525 12,992,915 Restricted net assets 3,560,868 2,938,288 1,400,455 1,232,016 4,961,323 4,170,304 Unrestricted net assets 784,520 (412,450) 201,015 105,739 985,535 (306,711) Total Net Assets $ 17,223,539 $ 14,351,799 $ 2,745,844 $ 2,504,709 $ 19,969,383 $ 16,856,508 The largest portion of the State’s net assets (70%) represents capital assets, net of related debt of $14.0 billion. The State uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the State’s investment in its capital assets is reported net of accumulated depreciation and related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. The State’s net assets also include $5.0 billion (25%) of resources that are subject to external restrictions on how they may be used. The largest restrictions are by the State’s Constitution for basic education funded by the earnings of the Land Endowments Fund and by federal regulations for unemployment insurance premiums from employers for funding the Unemployment Compensation Fund. Another major restriction is unspent debt instrument proceeds primarily for the acquisition and construction of federal, state, and local highways. The remaining balance of the State’s net assets of $985.535 million (5%) represents unrestricted net assets. The State’s net assets increased $3.1 billion during the current fiscal year. This increase was primarily caused by governmental activities increases for sales taxes, income taxes, gains on the sale of trust land, and capital assets. Additionally, net assets were further increased by business-type activities’ increases for the Universities Fund, the Unemployment Compensation Fund, and the Industrial Commission’s Special Fund. - 26 - State of Arizona-Primary Government Changes in Net Assets for Fiscal Years Ended June 30, 2006 and 2005 (expressed in thousands) Governmental Activities 2006 2005 Revenues: Program revenues: Charges for services Operating grants and contributions Capital grants and contributions General revenues: Sales taxes Income taxes Tobacco taxes Property taxes Motor vehicle and fuel taxes Other taxes Unrestricted investment earnings Unrestricted grants and contributions Miscellaneous revenue Gain on sale of trust land Total Revenues $ Expenses: General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Intergovernmental revenue sharing Interest on long-term debt Universities Unemployment compensation Industrial Commission special fund Lottery Other business-type activities Total Expenses Excess (deficiency) before contributions, special items and transfers Contributions to permanent endowments Special item - intergovernmental transfer of Sundome Center for the Performing Arts Transfers Change in Net Assets Net Assets - July 1 Net Assets - June 30 $ 721,759 $ Business-type Activities 2006 2005 617,659 $ 1,906,465 $ Primary Government Total 2006 2005 1,701,249 $ 2,628,224 $ 2,318,908 7,941,223 7,544,370 852,788 834,421 8,794,011 8,378,791 388,646 497,140 30,056 19,774 418,702 516,914 6,322,311 4,548,843 248,122 43,035 1,857,293 575,946 5,421,949 3,562,916 237,430 46,148 1,758,950 493,501 54,550 - 57,584 - 6,376,861 4,548,843 248,122 43,035 1,857,293 575,946 5,479,533 3,562,916 237,430 46,148 1,758,950 493,501 172,311 106,362 49,050 40,311 221,361 146,673 12,293 235,610 567,364 23,634,756 11,624 387,269 288,483 20,973,801 58,816 2,951,725 5 26,017 2,679,361 12,293 294,426 567,364 26,586,481 11,629 413,286 288,483 23,653,162 781,542 9,057,733 159,766 5,304,555 1,279,129 386,777 187,947 646,452 8,494,206 149,238 4,853,458 1,171,340 589,966 184,538 - - 781,542 9,057,733 159,766 5,304,555 1,279,129 386,777 187,947 646,452 8,494,206 149,238 4,853,458 1,171,340 589,966 184,538 2,658,636 172,439 - 2,335,828 182,852 - 2,759,142 226,171 2,540,193 292,127 2,658,636 172,439 2,759,142 226,171 2,335,828 182,852 2,540,193 292,127 19,988,524 18,607,878 (18,300) 377,104 136,894 3,481,011 106,295 317,226 120,629 3,376,470 (18,300) 377,104 136,894 23,469,535 106,295 317,226 120,629 21,984,348 3,646,232 2,365,923 (529,286) (697,109) 3,116,946 1,668,814 - - 3,803 2,955 3,803 2,955 (7,874) 774,492 241,135 2,504,709 2,745,844 $ 707,597 13,443 2,491,266 2,504,709 $ (774,492) 2,871,740 14,351,799 17,223,539 $ (707,597) 1,658,326 12,693,473 14,351,799 $ - 27 - (7,874) 3,112,875 16,856,508 19,969,383 $ 1,671,769 15,184,739 16,856,508 Change in Net Assets Governmental Activities – Net assets increased by $2.9 billion, or 20%. This increase was primarily attributed to the increases in earned general tax revenues. Reported sales tax and income tax revenue increased by $900.362 million, or 17%, and $985.927 million, or 28%, as compared to fiscal year 2005, respectively. Several key elements have led to this increase. The State ranked fourth, nationally, in terms of the number of jobs added during fiscal year 2006, as reported by Arizona’s Department of Economic Security, Research Administration. Furthermore, annual estimates of the U.S. Census Bureau show that Arizona led the nation in population growth, with a 3.5% increase, during fiscal year 2006. Additionally, during fiscal year 2006, personal income growth in Arizona, as reported by the U.S. Bureau of Economic Analysis, increased 7.8%, ranking Arizona sixth among all states in percentage change. Additionally, the State’s improved efforts in tax enforcement resulted in the collection of $530.00 million for fiscal year 2006 (an increase of $74.436 million from the prior fiscal year). Another significant contributor to the net asset increase was record auction sales of 3,426 acres in State trust land for gross sales of $544.330 million. In many of these auctions there was intense, competitive bidding which raised the total sales price by approximately 10.5% above the appraised value. Furthermore, net assets were increased by the capitalization of $302.375 million of capital assets that were previously recorded as transportation expenses. A comparison of the net cost (income) of services by function for the State’s governmental activities is shown below for fiscal years 2006 and 2005. Net cost (income) is the total cost less revenues generated by the activities and shows the financial burden placed upon the State’s taxpayers by each of these functions. Governmental Activities (expressed in thousands) Total Cost of Services 2006 2005 Functions/Programs: General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Intergovernmental revenue sharing Interest on long-term debt Total Governmental Activities $ 781,542 9,057,733 159,766 5,304,555 1,279,129 386,777 187,947 2,658,636 172,439 $ 19,988,524 - 28 - $ 646,452 8,494,206 149,238 4,853,458 1,171,340 589,966 184,538 2,335,828 182,852 $18,607,878 Net Cost (Income) of Services 2006 2005 $ 525,480 2,454,326 (678) 4,247,978 985,492 (200,657) 93,880 2,658,636 172,439 $ 10,936,896 $ 367,749 2,190,654 1,262 3,881,306 924,270 (43,964) 108,752 2,335,828 182,852 $ 9,948,709 Expenses and Program Revenues Governmental Activities for Fiscal Year 2006 (in millions of dollars) Expenses D eb t g ng -te rm Lo to n In te re s In te rg o vt . R ev en ue Sh ar in ce s n tio al R es ou r N at ur Tr an sp or ta Sa fe ty & ec tio n Ed uc at io n Program Revenues Pr ot G en er al G ov er nm en H ea t lth & In W sp el ec fa tio re n & R eg ul at io n $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Business-type Activities – The net assets increased by $241.135 million, or 10%. This increase was primarily caused by the net increase of the Unemployment Compensation Fund of $129.536 million; a net increase in the Universities Fund of $48.523 million; and a decrease in the Industrial Commission’s Special Fund deficit of $83.116 million. The increase in net assets from the Unemployment Compensation Fund was primarily caused by an increase in employer assessments (wages subject to unemployment tax rose 11% during the 12 months ending December 31, 2005) and a decline in the cost of sales and benefits (the amount of unemployment benefits paid decreased 23% during fiscal year 2006). The increase in net assets for the Universities Fund was primarily attributed to increases in non-operating revenues, including gains on sale of land, increased State appropriations, investment income, and gifts and donations. The Industrial Commission’s Special Fund deficit decreased primarily due to a decrease in insolvent carrier liabilities. Insolvent carrier liability decreased during fiscal year 2006, because there was an insignificant number of new workers’ compensation cases being assigned to the State Compensation Fund under ARS §23-966. In addition, during fiscal year 2006, $19.000 million was transferred from the Industrial Commission’s Administrative Fund to the Special Fund. A comparison of the net cost (income) of services by function for the State’s business-type activities is shown below for fiscal years 2006 and 2005. Net cost (income) is the total cost less revenues generated by the activities and shows the financial burden placed upon the State’s taxpayers by each of these functions. Business-type Activities (expressed in thousands) Total Cost of Services 2006 2005 Functions/Programs: Universities Unemployment Compensation Industrial Commission Special Fund Lottery Other Total Business-type Activities $ 2,759,142 226,171 (18,300) 377,104 136,894 $ 3,481,011 - 29 - $ $ 2,540,193 292,127 106,295 317,226 120,629 3,376,470 Net Cost (Income) of Services 2006 2005 $ $ 957,929 (132,076) (52,394) (91,593) 9,836 691,702 $ $ 871,465 (25,969) 49,248 (80,335) 6,617 821,026 FINANCIAL ANALYSIS OF THE STATE’S FUNDS The State uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds – The general government functions are contained in the general, special revenue, debt service, capital projects and permanent funds. The focus of the State’s governmental funds is to provide information on nearterm inflows, outflows, and balances of spendable resources. Such information is useful in assessing the State’s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government’s net resources available for spending at the end of the fiscal year. General Fund The General Fund is the chief operating fund of the State. At June 30, 2006, unreserved fund balance of the General Fund was $1.4 billion, while total fund balance closed the year at $2.3 billion. As a measure of the General Fund’s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures and other financing uses. Unreserved fund balance represents 8% of total expenditures and other financing uses, while total fund balance represents 13% of the same amount. The fund balance of the State’s General Fund increased by $955.736 million during the fiscal year. The primary source of the increase in fund balance is from the increase of sales tax and income tax revenues. Sales tax revenues increased $881.221 million from fiscal year 2005, an increase of 19%. Sales taxes paid by retail stores and construction contractors increased approximately $387.765 million and $253.975 million, respectively, when compared to fiscal year 2005 sales tax receipts. Income tax revenues increased $1.0 billion, an increase of 29%. Income taxes paid by individuals increased by approximately $812.594 million, when compared to fiscal year 2005 individual income tax receipts. In addition, income taxes paid by corporations increased approximately $194.338 million during the same period. Health and welfare expenditures and intergovernmental revenue increased by $568.922 million, or 7%, and $399.100 million, or 6%, as compared to fiscal year 2005, respectively. Overall program enrollment in the State’s various healthcare programs declined .2%. However, the cost of healthcare programs, including the Social Security Act Titles XIX (Medicaid) and XXI (State Children’s Health Insurance Program), were major contributing factors to an increase in health and welfare expenditures during fiscal year 2006. Utilization and inflationary trends for health care costs are incorporated into a rate development process for the managed care organization capitation rates. The capitation rates were increased by a weighted average of 8% for the contract period of October 2005 to September 2006, primarily due to pharmacy, physician, and inpatient costs. The State received additional intergovernmental revenue (including federal grants and county funding) to cover a major portion of these increased costs. Education expenditures increased $379.944 million, or 9%, compared to fiscal year 2005. The increase can be primarily attributed to an increase of approximately $216.000 million in State assistance for kindergarten through twelfth grade (K-12) operating expenditures largely to support an increase of 40,543 student enrollments and a 3.2% inflation adjustment. In addition, expenditures for full day kindergarten increased approximately $22.000 million and programs supported by federal grant aid increased by approximately $57.000 million during fiscal year 2006. Transportation and Aviation Planning, Highway Maintenance and Safety Fund The Transportation and Aviation Planning, Highway Maintenance and Safety Fund is responsible for the repair and maintenance of existing roads, paying the debt service for roads that are built from the issuance of revenue bonds, and providing technical assistance with road construction provided by contractors hired by the Arizona Department of Transportation. Total fund balance increased $52.124 million during fiscal year 2006. Fund balance increased primarily due to a $98.361 million increase in motor vehicle and fuel tax revenues and a $39.365 million increase in licenses, fees, and permits due to increased population, which tends to follow job growth. Also, distributions to other State agencies were $118.000 million less than fiscal year’s 2005 distributions due to 2004 Senate Bill 1314, which required an additional $118.000 million to be transferred from vehicle license tax revenues to the State’s General Fund in fiscal year 2005. Fund balance increases were offset, in part, due to a $103.952 million increase in distributions to Arizona counties and cities, as a result of increased motor vehicle and fuel tax collections, and a $91.407 million decrease in intergovernmental revenues. - 30 - Land Endowments Fund The fund was established when the federal government granted Arizona statehood. Both the State’s Constitution and the federal government require that the land grants given to the State be maintained indefinitely, and the earnings from the land grants should be used for public education, primarily K-12. The Land Endowments Fund total fund balance increased $326.494 million during fiscal year 2006. Permanent fund endowment investments increased $311.657 million, at fiscal year end, due to record receipts from State Trust land sales and a net increase in the fair value of investments of $71.006 million. Proprietary funds The business-type activities discussion for the fund level financial statements of the State’s enterprise funds provide the same type of information found in the government-wide financial statements analysis on page 29. GENERAL FUND BUDGETARY HIGHLIGHTS During the fiscal year, the original budget was amended by various supplemental appropriations and appropriation revisions. Budgetary Comparison Schedules for the major governmental funds are in the Required Supplementary Information section beginning on page 129. Differences between the original budget and the final amended budget resulted in a $657.075 million increase in appropriations for the General Fund, before adjustments. The following comments summarize current year budgetary results: • Some of the primary reasons for the General Fund appropriations $657.075 million increase were 1) $192.021 million of prior fiscal year obligations that were paid in the current fiscal year per ARS §35-191; 2) $191.294 million for the Department of Education’s deferral of Basic State Aid and Additional State Aid payments to school districts; 3) $16.163 million supplemental appropriation for the Arizona Health Care Cost Containment System’s Disproportionate Share Hospital program; 4) $38.050 million to the Department of Education for full-day kindergarten funding; 5) $16.564 million to the Department of Education, primarily for increases to Basic State Aid Entitlement and achievement testing; 6) $20.000 million for the Parks Board Growing Smarter transfer to the Land Conservation Fund per ARS §41-511.23; 7) $39.854 million for a 2.5% performance pay adjustment and increase of $1,650 for each full-time equivalent position beginning March 11, 2006. The original General Fund appropriation total was $13.2 billion, before adjustments. The final General Fund appropriation total was $13.9 billion, before adjustments. • The difference between the final budget and actual expenditures was $543.405 million, after adjustments. Of this amount, $69.861 million will continue as legislative multiple fiscal year spending authority for fiscal year 2007 and beyond, depending upon the budgetary guidelines of the Legislature. The remaining $473.544 million represents the unused portion of the State’s legislatively authorized annual operating budget. Additional budgetary information can be found on pages 149-150 of this report. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital assets: The State’s investment in capital assets for its governmental and business-type activities as of June 30, 2006 totaled $17.9 billion, net of accumulated depreciation. The total primary government increase in capital assets for the current period was 7%, with a 7% increase in capital assets used for governmental activities and an 8% increase for businesstype activities. Depreciation charges of the governmental and business-type activities for the fiscal year totaled $279.010 million. Major capital asset activity during the current fiscal year included the following: • The Universities’ additions to capital assets totaled approximately $501.933 million and included increased investments in instruction and research facilities. - 31 - • The Department of Transportation started or completed roads and bridges totaling $1.4 billion during the fiscal year. For the government-wide financial statement presentation, all depreciable assets were depreciated from the acquisition date to the end of the current fiscal year. Capital asset purchases of the governmental funds are reported in the financial statements as expenditures. Capital assets for the governmental and business-type activities as of June 30, 2006 are presented below (expressed in thousands): Land Buildings Improvements other than buildings Equipment Collections (non-depreciable) Infrastructure Construction in progress Less accumulated depreciation Total Governmental Activities 2006 2005 $ 2,227,782 $ 1,980,978 1,527,996 1,515,343 Business-type Activities 2006 2005 $ 143,587 $ 143,195 3,101,431 2,709,694 Total 2006 2005 $ 2,371,369 $ 2,124,173 4,629,427 4,225,037 133,624 696,119 142,563 666,417 3,601 1,166,876 3,600 1,108,706 137,225 1,862,995 146,163 1,775,123 9,386,364 2,036,194 8,870,232 1,785,351 34,159 305,975 163,030 33,130 289,215 284,181 34,159 9,692,339 2,199,224 33,130 9,159,447 2,069,532 (1,018,604) (948,054) (2,033,709) (1,893,919) (3,052,313) (2,841,973) $ 14,989,475 $ 14,012,830 $ 2,884,950 $ 2,677,802 $ 17,874,425 $ 16,690,632 See Note 4, capital assets, beginning on page 90 for additional capital asset data. As provided by GASB Statement 34, the State has elected to record its infrastructure assets, that the Department of Transportation is responsible for maintaining, using the modified approach. Assets accounted for under the modified approach include 6,922 center lane miles (18,668 travel lane miles) and 4,676 bridges. The State manages its roads using the Present Serviceability Rating (PSR), which measures the condition of the pavement and its ability to serve the traveling public. The PSR uses a five-point scale (5 excellent, 0 impassable) to characterize the condition of the roadway. The State’s serviceability rating goal is 3.23 for the overall system. The most recent assessment indicated that an overall rating of 3.52 was achieved for fiscal year 2006. The State manages its bridges using the Arizona Bridge Information and Storage System (ABISS). The State determines the condition rating based on standards developed by the Federal Highway Administration and additional internal criteria. It is the policy of the State to maintain a Condition Rating Index (CRI) of 92.5% or better. In fiscal year 2006, a CRI of 93.8% was obtained. - 32 - In addition to many smaller projects, each of the following major highway construction projects in excess of $20.000 million were started during fiscal year 2006 (expressed in thousands): Project Description Widen roadway on US 60 from Gilbert Road to Power Road within the City of Mesa, in Maricopa County. Construction of State Route Loop 202 from Power Road to University Drive within the City of Mesa, in Maricopa County. Construction of State Route Loop 202 from University Drive to Southern Avenue within the City of Mesa, in Maricopa County. Reconstruct roadway to a four lane divided highway on US 93, in Yavapai County. Reconstruction of the intersection of US 89 and I-40B within the City of Flagstaff, in Coconino County. Reconstruction at the intersection of I-40 and North Park Drive within the City of Winslow, in Navajo County. Contract Start Date Contract Amount Current Year Expenditures 09/23/05 $ 73,705 $ 37,153 12/19/05 195,340 34,091 10/24/05 67,415 24,065 09/23/05 25,472 10,302 11/22/05 30,480 6,398 10/25/05 20,629 5,578 In addition to many smaller projects, the following major highway construction projects had expenditures in excess of $15.000 million in fiscal year 2006 (expressed in thousands): Project Description Construction at the interchange of State Route Loop 202 and US 60, in Maricopa County. Construction of State Route Loop 202 from Power Road to University Drive, in Maricopa County. Construction of State Route Loop 202 from Frye Road to Power Road, in Maricopa County. Widen roadway on US 60 from Gilbert Road to Power Road, in Maricopa County. Construction of State Route Loop 202 from Gilbert Road to Frye Road, in Maricopa County. Construction of State Route Loop 202 from University Drive to Southern Avenue, in Maricopa County. Construction on US 93 north of Wickenburg, in Mohave County. Construction on US 60 at 59th Avenue and Glendale Avenue, in Maricopa County. Construction of State Route Loop 202 from Power Road to Elliot Road, in Maricopa County. Project Expenditures $ 50,944 43,694 43,013 40,130 36,549 26,088 22,912 21,306 20,162 Capital assets financed by debt instruments do not generate funds to repay the debt instruments. More detailed information regarding capital assets are on pages 90 and 91. Long-term debt: The State issues no general obligation debt instruments. The Arizona Constitution, under Article 9, Section 5, provides that the State may contract debts not to exceed $350 thousand. This provision has been interpreted to restrict the State from pledging its credit as a sole payment for debts incurred for the operation of the State government. As a result, the State pledges either dedicated revenue streams or the constructed building or equipment acquired as security for the repayment of long-term debt instruments. Major long-term debt activity during the current fiscal year included the following: • The Department of Transportation issued revenue bonds for $265.650 million to (i) finance portions of the Transportation Board’s Five Year Transportation Facilities Construction Program, (ii) pay the costs of issuing the bonds, (iii) pay interest on any bonds issued for highway purposes, and (iv) advance refund portions of previously issued revenue bonds with a total outstanding principal balance of $148.750 million. - 33 - • The School Facilities Board issued $448.760 million of revenue bonds to advance refund portions of previously issued revenue bonds with a total outstanding principal balance of $446.680 million. • The Universities issued revenue bonds for $68.470 million to fund the acquisition, construction or renovation of capital facilities and infrastructure. Furthermore, proceeds were used to pay principal and/or interest payments on the University of Arizona’s previously issued revenue bonds. • The Universities issued $175.027 million of certificates of participation to (i) fund building and infrastructure projects, (ii) current-refund previously issued certificates of participation with a total outstanding principal of $62.100 million, (iii) refund previously issued certificates of participation with a total outstanding principal of $9.845 million in advance of maturity, and (iv) pay principal and/or interest payments on some of the University of Arizona’s previously issued certificates of participation. State of Arizona-Primary Government Outstanding Major Long-Term Debt as of June 30, 2006 (expressed in thousands) Revenue bonds Grant anticipation notes Certificates of participation Total Governmental Activities 2006 2005 $ 2,106,700 $ 2,170,845 325,430 363,970 1,020,810 1,054,677 $ 3,452,940 $ 3,589,492 Business-type Activities Total 2006 2005 2006 $ 802,600 $ 768,000 $ 2,909,300 $ 325,430 946,766 860,759 1,967,576 $ 1,749,366 $ 1,628,759 $ 5,202,306 $ 2005 2,938,845 363,970 1,915,436 5,218,251 More detailed information regarding long-term debt begins on page 95. ECONOMIC CONDITION AND OUTLOOK Arizona’s economy outpaced the nation in fiscal year 2006, with solid growth in labor markets, population, and personal income. As previously mentioned, the State ranked fourth, nationally, in terms of the number of jobs added during fiscal year 2006, as reported by Arizona’s Department of Economic Security, Research Administration. Furthermore, annual estimates of the U.S. Census Bureau show that Arizona led the nation in population growth, with a 3.5% increase, during fiscal year 2006. Additionally, during fiscal year 2006, personal income growth in Arizona, as reported by the U.S. Bureau of Economic Analysis, increased 7.8%, ranking Arizona sixth among all states in percentage change. Arizona’s economy is projected to see a moderation of growth in 2007. Job growth was expected to slow in the second half of 2006, with further slowing in 2007, as the housing market and growth in consumer spending slows down. Nevertheless, Arizona’s economy was projected to grow at a faster rate than the nation in 2006 and 2007, according to the forecast update of the Arizona Department of Economic Security, Research Administration. CONTACTING THE STATE COMPTROLLER’S OFFICE This financial report is designed to provide citizens, taxpayers, customers, investors, and creditors with a general overview of the State’s finances and to demonstrate the State’s accountability for the money it receives. If you have any questions about this report or need additional financial information, contact the Department of Administration, General Accounting Office, Financial Reporting Section at (602) 542-5405. You may also access and print this report at http://www.gao.state.az.us/financials/. The State’s component units issue their own separately issued audited financial statements. These statements may be obtained by directly contacting the component unit. Contact information regarding the component units begins on page 68. - 34 - BASIC FINANCIAL STATEMENTS BASIC FINANCIAL STATEMENTS (This page intentionally left blank) STATE OF ARIZONA STATEMENT OF NET ASSETS JUNE 30, 2006 (Expressed in Thousands) PRIMARY GOVERNMENT TOTAL PRIMARY GOVERNMENT GOVERNMENTAL BUSINESS-TYPE ACTIVITIES ACTIVITIES ASSETS Current Assets: Cash Cash with U.S. Treasury Cash and pooled investments with State Treasurer Restricted cash and pooled investments with State Treasurer Cash held by trustee Collateral investment pool Short-term investments Restricted investments held by trustee Receivables, net of allowances: Taxes Interest Loans and notes Other Internal balances Due from U.S. Government Due from local governments Due from others Inventories, at cost Other current assets Total Current Assets $ $ - $ 158,994 902,130 244,890 $ 88,486 77,666 146,674 - 521,006 62,096 28,406 130,347 91,684 368,014 1,461 1 18,646 22,587 4,723,241 Noncurrent Assets: Restricted assets: Cash Cash and pooled investments with State Treasurer Cash held by trustee Investments Investments held by trustee Receivables, net of allowances: Loans and notes Other Securities held in escheat Investments Endowment investments Other noncurrent assets Capital assets: Infrastructure, land, and other non-depreciable Depreciable buildings, property and equipment, net of accumulated depreciation Total Noncurrent Assets Total Assets 7,611 3,471,382 71,945 3,889 11,625 91,020 (91,684) 64,217 120 29,123 5,592 1,804,687 166,605 902,130 3,716,272 COMPONENT UNITS $ 14,783 141,371 88,486 77,666 146,674 - 126,815 85,848 2,818 592,951 65,985 40,031 221,367 432,231 1,581 1 47,769 28,179 6,527,928 7,820 70,203 10,102 7,513 467,273 2,271 740,978 16,089 2,882 - 20,163 872 149,931 32,696 52,214 22,434 741,850 166,020 35,578 52,214 161,062 707,962 52,742 2,032,848 - 39,531 6,563 346,969 270,542 17,988 747,493 6,563 52,742 346,969 2,303,390 17,988 574,935 80,896 49,820 13,643,731 340,776 13,984,507 36,072 1,345,744 18,545,247 2,544,174 3,822,419 3,889,918 22,367,666 86,031 988,816 23,268,488 $ The Notes to the Financial Statements are an integral part of this statement. 5,627,106 $ 28,895,594 $ 1,456,089 (Continued) - 38 - STATE OF ARIZONA STATEMENT OF NET ASSETS JUNE 30, 2006 (Expressed in Thousands) PRIMARY GOVERNMENT TOTAL PRIMARY GOVERNMENT GOVERNMENTAL BUSINESS-TYPE ACTIVITIES ACTIVITIES LIABILITIES Current Liabilities: Accounts payable and other current liabilities Accrued liabilities Obligations under securities loan agreements Tax refunds payable Due to U.S. Government Due to local governments Due to others Unearned deferred revenue Current portion of accrued insurance losses Current portion of long-term debt Current portion of other long-term liabilities Total Current Liabilities $ 443,908 534,117 417 7,990 460,779 102,811 104,570 53,366 230,797 218,865 2,157,620 $ 116,781 69,378 77,666 9 7,698 71,410 93,494 27,304 65,422 10,622 539,784 $ 560,689 603,495 77,666 417 7,999 468,477 174,221 198,064 80,670 296,219 229,487 2,697,404 COMPONENT UNITS $ 37,488 21,617 5,013 31,770 4,878 100,766 Noncurrent Liabilities: Unearned deferred revenue Contracts payable Accrued insurance losses Funds held for others Long-term debt Other long-term liabilities Total Noncurrent Liabilities 6,006 313,834 3,560,892 6,597 3,887,329 34,770 2,125 382,939 45,095 1,824,336 52,213 2,341,478 40,776 2,125 696,773 45,095 5,385,228 58,810 6,228,807 2,355 9,733 867,820 9,139 889,047 Total Liabilities 6,044,949 2,881,262 8,926,211 989,813 12,878,151 1,144,374 14,022,525 10,240 63,219 561,795 44,846 6,106 949,919 9,198 63,219 567,901 949,919 54,044 19,489 19,244 2,785,419 86,345 784,520 189,746 178,001 67,423 62 201,015 208,990 2,963,420 67,423 86,407 985,535 261,156 175,391 NET ASSETS Invested in capital assets, net of related debt Restricted for: Federal grants Capital projects Unemployment Compensation Debt service Permanent funds and University funds: Expendable Nonexpendable Loans and other financial assistance: expendable Other purposes Unrestricted Total Net Assets $ 17,223,539 $ The Notes to the Financial Statements are an integral part of this statement. - 39 - 2,745,844 $ 19,969,383 $ 466,276 STATE OF ARIZONA STATEMENT OF FINANCIAL POSITION UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) ASSETS Cash and cash equivalent investments $ 80,427 Receivables: Pledges receivable Other receivables Total receivables 128,740 11,194 139,934 Investments: Investments in securities Investments held in trust for Universities Other investments Total investments 812,999 69,156 64,847 947,002 Net direct financing leases Property and equipment, net of accumulated depreciation Other assets 72,709 269,644 56,135 Total Assets 1,565,851 LIABILITIES Liability under Universities' endowment trust agreements Bonds payable Unearned revenue Other liabilities 89,821 463,967 20,770 42,705 Total Liabilities 617,263 NET ASSETS Permanently restricted Temporarily restricted Unrestricted Total Net Assets 596,752 279,168 72,668 $ 948,588 The Notes to the Financial Statements are an integral part of this statement. - 40 - (This page intentionally left blank) STATE OF ARIZONA STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) PROGRAM REVENUES CHARGES FOR SERVICES EXPENSES FUNCTIONS/PROGRAMS PRIMARY GOVERNMENT: Governmental Activities: General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Intergovernmental revenue sharing Interest on long-term debt Total Governmental Activities $ Business-type Activities: Universities Unemployment Compensation Industrial Commission Special Fund Lottery Other Total Business-type Activities Total Primary Government COMPONENT UNITS: Water Infrastructure Finance Authority University Medical Center Arizona Power Authority Total Component Units 781,542 9,057,733 159,766 5,304,555 1,279,129 386,777 187,947 2,658,636 172,439 19,988,524 $ 2,759,142 226,171 (18,300) 377,104 136,894 3,481,011 161,664 79,806 146,191 33,390 110,814 134,068 55,826 721,759 OPERATING GRANTS AND CONTRIBUTIONS $ 962,967 314,237 34,094 468,697 126,470 1,906,465 94,398 6,523,453 14,251 1,023,187 182,823 65,752 37,359 7,941,223 CAPITAL GRANTS AND CONTRIBUTIONS $ 808,190 44,010 588 852,788 148 2 387,614 882 388,646 30,056 30,056 $ 23,469,535 $ 2,628,224 $ 8,794,011 $ 418,702 $ 19,249 392,602 26,612 $ 18,670 406,697 26,329 $ 20,952 - $ - $ 438,463 $ 451,696 $ 20,952 $ - General Revenues: Taxes: Sales Income Tobacco Property Motor vehicle and fuel Other Unrestricted investment earnings Unrestricted grants and contributions Gain on sale of trust land Miscellaneous Contributions to permanent endowments Special Item - intergovernmental transfer of Sundome Center for the Performing Arts Transfers Total General Revenues, Contributions, Gains, Special Items, and Transfers Change in Net Assets Net Assets - Beginning Net Assets - Ending The Notes to the Financial Statements are an integral part of this statement. - 42 - NET (EXPENSE) REVENUE AND CHANGES IN NET ASSETS PRIMARY GOVERNMENT TOTAL GOVERNMENTAL BUSINESS-TYPE PRIMARY COMPONENT ACTIVITIES ACTIVITIES GOVERNMENT UNITS $ (525,480) (2,454,326) 678 (4,247,978) (985,492) 200,657 (93,880) (2,658,636) (172,439) (10,936,896) $ $ (10,936,896) (525,480) (2,454,326) 678 (4,247,978) (985,492) 200,657 (93,880) (2,658,636) (172,439) (10,936,896) (957,929) 132,076 52,394 91,593 (9,836) (691,702) (957,929) 132,076 52,394 91,593 (9,836) (691,702) (691,702) (11,628,598) $ 20,373 14,095 (283) 34,185 6,322,311 4,548,843 248,122 43,035 1,857,293 575,946 172,311 12,293 567,364 235,610 - 54,550 49,050 58,816 3,803 (774,492) 13,808,636 2,871,740 14,351,799 $ 17,223,539 (7,874) 774,492 932,837 241,135 2,504,709 $ 2,745,844 $ 6,376,861 4,548,843 248,122 43,035 1,857,293 575,946 221,361 12,293 567,364 294,426 3,803 19,817 95 - (7,874) 14,741,473 3,112,875 16,856,508 19,912 54,097 412,179 19,969,383 $ 466,276 - 43 - STATE OF ARIZONA STATEMENT OF ACTIVITIES UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) UNRESTRICTED REVENUES Contributions Rental revenue Sales and services Net investment income Net assets released from restrictions Capital lease revenue Other revenues $ Total Revenues EXPENSES Program services: Payments to Universities Leasing related expenses Payments on behalf of Universities Other program services Personal services, operations, and administrative expenses Fundraising expenses Interest Other expenses Total Expenses Increase in Net Assets Net Assets - Beginning, as restated Transfers Net Assets - Ending $ 15,165 22,361 26,822 16,216 100,935 92 19,430 TEMPORARILY PERMANENTLY RESTRICTED RESTRICTED $ 98,851 $ 120 16,200 (108,910) 10,311 TOTAL 83,815 34,899 7,975 153 $ 197,831 22,361 26,942 67,315 92 29,894 201,021 16,572 126,842 344,435 72,724 6,265 22,361 16,210 - - 72,724 6,265 22,361 16,210 39,471 7,465 8,955 9,605 - - 39,471 7,465 8,955 9,605 183,056 - - 183,056 17,965 54,121 582 16,572 264,487 (1,891) 126,842 468,601 1,309 161,379 787,209 - 72,668 $ 279,168 The Notes to the Financial Statements are an integral part of this statement. - 44 - $ 596,752 $ 948,588 STATE OF ARIZONA BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2006 (Expressed in Thousands) TRANSPORTATION & GENERAL FUND ASSETS Cash Cash and pooled investments with State Treasurer Receivables, net of allowances: Taxes Interest Loans and notes Other Due from U.S. Government Due from local governments Due from others Due from other Funds Inventories, at cost Restricted assets: Cash Cash and pooled investments with State Treasurer Cash held by trustee Investments Securities held in escheat Endowment investments Other Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and other current liabilities Accrued liabilities Tax refunds payable Due to U.S. Government Due to local governments Due to others Due to other Funds Unavailable deferred revenue Unearned deferred revenue Total Liabilities $ OTHER GOVERNMENTAL FUNDS $ $ - $ 28 5,814 TOTAL $ 7,611 2,298,635 144,645 61,305 852,371 3,356,956 431,202 27,008 84,974 339,631 1,461 263,600 10,299 70,212 1,681 9,464 8,493 26,759 20,000 5,005 30,549 726,904 4,628 392 - 19,592 2,846 25,353 1 59,665 369 521,006 62,084 736,368 123,448 366,390 1,461 1 343,657 15,673 2,271 - - - 2,271 122,274 12,330 2,882 52,742 216 595,049 8,128 2,032,848 - 23,655 3,759 1 740,978 16,089 2,882 52,742 2,032,848 8,345 $ 3,651,294 $ 889,436 $ 2,856,654 $ 993,426 $ 8,390,810 $ 258,799 208,559 417 7,990 282,118 102,760 44,784 401,733 77,996 1,385,156 $ 88,786 11,784 127,684 200,990 9,464 438,708 $ 7,072 191 13,107 760,574 31,621 812,565 $ 33,102 77,983 50,977 51 28,941 1,389 959 193,402 $ 387,759 298,517 417 7,990 460,779 102,811 287,822 1,173,160 110,576 2,829,831 Fund Balances: Reserved for: Budget stabilization fund Highway construction Other construction School facilities improvements Permanent funds Continuing appropriations Debt service Other fund balance reservations Unreserved Unreserved reported in: Non-major special revenue funds Total Fund Balances Total Liabilities and Fund Balances 1,769 AVIATION PLANNING, HIGHWAY LAND MAINTENANCE & ENDOWMENTS SAFETY FUND FUND $ 651,020 110,149 69,861 302 1,434,806 405,571 79,832 5,005 (39,680) 2,043,591 498 - 20,444 6,256 38,341 37,792 140 - 651,020 426,015 6,256 110,149 2,043,591 188,532 37,792 5,447 1,395,126 2,266,138 450,728 2,044,089 697,051 800,024 697,051 5,560,979 3,651,294 $ 889,436 $ 2,856,654 The Notes to the Financial Statements are an integral part of this statement. - 45 - $ 993,426 $ 8,390,810 STATE OF ARIZONA RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2006 (Expressed in Thousands) Total fund balances - governmental funds $ 5,560,979 Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 14,919,764 Receivables are not available to pay for current period expenditures and, therefore, are deferred in the funds. 1,173,160 Internal service funds are used by management to charge the costs of certain activities to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the Statement of Net Assets. (245,684) The allocation of internal service fund net loss results in an amount due from business-type activities, which is not reported in the funds. 34,500 Deferred issue costs are reported as current expenditures in the funds. However, deferred issue costs are amortized over the life of the bonds and are included in the governmental activities in the Statement of Net Assets. 7,066 Long-term debt is not due and payable from current financial resources and, therefore, is not reported in the funds. These amounts consist of: Revenue bonds Grant anticipation notes Certificates of participation Capital leases Installment purchase contracts Premium on debt Deferred amount on refundings (2,106,700) (325,430) (1,020,810) (118,678) (6,815) (219,958) 17,832 (3,780,559) Accrued liabilities for AHCCCS programmatic costs and reimbursements are not due and payable from current financial resources and, therefore, are not reported in the funds. (237,071) Other long-term liabilities are not due and payable from current financial resources and, therefore, are not reported in the funds. Those liabilities consist of: Compensated absences Claims and judgments (122,000) (91,116) (213,116) Other long-term assets are not available to pay for current-period expenditures and, therefore, are not reported in the funds. Those assets consist of: Other long-term assets 4,500 Net assets of governmental activities $ The Notes to the Financial Statements are an integral part of this statement. - 46 - 17,223,539 STATE OF ARIZONA STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) GENERAL FUND REVENUES Taxes: Sales Income Tobacco Property Motor vehicle and fuel Other Intergovernmental Licenses, fees, and permits Earnings on investments Sales and charges for services Fines, forfeitures, and penalties Gaming Tobacco settlement Other Total Revenues $ EXPENDITURES Current: General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Intergovernmental revenue sharing Debt service: Principal Interest and other fiscal charges Capital outlay Total Expenditures Excess (Deficiency) of Revenues Over Expenditures OTHER FINANCING SOURCES (USES) Transfers in Transfers out Proceeds from sale of trust land Proceeds from sale of capital assets Capital lease and installment purchase contracts Refunding bonds issued Payment to refunded bond escrow agent Bonds issued Premium on bonds issued Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning Fund Balances - Ending $ TRANSPORTATION & AVIATION PLANNING, HIGHWAY LAND MAINTENANCE & ENDOWMENTS SAFETY FUND FUND OTHER GOVERNMENTAL FUNDS $ $ 5,427,713 4,535,454 64,078 29,117 587 467,428 7,532,085 106,244 116,618 89,593 18,087 6,008 86,231 97,532 18,576,775 316,491 13,686 1,856,682 453,502 121,179 17,717 1,214 9,607 2,790,078 $ 41 75,126 13,729 17,939 106,835 568,886 38 184,044 232 24 108,518 33,881 182,646 37,789 57,512 120,267 78,786 144,333 1,516,956 TOTAL $ 6,313,090 4,535,492 248,122 43,035 1,857,293 575,946 8,019,509 410,069 247,250 162,048 138,354 84,794 86,231 269,411 22,990,644 749,992 8,657,773 53,422 4,713,730 1,129,320 76 66,892 1,470,931 370,358 1,190,963 28 6,290 50,622 5,911 - 111,353 331,367 103,979 538,590 112,277 3,169 111,940 - 861,373 8,995,430 157,401 5,302,942 1,247,508 373,603 178,832 2,661,894 17,861 39,339 85,736 16,985,072 2,748 731,072 2,295,141 343 63,194 243,416 134,846 249,664 1,940,601 261,277 176,933 1,066,815 21,284,008 1,591,703 494,937 43,641 277,982 (917,492) 3,543 (635,967) 955,736 1,310,402 3,926 (457,857) 11,118 (442,813) 52,124 398,604 2,266,138 $ 450,728 The Notes to the Financial Statements are an integral part of this statement. - 47 - 131 (1,571) 284,293 282,853 326,494 1,717,595 $ 2,044,089 $ (423,645) 1,706,636 530,044 (208,834) 596,160 (646,689) 118,250 59,711 448,642 24,997 775,027 812,083 (1,585,754) 284,293 11,118 3,543 596,160 (646,689) 118,250 59,711 (347,285) 1,359,351 4,201,628 800,024 $ 5,560,979 STATE OF ARIZONA RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Net change in fund balances - total governmental funds $ 1,359,351 Amounts reported for governmental activities in the Statement of Activities are different because: Capital outlays are reported as expenditures in governmental funds. However, in the Statement of Activities, the cost of assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Capital outlay 1,066,815 Depreciation expense (95,527) 971,288 The net loss of internal service funds that is included with governmental activities in the Statement of Activities. (39,812) Some revenues reported in the Statement of Activities are not currently available at yearend and are not reported as revenue in the governmental funds. Operating grants 17,036 Sales taxes 9,221 Income taxes 13,351 Accrued interest on land sales contracts 26,179 Other revenue 3,508 69,295 Trust land sales are financed with long-term mortgages. In the Statement of Activities, the gain on sale of trust land is reported, whereas in the governmental funds, the proceeds from the collection of mortgage payments are reported. 283,071 Some expenses reported in the Statement of Activities do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. Kerr vs. Killian lawsuit (15,000) AHCCCS accrued programmatic costs (31,965) Other noncurrent expenses (423) (47,388) Certain expenditures that are reported in the funds in the current year, but were incurred in prior fiscal years, are not reported in the Statement of Activities. Ladewig vs. State of Arizona lawsuit 49,539 Accrued contract payable 48,079 Compensated absences 18,271 The Notes to the Financial Statements are an integral part of this statement. 115,889 (Continued) - 48 - STATE OF ARIZONA RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) The estimated liability for the Ladewig vs. State of Arizona lawsuit, which was accrued at the government-wide level in fiscal year 2005, has been revised, in the State's favor, in fiscal year 2006. This accrual was not financed from current financial resources in fiscal year 2005 and, therefore, was not reported in the fund statements in fiscal year 2005. 25,250 Bond proceeds provide current financial resources to the governmental funds; however, issuing debt increases long-term liabilities in the Statement of Net Assets. In the current period, proceeds were received from: New bonds issued (118,250) Refunding bonds issued (596,160) Premium on bonds issued (59,711) Deferred amount on debt refunding 21,398 (752,723) Repayment of long-term debt is reported as an expenditure in governmental funds, but the repayment reduces noncurrent liabilities in the Statement of Net Assets. In the current year, these amounts consist of: Debt service principal 261,277 Payment to refunded bond escrow agent 595,430 Debt premium/discount amortization 37,921 Amortization of deferred amount (3,566) 891,062 Some capital asset additions were financed through capital leases and installment purchase contracts. Such financing arrangements are reported as an other financing source in the governmental funds, however, these amounts are reported as liabilities in the Statement of Net Assets. (3,543) Change in net assets of governmental activities $ The Notes to the Financial Statements are an integral part of this statement. - 49 - 2,871,740 STATE OF ARIZONA STATEMENT OF NET ASSETS PROPRIETARY FUNDS JUNE 30, 2006 (Expressed in Thousands) UNIVERSITIES ASSETS Current Assets: Cash $ Cash with U.S. Treasury Cash and pooled investments with State Treasurer Restricted cash and pooled investments with State Treasurer Collateral investment pool Short-term investments Receivables, net of allowances: Taxes Interest Loans and notes Other Due from U.S. Government Due from local governments Due from other Funds Inventories, at cost Other current assets Total Current Assets Noncurrent Assets: Restricted assets: Cash Cash and pooled investments with State Treasurer Cash held by trustee Investments Investments held by trustee Receivables, net of allowances: Loans and notes Other Investments Endowment investments Other long-term assets Capital assets: Infrastructure, land, and other non-depreciable Depreciable buildings, property and equipment, net of accumulated depreciation Total Noncurrent Assets Total Assets 115,576 145,863 BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS INDUSTRIAL UNEMPLOYMENT COMMISSION COMPENSATION SPECIAL FUND LOTTERY $ 902,130 - $ 42,750 13,345 $ OTHER 56,589 $ 668 29,093 27,916 146,632 - 49,750 - - 88,486 42 1,251 4,139 71,901 64,146 19,172 4,960 601,556 67,287 7,882 977,299 4,658 2,175 1,489 114,167 3,489 2,897 62,975 463 7,486 6,259 71 120 131,310 7,054 632 271,684 20,163 - - - - 149,931 32,696 52,159 - 55 - 872 - 29,424 6,563 118,270 270,542 10,672 - 228,699 - 7,316 10,107 - 332,348 - 2,996 1,110 4,322 2,506,352 3,529,120 4,130,676 977,299 18,552 250,302 364,469 2,563 10,989 73,964 16,707 32,008 303,692 The Notes to the Financial Statements are an integral part of this statement. - 50 - TOTAL ENTERPRISE FUNDS $ 158,994 902,130 244,890 GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS $ 114,426 88,486 77,666 146,674 - 71,945 3,889 11,625 91,020 64,217 120 131,310 29,123 5,592 2,027,681 11 6,899 3,467 2,973 7,176 134,952 20,163 - 872 149,931 32,696 52,214 - 39,531 6,563 346,969 270,542 17,988 - 340,776 - 2,544,174 3,822,419 5,850,100 69,711 69,711 204,663 (Continued) - 51 - STATE OF ARIZONA STATEMENT OF NET ASSETS PROPRIETARY FUNDS JUNE 30, 2006 (Expressed in Thousands) UNIVERSITIES LIABILITIES Current Liabilities: Accounts payable and other current liabilities Accrued liabilities Obligations under securities loan agreements Due to U.S. Government Due to local governments Due to others Due to other Funds Unearned deferred revenue Current portion of accrued insurance losses Current portion of long-term debt Current portion of other long-term liabilities Total Current Liabilities Noncurrent Liabilities: Unearned deferred revenue Contracts payable Accrued insurance losses Funds held for others Long-term debt Other long-term liabilities Total Noncurrent Liabilities Total Liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Capital projects Unemployment compensation Debt service University funds: Expendable Nonexpendable Loans and other financial assistance: Expendable Other Unrestricted (deficit) Total Net Assets $ BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS INDUSTRIAL UNEMPLOYMENT COMMISSION COMPENSATION SPECIAL FUND LOTTERY OTHER 95,723 43,247 27,916 27,642 81,805 65,422 9,413 351,168 17,836 9 8,777 758 27,380 14,126 49,750 27,304 91,180 2,606 7,698 34,856 17,176 363 62,699 4,326 8,295 135 170,560 11,689 846 195,851 34,770 45,095 1,824,296 52,145 1,956,306 2,307,474 27,380 382,939 382,939 474,119 62,699 2,125 40 68 2,233 198,084 1,098,164 - 21,548 3,673 20,989 6,106 9,198 949,919 - - - - 189,746 178,001 - - - - 341,987 - 7,592 67,423 62 17,134 1,823,202 $ 949,919 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds. Net assets of business-type activities The Notes to the Financial Statements are an integral part of this statement. - 52 - (131,198) $ (109,650) $ 11,265 $ 105,608 TOTAL ENTERPRISE FUNDS GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS 116,781 69,378 77,666 9 7,698 71,410 188,494 93,494 27,304 65,422 10,622 728,278 56,149 1,404 2,118 53,366 2,579 7,891 123,507 34,770 2,125 382,939 45,095 1,824,336 52,213 2,341,478 3,069,756 313,834 8,551 4,455 326,840 450,347 1,144,374 58,581 6,106 949,919 9,198 - 189,746 178,001 - 67,423 62 235,515 $ 2,780,344 (304,265) $ (245,684) (34,500) $ 2,745,844 - 53 - STATE OF ARIZONA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) UNIVERSITIES OPERATING REVENUES Sales and charges for services: Pledged student tuition and fees, net of scholarship allowances of $175,898 Pledged auxiliary enterprises, net of scholarship allowances of $7,496 Pledged educational department Lottery Other Unemployment assessments Workers' compensation assessments Intergovernmental Nongovernmental grants and contracts Licenses, fees, and permits Earnings on investments Fines, forfeitures, and penalties Settlement income Other (revenues for Universities are pledged) Total Operating Revenues $ OPERATING EXPENSES Cost of sales and benefits Interest on notes payable Scholarships and fellowships Personal services Contractual services Depreciation and amortization Insurance Other Total Operating Expenses Operating Income (Loss) NON-OPERATING REVENUES (EXPENSES) Share of State sales tax revenues Gifts and donations Gain (loss) on sale of capital assets Investment income (revenues for Universities are pledged) Endowment earnings on investments Other non-operating revenue Distributions to local governments Interest expense Other non-operating expense Total Non-Operating Revenues (Expenses) Income (Loss) Before Contributions and Transfers Capital grants and contributions Contributions to permanent endowments Special Item - intergovernmental transfer of Sundome Center for the Performing Arts Transfers in Transfers out $ $ - $ - $ - 311,687 7,125 2,550 27 321,389 24,908 9,186 34,094 468,697 81 468,778 122,466 588 723 3,281 2,557 129,615 657,436 114,354 1,718,901 166,799 2,657,490 (981,068) 226,171 226,171 95,218 (24,433) 1,157 (23,276) 57,370 308,572 5,657 11,303 215 53 2,548 328,348 140,430 89,494 4,040 26,934 7,356 2,322 503 6,244 136,893 (7,278) 54,550 96,441 (27) - 35,074 21,619 29,247 (70,255) (14,347) 152,302 36,885 36,885 9,595 2,127 (3) (4,973) 6,746 796 (48,650) (106) (47,960) 4,381 597 (1) 5,063 (828,766) 132,103 64,116 92,470 (2,215) - - - (7,874) 851,304 - 1,823,202 - (2,567) 48,523 1,774,679 $ - OTHER 277,332 60,712 595,594 94,536 23,325 1,676,422 30,056 3,803 Change in Net Assets Total Net Assets - Beginning Total Net Assets - Ending 624,923 BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS INDUSTRIAL UNEMPLOYMENT COMMISSION COMPENSATION SPECIAL FUND LOTTERY 129,536 820,383 $ 949,919 $ Change in net assets of enterprise funds Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds. Change in net assets of business-type activities The Notes to the Financial Statements are an integral part of this statement. - 54 - - 19,000 - (92,367) 83,116 (192,766) 103 11,162 (109,650) $ 11,265 86 110 (988) (3,093) 108,701 $ 105,608 TOTAL ENTERPRISE FUNDS $ 624,923 GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS $ 277,332 60,712 468,697 122,466 311,687 24,908 603,307 94,536 723 3,281 2,550 9,186 25,990 2,630,298 724,732 681 725,413 1,257,240 4,040 114,354 1,751,492 18,659 170,493 556 8,792 3,325,626 (695,328) 593,709 27,818 28,848 12,990 116,804 6,305 786,474 (61,061) 54,550 96,441 59 353 85,935 21,619 32,767 (48,650) (70,259) (19,426) 153,036 188 139 (356) 324 (542,292) (60,737) 30,056 3,803 4,696 - (7,874) 870,414 (95,922) (821) 258,185 2,522,159 $ - 2,780,344 $ 258,185 (17,050) $ 241,135 (56,862) (188,822) $ (245,684) - 55 - STATE OF ARIZONA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) UNIVERSITIES CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Receipts from assessments Receipts from student loans collected Receipts from sales and services of auxiliary enterprises Receipts from sales and services of educational departments Receipts from interfund services / premiums Receipts from student tuition and fees Receipts from federal and local governments Receipts from settlement income Receipts from other Funds Payments to suppliers, prize winners, claimants, insurance companies, or beneficiaries Payments to employees Payments to retirees Payments for scholarships and fellowships Payments for student loans issued Payments to other Funds Other receipts Net Cash Provided (Used) by Operating Activities CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Custodial funds received Office rental receipts Share of State sales tax receipts Grants and contributions received Transfers from other Funds Interest paid Custodial funds disbursed Grants and contributions disbursed Distributions to local governments Transfers to other Funds Other receipts (payments) Net Cash Provided (Used) by Non-capital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from sale of capital assets Proceeds from capital debt, installment purchase contracts and capital leases Capital grants and contributions received Acquisition and construction of capital assets Interest paid on capital debt, installment purchase contracts and capital leases Principal paid on capital debt, installment purchase contracts and capital leases Other (payments) Net Cash (Used) by Capital and Related Financing Activities $ 37,468 BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS INDUSTRIAL UNEMPLOYMENT COMMISSION COMPENSATION SPECIAL FUND LOTTERY $ 310,795 - $ 25,529 - $ OTHER 267,416 - $ 131,795 - 280,497 - - - - 64,436 618,343 685,848 - 7,125 - 9,186 - - 621 19,232 (625,418) (1,689,944) (133,726) (38,115) 19,161 (781,450) (224,126) 2,577 96,371 (14,872) 19,843 (127,639) (5,555) 13,152 147,374 (92,988) (27,088) (35,921) 687 (3,662) 263,311 65,168 482,248 857,190 (240,644) (380,156) - (2,056) - 2,127 19,000 (1,967) (48,650) (92,187) - 197 3,573 (988) 399 (2,056) 19,160 (140,837) 3,181 1,047,117 22,058 - 177,357 16,951 (389,381) - (226) (70,854) - (3) - (56,677) - - (3,100) (12) - (300,546) - (3,341) The Notes to the Financial Statements are an integral part of this statement. - 56 - - (413) (413) (3,604) (18) (3,622) TOTAL ENTERPRISE FUNDS $ 399,211 336,324 37,468 GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS $ - 280,497 - 64,436 618,343 693,594 9,186 19,232 729,431 - (1,085,043) (1,722,587) (133,726) (38,115) (35,921) 35,577 (521,524) (677,637) (27,534) (9,785) 693 15,168 263,311 2,127 65,168 482,445 879,763 (240,644) (380,156) (48,650) (95,231) (1,568) 10,869 (356) (11,700) 139 926,565 (1,048) 22,058 177,357 16,951 (393,624) 758 (10,040) (70,857) - (59,795) (12) - (307,922) (9,282) (Continued) - 57 - STATE OF ARIZONA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) UNIVERSITIES CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments Interest and dividends from investments Change in cash collateral received from securities lending transactions Purchase of investments Other (payments) Net Cash Provided by Investing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation and amortization Loss on sale of capital assets Net changes in assets and liabilities: (Increase) decrease in receivables, net of allowances Decrease in due from U.S. Government Decrease in due from local governments (Increase) in due from other Funds (Increase) decrease in inventories, at cost (Increase) decrease in other assets Increase (decrease) in accounts payable Increase in accrued liabilities (Decrease) in due to U.S. Government Increase in due to others Increase in due to other Funds Increase (decrease) in deferred revenue Increase (decrease) in accrued insurance losses Increase in contracts payable Increase (decrease) in other liabilities Net Cash Provided (Used) by Operating Activities $ $ BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS INDUSTRIAL UNEMPLOYMENT COMMISSION COMPENSATION SPECIAL FUND LOTTERY 540,236 33,821 36,884 149,264 12,776 330 4,220 (536,729) 37,328 36,884 2,811 (147,277) (3,269) 14,305 330 (1) 4,219 2,449 429,084 131,199 770,931 49,967 55,878 431,533 SCHEDULE OF NONCASH INVESTING, CAPITAL AND NON-CAPITAL FINANCING ACTIVITIES Gifts and conveyances of capital assets $ Assets acquired under capital leases Contribution of capital assets from other funds Change in fair value of investments Amortization of bond discount and issuance costs Amortization of deferred amount on refunding and bond premium Gain on disposal of capital assets, net Intergovernmental transfer of capital assets Amortization of deferred rent Refinancing of long-term debt Total Noncash Investing, Capital and Non-capital Financing Activities $ 6,454 50,135 116 119,003 $ 902,130 $ 105,845 $ 56,589 $ (981,068) $ 95,218 $ 57,370 $ 140,430 $ 166,799 - $ OTHER - 215 3 2,322 - 671 12,000 (51,355) - 3,366 (570) (586) (271) 4,787 - 114 33 83 (12,899) 1,208 13 2,026 3,295 40 4,040 1,401 2,125 (185) (1,642) 2,797 (2) - (781,450) $ 96,371 $ 19,843 $ 147,374 $ 3,076 $ (653) (1,902) - $ 3,187 - $ 31 - $ 1,248 14,248 (7,874) 4,900 71,585 $ - The Notes to the Financial Statements are an integral part of this statement. - 58 - $ (7,278) 1,157 - 287 (258) (2,090) 22,025 13,508 82 (735) - 84,628 119,119 3,187 $ 31 (3,662) 106 - $ 106 TOTAL ENTERPRISE FUNDS GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS 689,500 88,031 188 2,811 (684,007) (3,269) 93,066 188 190,185 1,425,031 $ $ 1,615,216 5,026 109,400 $ (695,328) $ 114,426 (61,061) 170,493 3 12,990 - 2,796 33 83 (12,899) 380 (2,663) 35,780 24,387 (2) 122 4,040 666 (51,355) 2,125 (185) 4,502 (709) (155) (5,028) (4,229) 987 1,427 65,600 844 $ (521,524) $ 15,168 $ 3,076 $ 2,671 (1,902) 5,220 3,903 - 1,248 14,248 (7,874) 4,900 71,585 $ 87,952 $ 9,123 - 59 - STATE OF ARIZONA STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS JUNE 30, 2006 (Expressed in Thousands) PENSION INVESTMENT AGENCY TRUSTS FUNDS TRUSTS ASSETS Cash Cash and pooled investments with State Treasurer Prepaid benefits Short-term investments Receivables, net of allowances: Accrued interest and dividends Securities sold Forward contract receivable Contributions Court fees Due from other Funds Miscellaneous receivables Total receivables $ Due from others Investments, at fair value: Temporary investments Temporary investments from securities lending U.S. Government securities Corporate bonds Corporate notes Corporate stocks Real estate mortgages and contracts Collateral investment pool Repurchase agreements Other investments Money market mutual funds Total investments Custodial securities in safekeeping Other assets Property and equipment, net of accumulated depreciation Total Assets LIABILITIES Accounts payable and other current liabilities Payable for securities purchased Accrued liabilities Obligation under securities loan agreements Due to local governments Due to others Due to other Funds Total Liabilities NET ASSETS Held in trust for: Pension benefits Pool participants Total Net Assets $ 28,649 $ - $ 41,132 120,076 - - 376,799 5,906 82,343 371,018 1,889,592 39,686 341 320 4,785 2,388,085 8,775 8,775 786 786 - - 92,983 1,876,609 - - 2,265,754 4,411,362 2,713,331 293,862 21,010,693 245,787 1,121,778 200,708 34,139,884 1,081,884 873,213 1,264,696 8,703 3,228,496 - - - 2,641,576 4,072 4,447 - - 36,681,141 3,237,271 3,163,254 1,916,812 895,749 - - 188,274 8,112 3,387,532 320 5,234 - 19,055 2,947,813 - 6,200,413 5,234 3,163,254 30,480,728 - 3,232,037 - 30,480,728 $ 3,232,037 $ - The Notes to the Financial Statements are an integral part of this statement. - 60 - STATE OF ARIZONA STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FIDUCIARY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) ADDITIONS: Member contributions Employer contributions Member purchase of service credit Court fees $ PENSION INVESTMENT TRUSTS TRUSTS 728,682 770,993 136,857 3,855 $ - Investment income: Net increase (decrease) in fair value of investments Interest income Dividends Real estate Other investment income Securities lending income Total investment income 2,050,159 379,154 301,489 8,150 6,062 90,333 2,835,347 (16) 128,584 128,568 Less investment expenses: Investment activity expenses Security lending expenses Net investment income 53,000 83,290 2,699,057 2,593 125,975 Capital share and individual account transactions: Shares sold Reinvested interest income Shares redeemed Net capital share and individual account transactions - Other additions Total Additions DEDUCTIONS: Retirement and disability benefits Death benefits Refunds to withdrawing members, including interest Administrative expense Dividends to investors Other deductions Total Deductions Change in net assets held in trust for: Pension benefits Pool participants Net Assets - Beginning Net Assets - Ending $ 4,548,543 117,750 (4,599,181) - 67,112 5,790 - 4,345,234 193,087 2,034,736 17,125 - 83,286 36,047 9,107 125,975 - 2,180,301 125,975 2,164,933 28,315,795 67,112 3,164,925 30,480,728 $ 3,232,037 The Notes to the Financial Statements are an integral part of this statement. - 61 - STATE OF ARIZONA COMBINING STATEMENT OF NET ASSETS COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) WATER INFRASTRUCTURE FINANCE AUTHORITY ASSETS Current Assets: Cash $ Cash and pooled investments with State Treasurer Cash held by trustee Short-term investments Restricted investments held by trustee Receivables, net of allowances: Interest Other Inventories, at cost Other current assets Total Current Assets 135,395 126,815 - UNIVERSITY MEDICAL CENTER $ 14,783 85,848 - ARIZONA POWER AUTHORITY $ 5,976 2,818 TOTAL $ 14,783 141,371 126,815 85,848 2,818 7,671 3,103 272,984 64,152 10,102 5,630 180,515 149 2,948 1,883 13,774 7,820 70,203 10,102 7,513 467,273 574,935 80,896 3,540 154,515 3,520 6,547 42,760 161,062 574,935 80,896 49,820 102 (94) 659,379 36,072 271,123 (185,336) 279,894 1,324 (1,088) 49,543 36,072 272,549 (186,518) 988,816 932,363 460,409 63,317 1,456,089 5,147 25,110 59 30,316 34,010 15,762 5,013 3,835 4,751 63,371 3,478 708 2,825 68 7,079 37,488 21,617 5,013 31,770 4,878 100,766 Noncurrent Liabilities: Unearned deferred revenue Accrued insurance losses Long-term debt Other long-term liabilities Total Noncurrent Liabilities 2,355 586,895 589,250 9,733 228,004 9,139 246,876 52,921 52,921 2,355 9,733 867,820 9,139 889,047 Total Liabilities 619,566 310,247 60,000 989,813 8 9,996 236 10,240 261,156 51,633 19,489 120,677 3,081 19,489 261,156 175,391 Noncurrent Assets: Restricted assets: Investments held by trustee Loans and notes receivable, net of allowances Investments Other noncurrent assets Capital assets: Land and other nondepreciable Depreciable buildings, property and equipment Less: accumulated depreciation Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities: Accounts payable and other current liabilities Accrued liabilities Current portion of accrued insurance losses Current portion of long-term debt Current portion of other long-term liabilities Total Current Liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Debt service Loans and other financial assistance Unrestricted Total Net Assets $ 312,797 $ 150,162 The Notes to the Financial Statements are an integral part of this statement. - 62 - $ 3,317 $ 466,276 STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS COMPONENT UNITS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) WATER INFRASTRUCTURE FINANCE AUTHORITY OPERATING REVENUES Sales and charges for services Intergovernmental Licenses, fees, and permits Earnings on investments Total Operating Revenues $ 20,952 7,636 11,034 39,622 OPERATING EXPENSES Cost of sales and benefits Personal services Contractual services Aid to local governments Depreciation and amortization Insurance Other Total Operating Expenses Operating Income 823 553 121 4 17,748 19,249 20,373 NON-OPERATING REVENUES (EXPENSES) Investment income Other non-operating revenue Interest expense Total Non-Operating Revenues (Expenses) 10,021 10,021 Change in Net Assets Total Net Assets - Beginning Total Net Assets - Ending UNIVERSITY MEDICAL CENTER $ 406,697 406,697 312,797 $ 93,716 188,627 61,001 18,706 4,367 22,647 389,064 17,633 150,162 The Notes to the Financial Statements are an integral part of this statement. - 63 - $ 19,817 95 (3,933) 15,979 562 2,755 $ 3,317 433,026 20,952 7,636 11,034 472,648 118,379 189,450 61,554 121 18,750 4,367 41,909 434,530 38,118 750 95 (395) 450 23,141 127,021 $ 26,329 26,329 TOTAL 24,663 40 1,514 26,217 112 9,046 (3,538) 5,508 30,394 282,403 $ ARIZONA POWER AUTHORITY 54,097 412,179 $ 466,276 STATE OF ARIZONA COMBINING STATEMENT OF FINANCIAL POSITION UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) ARIZONA STATE UNIVERSITY FOUNDATION ASSETS Cash and cash equivalent investments $ Receivables: Pledges receivable Other receivables Total receivables Investments: Investments in securities Investments held in trust for Universities Other investments Total investments Net direct financing leases Property and equipment, net of accumulated depreciation Other assets Total Assets LIABILITIES Liability under Universities' endowment trust agreements Bonds payable Unearned revenue Other liabilities Total Liabilities NET ASSETS Permanently restricted Temporarily restricted Unrestricted Total Net Assets $ UNIVERSITY OF ARIZONA FOUNDATION 6,835 $ ARIZONA CAPITAL FACILITIES FINANCIAL CORPORATION OTHER COMPONENT UNITS TOTAL 61,398 $ 224 $ 11,970 $ 64,907 1,504 66,411 29,230 724 29,954 311 311 34,603 8,655 43,258 128,740 11,194 139,934 345,224 64,135 55,371 464,730 303,638 8,379 312,017 76,870 868 77,738 87,267 5,021 229 92,517 812,999 69,156 64,847 947,002 24,599 - 35,000 13,110 72,709 18,063 20,664 3,111 15,321 191,967 7,649 56,503 12,501 269,644 56,135 601,302 421,801 312,889 229,859 1,565,851 64,135 81,710 11,672 20,245 160 5,142 302,746 603 18,168 5,441 79,351 20,167 7,723 89,821 463,967 20,770 42,705 157,517 25,547 321,517 112,682 617,263 298,167 112,721 32,897 267,075 116,235 12,944 (8,628) 31,510 50,212 35,455 596,752 279,168 72,668 443,785 $ 396,254 $ (8,628) $ The Notes to the Financial Statements are an integral part of this statement. - 64 - 117,177 $ 80,427 948,588 STATE OF ARIZONA COMBINING STATEMENT OF ACTIVITIES UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) ARIZONA STATE UNIVERSITY FOUNDATION REVENUES Contributions Rental revenue Sales and services Net investment income Capital lease revenue Other revenues $ Total Revenues EXPENSES Program services: Payments to Universities Leasing related expenses Payments on behalf of Universities Other program services Personal services, operations, and administrative expenses Fundraising expenses Interest Other expenses Total Expenses Increase (Decrease) in Net Assets Net Assets - Beginning, as restated Net Assets - Ending $ 123,378 768 18,190 35,178 7,262 ARIZONA CAPITAL FACILITIES FINANCIAL CORPORATION UNIVERSITY OF ARIZONA FOUNDATION $ 53,345 24,058 10,525 $ 3,878 121 615 4,370 OTHER COMPONENT UNITS $ 21,108 17,715 8,631 7,464 92 7,737 TOTAL $ 197,831 22,361 26,942 67,315 92 29,894 184,776 87,928 8,984 62,747 344,435 32,223 11,442 33,086 14,345 - - 7,415 6,265 8,016 4,768 72,724 6,265 22,361 16,210 15,264 2,375 2,709 3,813 4,798 - 3,164 3,850 4,217 17,230 2,667 2,730 2,679 39,471 7,465 8,955 9,605 64,013 56,042 11,231 51,770 183,056 120,763 323,022 31,886 364,368 (2,247) (6,381) 10,977 106,200 161,379 787,209 (8,628) $ 117,177 443,785 $ 396,254 The Notes to the Financial Statements are an integral part of this statement. - 65 - $ $ 948,588 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS INDEX Page Page Note 1. Summary of Significant Accounting Policies--------- 67 A. Reporting Entity------------------------------------- 67 B. Basis of Presentation-------------------------------- 70 C. Measurement Focus and Basis of Accounting------------------------------------------ 72 D. Deposits and Investments -------------------------- 72 E. Taxes Receivable------------------------------------ 73 F. Inventories ------------------------------------------- 74 G. Property Tax Calendar------------------------------ 74 H. Capital Assets---------------------------------------- 74 I. Investment Earnings -------------------------------- 75 J. Scholarship Allowances ---------------------------- 75 K. Deferred Revenue ----------------------------------- 75 L. Compensated Absences ---------------------------- 75 M. Long-Term Obligations ---------------------------- 75 N. New Accounting Pronouncements ---------------- 76 Note 6. Long-Term Obligations---------------------------------- 95 A. Revenue Bonds---------------------------------------- 95 B. Grant Anticipation Notes ---------------------------- 98 C. Certificates of Participation ------------------------- 99 D. Leases and Installment Purchases ---------------- 103 E.-Litigation--------------------------------------------- 105 F. Compensated Absences ---------------------------- 105 G. Changes in Long-Term Obligations -------------- 106 Note 2. Deposits and Investments-------------------------------- 76 A. Deposits and Investment Policies----------------- 76 B. Custodial Credit Risk – Deposits and Investments ----------------------- 77 C. Interest Rate Risk ----------------------------------- 78 D. Credit Risk------------------------------------------- 82 E. Concentration of Credit Risk ---------------------- 83 F. Foreign Currency Risk ----------------------------- 84 G. Unemployment Compensation -------------------- 85 H. Securities Lending ---------------------------------- 85 I. Derivatives ---------------------------------------- 86 J. State Treasurer’s Separately Issued Financial Statements ------------------------------ 87 Note 7. Interfund Transactions---------------------------------- 107 Note 8. Fund Deficit---------------------------------------------A. Industrial Commission Special Fund------------B. Healthcare Group ----------------------------------C. Risk Management Fund---------------------------D. Retiree Accumulated Sick Leave Fund ---------- 108 108 108 109 109 Note 9. Joint Venture--------------------------------------------- 109 Note 10. Commitments, Contingencies, and Compliance --A. Risk Management Insurance Losses -----------B. Litigation ------------------------------------------C. Accumulated Sick Leave ------------------------D. Unclaimed Property ------------------------------E. Construction Commitments ---------------------F. Arizona State Lottery ----------------------------- 109 109 111 112 112 113 113 Note 11. Tobacco Settlement------------------------------------ 113 Note 12. Public-Private Partnership---------------------------- 113 Note 3. Receivables/Deferred Revenue ------------------------- 88 A. Taxes Receivable ----------------------------------- 88 B. Deferred Revenue----------------------------------- 89 Note 13. Conduit Debt ------------------------------------------- 113 Note 4. Capital Assets --------------------------------------------- 90 Note 15. Summary of Significant Accounting PoliciesComponent Units -------------------------------------- 114 A. Financial Reporting Policies --------------------- 114 B. Deposits and Investments ------------------------ 116 C. Program Loans------------------------------------- 119 D. Pledges Receivable-------------------------------- 120 E. Direct Financing Lease Agreement ------------- 120 F. Capital Assets -------------------------------------- 121 G. Long-Term Obligations--------------------------- 121 H. Related Party Transactions ----------------------- 126 Note 5. Retirement Plans------------------------------------------ 91 A. Plan Descriptions------------------------------------- 91 B. Summary of Significant Accounting Policies ---- 92 C. Funding Policy --------------------------------------- 92 D. Annual Pension Cost--------------------------------- 93 E. Trend Information------------------------------------ 93 F. Universities’ Retirement Plans --------------------- 93 G. Post-Employment Benefits-------------------------- 94 - 66 - Note 14. Subsequent Events------------------------------------- 114 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the State of Arizona (the State) conform to U.S. Generally Accepted Accounting Principles (GAAP) applicable to governmental units adopted by the Governmental Accounting Standards Board (GASB). A. REPORTING ENTITY The State is a general purpose government. The accompanying financial statements present the activities of the State (the primary government) and its component units. Component Units’ footnote disclosures are presented in Note 15 – Summary of Significant Accounting Policies – Component Units. Component Units Component units are legally separate entities for which the State is considered to be financially accountable, or organizations that raise and hold economic resources for the direct benefit of the State. Blended component units, although legally separate entities, are in substance part of a government’s operations. Therefore, data from these units is combined with data of the primary government. Discretely presented component units of the State, except for component units affiliated with the State's Universities, are reported in a separate column in the government-wide financial statements to emphasize they are legally separate from the State. Because the component units affiliated with the Universities follow Financial Accounting Standards Board (FASB) statements, these financial statements have been reported on separate pages following the respective counterpart financial statements of the State. For financial reporting purposes, only the statement of financial position and the statement of activities for component units affiliated with the Universities are included in the State's financial statements as required by the GASB. The GASB has set forth criteria to be considered in determining financial accountability. These criteria include appointing a voting majority of an organization’s governing body and (1) the ability of the State to impose its will on that organization or (2) the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the State. In addition, GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units (GASB 39) requires that legally separate, tax-exempt entities that meet all of the following criteria should be discretely presented as component units: (1) The economic resources received or held by the separate organization are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents, (2) The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the separate organization, and (3) The economic resources received or held by an individual organization that the specific primary government, or its component units, is entitled to, or has the ability to otherwise access, are significant to that primary government. The State reports the following blended component units: The Arizona State Retirement System (ASRS) is a cost-sharing, multiple-employer, defined benefit pension plan that benefits employees of the State, its political subdivisions, and public schools. The ASRS is governed by a nine-member board that is appointed by the Governor and approved by the Senate to serve three-year terms. The Public Safety Personnel Retirement System (PSPRS) is an agent, multi-employer, public employee retirement system that benefits fire fighters and police officers employed by the State and its political subdivisions. The PSPRS is jointly administered by the Fund Manager and 203 local boards. The Fund Manager is a five-member board appointed by the Governor. All members serve a fixed three-year term. Each eligible group participating in the system has a five-member local board. All members serve a fixed four-year term. The Elected Officials’ Retirement Plan (EORP) is a cost-sharing, multi-employer, public employee retirement plan that benefits all State and county elected officials and judges and certain elected city officials. The EORP is administered by a five-member board appointed by the Governor. All members serve a fixed three-year term. The Corrections Officer Retirement Plan (CORP) is an agent, multi-employer, public employee retirement plan that benefits county detention officers and certain employees of the State’s Department of Corrections and Department of Juvenile Corrections. The CORP is jointly administered by the Fund Manager of the PSPRS and 20 local boards. Each employer member participating in the CORP has a five-member local board. All members serve a fixed four-year term. - 67 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The State reports the following discretely presented component units: University Medical Center (UMC) – The UMC is the primary teaching hospital for the College of Medicine, the College of Nursing, the College of Pharmacy, the College of Public Health, and the School of Health Related Professions of the University of Arizona (U of A). The UMC was created in 1984 when the State Legislature passed a bill that allowed the Arizona Board of Regents (ABOR) to convey the UMC to a private, not-for-profit, tax-exempt corporation. Although an autonomous entity was created, the teaching missions and research alliances with the U of A and the State remained. The ABOR confirms all members of the UMC’s Board of Directors, and must approve all amendments to the UMC’s articles of incorporation and bylaws. Complete financial statements may be obtained from the UMC’s administrative offices at 655 East River Road, Tucson, Arizona 85704, (520) 6942700. Arizona Power Authority (APA) – The APA purchases the State’s allocation of power produced at the federally owned Boulder Canyon Project hydropower plant and resells it to Arizona entities that are eligible purchasers under federal and state laws. The APA is governed by a commission of five members appointed by the Governor and approved by the Senate. The term of office of each member is six years and the members select a chairman and vice-chairman from among their membership for a term of two years. All revenue bonds issued by the APA must be approved by the State Certification Board. Complete financial statements may be obtained from the APA’s administrative offices at 1810 West Adams Street, Phoenix, Arizona 85007-2697, (602) 542-4263. Water Infrastructure Finance Authority (WIFA) – The WIFA is authorized to administer the Clean Water Revolving Fund. The Clean Water Revolving Fund was created pursuant to the Federal Water Pollution Control Act, which required the State to establish the Clean Water Revolving Fund to accept federal capitalization grants for publicly owned wastewater treatment projects. The WIFA has also entered into an agreement with the Environmental Protection Agency to administer the Drinking Water Revolving Fund pursuant to the Safe Drinking Water Act. The WIFA is governed by a twelve-member board of directors. The ten Governor appointed directors serve staggered terms of five years and serve at the pleasure of the Governor. Complete financial statements may be obtained from the WIFA’s administrative offices at 1100 West Washington, Suite 290, Phoenix, Arizona 85007, (602) 3641310. Component units of the State affiliated with the Universities are legally separate, tax-exempt organizations controlled by separate Boards of Directors that meet the criteria established in GASB 39, with the exception of the Collegiate Golf Foundation and Campus Research Corporation (CRC). The Collegiate Golf Foundation is included because it is a legally separate organization that the State believes would be misleading to exclude due to its financial relationship to the State. The CRC is included because the U of A appoints a majority of the board of directors and approves the budget; the U of A can thus impose its will on the CRC. The following discretely presented component units affiliated with the Universities are reported as major component units of the State: Arizona State University Foundation (ASU Foundation) – The ASU Foundation's resources are disbursed at the discretion of the Foundation's independent board of trustees, in accordance with donor directions and Foundation policy. Arizona Capital Facilities Finance Corporation (ACFFC) - The ACFFC provides facilities for either the use by students of ASU or ASU itself. University of Arizona Foundation (U of A Foundation) - The U of A Foundation supports the U of A through various fund-raising activities and contributes funds to the U of A in support of various programs. The following discretely presented component units affiliated with the Universities are reported as non-major component units of the State: Arizona State University Alumni Association, Sun Angel Foundation, and Sun Angel Endowment - These three foundations receive funds primarily through donations and dues, and contribute funds to ASU for support of various programs. Arizona State University Research Park, Inc. (ASU Research Park) - ASU Research Park is developing a research park to promote and support research activities in coordination with ASU. Mesa Student Housing, LLC – Mesa Student Housing, LLC provides facilities for either the use by students of ASU or ASU itself. - 68 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Collegiate Golf Foundation - This foundation operates an ASU-owned golf course. University of Arizona Alumni Association (U of A Alumni Association) - The U of A Alumni Association was established to serve the U of A and its graduates, former students, and friends by attracting, organizing, and encouraging them to advance the U of A's missions - teaching, research, and public service. University of Arizona Law College Association (Law Association) - The Law Association was established to provide support and financial assistance to the College of Law at the U of A. The Law Association funds provide support to the College on many levels, from endowed student scholarships to named faculty professorships. University of Arizona Campus Research Corporation (CRC) - The CRC was established to assist the U of A in the acquisition, improvement, and operation of the U of A Science and Technology Park (Park) and related properties. The CRC currently leases from the U of A the remaining 32.00% of building space of the Park not leased to the Arizona Research Park Authority. The CRC is responsible for assisting in the development of the presently undeveloped portions of the Park and for subleasing unoccupied space, newly developed space, and space now occupied by IBM or its subtenants once the current subleases expire. The U of A is responsible for payment of operational expenses associated with the space occupied by the U of A departments, offices, and programs. Northern Arizona University Foundation, Inc. (NAU Foundation) - The NAU Foundation receives gifts and bequests, administers and invests securities and property, and disburses payments to and on behalf of the NAU for advancement of its mission. Northern Arizona Capital Facilities Finance Corporation (NACFFC) - The NACFFC was established for the purpose of acquiring, developing, constructing, maintaining and operating student housing and other capital facilities and equipment for the use and benefit of the NAU's students. Complete financial statements for each of the aforementioned component units, except for the U of A Foundation, may be obtained at the following addresses: ASU Foundation, ASU Alumni Association, Sun Angel Foundation, Sun Angel Endowment, ASU Research Park, Inc., Collegiate Golf Foundation, ACFFC, and Mesa Student Housing, LLC - Arizona State University, Financial Services, P.O. Box 875812, Tempe, Arizona 85287-5812 or (480) 965-3601 The U of A Alumni Association - P.O. Box 210109, Tucson, Arizona 85721-0109 Law College Association of the U of A - P.O. Box 210176, Tucson, Arizona 85721-0176 CRC - University of Arizona Science and Technology Park, 9040 South Rita Road, Suite 1400, Tucson, Arizona 85747 NAU Foundation and NACFFC - Northern Arizona University, Comptroller's Office, P.O. Box 4069, Flagstaff, Arizona 86011 The financial statements of the U of A Foundation are not publicly available. For information regarding the U of A Foundation's financial statements, contact the U of A Comptroller at the following address: University of Arizona, Financial Services, P.O. Box 3310, Tucson, Arizona 85722-3310. Related Organizations Related organizations are legally separate entities for which the State is not considered to be financially accountable, and that do not meet the criteria established by GASB 39. The State’s accountability for these organizations does not extend beyond making the appointments, nor are the economic resources accessible to the State. As a result, financial activity for the organizations described below is not included in the State’s financial statements. Arizona Health Facilities Authority (the Authority) – Arizona Revised Statutes (ARS) §36-482 established the Authority to issue tax-exempt bonds and loans for the purpose of reducing health care costs and improving health care for Arizona residents by providing less expensive financing for health care institutions. Proceeds from bond issues are loaned to various qualifying nonprofit health care institutions. The health care institutions reimburse the Authority for expenses for issuance of the bonds, pay fees of the Authority, and make payments under the loans for the benefit of the holders of the bonds. The Authority is governed by a seven- 69 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 member board of directors that is appointed by the Governor and approved by the Senate. The directors serve staggered terms of seven years, and can be removed for cause or at will by the Governor with the consent of the Senate. Arizona International Development Authority (the Authority) – ARS §41-1553.01 established the Authority to facilitate the development of international trade or commerce between Arizona and other countries. The Authority is governed by a sevenmember board of directors appointed by the Governor and approved by the Senate for five-year terms, and can be removed only for cause. Arizona Tourism and Sports Authority (the Authority) – ARS §5-802 established the Authority to construct, finance, maintain, improve, operate, market, and promote the use of a multipurpose facility and do all things necessary to accomplish those purposes. The Authority may issue revenue bonds in such principal amounts to accomplish the above stated purposes. The Authority is governed by a nine-member board of directors of which five are appointed by the Governor and approved by the Senate and two members each by the President of the Senate and the Speaker of the House. The directors serve terms of five years, and may be reappointed for one full subsequent term, and can be removed only for cause. Arizona Housing Finance Authority (the Authority) – ARS §41-3902 established the Authority to issue bonds for residential dwelling units and multifamily residential rental projects in rural areas. The Authority may also establish mortgage credit certificate programs to finance residential dwelling units in rural areas. The Authority is required to notify and obtain written consent from the governing bodies of any city, town, county, tribal government, or existing corporation for any multifamily residential rental projects planned for their jurisdiction. The Authority is governed by a seven-member board of directors that is appointed by the Governor and approved by the Senate. The directors serve terms of seven years, and can be removed only for cause. State Compensation Fund (the Fund) – ARS §23-981 established the Fund to provide insurance to employers for workers’ compensation, occupational disease compensation, and medical, surgical, and hospital benefits. The Fund is governed by a board of directors that consists of five members appointed by the Governor for staggered terms of five years, and can be removed only for cause. Annually, the Governor appoints a chairman from among the board members. Joint Ventures As described in Note 9, the U of A participates in a joint venture. In accordance with U.S. GAAP, the financial activities of this joint venture are not included in the State’s financial statements. B. BASIS OF PRESENTATION The basic financial statements include both government-wide statements and fund financial statements. The government-wide statements focus on the State as a whole, while the fund financial statements focus on major funds. Each presentation provides valuable information that can be analyzed and compared between years and between governments to enhance the usefulness of the information. Government-wide statements - provide information about the primary government and its component units. The statements include a statement of net assets and a statement of activities. These statements report the financial activities of the overall government, except for fiduciary activities. They also distinguish between the governmental and business-type activities of the State and between the State and its discretely presented component units. Governmental activities generally are financed through taxes and intergovernmental revenues. Business-type activities are financed in whole or in part by fees charged to external parties. The Statement of Net Assets presents the State’s non-fiduciary assets and liabilities, with the difference reported as net assets. Net assets are reported in three categories: Invested in capital assets, net of related debt consist of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Restricted net assets result when constraints placed on net asset use are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or voter initiative. - 70 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Unrestricted net assets consist of net assets which do not meet the definition of the two preceding categories. Unrestricted net assets often have constraints on resources, which are imposed by management, but can be removed or modified. The Statement of Activities presents a comparison between direct expenses and program revenues for each function of the State’s governmental activities, and its different business-type activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular program or function. The State does not allocate indirect expenses to programs or functions. Program revenues include: • • • charges to customers or applicants for goods, services, privileges provided, and fines or forfeitures, operating grants and contributions, and capital grants and contributions, including special assessments. Revenues that are not classified as program revenues, including internally dedicated resources and all taxes, are reported as general revenues. Interfund balances have been eliminated from the government-wide financial statements to the extent that they occur within either the governmental or business-type activities. Balances between governmental and business-type activities are presented as internal balances and are eliminated in the total column. Revenues and expenses associated with reciprocal transactions within governmental or within business-type activities have not been eliminated. Fund financial statements - provide information about the State’s funds, including fiduciary funds. Separate statements are presented for the governmental, proprietary, and fiduciary fund categories. The emphasis of fund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental and enterprise funds are aggregated and reported as non-major funds. Fiduciary funds are aggregated and reported by fund type. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The State reports the following major governmental funds: The General Fund - is the State’s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. The Transportation and Aviation Planning, Highway Maintenance and Safety Fund - accounts for all financial transactions applicable to the general operations of the Arizona Department of Transportation (ADOT). The ADOT builds and maintains the State’s highway system and the Grand Canyon Airport. The Land Endowments Fund - holds lands granted to the State by the Federal government for the benefit of public schools and other public institutions. Principal is maintained intact and investment earnings and lease revenues are distributed to beneficiaries in accordance with State statute. The State reports the following major enterprise funds: The Universities - account for transactions of the State’s three universities, which comprise the State’s university system. Unemployment Compensation - pays claims for unemployment to eligible recipients from employer contributions and reimbursements. The Industrial Commission Special Fund – accounts for deposits not to exceed 2.50% of all premiums received by the State Compensation Fund and private insurance carriers during the preceding calendar year. These monies are used to provide additional awards as necessary to enable injured employees to accept the benefits of any law for promotion of vocational rehabilitation of persons disabled in industry. In addition, benefits may be paid for workers’ compensation claims filed by employees of non-insured - 71 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 employers. The Industrial Commission (Commission) then pursues against the non-insured employer for reimbursement of all benefits paid, including assessed penalties. The Lottery - accounts for the activities of the Arizona State Lottery. Additionally, the State reports the following fund types: Internal Service Funds - account for insurance coverage, employee benefits, automotive maintenance and operation, highway equipment rentals, and data processing and telecommunication services provided to State agencies on a cost-reimbursement basis. It is the policy of the State to classify immaterial proprietary fund activities in governmental funds. This policy helps to reduce the number of funds reported in the financial statements to the minimum amount needed. These funds allocate a fixed rate payroll processing charge among all agencies, allocate postage and mailing costs among all agencies, and arrange for the sale of the State’s office equipment and motorized vehicles at public auctions. Pension Trust Funds - account for the activities of the ASRS, the PSPRS, the EORP, and the CORP, for which the State acts as a trustee. These retirement plans accumulate resources to pay pension benefits of State employees and employees of other governmental entities participating in the plans. Investment Trust Funds - account for transactions by local governments and political subdivisions that elect to participate in the State Treasurer’s investment pools. The Treasurer acts as trustee for the original deposits made into the investment pools. Agency Funds - account for the receipt and disbursement of various taxes, deposits, deductions, and property collected by the State, where the State acts as an agent for distribution to other governments and organizations. C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING The government-wide, proprietary fund, and fiduciary fund financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Grants and donations are recognized as revenues as soon as all eligibility requirements the provider imposed have been met. Governmental funds in the fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The State considers all revenues reported in the governmental funds to be available if the revenues are collected within 31 days after year-end. Those revenues susceptible to accrual are federal reimbursements, highway user revenue tax, and state sales tax. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they are due and payable. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of long-term debt and acquisitions under capital leases are reported as other financing sources. Under the terms of grant agreements, the State funds certain programs through a combination of grants and general revenues. Therefore, when program expenses are incurred, there are both restricted and unrestricted resources available to finance the program. The State’s policy regarding whether to first apply restricted or unrestricted resources is made on a case-by-case basis. The State’s business-type activities and enterprise funds follow Financial Accounting Standards Board (FASB) Statements and Interpretations issued on or before November 30, 1989; Accounting Principles Board Opinions; and Accounting Research Bulletins, unless those pronouncements conflict with GASB pronouncements. The State has chosen the option not to follow FASB Statements and Interpretations issued after November 30, 1989. D. DEPOSITS AND INVESTMENTS 1. Cash and Cash Equivalents On the Statement of Cash Flows, the amount reported as “Cash and Cash Equivalents” is equal to the total of the amounts on the Statement of Net Assets “Cash”, “Cash with U.S. Treasury”, “Cash and pooled investments with State Treasurer”, “Cash held by trustee” and “Collateral investment pool” (for the Industrial Commission Special Fund). For purposes of the Statement of Cash - 72 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Flows, the State considers only those highly liquid debt instruments with an original maturity of ninety days or less to be cash equivalents. • Cash (not with State Treasurer) – cash includes undeposited receipts, petty cash, bank accounts, non-negotiable certificates of deposit, and demand deposits with banking institutions other than the State Treasurer. • Cash with U.S. Treasury – consists of unemployment compensation contributions from Arizona employers that are deposited in a trust fund maintained by the United States Treasury. • Cash and pooled investments with State Treasurer – the State Treasurer maintains a centralized management of most State cash resources. From the perspective of the various State funds, the pool functions as both a cash management pool and a demand deposit account. The operations and investments of the State Treasurer’s pooled investments are described in Note 2. • Cash held by trustee – consists of certificates of participation (COPs) proceeds that primarily are invested in government money market mutual funds to be used for capital projects. • Collateral investment pool – consists of cash received as collateral on securities lending transactions and investments made with that cash. The State records the collateral received as an asset. A corresponding liability is also recorded for such securities lending transactions. 2. Investment Valuation Investments maintained by the State Treasurer are reported at fair value using Bank of New York (BONY) prices, as determined by independent, industry leading data vendors whose values are either exchange provided or matrix based on similar securities. Equities are priced utilizing the primary market close price. In the absence of a closed price, the mid, bid or ask price will be utilized. All bonds are priced using an evaluated price, the closing exchange price or the most recent exchange or quoted bid. The official price is normally the last traded price. Short-term instruments such as certificates of deposit and commercial paper are based on an internal model which uses primarily a vendor price. Equity prices are compared to Bloomberg’s Index Alert. Any differences in prices are researched and generally Bloomberg’s end of day price is used over BONY’s price. All investments with a remaining maturity of 90 days or less, that have no price available, are priced using amortized cost (amortizing premium/accreting discount on a straight-line to maturity method). The ASRS investments are reported at fair value determined by the custodial agents, except for real estate and commercial mortgages. The agent’s determination of fair values includes, among other things, using pricing services or prices quoted by independent brokers at current exchange rates. The fair value of real estate investments is based on independent appraisals or estimated value. Commercial mortgages have been valued on an amortized cost basis, which approximates fair value. No allowance for loan loss has been provided as all loans are considered by the ASRS to be fully collectible. Short-term investments are reported at cost plus accrued interest, which approximates fair value. For investments where no readily ascertainable fair value exists, the ASRS, in consultation with its investment advisors, has determined the fair values for the individual investments based on anticipated maturity dates and current interest rates commensurate with the investment’s degree of risk. Security transactions and any resulting gains or losses are accounted for on a trade date basis. Net investment income includes net appreciation (depreciation) in the fair value of investments, interest income, dividend income, and total investment expense, which includes investment management and custodial fees and all other significant investment related costs. For the PSPRS, the EORP, and the CORP, investments are reported at fair value. Marketable securities (stocks and bonds), traded on public exchanges are priced by PSPRS’s custodian Wells Fargo Bank N.A. using third party pricing services. Equity securities are valued at the last reported sales price. Fixed income securities are generally valued using the last reported sales price or thinly traded bonds are reported at fair value using estimates. Short term and alternative investments are reported at cost. Investment income is recognized as earned. E. TAXES RECEIVABLE Taxes receivable include amounts owed by taxpayers for the 2005 and prior calendar years including assessments for underpayments, penalties, and interest. In the government-wide financial statements, a corresponding amount is recorded as revenue using the accrual basis of accounting. In the governmental fund financial statements, revenue is recorded using the modified accrual basis of accounting. The remainder is recorded as deferred revenues. - 73 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The income tax receivable is composed of individual and corporate estimated payments, withholding payments, and payments with final returns and assessments that relate to income earned through June 30, 2006. Sales and motor vehicle and fuel tax receivables represent amounts that are earned by the State in the fiscal period ended June 30, 2006, but not collected until the following month. F. INVENTORIES Inventories consist of expendable supplies held for consumption in all funds and merchandise intended for sale to customers in the Proprietary Funds. Inventories are stated at cost using the first-in, first-out method, weighted average, or lower of cost or market. In the Governmental Funds, inventories are accounted for using the consumption method. Under this method, inventories are recorded as expenditures as they are used. G. PROPERTY TAX CALENDAR Real property taxes are levied on or before the third Monday in August and become due and payable in two equal installments. The first installment is due on the first day of October and becomes delinquent after the first business day of November. The second installment is due on the first day of March of the next year and becomes delinquent after the first business day of May. A lien attaches on the first day of January preceding assessment and levy. H. CAPITAL ASSETS Capital assets are stated at cost at the date of acquisition or, if donated, at the estimated fair market value at the date received. Interest incurred during the construction of capital assets is only capitalized in the Proprietary Funds. Most capital assets are depreciated over their useful life. However, the State utilizes an alternative accounting treatment for most infrastructure assets in which costs to maintain and preserve these assets are expensed and no depreciation expense is recorded. This approach is discussed further in the Required Supplementary Information portion of this report. The State has adopted a general policy for capitalization thresholds, depreciation, and estimated useful lives of capital assets. In addition, the State has approved alternative policies for some State agencies. Depreciable capital assets are depreciated on a straight-line basis. Capitalization thresholds (the dollar values at which asset acquisitions are added to the capital asset accounts) and estimated useful lives of capital assets being depreciated in the governmentwide financial statements and the Proprietary Funds are as follows: Asset Category Land Buildings Improvements other than buildings Equipment Infrastructure General State Policy Capitalization Estimated Useful Life Threshold (yrs) All capitalized Not depreciated All capitalized 25-40 $5,000 15 $5,000 3-15 All capitalized Not depreciated Other Authorized Agency Policies Capitalization Estimated Useful Threshold Life (yrs) All capitalized Not depreciated $0-$100,000 10-50 $5,000-$100,000 20-50 $0-$5,000 3-25 $0-$100,000 20-100 The State is trustee for approximately 9.3 million acres of land acquired through U.S. Government land grants in the early 1900’s. The State acquired a substantial portion of this land at no cost and its fair market value at acquisition has not been reliably estimated. Accordingly, this land is not reported in the accompanying financial statements. A portion of the land that the State is trustee for has been sold and the buyers of the land have defaulted on the loans. The value of this land has been recorded at the sales price and properly included in the financial statements. The State has interest in and maintains significant special collections, works of art, and historical treasures. All special collections, works of art, and historical treasures which are held for financial gain are capitalized at fair market value at the date of acquisition or donation. Those special collections, works of art, and historical treasures which are held for educational, research, or public exhibition purposes are not capitalized, as they are not subject to disposal for financial gain or encumbrance. Such items are inventoried for property control purposes. Additional disclosures related to capital assets and assets acquired through capital leases are provided in Notes 4 and 6, respectively. - 74 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 I. INVESTMENT EARNINGS Investment earnings are composed of interest, dividends, and net changes in fair value of applicable investments. J. SCHOLARSHIP ALLOWANCES Student tuition and fee revenues, and certain other revenues earned by the three State Universities are reported net of scholarship discounts and allowances in the Statement of Revenues, Expenses and Changes in Fund Net Assets. A scholarship discount and allowance is the difference between the stated charge for goods and services provided and the amount that is paid by the student or third party making payment on behalf of the student. Accordingly, some types of student financial aid such as Pell grants and scholarships awarded by the Universities are considered to be scholarship allowances. These allowances are netted against applicable revenues in the Statement of Revenues, Expenses and Changes in Fund Net Assets. K. DEFERRED REVENUE Deferred revenue consists of payments to the State for goods and services, not yet rendered, or taxes, grants, and other nonexchange transactions for which related resources are not available to pay current liabilities. In the government-wide and proprietary fund financial statements, revenue is deferred when cash, receivables, or other assets are received prior to their being earned. In the governmental fund financial statements, revenue is deferred when that revenue is unearned or unavailable. L. COMPENSATED ABSENCES In the government-wide and proprietary fund financial statements, the State accrues liabilities for compensated absences as required by the GASB. In the governmental fund financial statements, liabilities for compensated absences are not accrued, because they are not considered due and payable. In general, State employees accrue vested annual leave at a variable rate based on years of service. Except for University employees, an employee forfeits accumulated annual leave in excess of 240 hours at the end of a calendar year, unless the Director of the Department of Administration authorizes an exception. University employees may accumulate up to 264 hours of vacation, and any vacation hours in excess of the maximum amount that are unused at December 31 are forfeited. Except for University employees, an employee who separates from State service is paid for all unused and unforfeited annual leave at the employee’s rate of pay at the time of separation. University employees, upon termination of employment, are paid all unused vacation benefits not exceeding 176 hours (annual accrual amount), depending on years of service and full-time equivalent employment status. Some employees accumulate compensatory leave for time worked over 40 hours per week. An employee may accumulate up to 240 hours of compensatory leave (480 if working in a public safety activity or an emergency response activity). An employee who separates from State service is paid for all unused compensatory leave at either the employee’s average base salary during the last three years of employment or final base salary, whichever is higher. Sick leave includes any approved period of paid absence granted an employee due to illness, injury, or disability. Most State 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. However, 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 (See Note 10.C). M. LONG-TERM OBLIGATIONS In the government-wide and proprietary fund financial statements, long-term debt and long-term liabilities are reported as liabilities. Amounts due within one year are reported as current liabilities, and amounts due thereafter are reported as non-current liabilities. Premiums and discounts on revenue bonds and COPs are deferred and amortized over the life of the debt instrument using the straight-line method. Bonds and COPs are reported net of the applicable premium or discount. Bond issuance costs and deferred gains or losses on debt refundings are charged to expense in the period incurred unless those costs are deemed to be material to the State’s financial statements by management, in which case, they are deferred and amortized using either the straight-line method or the effective interest method. - 75 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 In the fund financial statements, governmental fund types recognize proceeds from revenue bonds, COPs, and premiums and discounts on revenue bonds and COPs as other financing sources and uses in the current period. Long-term liabilities are more fully described in Note 6. N. NEW ACCOUNTING PRONOUNCEMENTS GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. This Statement establishes accounting and financial reporting standards for impairment of capital assets. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. This Statement also clarifies and establishes accounting requirements for insurance recoveries. The requirements of this Statement are effective for periods beginning after December 15, 2004. The State has implemented the requirements of this standard, but they had no material effect on the financial statements. GASB Statement No. 43, Financial Reporting for Postemployment Benefits Plans Other Than Pension Plans. This Statement establishes uniform financial reporting standards for OPEB plans and supersedes the interim guidance included in Statement No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans. The requirements of this Statement for OPEB plan reporting are effective for periods beginning after December 15, 2005. The ASRS has early implemented the requirements of this standard, but they had no material effect on the financial statements. GASB Statement No. 44, Economic Condition Reporting: The Statistical Section – an amendment of NCGA Statement. This Statement improves the understandability and usefulness of the information presented as supplementary information in the statistical section. The provisions of this Statement are effective for statistical sections prepared for periods beginning after June 15, 2005. The State has implemented the requirements of this standard. GASB Statement No. 46, Net Assets Restricted by Enabling Legislation – an amendment of GASB Statement No. 34. This Statement enhances the usefulness and compatibility of net asset information reported by clarifying the meaning of the phrase legally enforceable as it applies to restrictions imposed on net asset use by enabling legislation and by specifying the accounting and financial reporting requirements for those restricted net assets. The requirements of this Statement are effective for periods beginning after June 15, 2005. The State has implemented the requirements of this standard, but did not have any restricted net assets that are covered by this statement. GASB Statement No. 47, Accounting for Termination Benefits. This Statement provides guidance to governmental employers for measuring, recognizing, and reporting liabilities and expenses/expenditures related to all termination benefits, without limitation as to the period of time during which the benefits are offered, and involuntary termination benefits. This Statement is effective for periods beginning after June 15, 2005. The State has implemented the requirements of this standard, but did not have any current benefits that are covered by this statement. NOTE 2. DEPOSITS AND INVESTMENTS A. DEPOSITS AND INVESTMENT POLICIES The State’s deposits and investments are primarily under the control of the State Treasurer, the Retirement Systems, the Universities, and the Commission. These entities maintain the majority of the deposits and investments of the primary government. The investment policies of these organizations are defined according to State statutes or a governing board or both and are described below. The ARS §35-312, §35-313, and §35-314 authorize the State Treasurer to invest operating, trust, and permanent endowment fund monies. Monies deposited with the State Treasurer by State agencies are invested by the State Treasurer in a pooled fund. Any interest earned is allocated monthly into each respective fund based on average daily cash balances. There is no income from investments associated with one fund that is assigned to another fund. The State statutes and the State Treasurer’s investment policies designed to administer these statutes restrict investments to obligations of the U.S. Government and its agencies, obligations or other evidence of indebtedness of the State and certain local government divisions, negotiable certificates of deposit, bonds, debentures and notes issued by U.S. corporations, commercial paper issued by entities organized and doing business in the United States, bankers acceptances, collateralized repurchase agreements, - 76 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 money market mutual funds, domestic equities, and other securities. The State Treasurer is not allowed to invest in foreign investments. The State Treasurer maintains external investment pools [the Local Government Investment Pool (LGIP), Local Government Investment Pool-Government, and the Central Arizona Water Conservation District]. The pools are not required to register (and are not registered) with the Securities and Exchange Commission under the 1940 Investment Advisors Act. The activity and performance of the pools are reviewed monthly by the State Board of Investment in accordance with ARS §35-311. The fair value of investments is measured on a monthly basis. Participant shares are purchased and sold based on the Net Asset Value (NAV) of the shares. The NAV is determined by dividing the fair value of the portfolio by the total shares outstanding. The State Treasurer does not contract with an outside insurer in order to guarantee the value of the portfolio or the price of shares redeemed. State statutes authorize the retirement systems to make investments in accordance with the “Prudent Person” rule. This rule imposes the responsibility of making investments with the judgment and care that persons of ordinary prudence would exercise in the management of their own affairs when considering both the probable safety of their capital and the probable income from that capital. The ASRS invests in U.S. government and government agency obligations, real estate, commercial mortgages, corporate bonds, and equity obligations. Per ARS §38-719, no more than 80.00% of the ASRS’ total assets may be invested at any given time in corporate stocks or equity equivalents, based on cost value of the stocks or equity equivalents irrespective of capital appreciation. No more than 5.00% of the voting stock of any one corporation may be owned. No more than 20.00% of the ASRS’ assets may be invested in foreign equity securities, and those investments shall be made only by investment managers with demonstrated expertise in such investments. No more than 10.00% of the ASRS’ assets may be invested in bonds or other evidences of indebtedness of those multinational development banks in which the U.S. is a member nation, including the International Bank for Reconstruction and Development, the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank. No more than 1.00% of ASRS’ assets may be invested in economic development projects authorized as eligible for such investment by the Arizona State Department of Commerce. The ASRS Board has not formally adopted more restrictive policies for the various types of risks. Per ARS §38-848, the PSPRS, the EORP, and the CORP may not invest more than 70.00% in corporate stocks, based on cost value of such stocks irrespective of capital appreciation, and shall be restricted to stocks that, except for bank and insurance stocks, are either: 1) listed or approved on issuance for listing on an exchange registered under the Securities Exchange Act of 1934, as amended, 2) designated or approved on notice of issuance for designation on the national market system of a national securities association registered under the Securities Exchange Act of 1934, as amended, 3) listed or approved on issuance for listing on an exchange registered under the laws of this State or any other State, or 4) listed or approved on issuance for listing on an exchange registered of a foreign country with which the U.S. is maintaining diplomatic relations at the time of purchase, except that no more than 10.00% may be invested in foreign equity securities on these exchanges, based on the cost value of the stocks irrespective of capital appreciation. Not more than 5.00% of the voting stock of any one corporation shall be owned. The Board of Regents governs the investment policies of the Universities. The Universities may invest operating funds and capital projects funds in collateralized certificates of deposits and repurchase agreements with commercial banks, U.S. Treasury securities and other Federal agency securities, or in the Local Government Investment Pool administered by the State Treasurer. For endowment investments, donor restrictions for these investments will be applied, if any. In addition, the Board of Regents has authorized the Universities to establish investment committees to make investment policies and investment decisions. The Board of Regents’ policies guide the investment committees’ decisions and constitute each University’s investment policy. Per ARS §23-1065, the Commission’s investment committee is responsible for defining, developing, and implementing investment objectives, policies and restrictions and supervising the investment activities of the Commission. The Commission requires that their investment policy be responsive to the unpredictable nature of the incidence and severity of claims, the long periods over which losses may be paid, and the effect on both claims and losses of increases in treatment and rehabilitation costs. The investment committee may invest in any legal investment authorized under ARS §38-719. B. CUSTODIAL CREDIT RISK – DEPOSITS AND INVESTMENTS Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the deposits or collateral securities may not be recovered from an outside party. The State Treasurer, the Retirement Systems, and the Universities’ deposits with financial institutions are required by State statutes to be entirely covered by the Federal Depository Insurance - 77 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Corporation (FDIC) or, alternatively, collateralized for amounts in excess of the amount insured. The Commission’s deposits are not required to be insured or collateralized. Surety collateral for the Universities, the ASRS, the PSPRS, the EORP, and the CORP must be equal to at least 100.00% of the bank balance required to be collateralized (102.00% for the State Treasurer). Beyond this requirement, these organizations do not have a formal policy specifically addressing custodial credit risk on deposits, except for the State Treasurer. The State statutes require surety collateral for the State Treasurer to consist of U.S. Government obligations, State obligations, and obligations of counties and municipalities within the State. As of June 30, 2006, $3.050 million was uncollateralized and uninsured and $2.408 million was collateralized with securities held by the pledging financial institution or its trust department/agent, but not in the State’s name. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, the value of the investment or collateral securities that are in the possession of an outside party may not be recovered. The State does not have a formal policy in regards to custodial credit risk for investments. As of June 30, 2006, the State had $58.442 million in securities that were uninsured, not registered in the State’s name and held by a counterparty or a counterparty’s trust department or agent but not in the State’s name. C. INTEREST RATE RISK Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The State manages interest rate risk using the segmented time distribution, weighted average maturity, and duration methods. The State Treasurer manages interest rate risk by incorporating ARS §35-323, which states that the State Treasurer will invest public monies in securities with a maximum maturity of five years and operating fund monies shall not be invested for a duration of longer than three years, into their investment policy and setting forth various thresholds or parameters in accordance with each investment pool’s portfolio structure. The State Treasurer’s policy provides either maturity or duration limitations for the various investment pools. The interest rate risk inherent in the portfolio is monitored monthly by measuring the weighted average maturity and/or duration. The ASU manages interest rate risk by a policy for operating funds that limits the maximum maturity of any fixed rate issue to three years. The capital projects funds portfolio is not limited as to the overall maturity of its investments, with funds invested per the financing indentures to coincide with capital spending needs and debt service requirements, which are typically less than three years, with the additional limitation that certificates of deposit and commercial paper have maximum maturities of 360 days and 270 days, respectively. The Commission manages interest rate risk by setting different goals of yield periods or duration of maturities for each individual investment segment within the Commission. Beyond this requirement, the Commission does not have a formal policy specifically addressing interest rate risk. - 78 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The following table presents the State Treasurer’s, the ASU’s, and the Commission’s weighted average maturity in years by investment type (expressed in thousands): Investment Type Bond mutual funds Certificate of deposit Commercial mortgage – backed securities Commercial paper Corporate asset backed securities Corporate collateralized mortgage obligations Corporate notes & bonds Government bonds Government mortgage backed securities Index linked government bonds Money market mutual funds Repurchase agreements U.S. Agency Securities U.S. Agency Mortgage Backed Securities U.S. Treasury Securities Other Total Debt Securities Fair Value $ 8,453 4,932 2,881 2,600,877 7,094 70,835 1,039,428 16,438 11,767 4,792 78,915 1,745,625 2,914,780 654,076 660,170 6,803 Weighted Average Maturity (in years) 2.70 1.09 29.77 0.03 5.72 20.51 1.94 11.16 19.04 6.97 0.30 0.01 0.76 19.39 1.19 6.55 $ 9,827,866 2.03 - 79 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The ASRS does not have a formal policy in regards to interest rate risk, but does manage interest rate risk using effective duration. Effective duration measures the expected change in value of a fixed income security for a given change in interest rate. This method takes into account the likely timing and amounts of variable cash flows for bonds with call options and prepayment provisions. The following table presents ASRS’ effective duration by investment type (expressed in thousands): Investment Type Domestic Fixed Income Securities Asset backed securities Bond funds CMO's of government sponsored entities Commercial mortgage backed securities Commercial paper Corporate bonds Dollar denominated debt of foreign companies Dollar denominated debt of foreign countries Fixed income strips GNMA pools Government sponsored entity debt Indexed linked government bond funds Indexed linked treasury bonds Municipal bonds Non-government backed CMO's Pools of government sponsored entities Short term investments U.S. Treasury Debt Total Domestic Debt Securities Fair Value $ 253,388 36,043 423,889 390,780 157,443 1,043,042 55,906 45,329 37,434 116,187 311,866 1,092,671 16,337 1,260 168,515 1,414,300 1,697,024 630,702 7,892,116 1.66 8.53 3.86 3.91 0.03 4.27 6.86 6.54 7.88 3.45 4.21 0.00 4.73 14.89 2.36 4.11 0.08 4.20 3.28 849 6,172 3,307 1,605 11,933 6.77 0.33 6.77 0.08 2.54 Foreign Debt Securities Corporate bonds Government bonds Provincial bonds Margin accounts Total Foreign Debt Securities Total Debt Securities $ Effective Duration 7,904,049 - 80 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The PSPRS, the EORP, the CORP, and the NAU do not have a formal policy in regards to interest rate risk. The U of A’s investment policy limits its operating funds to having a portfolio comprised of a significant proportion of authorized securities with maturities of one year or less, and requires that a maximum maturity of any fixed rate issue may not exceed three years and the final maturity of any floating rate issue may not exceed five years. The U of A capital projects and endowment funds have no such limitations. The following table presents the interest rate risk for the PSPRS, the EORP, the CORP, the NAU, the U of A, and other State agencies utilizing the segmented time distribution (expressed in thousands): Investment Maturities (in years) Investment Type Corporate bonds Corporate bond funds Collateralized bond obligations (CBO’s) Collateralized debt obligations (CDO’s) Commercial paper Indexed treasury bond fund International fixed income fund Money market mutual funds Municipal bonds Repurchase agreements Securities lending pool U.S. Agency Securities U.S. Treasury Securities Other investments Total Debt Securities Fair Value $ 714,644 1,368 Less than 1 $ 17,872 - 1-5 $ 111,536 855 6-10 $ 135,240 384 11-15 $ 78,116 129 16-20 $ 59,377 - More than 20 $ 312,503 - 52,434 - - 7,800 15,813 - 28,821 4,120 293,862 1,220 8,443 140,185 1,679 94,202 21,567 635,721 459 7,769 293,862 2,406 140,185 94,202 21,567 143,611 708 2,438 149 32,700 83 3,049 1,996 311 187,126 65 3,892 1,220 1,603 1,219 135,294 311 120 47,795 - 4,120 89,195 - $ 1,977,673 $ 714,413 $ 150,810 $ 336,814 $ 233,825 $ 107,172 $ 434,639 - 81 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The following table presents the State’s investments at fair value that are considered to be highly sensitive to interest rate changes (expressed in thousands): Interest Rate Terms U.S. LIBOR plus/minus fixed point variable monthly to semiannually Mortgage backed securities - when interest rates fall, mortgages are refinanced and paid off early and the reduced stream of future interest payments diminish fair value. Callable step-up notes - where on certain specified dates, the issuer can call the security. If the security is not called, the interest rate is increased by a specified amount. Prevailing interest rates may go up faster than this increase in the coupon interest rate. Other securities with sensitivity to rate changes Total Corporate Bonds $ 750,013 U.S. Agency Securities $ 180,360 Total $ 930,373 - 673,863 673,863 - 127,307 128,200 127,307 128,200 $ 750,013 $ 1,109,730 $ 1,859,743 D. CREDIT RISK Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations to the holder of the investment. The State statutes and the State Treasurer’s investment policy require that commercial paper must be rated P1 by Moody’s Investor Service (Moody’s) or A1 or better by Standard and Poor’s Ratings Service (S & P). Corporate bonds, debentures, and notes must carry a minimum Baa or better rating of Moody’s or a BBB or better rating of S & P. For investments not rated by Moody’s, Fitch rating information is used. There is no statute or investment policy on ratings or credit quality for obligations issued by the U.S. Government or its agencies or repurchase agreements. The underlying securities for repurchase agreements must be explicitly guaranteed by the U.S. Government. The ASRS has not adopted a formal policy with respect to credit risk. The PSPRS, the EORP, and the CORP’s investment policy is specific as to permissible credit quality ranges, exposure levels within individuals’ quality tiers, and the average credit quality of the overall portfolios. The fixed income portfolio must have a minimum weighted average quality rating of A3 by Moody’s and A- by S & P. Fixed income investments must have a minimum quality rating of Baa3 by Moody’s and BBB- by S & P at the time of purchase. Commercial paper must have a minimum quality rating of P1 by Moody’s and A1 by S & P at the time of purchase. The portion of the bond portfolio in investments rated Baa3 through Baa1 by Moody’s and BBB- through BBB+ by S & P must be 20.00% or less of the fair value of the fixed income portfolio. The Universities each have a different policy regarding credit risk. The ASU’s policy requires that certificates of deposit have a minimum credit rating of A1/P1, commercial paper have a minimum credit rating of A1+/P1 and money market funds have a credit rating of AAAm or better, all rated by S & P. The U of A’s policy requires that for endowment funds, corporate bonds and notes should be rated Baa or higher by Moody’s at the time of purchase. The NAU does not have a formal policy with respect to credit risk. The Commission’s investment policy requires that fixed income investments be rated Ba or better by Moody’s or BB or better by S & P at the time of purchase. Fixed income managers hired to manage funds in a specialized manner (high yield) are exempted from this requirement. Purchases of high yield fixed income investments will consist of a diversified portfolio of holdings which will maintain in the aggregate a minimum credit rating of Ba3 by Moody’s and BB by S & P. - 82 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The following table presents the State’s investments which were rated by S & P and/or an equivalent national rating organization as of June 30, 2006. The ratings are presented using S & P’s rating scale (expressed in thousands): Investment Type Alternative investments Asset backed securities Bond funds Certificates of deposit CBO’s CDO’s CMO's of government sponsored entities Commercial mortgage backed securities Commercial paper Corporate bonds Dollar denominated debt of foreign companies Dollar denominated debt of foreign countries Fixed income strips incl US strips Foreign corporate bonds Foreign government bonds Foreign margin accounts Foreign provincial bonds GNMA pools Government bonds Government mortgage backed securities Government sponsored entity debt Indexed linked government bond funds Indexed linked treasury bonds International fixed income fund Money market mutual funds Mortgages Municipal bonds Non-government backed CMO's Pools of government sponsored entities Securities lending pool Short term money markets U.S. Agency Securities Other investments Total Fair Value $ 200,705 260,866 45,864 4,932 52,435 77,823 423,889 393,661 3,052,182 2,784,409 AAA $ 235,778 36,043 7,355 73,703 96,392 351,449 157,443 211,348 AA $ 5,498 1,368 4,932 1,121 447,466 A $ 5,328 37,280 277 1,254,968 BBB $ 1,574 1,794 4,120 481,497 BB $ 6,006 69,069 B A1 $ 1,079 53,475 2,894,739 - Not Rated $ 200,705 11,609 8,453 327,497 40,814 266,586 $ 55,906 809 3,759 27,291 22,753 1,294 - - - 45,329 37,434 849 6,172 1,605 3,307 116,187 22,175 11,767 311,866 1,092,671 17,557 8,443 219,099 10,599 2,939 168,515 1,414,300 21,567 1,697,024 3,998,267 13,440 $ 16,573,784 23,740 37,434 849 5,894 116,187 22,175 11,767 291,446 17,557 6,713 126,078 10,599 1,369 164,493 1,414,300 2,827,299 $6,248,220 2,638 3,307 20,420 168 1,570 25,169 $517,416 2,573 768 41 $1,328,526 16,378 278 401 $528,795 234 $76,603 159 $54,713 1,145,710 $4,040,449 1,605 1,092,671 93,021 3,981 21,567 1,697,024 89 13,440 $3,779,062 E. CONCENTRATION OF CREDIT RISK Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s investment in a single issuer. The State Treasurer’s, the ASRS’, the U of A’s, and the Commission’s investment policies state that no more than 5.00% of their investments may be invested in securities issued by any one institution, agency, or corporation, other than securities issued as direct obligations of or are fully guaranteed by the U.S. Government or mortgage backed securities and agency debentures issued by federal agencies. The PSPRS, the EORP, and the CORP’s investment policy states that no more than 5.00% of their investments may be invested in securities issued by any one institution, agency, or corporation, other than securities issued as direct obligations of or are fully guaranteed by the U.S. Government. The ASU and the NAU have no formal policy in regards to the concentration of credit risk. At June 30, 2006, more than 5.00% of the Governmental Activities’ total investments were held in the following single issuers (expressed in thousands): - 83 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Issuer Description Federal Home Loan Mortgage Corporation Federal Home Loan Bank Federal National Mortgage Association $ Fair Value 1,199,482 862,745 624,781 Percentage 18.96% 13.64% 9.88% At June 30, 2006, more than 5.00% of the Business-type Activities’ total investments were held in the following single issuers (expressed in thousands): Issuer Description Federal National Mortgage Association Fair Value $ 125,568 Percentage 5.04% F. FOREIGN CURRENCY RISK Foreign currency risk is the risk that changes in the foreign exchange rate will adversely impact the fair value of an investment or deposit. The State does not have a policy regarding foreign currency risk. The ASRS is the primary State agency that has foreign currency risk. Per ARS §38-719, no more than 20.00% of the ASRS assets may be invested in foreign equity securities and those investments shall be made only by investment managers with demonstrated expertise in those investments. The ASRS Board has not adopted a formal policy that is more restrictive. The following table summarizes the State’s foreign currency risk as of June 30, 2006 (expressed in thousands): Foreign Currency Risk by Investment Type at Fair Value Currency Australian Dollar British Pound Sterling Canadian Dollar Danish Krone Euro Currency Hong Kong Dollar Indonesian Rupiah Japanese Yen New Mexican Peso New Taiwan Dollar New Zealand Dollar Norwegian Krone Singapore Dollar South Korean Won Swedish Krona Swiss Franc Thailand Baht Other Total Short Term $ 628 (938) 106 1,898 6,346 352 17,091 296 488 22 135 577 538 3,252 $ 30,791 Fixed Income $ $ 5,894 278 3,307 9,434 18,913 - 84 - Equities $ Real Estate Total 53,308 572,484 16,131 21,434 1,071,646 72,859 4,284 688,921 21,650 10,947 7,660 65,094 28,050 30,421 268,992 4,293 52,094 $ 45 19 - $ 53,936 571,546 16,237 23,332 1,083,931 73,211 4,284 706,012 574 21,650 14,742 7,682 65,248 28,050 30,998 269,530 4,293 64,780 $2,990,268 $ 64 $3,040,036 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 G. UNEMPLOYMENT COMPENSATION The ARS §23-703 requires that unemployment compensation contributions from Arizona employers be deposited in an unemployment trust fund account with the Secretary of the Treasury of the United States that is established and maintained pursuant to Section 1104 of the Social Security Act. The cash on deposit in the trust fund account is pooled and invested. Interest earned from investments purchased with such pooled monies is deposited in the trust fund account. The Unemployment Compensation Fund, reported as a major Enterprise Fund, has been established for this purpose. H. SECURITIES LENDING Cash received as collateral on securities lending transactions and investments made with that cash are reported as assets. A corresponding liability is also recorded for such securities lending transactions. 1. Industrial Commission State statutes and the Commission’s policies permit the Commission to enter into securities lending transactions with its custodial bank. There were no significant violations of legal or contractual provisions, and there were no borrower or lending agent default losses to the securities lending agent. The custodial bank, Northern Trust, manages the securities lending operations through a contractual agreement with the Commission and splits the fees received with the Commission. There was no credit risk (i.e., lender’s exposure to the borrowers of its securities) related to the securities lending transactions at June 30, 2006. Northern Trust’s indemnification responsibilities include performing appropriate borrower and collateral investment credit analysis, demanding adequate types and levels of collateral, and complying with applicable Department of Labor and Federal Financial Institutions Examinations Council regulations concerning securities lending. Securities are loaned for collateral that may include cash, U.S. Government securities, and irrevocable letters of credit. Domestic securities are loaned for collateral valued at 102.00% of the market value of securities loaned plus accrued interest. International securities are loaned for collateral valued at 105.00% of the market value of securities loaned plus accrued interest. The market value at June 30, 2006 for loaned securities collateralized by cash and non-cash collateral was $48.935 million and $5.207 million, respectively. As part of the securities lending transactions, Northern Trust received cash and non-cash collateral valued at $49.750 million and $5.295 million, respectively at June 30, 2006. Non-cash collateral cannot be pledged or sold unless the borrower defaults. Deposit and investment risk disclosures are only reported for collateral received on securities lent. All securities loans can be terminated on demand by either the lender or the borrower. The average term of the loans is 80 days and cash open collateral is invested in a short-term investment pool, the Core USA Collateral Section, which had an average weighted maturity of 41 days as of June 30, 2006. Cash collateral may also be invested separately in term loans, in which case the investments match the loan term. Cash open loans can be terminated on demand by either lender or borrower and there were no dividends or coupon payments owing on securities lent. Securities lending earnings are credited to participating clients on approximately the fifteenth day of the following month. Investments made with cash collateral received are classified as an asset on the Statement of Net Assets. A corresponding liability is recorded as the Commission must return the cash collateral to the borrower upon expiration of the loan. At June 30, 2006, the Commission had $49.750 million outstanding as payable for securities lending. 2. Arizona State Retirement System The ASRS is permitted by ARS §38-715(D) (3), to enter into securities lending transactions. The ASRS’ custodial bank enters into agreements with counterparts to loan securities and have the same securities redelivered at a later date. All securities are eligible for loan (U.S. fixed income securities, U.S. equities, and international equities) with a higher percentage of U.S. Treasuries on loan than most other security types. It is the policy of the ASRS to receive as collateral at least 102.00% of the market value of the loaned securities and maintain collateral at no less than 100.00% for the duration of the loan. At year-end, the ASRS has no credit risk exposure to borrowers because the amount the ASRS owes the borrowers exceeds the amount the borrowers owe the ASRS. The ASRS records the collateral received as an asset and the same amount as an obligation for securities on loan. Any cash collateral received is invested in short-term investments. The maturities of the investments are closely matched to those of the security loans to avoid interest rate exposure. The ASRS receives a spread for its lending activities. Investments made with cash collateral received are classified as an asset on the Statement of Fiduciary Net Assets. A corresponding liability is recorded as the ASRS must return the cash collateral to the borrower upon expiration of the loan. At June 30, 2006, the ASRS had $2.3 billion outstanding as payable for securities on loan. - 85 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 3. Public Safety Personnel Retirement System, Elected Officials’ Retirement Plan and Corrections Officer Retirement Plan The EORP, the PSPRS, and the CORP are permitted by ARS Title 38, Chapter 5, Articles 3, 4, and 6, respectively, to enter into securities lending transactions. The PSPRS, the EORP, and the CORP are parties to securities lending agreements with a bank. The bank, on behalf of the PSPRS, the EORP, and the CORP, enters into agreements with brokers to loan securities and have the same securities returned at a later date. The loans are fully collateralized, primarily by cash. Collateral is marked-to-market on a daily basis. Non-cash collateral can be sold only upon borrower default. The PSPRS, the EORP, and the CORP require collateral of at least 102.00% of the fair value of the loaned U.S. Government or corporate security. Securities on loan are carried at fair value. As of June 30, 2006, the fair values of securities on loan were (expressed in millions): PSPRS EORP CORP 4. $ 891.375 70.380 134.101 University of Arizona During the fiscal year, the U of A engaged in securities lending transactions within its endowment funds, as authorized by the Board of Regents. The U of A entered into an agreement with Wells Fargo, the U of A’s custodian, to carry out these transactions. The custodian enters into agreements with brokers to loan securities and have the same securities returned at a later date. It is the policy of the U of A to receive as collateral at least 102.00% of the market value of the loaned securities and accrued interest, and maintain collateral at no less than 100.00% for the duration of the loan. At year-end, the U of A had no credit risk to borrowers because the U of A was holding more collateral than the amount of loaned securities outstanding. The U of A records the collateral received as an asset, which is offset by an obligation recorded under securities lending. During the fiscal year ended June 30, 2006, there were no violations of legal or contractual provisions, and there were no borrower or lending agent default losses. Wells Fargo does indemnify the U of A against losses due to borrower defaults. Collateral can be received in the form of U.S. Government securities, letters of credit, or cash. As of June 30, 2006, the custodian has received only cash collateral. This collateral may be invested in U.S. Treasury and sponsored agency obligations, repurchase agreements, bankers’ acceptances, commercial paper, mortgage backed securities, municipal securities, and corporate bonds or in a cash collateral investment pool, which invests in similar securities. At June 30, 2006, cash collateral received from borrowers was invested in the cash collateral investment pool and corporate bonds, which had a weighted average maturity of 3 days and 377 days, respectively, and represented 78.00% and 22.00% of cash collateral investments, respectively. The relationship between the maturities of the cash collateral investment pool and the U of A’s securities loans is affected by the maturities of the securities loans made by other entities that use the custodial bank’s pool, which the U of A cannot determine. However, the U of A or the borrower can terminate securities loans on demand. Other cash collateral investments are made such that their maturities will match those of the related securities loans. Such matching existed at year-end. At June 30, 2006, cash collateral investments totaled $27.916 million with a corresponding market value of securities on loan of $27.270 million. Securities lent for cash collateral included corporate stocks, corporate bonds, agency notes, agency bonds, government notes, and government bonds. The U of A cannot sell or pledge securities received as collateral unless the borrower defaults. The U of A earns a negotiated fee for participating in securities lending activities. I. DERIVATIVES A derivative instrument is a financial instrument or other contract with all three of the following characteristics: • It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and in some cases whether or not a settlement is required. • It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. • Its terms require or permit net settlement, it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement. - 86 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The principal categories of derivatives employed and their uses during the year were as follows: Category Currency forward contracts Futures contracts Purpose Hedge currency risk of investments denominated in foreign currencies. Reduce transaction costs; obtain market exposure; enhance returns. Derivatives are reported at fair value. The fair value of currency forward contracts is determined by interpolating the spot rate and the forward rates based upon number of days to maturity. The interpolated rate is used to determine the unrealized gain/loss at the valuation date. The fair value of futures contracts is determined by calculating the difference between the closing Bloomberg market price on valuation date and the original futures trade price. Futures are settled daily. Generally, derivatives are subject to both interest rate risk and credit risk. The derivatives utilized by ASRS internal investment managers typically have no greater interest rate risk than their physical counterparts, and in many cases are offset by exposure elsewhere in the portfolio. As of June 30, 2006, the ASRS had $1.2 billion in temporary investments held as collateral for equity and fixed income derivatives which may have a positive or negative notional value. The ASRS believes that it is unlikely that any of the derivatives used by its internal investment managers could have a material adverse effect on the financial conditions of the System. J. STATE TREASURER’S SEPARATELY ISSUED FINANCIAL STATEMENTS The State Treasurer issues a separately published Annual Financial Report. The report provides additional information relating to the State Treasurer’s total investing activities, including the Investment Trust Funds. A copy of the State Treasurer’s Office Annual Financial Report can be obtained from their office location at: State Treasurer’s Office 1700 W. Washington Phoenix, Arizona 85007-2812 The Treasurer’s financial statements are audited by the Office of the Auditor General. - 87 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 3. RECEIVABLES/DEFERRED REVENUE A. TAXES RECEIVABLE The following table summarizes taxes receivable at June 30, 2006 (expressed in thousands): General Fund Type of Tax Sales Income – individual and corporate Motor vehicle and fuel Luxury Unemployment Other Gross taxes receivable Allowance for uncollectible taxes Net Taxes Receivable $ $ 400,429 132,015 8,842 541,286 (110,084) 431,202 Transportation & Aviation Planning, Highway Maintenance & Unemployment Safety Compensation Fund Fund $ $ 70,212 70,212 70,212 $ $ - 88 - 67,287 67,287 67,287 Industrial Commission Special Fund $ $ 4,658 4,658 4,658 Non-Major Governmental Funds $ $ 3,055 16,537 19,592 19,592 GovernmentWide Total $ $ 403,484 132,015 70,212 25,379 67,287 4,658 703,035 (110,084) 592,951 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 B. DEFERRED REVENUE At June 30, 2006, the components of deferred revenue, in terms of revenue unavailable and unearned, were as follows (expressed in thousands): Current Deferred Revenue for Governmental Funds: General Fund: Delinquent sales tax Delinquent income tax Tobacco settlement Child support administrative reimbursements Advance insurance premiums Advance land lease payments Public assistance overpayments Vaccine & commodity food supplement Advanced county Medicaid payments Federal grants Tribal reimbursements Transportation & Aviation Planning, Highway Maintenance & Safety Fund: Notes receivable for real estate mortgage loans Land Endowments Fund: Land sales receivable Land leases receivable Advance land lease payments Non-Major Funds: Public assistance overpayments Advance payments for Hawaii/Arizona PMMIS Alliance Other Total Current Deferred Revenue for Governmental Funds Unavailable $ Noncurrent Deferred Revenue for Governmental Funds: General Fund: Advance land lease payments Total Noncurrent Deferred Revenue for Governmental Funds $ Total Current and Noncurrent Deferred Revenue for Governmental Funds Total Deferred Revenue Unearned 94,113 72,212 42,907 4,894 1,601 185,882 124 $ 41,752 291 9,272 20,675 - 94,113 72,212 42,907 4,894 41,752 291 1,601 9,272 20,675 185,882 124 9,464 - 9,464 757,430 3,144 - 31,621 757,430 3,144 31,621 1,389 1,173,160 906 53 104,570 1,389 906 53 1,277,730 - 6,006 6,006 6,006 6,006 1,173,160 $ 110,576 $ 1,283,736 Current Deferred Revenue for Proprietary Funds: Universities: Unexpended cash advances received Auxiliary sales and services IBM lease related to acquisition of research park Student tuition and fees Other deferred revenue Deposits Non-Major Funds: Policyholders' advance premiums Magazine subscriptions Total Current Deferred Revenue for Proprietary Funds Unearned $ 8,097 3,592 93,494 Noncurrent Deferred Revenue for Proprietary Funds: Universities: IBM lease related to acquisition of research park Total Noncurrent Deferred Revenue for Proprietary Funds $ 34,770 34,770 $ - 89 - $ 31,138 5,985 4,900 34,526 3,759 1,497 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 4. CAPITAL ASSETS Capital asset activities for the fiscal year ended June 30, 2006 were as follows (expressed in thousands): Primary Government Beginning Balance Governmental Activities: Non-depreciable capital assets: Land Construction in progress Infrastructure Total Non-depreciable Capital Assets $ 1,980,978 1,785,351 8,863,628 12,629,957 Additions $ 257,668 654,666 516,176 1,428,510 Retirements $ (10,864) (389,869) (48) (400,781) Adjustments & Reclassifications Ending Balance $ (13,954) (1) (13,955) $ 2,227,782 2,036,194 9,379,755 13,643,731 Depreciable capital assets: Buildings Improvements other than buildings Equipment Infrastructure 1,515,343 142,563 666,417 6,604 5,659 1,471 63,273 - (434) (12,733) (39,613) - 7,428 2,323 6,042 5 1,527,996 133,624 696,119 6,609 Total Depreciable Capital Assets 2,330,927 70,403 (52,780) 15,798 2,364,348 Less accumulated depreciation for: Buildings Improvements other than buildings Equipment Infrastructure Total Accumulated Depreciation (420,573) (59,556) (463,763) (4,162) (948,054) (38,536) (4,048) (65,836) (97) (108,517) 47 36,036 36,083 689 55 1,140 1,884 (458,373) (63,549) (492,423) (4,259) (1,018,604) Total Depreciable Capital Assets, Net 1,382,873 (38,114) (16,697) 17,682 1,345,744 $ 14,012,830 $ 1,390,396 $ (417,478) 3,727 $ 14,989,475 Total Governmental Activities Capital Assets, Net Beginning Balance Business-type Activities: Non-depreciable capital assets: Land Construction in progress Collections Total Non-depreciable Capital Assets Retirements Adjustments & Reclassifications $ 4,187 194,134 1,107 199,428 $ (3,908) (112,103) (78) (116,089) Depreciable capital assets: Buildings Improvements other than buildings Equipment Infrastructure Total Depreciable Capital Assets 2,709,694 3,600 1,108,706 289,215 4,111,215 208,084 88,749 10,332 307,165 (12,173) (30,578) (816) (43,567) 195,826 1 (1) 7,244 203,070 3,101,431 3,601 1,166,876 305,975 4,577,883 Less accumulated depreciation for: Buildings Improvements other than buildings Equipment Infrastructure Total Accumulated Depreciation (1,035,505) (2,092) (769,387) (86,935) (1,893,919) (92,120) (170) (68,475) (9,728) (170,493) 4,623 10 25,768 539 30,940 (44) 1 (193) (1) (237) (1,123,046) (2,251) (812,287) (96,125) (2,033,709) 2,217,296 136,672 (12,627) 202,833 2,544,174 $ 2,677,802 $ 336,100 $ (128,716) (236) $ 2,884,950 Total Business-type Activities Capital Assets, Net - 90 - $ $ 113 (203,182) (203,069) Ending Balance 143,195 284,181 33,130 460,506 Total Depreciable Capital Assets, Net $ Additions $ $ 143,587 163,030 34,159 340,776 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Depreciation expense was charged to governmental functions as follows (expressed in thousands): General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Total Governmental Activities $ $ 26,762 19,027 1,575 1,132 37,557 15,311 7,153 108,517 Depreciation expense was charged to business-type activities as follows (expressed in thousands): Lottery Industrial Commission Special Fund Universities Other Total Business-type Activities $ $ 215 1,157 166,799 2,322 170,493 NOTE 5. RETIREMENT PLANS The State contributes to the four plans described below. The four plans are considered part of the State’s financial reporting entity and are included in the State’s financial statements as Pension Trust Funds. A. PLAN DESCRIPTIONS The State participates in the ASRS, the PSPRS, the EORP, and the CORP. Benefits are established by State statutes and provide retirement, death, long-term disability, survivor, and health insurance premium benefits to State employees, public school employees and employees of counties, municipalities, and other State political subdivisions. The ASRS is a cost-sharing, multiple-employer defined benefit pension plan that benefits employees of the State, its political subdivisions, and public schools. The ASRS is governed by the Arizona State Retirement System Board according to the provisions of ARS Title 38, Chapter 5, Article 2. In addition, the ASRS administers the Health Benefit Supplement Fund (HBS) and the LongTerm Disability Fund, which are benefit cost-sharing, multiple-employer post-employment benefit plans. Although the assets of the HBS plan are commingled with assets of the Retirement Fund, each plan’s assets may be used only for the payment of benefits to the members of the plan, in accordance with terms of the plan. The PSPRS is an agent, multiple-employer defined benefit pension plan that benefits public safety employees of the State or certain local governments. The PSPRS, acting as a common investment and administrative agent, is governed by a five-member board, known as the Fund Manager, and 203 local boards according to the provisions of ARS Title 38, Chapter 5, Article 4. The EORP is a cost-sharing, multiple-employer defined benefit pension plan that benefits all elected State and county officials and judges and certain elected city officials. The EORP is governed by the Fund Manager of the PSPRS according to the provisions of ARS Title 38, Chapter 5, Article 3. The CORP is an agent, multiple-employer defined benefit pension plan that benefits town, city, and county detention officers; and certain employees of the Arizona Department of Corrections and the Arizona Department of Juvenile Corrections. The CORP is governed by the Fund Manager of the PSPRS and 20 local boards according to the provisions of ARS Title 38, Chapter 5, Article 6. Each plan issues a publicly available financial report that includes its financial statements and required supplementary information. A report may be obtained by writing or calling the applicable plan. Arizona State Retirement System P.O. Box 33910 Phoenix, Arizona 85067-3910 (602) 240-2000 or (800) 621-3778 - 91 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Public Safety Personnel Retirement System, Elected Officials’ Retirement Plan or the Corrections Officer Retirement Plan 3010 East Camelback Road, Suite 200 Phoenix, Arizona 85016 (602) 255-5575 The number of participating government employers as of June 30, 2006 is shown below: Employer Cities and towns Counties and county agencies State Special districts School districts Charter schools Community college districts Dispatchers ASRS PSPRS EORP CORP 74 15 1 81 235 180 10 - 130 24 1 48 - 19 15 1 - 13 1 6 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES As part of the Pension Trust Funds, the financial statements are prepared using the accrual basis of accounting under which expenses are recorded when the liability is incurred and revenues are recorded in the accounting period in which they are earned and become measurable. Employee contributions are recognized in the period in which contributions are due. Employer contributions are recognized when due and the employer has made a formal commitment to provide the contributions. Contributions from employees and employers for service through June 30 are accrued. These contributions are considered to be fully collectible and, accordingly, no allowance for uncollectible receivables is reflected in the financial statements. Benefit and refund payments are recognized when due and payable in accordance with the terms of the retirement health benefit supplement and long-term disability plan. C. FUNDING POLICY The contribution requirements of plan members and the State are established by Title 38, Chapter 5 of the Arizona Revised Statutes. These contribution requirements may be amended by the Arizona State Legislature. Cost-sharing plans – For the year ended June 30, 2006, active ASRS members and the State were each required by statute to contribute at the actuarially determined rate of 7.40% (6.90% retirement and 0.50% long-term disability) of the members’ annual payroll. The State’s contributions to ASRS for the years ended June 30, 2006, 2005, and 2004 were $128.575, $93.148, and $87.657 million, respectively, for the primary government which were equal to the required contributions for these years. In addition, active EORP members were required by statute to contribute 7.00% of the members’ annual covered payroll. The State was required to contribute a designated portion of certain fees collected by the Supreme Court plus additional contributions of 20.54% of the members’ annual covered payroll, as determined by actuarial valuation. The State’s contributions to EORP for the years ended June 30, 2006, 2005, and 2004 were $2.140 million, $1.010 million, and $987 thousand, respectively, which were equal to the required contributions for the year. Agent plans – For the year ended June 30, 2006, active PSPRS members were required by statute to contribute 7.65% of the members’ annual covered payroll and the participating State agencies were required to contribute at actuarially determined rates of 7.52 – 28.99%. Active CORP members were required by statute to contribute 8.50% of the members’ annual covered payroll and the participating State agencies were required to contribute at actuarially determined rates of 5.51 – 5.56%. - 92 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 D. ANNUAL PENSION COST The State’s annual pension cost and related actuarial data for each of the agent, multiple-employer defined benefit pension plans for the year ended June 30, 2006, is as follows (expressed in thousands): Contribution rates: State Plan members Annual pension cost Contributions made Actuarial valuation date Actuarial cost method Actuarial assumptions: Investment rate of return Projected salary increases includes inflation at Cost-of-living adjustments Amortization method Remaining amortization Asset valuation method PSPRS CORP 7.52 – 28.99% 7.65% $15,878 $15,878 6/30/04 entry age 5.51 – 5.56% 8.50% $17,472 $17,472 6/30/04 entry age 8.75% 6.25 – 9.25% 8.75% 6.25 – 9.25% 5.25% None level percent open 20 years smoothed market value 5.25% None level percent open 20 years smoothed market value E. TREND INFORMATION Information for each of the agent, multiple-employer defined benefit plans as of the most recent actuarial valuations is as follows (expressed in thousands): Contributions Required and Contributions Made PSPRS CORP Fiscal Year Ended 6/30/06 6/30/05 6/30/04 Annual Pension Cost (APC) $15,878 6,442 6,299 Percentage of APC Contributed 100% 100% 100% 6/30/06 6/30/05 6/30/04 17,472 12,754 11,900 100% 100% 100% Net Pension Obligation $ 0 0 0 0 0 0 F. UNIVERSITIES’ RETIREMENT PLANS Faculty, academic professional, and administrative officers at the three universities (the ASU, the NAU, and the U of A) may select one of six retirement plans: the Teachers Insurance Annuity Association/College Retirement Equities Fund (TIAA/CREF), Variable Annuity Life Insurance Company (VALIC), Fidelity Investments Tax-Exempt Services Company (Fidelity), Aetna Life Insurance and Annuity Company (Aetna), The Vanguard Group (Vanguard), or the ASRS. The ASRS is a defined benefit plan (described above) and the other five plans are defined contribution plans. The five defined contribution plans are administered by independent insurance and annuity companies approved by the ABOR. In addition, the U of A employees hired before July 1, 1972, have the option to participate in the defined contribution plan administered by the ASRS. Eligible classified staff belong to the ASRS. In a defined contribution plan, benefits depend solely on amounts contributed to the plan plus investment earnings. The Arizona State Legislature establishes and may amend active plan members’ and the Universities’ contribution rates. For the year ended June 30, 2006, plan members and the three Universities were each required by statute to contribute an amount equal to 7.00% of an employee’s compensation, except for an 8.13% contribution for the ASRS defined contribution plan. Contributions to these plans for the year ended June 30, 2006, were as follows (expressed in thousands): - 93 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Plan TIAA/CREF VALIC Fidelity Aetna Vanguard ASRS University Contributions $ 27,572 3,169 8,455 209 1,139 108 Employee Contributions $ 27,572 3,169 8,455 209 1,139 93 Total Contributions $ 55,144 6,338 16,910 418 2,278 201 G. POST-EMPLOYMENT BENEFITS In addition to the pension benefits described, the ASRS offers the Retiree Group Insurance Program and the Health Insurance Premium Benefit Program to eligible retired and disabled members. A retired member is defined as a member actively receiving an annuity benefit and a disabled member is defined as a member receiving a Long-Term Disability (LTD) benefit through the LTD program administered by the ASRS or through their former member employer’s group LTD plan. Pursuant to ARS §38-782, the Retiree Group Insurance Program makes available group health insurance coverage to eligible retired and disabled members and their dependents. Retired and disabled members of the ASRS, University Optional Retirement Plans, the PSPRS, the EORP, and the CORP may participate if they are no longer eligible for health insurance benefits through their former employer. More than 48,000 coverage agreements currently exist for retired and disabled members and their dependents. Pursuant to ARS §38-783, retired and disabled members with at least five years of credited service are eligible to participate in the Health Insurance Premium Benefit (subsidy) Program. This assistance is provided to those members who elect group coverage through either the Retiree Group Insurance Program or their former member employer. The ASRS offers a monthly subsidy to decrease the cost of group healthcare insurance offered to all retired and disabled persons of the ASRS, the PSPRS, the CORP, and the EORP that is provided by the primary government of the State. The amount of the subsidy provided to retired or disabled participants is dependent upon the number of years of credited service; whether the participant is eligible for Medicare coverage; if the participant elects group insurance coverage for spouse or dependents; and if the participant lives in an isolated or rural location of the State. The amount of the monthly subsidy paid on a member’s and their dependents’ behalf toward the cost of group health insurance by the ASRS ranges from $50 to $470. The ASRS reimbursed approximately $80.800 million and $89.600 million towards the cost of group health insurance coverage for the years ended June 30, 2006 and June 30, 2005, respectively. Employment functions of the retired and disabled members eligible for the subsidy are teachers, State employees, and political subdivision employees. The subsidy was enacted by the State Legislature as part of the enabling and operating laws of the ASRS (ARS §38-782 and §38783). The actuarial calculation of the ASRS plan liabilities used to assess the annual required contribution rate to all participating employers includes an actuarial dollar amount of $904.119 million for fiscal year 2006 (3.20% of the total actuarial liabilities) to fund the health insurance subsidy program. The total annual required contribution rate for both employers and employees during fiscal year 2006 was 6.40%. The participating ASRS employers and employees make no other contributions for funding the health insurance subsidy benefit enacted by the State Legislature. Total actuarial liabilities of the ASRS, including funding for the healthcare insurance subsidy, are determined on a projected unitcredit basis. As the ASRS is a cost-sharing plan, the number of subsidy participants and amount contributed for the subsidy by each participating employer is not available. Total Net Assets available to pay the subsidy for all participants at June 30, 2006, is $969.746 million. The State Legislature in ARS §38-783 has made the payment of the healthcare subsidy to retired and disabled participants subordinate to the payment of normal retirement benefits. During the November 1998 general election, voters added Article XXIX to the State of Arizona Constitution. Article XXIX is titled Public Retirement Systems. Article XXIX provided for the following actions: 1. Public retirement systems shall be funded with contributions and investment earnings using actuarial methods and assumptions that are consistent with generally accepted actuarial standards. - 94 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 2. The assets of the State’s public retirement systems, including investment earnings and contributions, are separate and independent trust funds and shall be invested, administered, and distributed as determined by law solely in the interests of the members and beneficiaries of the public retirement systems. 3. Membership in a public retirement system is a contractual relationship that is subject to Article II, Section 25 of the State’s constitution, and public retirement system benefits shall not be diminished or impaired. Article II, Section 25 of the State’s constitution indicates that no law impairing the obligation of a contract shall ever be enacted. NOTE 6. LONG-TERM OBLIGATIONS A. REVENUE BONDS Governmental Activities 1. Arizona Department of Transportation The ADOT issued Senior and Subordinated Highway Revenue Bonds to provide funds for acquisition of right-of-way and construction of federal, state, and local highways. The original amount of Highway Revenue Bonds issued in prior years and outstanding at the start of the fiscal year was $1.2 billion. During the year, Highway Revenue Bonds totaling $265.650 million were issued to (i) finance portions of the Transportation Board’s Five Year Transportation Facilities Construction Program, (ii) pay interest on any bonds issued for highway purposes, (iii) pay costs of issuing the bonds, and (iv) refund portions of the Board’s outstanding Senior Series 1999 Bonds ($13.985 million), Senior Series 2001 Bonds ($86.170 million), and Senior Series 2002 B Bonds ($48.595 million). The Highway Revenue Bonds are secured by a prior lien on and a pledge of motor vehicle and related fuel fees and taxes. Arizona Revised Statutes restrict the total principal amount of Arizona Highway Revenue Bonds that may be outstanding at any time, excluding refunded bonds, from exceeding $1.3 billion. The Maricopa County Regional Area Road Bond Fund is used to record all payments of principal and interest for Transportation Excise Tax Revenue Bonds issued by ADOT. The Bonds are secured by transportation excise taxes collected by the Arizona Department of Revenue on behalf of Maricopa County. The original amount of Transportation Excise Tax Revenue Bonds issued in prior years and outstanding at the start of the fiscal year was $80.375 million. The bond resolution adopted by the Transportation Board on July 25, 1986 established a debt service reserve requirement equal to the maximum annual interest due in the current year or future years on any series of outstanding Transportation Excise Tax Revenue Bonds. The Second Supplemental Transaction Excise Tax Revenue Bond Resolution adopted by the Board on September 22, 1988, gives the Board the option, which it has elected, of acquiring debt service reserve insurance policies in lieu of the debt service reserve requirement. Accordingly, no debt service reserve is reported in the accompanying financial statements. The policies were issued by Financial Guaranty Insurance Company, except for the 1993 Series Subordinated Bonds policies, which were issued by MBIA Insurance Corporation, and the 1995 Series A and Series B Subordinated Bonds policies, which were issued by AMBAC Assurance Corporation. These policies are non-cancelable and insure payment, up to the policy amount, of the bond interest on their respective payment dates. The policies terminated on July 1, 2005. The premiums on these insurance policies are recorded as expenditures in the year of payment. There are no Transportation Excise Tax Revenue Bonds outstanding as of June 30, 2006. In prior fiscal years, the ADOT refinanced various bond issues through advance-refunding arrangements. Under the terms of the refunding bond issues, sufficient assets to pay all principal, redemption premium, if any, 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 assets, liabilities, and financial transactions of these trust accounts and the liability for the defeased bonds are not reflected in the accompanying financial statements. Refunded bonds for the ADOT at June 30, 2006 totaled $212.880 million. ADOT advance-refunded a portion of the Highway Revenue Bonds Series 1999 Bonds ($13.985 million), a portion of the Highway Revenue Bonds Series 2001 Bonds ($86.170 million), and a portion of the Highway Revenue Bonds Series 2002B Bonds ($48.595 million) to reduce its total debt service payments by $7.833 million and to obtain an economic gain (difference between the present - 95 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 values of the debt service payments on the old and new debt) of $5.848 million. The payment to the refunded bond escrow agent totaled $161.726 million, representing principal of $148.750 million and interest of $12.976 million. 2. School Facilities Board On August 18, 2005, the Arizona School Facilities Board (SFB) issued State School Improvement Revenue Refunding Bonds, Series 2005 for $448.760 million. The 2005 Bonds include $448.760 million of serial bonds with interest rates ranging from 3.00% to 5.00% and maturity dates ranging from 2007 to 2021. The 2005 Bonds maturing on or after July 1, 2015, are subject to optional redemption prior to maturity without premium. The SFB realized net proceeds from the 2005 Bonds of $484.963 million after receipt of $37.304 million net reoffering premium and payment of $1.101 million for issuance costs. The SFB net proceeds were used to advance-refund a portion of School Improvement Revenue Bonds Series 2001, 2002, and 2003 with a total outstanding principal balance of $446.680 million. The advance-refunding resulted in a debt service savings of $24.494 million and a net present value benefit of $14.907 million (difference between the present values of the old debt and new debt service payments) for the SFB. The advance-refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $21.398 million. The loss on refunding is being amortized using the straight line method as a charge to interest expense. The refunded Bonds Series 2001, 2002, and 2003 will be paid by investments held in an irrevocable trust with a fair value of $484.963 million. As a result, the refunded debt is considered to be defeased and is not included in the State’s financial statements. Refunded Bonds for the SFB at June 30, 2006 totaled $446.680 million. Business-Type Activities 3. Universities a. University of Arizona The U of A’s bonded debt consists of various issues of system revenue bonds that are generally callable with interest payable semiannually. Bond proceeds are used to pay for acquiring or constructing capital facilities and infrastructure. Bond proceeds are also used for refunding obligations from previously issued bonds. Payment of principal and interest on bonds is secured by a pledge of tuition and fees, sales and services, auxiliary enterprises, and other charges. On September 13, 2005, the U of A sold System Revenue Bonds Series 2005A (2005A Bonds) for $35.570 million dated September 1, 2005. The 2005A Bonds include $25.255 million of serial bonds with interest rates ranging from 3.00% to 5.00% and maturity dates ranging from 2007 to 2025. The 2005A Bonds also include two term bonds consisting of $4.785 million with an interest rate of 5.00% due June 1, 2028, and $5.530 million with an interest rate of 5.00% due June 1, 2031. The 2005A Bonds with maturity on or after June 1, 2016, are subject to optional redemption without premium. The 2005A Bonds with maturity on June 1, 2028 and June 1, 2031, are subject to mandatory sinking fund redemption without premium pursuant to the debt documents. The 2005A Bonds sold at a premium of $1.372 million and had accrued interest of $119 thousand. The U of A realized net proceeds of $36.647 million after payment of $414 thousand for issuance costs, underwriter discounts, and bond insurance. The net proceeds were used to finance the Architecture Building Expansion Project, the Poetry Center Project, the Residence Life Building Renewal Phase II Project, the Deferred Renovation - Building Renewal and Infrastructure Project, and to pay the December 1, 2005 interest payments on the U of A’s System Revenue Bonds Series 1992A, 1998, 2002, 2003, 2004A, and 2004B. The interest payments from the net proceeds provided budget relief to assist the U of A with implementing a budget stabilization plan. On May 9, 2006, the U of A sold System Revenue Bonds Series 2006A (2006A Bonds) for $17.645 million dated May 1, 2006. The 2006A Bonds include $17.645 million of serial bonds with an interest rate of 5.00% and maturity dates ranging from 2016 to 2020. The 2006A Bonds with maturity on or after June 1, 2017, are subject to optional redemption without premium. The 2006A Bonds sold at a premium of $993 thousand. The U of A realized net proceeds of $18.477 million after payment of $303 thousand for issuance costs, underwriter discounts, and bond insurance and a U of A Contribution of $142 thousand. The net proceeds were used to pay the June 1, 2006 principal and interest payments on the U of A’s System Revenue Bonds Series 1992A, 1998, 2002, 2003, 2004A, and 2004B. This provided budget relief to assist the U of A with implementing a budget stabilization plan. In fiscal year 2003, the U of A refunded, in advance of maturity, a portion of outstanding System Revenue Bonds Series 2000A. At June 30, 2006, the outstanding principal balance of the refunded bonds was $4.330 million, which will be paid by investments held in an irrevocable trust with a fair value of $4.364 million. Accordingly, the trust account assets and liability for these defeased bonds are not included in the U of A’s financial statements. - 96 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 In fiscal year 2005, the U of A refunded, in advance of maturity, a portion of outstanding System Revenue Bonds Series 1998 and the remaining portion of System Revenue Bonds Series 2000A. At June 30, 2006, the total outstanding principal balance of the refunded bonds was $28.285 million, which will be paid by investments held in an irrevocable trust with a total fair value of $29.859 million. Accordingly, the trust account assets and liability for these defeased bonds are not included in the U of A’s financial statements. b. Northern Arizona University On October 19, 2005, the NAU sold System Revenue Bonds Series 2005 for $15.255 million dated November 1, 2005. The 2005 Bonds include $6.280 million of serial bonds with interest rates ranging from 3.00% to 4.50% and maturity dates ranging from June 1, 2007 to June 1, 2026. The 2005 Bonds also include $8.975 million of term bonds, with interest rates ranging from 4.60% to 5.125% and maturing on June 1, 2030, 2035, and 2040. The 2005 Bonds were sold with net original issue discount of $11 thousand. NAU realized net proceeds of $15.000 million after payment of $244 thousand for issuance costs, underwriter discounts, and bond insurance. The costs associated with this issue were recorded in the current fiscal year. The net proceeds of $15.000 million are being used to finance a new parking garage and enclosed pedestrian bridge on the NAU’s Mountain Campus. In prior years, the NAU defeased certain revenue bonds by either placing the proceeds of new bonds, or cash and investments accumulated in the sinking fund, in an irrevocable trust to provide for all future debt service payments on the refunded bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the NAU’s financial statements. At June 30, 2006, $25.425 million of such bonds outstanding are considered defeased. c. Arizona State University At June 30, 2006, the ASU held a combination of fixed and variable rate bonds. The ASU’s fixed rate bonded debt consists of various issues of system revenue bonds that are generally callable at a prescribed date with interest payable semi-annually. In prior years, certain system revenue bonds of the ASU were defeased through advance-refunding by depositing sufficient U.S. Government securities to pay all future debt service in an irrevocable trust. Accordingly, the liabilities for these defeased bonds are not included in the ASU’s financial statement. The principal amount of all such bonds outstanding June 30, 2006 was $46.900 million. The ASU had outstanding two series of variable rate demand system revenue bonds, Series 2003A and 2003B, totaling $103.000 million, with final maturities of July 1, 2034. Both series of bonds continue to bear interest at a weekly rate not to exceed 12.00% per annum based upon prevailing market conditions, as determined by the respective remarketing agents. The bonds are subject to conversion, at the option of the Arizona Board of Regents on behalf of the ASU, to a different or alternate adjustable rate mode, or a fixed rate pursuant to the bond indenture. The interest rate in effect at June 30, 2006 was 3.95% for the Series 2003A bonds and Series 2003B bonds. The variable rate bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on seven days’ notice and delivery to the remarketing agents. If the remarketing agents are unable to resell the bonds, the ASU has a Standby Purchase Agreement with Bank of America, N.A. to extend credit through the purchase of the unremarketed bonds. Assuming all of the $51.500 million Series 2003A bonds and $51.500 million Series 2003B bonds are not resold within 90 days, the ASU would be responsible to make annual installment principal payments of $20.600 million over a five year period, plus interest to be calculated as established in the Standby Purchase Agreement. The ASU has agreed to pay Bank of America, N.A. an annual commitment fee of 0.18% on the outstanding principal for the Standby Purchase Agreement. The Standby Purchase Agreement is valid through October 15, 2008. Securities and cash restricted for bond debt service held by the trustee at June 30, 2006 totaled $26.500 million. - 97 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Summary of Revenue Bonds The following schedule summarizes revenue bonds outstanding at June 30, 2006 (expressed in thousands): Revenue Bonds Outstanding Governmental Activities: Department of Transportation School Facilities Board Proprietary Funds: University Revenue Bonds Interest Rates Outstanding Balance at June 30, 2006 Dates Issued Maturity Dates 1992-2006 2001-2006 2007-2025 2007-2021 3.40-6.00% .14-5.75% $1,223,425 883,275 1969-2006 2007-2040 2.50-7.13% 802,600 Principal and interest debt service payments on revenue bonds outstanding at June 30, 2006 are as follows (expressed in thousands): Annual Debt Service Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 2027-2031 2032-2036 2037-2040 Total Total Principal $ 102,860 108,925 114,715 121,080 127,520 683,110 691,865 156,625 $ 2,106,700 Governmental Activities Total Interest $ 105,615 100,895 95,301 89,683 83,171 314,651 128,726 14,900 $ 932,942 Business-Type Activities Total $ $ Total Principal 208,475 209,820 210,016 210,763 210,691 997,761 820,591 171,525 3,039,642 $ $ Total Interest 42,435 47,215 44,255 46,335 48,425 213,950 140,810 95,660 74,460 45,875 3,180 802,600 Total $ 37,731 35,665 33,463 31,203 28,869 111,319 65,254 38,993 18,949 4,595 417 $ 406,458 $ $ 80,166 82,880 77,718 77,538 77,294 325,269 206,064 134,653 93,409 50,470 3,597 1,209,058 B. GRANT ANTICIPATION NOTES Grant Anticipation Notes are issued by the Transportation Board and secured by revenues received from the Federal Highway Administration under a grant agreement and certain other federal-aid revenues. The original amount of Grant Anticipation Notes issued in prior years and outstanding at the start of the fiscal year was $363.970 million. Grant Anticipation Notes currently outstanding are as follows (expressed in thousands): Grant Anticipation Notes Outstanding Governmental Activities: Department of Transportation Dates Issued Maturity Dates Interest Rates 2000-2005 2007-2016 2.50-5.25% - 98 - Outstanding Balance at June 30, 2006 $ 325,430 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Future debt service principal and interest payments on Grant Anticipation Notes issues for fiscal years ended June 30 are summarized below (expressed in thousands): Annual Debt Service Governmental Activities Total Total Fiscal Year 2007 Principal $ Interest 42,570 $ 14,578 Total $ 57,148 2008 36,565 13,300 49,865 2009 29,990 11,832 41,822 2010 31,350 10,468 41,818 2011 32,785 9,034 41,819 2012-2016 152,170 20,075 172,245 Total $ 325,430 $ 79,287 $ 404,717 C. CERTIFICATES OF PARTICIPATION Governmental Activities 1. Department of Administration The State has issued COPs to finance construction or improvements of office buildings that are primarily leased to State agencies. The State’s obligation to make lease payments and any other obligations of the State under the lease are subject to, and dependent upon, annual appropriations made by the State Legislature and annual allocations of such appropriations being made by the Department of Administration for such purpose. The Department of Administration agrees to use its best efforts to budget, obtain, allocate, and maintain sufficient appropriated monies to make lease payments. In the event any such appropriation and allocation is not made, the leases will terminate and there can be no assurance that the proceeds for the re-leasing or sale of the projects will be sufficient to pay principal and interest with respect to the then outstanding COPs. The scheduled payments of principal and interest with respect to the COPs are guaranteed under certificate insurance policies. The State’s obligation to make lease payments does not constitute a debt or liability of the State within the meaning of any constitutional or statutory limitation. Neither the full faith and credit nor the general taxing power of the State is pledged to make payments of principal or interest due with respect to the COPs. Such payments will be made solely from amounts derived under the terms of the lease, including lease payments, and amounts from time to time on deposit under the terms of the declaration of trust. 2. School Facilities Board In prior fiscal years, the SFB refinanced various COPs through advance-refunding arrangements. Under the terms of the refundings, sufficient assets to pay all principal, redemption premiums, if any, and interest on the refunded COPs have been placed in irrevocable trust accounts at commercial banks and invested in U.S. securities which, together with interest earned thereon, will provide amounts sufficient for future payment of principal and interest of the issues refunded. The assets, liabilities, and financial transactions of these trust accounts and the liability for the defeased COPs are not reflected in the accompanying financial statements. Refunded COPs for the SFB at June 30, 2006 totaled $311.130 million. Business-Type Activities 3. University of Arizona On November 16, 2005, the U of A issued Refunding COPs Series 2005D, 2005E, 2005F, 2005G, 2005H, 2005I (2005D-I) for $6.655 million, $3.555 million, $14.915 million, $2.245 million, $770 thousand, and $1.320 million, respectively, dated November 1, 2005 at a net premium of $202 thousand. The 2005D-I COPs include $29.460 million of serial certificates with interest rates ranging from 3.25% to 5.00% and maturity dates ranging from 2006 to 2025. The 2005D-I Certificates maturing on or after June 1, 2016, are subject to optional redemption prior to maturity without premium and there are also extraordinary redemption dates pursuant to the debt documents. The U of A realized net proceeds from the 2005D-I COPs of $29.147 million after payment of $515 thousand for issuance costs, underwriters discount, and bond insurance. These net proceeds were used for the following: - 99 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 • Pay the December 1, 2005 debt service interest payments on the COPs Series 1999A, 1999B, 1999, 2000A, 2001A, 2001B, 2002A, 2002B, 2003A, 2003B, and 2004A, which provided budget relief to assist the U of A with implementing a budget stabilization plan. • Current-refund a $14.070 million principal portion of a variable rate COPs Series 2000A. At the time of the refunding, the effective rate of the refunded 2000A variable rate COPs was 3.05% and the maximum annual interest rate could not exceed 12.00%. Depending on what the future changes might have been in the variable rates of the refunded 2000A COPs, the difference in debt service payments resulting from changes in variable interest rates compared to the 2005F Certificates’ average fixed interest rate of 4.30% over the next 19 years is ($2.130 million) to $15.417 million. The difference between the present value of the old and new debt service payments results in a range of an economic loss of $135 thousand to an economic gain of $974 thousand. The current refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $209 thousand. This difference, reported in the accompanying financial statements as a deduction of long-term debt, is being amortized to interest expense through the year 2025 using the straight-line method. • Refund in advance of maturity a $6.555 million principal portion of the COPs Series 1999A and the $3.290 million principal balance of the Series 1999. The advance-refunding generated a combined net present value economic gain of $437 thousand (difference between the present values of the old debt and new debt service payments) for the U of A. The advance-refunding decreases the U of A’s debt service by $260 thousand in year one, $43 thousand in year two, and by an average $27 thousand in years three through nine when the annual debt service increase by an average of $4 thousand from years ten through fifteen. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $654 thousand. This difference, reported in the accompanying financial statements as a deduction from long-term debt, is being amortized to interest expense through the year 2020 using the straight-line method. The refunded COPs Series 1999A and 1999 will be paid by investments held in an irrevocable trust with a combined fair value of $9.969 million. Accordingly, the trust account assets and liability for these defeased bonds are not included in the U of A’s financial statements. On May 9, 2006, the U of A issued Refunding COPs Series 2006A, 2006B, 2006C, 2006D, and 2006E (2006A-E) for $35.785 million, $12.395 million, $6.100 million, $1.285 million, and $3.085 million, respectively, dated May 1, 2006, at a net premium of $996 thousand. The 2006A-E COPs include $58.650 million of serial certificates with interest rates ranging from 3.60% to 5.00% and maturity dates ranging from 2007 to 2025. The 2006A-E COPs maturing on or after June 1, 2017, are subject to optional redemption prior to maturity without premium, and there are also extraordinary redemption dates pursuant to the debt documents. The U of A realized net proceeds from the 2006A-E COPs of $58.824 million after payment of $913 thousand for issuance costs, underwriters discount, and bond insurance and the U of A contribution of $91 thousand. The net proceeds were used for the following: • Pay the June 1, 2006 debt service principal and interest payments on the COPs Series 1999A, 2000A, 2001A, 2001B, 2002A, 2002B, 2003A, 2003B, and 2004A. • Current-refund the variable rate COPs Series 1999B and the remaining portion of the variable rate COPs Series 2000A, with outstanding principal balances of $36.500 million and $11.530 million, respectively. At the time of the refunding, the effective rate of the refunded 1999B and 2000A variable rate COPs was 3.60% and the maximum annual interest rate could not exceed 12.00%. Depending on what the future changes might have been in the variable rates of the refunded 1999B and 2000A COPs, the difference in the combined debt service payments resulting from changes in variable interest rates compared to the 2006A Certificates’ average fixed interest rate of 4.90% over the next 18 years is ($7.290 million) to $45.871 million. The difference between the present values of the old and new debt service payments results in a range of an economic loss of $486 thousand to an economic gain of $3.058 million. The current refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $629 thousand. This difference, reported in the accompanying financial statements as a deduction from long-term debt, is being amortized to interest expense through the year 2025 using the straight-line method. On June 6, 2006, the U of A issued COPs Series 2006 for $18.240 million at a discount of $104 thousand dated June 1, 2006. The 2006 COPs include two term certificates consisting of $3.780 million with an interest rate of 4.50% due June 1, 2028, and $6.320 million with an interest rate of 4.50% due June 1, 2031. The 2006 COPs with maturity on or after June 1, 2017, are subject to optional redemption without premium. The 2006 COPs with maturity on June 1, 2028 and June 1, 2031, are subject to mandatory sinking fund redemption without premium pursuant to the debt documents. There are also extraordinary redemption dates pursuant to the debt documents. The U of A realized net proceeds of $17.807 million after payment of $329 thousand for issuance costs, - 100 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 underwriter discounts, and bond insurance. The net proceeds were used to finance the Arizona Biomedical Research Collaborative Building construction project. The U of A has outstanding at June 30, 2006, variable rate COPs, Series 2004B, totaling $41.400 million. These certificates bear interest at a weekly rate, determined by J.P. Morgan Securities as remarketing agents, with a final maturity date of June 1, 2031. These certificates are subject to conversion, at the option of the Arizona Board of Regents, to an adjustable rate, an annual rate, or a term rate pursuant to the debt documents. If not converted, the 2004B COPs will bear interest at a weekly rate not to exceed 12.00% per annum determined under prevailing market conditions by the remarketing agent. The variable rate COPs are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on seven days’ notice and delivery to the remarketing agents. If the remarketing agents are unable to resell the demand certificates, the U of A has Standby Purchase Agreements with Bayerische Landesbank to extend credit through the purchase of the un-marketed certificates. Assuming all of the $41.400 million COPs are not resold within 90 days, the U of A would be responsible to make annual installment principal payments of $8.280 million over a five year period, plus interest to be calculated as established in the Standby Purchase Agreements. Bayerische Landesbank charges the U of A an annual Standby Purchase Agreement commitment fee on the outstanding principal for the COPs for the Series 2004B. The fee is 0.19%. The Standby Purchase Agreement is valid through November 30, 2015. In fiscal year 2003, the U of A refunded, in advance of maturity, a portion of outstanding COPs Series 2001B. At June 30, 2006, the outstanding principal balance for the COPs Series 2001B was $5.465 million, which will be paid by investments held in an irrevocable trust with a fair market value of $5.437 million. Accordingly, the trust account assets and liability for these defeased COPs are not included in the U of A’s financial statements. In fiscal year 2005, the U of A refunded, in advance of maturity, a portion of outstanding COPs Series 1999A, 1999, and 2001A. At June 30, 2006, the total outstanding principal balance for the COPs Series 1999A, 1999, and 2001A was $41.935 million, which will be paid by investments held in an irrevocable trust with a fair value of $43.283 million. Accordingly, the trust account assets and liability for these defeased COPs are not included in the U of A’s financial statements. 4. Arizona State University During fiscal year 2006, the ASU issued $15.810 million in certificates of participation to fund the Arizona Biomedical Research Collaborative Building in cooperation with the U of A and to provide additional funding for Biodesign Institute Building B. The 2006 COPs were issued in June 2006 at an average interest rate of 4.52%. The annual debt service for the 2004, 2005A, and 2006 COPs will be funded by state appropriations in the amount of $14.500 million annually beginning in fiscal 2008. Securities and cash restricted for COP debt service held by the trustee at June 30, 2006 totaled $21.800 million. 5. Northern Arizona University On July 27, 2005, the NAU issued COPs Series 2005 for $40.255 million dated August 1, 2005. The Series 2005 COPs included $31.455 million of serial certificates with interest rates ranging from 3.00% to 5.00% and maturity dates ranging from 2008 to 2029. The 2005 COPs also included $8.800 million of term certificates with interest rates ranging from 4.75% to 5.00% and maturing on September 1, 2020 and September 1, 2030. The 2005 COPs were issued at a premium of $1.158 million. NAU realized net proceeds of $40.763 million after payment of $650 thousand for issuance costs, underwriters discount, and bond insurance. The costs associated with this issue were recorded in the current fiscal year. The net proceeds are being used to finance the Laboratory Facility building and the North Campus Research Infrastructure project. On June 7, 2006, the NAU issued COPs Series 2006 for $12.445 million dated June 1, 2006. The Series 2006 COPs included $9.390 million of serial certificates with interest rates ranging from 4.00% to 4.40% and maturity dates ranging from 2008 to 2027. The 2006 COPs also included a $3.055 million term certificate with an interest rate of 4.50% and maturing on September 1, 2030. The 2006 COPs were issued at a net discount of $169 thousand. NAU realized net proceeds of $12.004 million after payment of $272 thousand for issuance costs, underwriters discount, and bond insurance. The costs associated with this issue were recorded in the current fiscal year. The net proceeds are being used to finance the Arizona Western NAU Yuma Research Facility project and the Utility Infrastructure project. - 101 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 A summary of the COPs issued as of June 30, 2006, is as follows (expressed in thousands): Project Governmental Activities: Refunding Certificates of 92A, 92C, & 1091 Health Lab/HRIS Refunding Certificates of 92B School Facilities Board 2003A School Facilities Board 2003B School Facilities Board 2004A ADOA Refunding Certificates of 93B ADOA Series 2004B School Facilities Board 2004B School Facilities Board 2004C SFB Refunding Certificates of 2003A SFB Refunding Certificates of 2003B SFB Refunding Certificates of 2004B Total Governmental Activities: Business-Type Activities: Arizona State University: Towers Project Downtown Center – 1999A Downtown Center – 1999B 2002 Certificates of Participation 2004 West Campus – Refunding 2004 Certificates of Participation 2005A Certificates of Participation 2006 Certificates of Participation University of Arizona: Fixed Student Union A Parking Garage/Residence Hall Park Student Union/Ln Svcs/6th St Gar Gittings Bldg. Highland Infra. Life Sci. Student Housing, Health Bldg., UA North Meinel Bldg & Refund COPS 1994B Refund COPS 1997 & Portion of Series 2001B Med. Resh. Bldg./Biomed Sci./Tech. Infstr. Chem.Bldg./Res.Life/Pkg.Garage/Rfnd.COPS Chemical Building Expansion Refund COPS 1999A Refund COPS 1999 Refund COPS 2001A Refund COPS 1999, 1999A&B, 2000A, 2001A&B, 2002A&B, 2003A&B, 2004A Refund COPS 1999A&B, 2000A, 2001A&B, 2002A&B, 2003A&B, 2004A Biomed Rsch Collab Bldg Project Northern Arizona University: 2004 Certificates of Participation 2005 Certificates of Participation 2006 Certificates of Participation Total Business-Type Activities: Total Certificates of Participation Issue Date Final Maturity Date 2001 2002 2002 2003 2004 2004 2004 2004 2005 2005 2005 2005 2005 2011 2023 2011 2018 2019 2019 2012 2019 2020 2020 2018 2019 2020 Amount Authorized And Issued $ $ 1991 1999 1999 2002 2004 2005 2005 2006 2011 2025 2025 2027 2010 2031 2031 2031 $ 1999 1999 2001 2001 2002 2002 2020 2009 2025 2022 2022 2023 2003 2004 2004 2004 2005 2005 2005 57,930 63,270 75,295 372,730 194,610 47,160 16,725 31,965 190,040 47,585 201,125 80,055 53,045 1,431,535 $ $ 4.00 – 5.25 3.50 – 5.50 2.90 – 5.50 2.50 – 5.00 2.25 – 5.25 2.00 – 5.00 3.00 – 5.00 3.00 – 5.25 3.50 – 5.25 3.00 – 5.00 2.50 – 5.00 2.50 – 5.00 2.50 – 5.00 6.89 5.75 8.00 4.75 2.36 4.89 4.36 4.52 21,607 18,635 31,695 21,425 76,965 29,845 3,601 505 15,165 13,385 64,400 28,845 5.13 – 5.30 4.85 – 5.00 3.88 – 5.50 4.00 – 5.13 4.13 – 5.50 3.00 – 5.13 2022 2031 2029 2031 2024 2024 2022 10,615 153,960 42,020 41,400 12,660 14,825 16,330 10,615 152,360 40,895 41,400 12,660 14,825 16,330 3.50 – 5.00 2.00 – 5.25 3.50 – 5.25 Variable not to exceed 12 4.00 – 5.00 5.00 4.13 – 5.00 2006 2025 29,460 29,010 3.25 – 5.00 2006 2006 2025 2031 58,650 18,240 58,650 18,240 3.60 – 5.00 4.00 – 5.00 2005 2006 2006 2030 2031 2031 37,585 40,255 12,445 1,036,397 2,467,932 37,585 40,255 12,445 946,766 1,967,576 2.50 – 5.13 3.00 – 5.00 4.00- 4.50 - 102 - $ 34,700 52,655 62,765 154,270 115,170 44,405 13,620 30,260 131,155 47,585 201,125 80,055 53,045 1,020,810 Interest Rates 1,815 4,935 4,690 95,460 22,495 80,275 110,115 15,810 $ $ 4,500 5,620 5,165 103,800 22,495 80,275 110,115 15,810 Outstanding Balance $ $ STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Principal and interest debt service requirements on COPs outstanding at June 30, 2006, are as follows (expressed in thousands): Annual Debt Service Governmental Activities Fiscal Year 2007 Total Principal $ Business-type Activities Total Amount Required Total Interest 60,945 $ 47,664 $ 108,609 Total Principal Total Interest Total Amount Required $ $ $ 16,805 43,755 60,560 2008 63,215 45,202 108,417 30,160 43,139 73,299 2009 65,805 42,417 108,222 31,155 42,043 73,198 2010 68,580 39,425 108,005 32,120 40,715 72,835 2011 71,680 36,120 107,800 28,255 39,623 67,878 2012-2016 414,055 122,826 536,881 189,885 177,004 366,889 2017-2021 272,090 21,998 294,088 251,126 123,432 374,558 2022-2026 4,440 229 4,669 205,145 62,924 268,069 2027-2031 - - - 162,115 19,958 182,073 946,766 $ 592,593 $ 1,539,359 Total $ 1,020,810 $ 355,881 $ 1,376,691 $ D. LEASES AND INSTALLMENT PURCHASES 1. Leases The total operating lease expenditures for the fiscal year ended June 30, 2006, were $32.576 million for governmental activities and $20.422 million for business-type activities. The future minimum lease payments for long-term operating leases as of June 30, 2006, are summarized below (expressed in thousands): Fiscal Year 2007 2008 2009 2010 2011 2012-2016 Total Minimum Lease Payments Governmental Activities $ 24,926 17,468 13,462 7,121 2,051 794 $ 65,822 Business-type Activities $ 3,022 2,343 919 462 227 $ 6,973 Total $ 27,948 19,811 14,381 7,583 2,278 794 $ 72,795 Many operating leases are for buildings and land leased by State agencies. Although these leases are considered to be long-term, they are cancelable under certain circumstances. • An agency must be able to cancel the lease if monies are not appropriated to cover the lease expenditures. • If an agency is ordered to move into State-owned property and a 60-day notice is given, the lease can be canceled without penalty. • In situations where the use of the leased property is dependent on the use of Federal monies, the lease must be cancelable in the event Federal monies are no longer available. The State has entered into capital lease agreements for the acquisition of buildings, telephone systems, copy machines, and other equipment. Capital lease assets and liabilities are reported on the government-wide Statement of Net Assets. A lease is reported as a capital lease if one or more of the following criteria are met: • Title to or ownership of the asset is transferred to the State at the end of the lease. • The lease contains a bargain purchase option. - 103 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 • The lease term is equal to 75.00% or more of the useful life of the leased asset. (This criteria does not apply if the beginning lease term falls within the last 25.00% of the total useful life of the asset.) • The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90.00% of the fair market value of the leased asset. (This criterion does not apply if the beginning lease term falls within the last 25.00% of the total useful life of the asset.) The future minimum lease payments for long-term capital leases as of June 30, 2006 are summarized below (expressed in thousands): Annual Debt Service Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 2027-2031 2032-2036 Governmental Activities $ 14,963 15,217 15,348 14,323 12,433 64,468 70,638 76,375 20,435 - Business-type Activities $ 9,209 9,521 9,842 8,907 8,292 36,253 30,656 30,072 30,414 15,543 304,200 (76,254) (98,138) 188,709 (75,321) - Total minimum lease payments Less: amount representing interest Less: amount representing executory costs Obligations under capital leases 2. $ 129,808 $ 113,388 Installment Purchases The State has installment purchase contracts payable for acquisitions of computer and other equipment. Installment purchases assets and liabilities are reported in the government-wide Statement of Net Assets. The future minimum payments for long-term installment purchases as of June 30, 2006, are summarized below (expressed in thousands): Annual Debt Service Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 Total future minimum payments Less: amount representing interest Obligations under installment purchases Governmental Activities $ 2,530 2,270 1,625 754 7,179 (364) $ 6,815 - 104 - Business-type Activities $ 2,637 2,255 2,034 1,600 1,600 1,676 135 11,937 (1,658) $ 10,279 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 3. Capital Assets Financed through Capital Leases and Certificates of Participation The following table summarizes the historical costs of assets acquired under capital leases and COPs (expressed in thousands): Governmental Activities Land $ Construction in progress Buildings Improvements other than buildings Equipment Less: Accumulated Depreciation Carrying Value 6,078 Business-type Activities $ - 302,427 1,067,487 3,653 - 64,308 56 401,213 1,067,543 (118,486) $ - 24,747 282,727 (72,218) $ 995,325 E. LITIGATION The amounts shown for the Ladewig vs. Arizona Department of Revenue and the Kerr vs. Killian settlements are further discussed in Note 10.B – Litigation. The State has typically paid for litigation from the General Fund. F. COMPENSATED ABSENCES Compensated absences are paid from various funds in the same proportion that those funds pay payroll costs. The compensated absence liability attributable to governmental activities will be liquidated primarily by the General Fund. During fiscal year 2006, the State paid for compensated absences as follows: 85.00% from the General Fund, 9.00% from other funds, and 6.00% from other major funds. - 105 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 G. CHANGES IN LONG-TERM OBLIGATIONS The following is a summary of changes in Long-Term Obligations (expressed in thousands): Governmental Activities: Long-term Debt: Revenue bonds Grant anticipation notes Certificates of participation Capital leases Installment purchase contracts Premiums and discounts on debt Deferred amounts on refundings Total Long-term Debt Balance July 1, 2005 Increases $ 2,170,845 363,970 1,054,677 126,676 6,926 197,479 3,920,573 $ 714,410 8,752 2,091 59,711 (21,398) 763,566 153,235 214,909 (233,798) 150,905 304,140 15,000 229,909 (74,789) (308,587) $ 4,224,713 $ 993,475 $ (1,201,037) $ $ 768,000 860,759 120,361 7,276 30 36,133 (20,821) $ 68,470 175,027 4,764 4,534 (1,492) $ $ 1,771,738 251,303 55,819 55,819 $ 1,827,557 Other Long-term Liabilities: Compensated absences Ladewig vs. Arizona Department of Revenue Settlement Kerr vs. Killian Settlement Total Other Long-term Liabilities Total Long-term Obligations Business-type Activities: Long-term Debt: Revenue bonds Certificates of participation Capital leases Installment purchase contracts Notes payable Premiums and discounts on debt Deferred amounts on refundings Total Long-term Debt Other Long-term Liabilities: Compensated absences Total Other Long-term Liabilities Total Long-term Obligations Decreases $ (778,555) (38,540) (33,867) (5,620) (2,202) (37,232) 3,566 (892,450) (33,870) (89,020) (6,973) (1,761) (30) (3,723) 2,094 Reclassifications $ Balance June 30, 2006 $ Due Thereafter 102,860 42,570 60,945 5,699 2,342 19,947 (3,566) 230,797 $ 2,003,840 282,860 959,865 124,109 4,473 200,011 (14,266) 3,560,892 134,346 127,749 6,597 - 76,116 15,000 225,462 76,116 15,000 218,865 6,597 - $ 4,017,151 $ 449,662 $ 3,567,489 $ $ 42,435 16,805 4,057 2,180 1,633 (1,688) - $ 2,106,700 325,430 1,020,810 129,808 6,815 219,958 (17,832) 3,791,689 Due Within One Year 1,387 (1,387) 802,600 946,766 113,388 10,279 38,331 (21,606) (133,283) - 1,889,758 65,422 1,824,336 72,134 72,134 (65,118) (65,118) - 62,835 62,835 10,622 10,622 52,213 52,213 $ 323,437 $ (198,401) - $ 1,952,593 76,044 $ 1,876,549 $ $ $ 760,165 929,961 109,331 8,099 36,698 (19,918) The above long-term obligations relating to governmental activities include Internal Service Funds. Amounts for capital leases and compensated absences differ from those in the Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets because $11.130 million of capital leases and $12.346 million of compensated absences are attributable to Internal Service Funds. These amounts are included in the reconciliation as part of Internal Service Fund net assets. - 106 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 7. INTERFUND TRANSACTIONS INTERFUND BALANCES AND TRANSFERS Interfund Receivables/Payables Interfund balances as of June 30, 2006 are as follows (expressed in thousands): Due To Due From General Fund General Fund $ - Transportation & Aviation Planning, Highway Maintenance & Safety Fund $ - 66,822 2,247 26,809 3 16,135 150,559 1,025 $ 263,600 20,000 20,000 Land Endowments Fund $ 392 Non-Major Non-Major Governmental Enterprise Funds Funds $ 42,695 $ 3 Internal Service Funds $ 1,694 Total Due To $ 44,784 1 681 1 1,090 3,467 200,990 13,107 28,941 758 17,176 170,560 2,118 $ 478,434 Transportation & Aviation Planning, Highway Maintenance & Safety Fund Land Endowments Fund Non-Major Governmental Funds Unemployment Compensation Fund Lottery Fund Non-Major Enterprise Funds Internal Service Funds Total Due From $ 392 $ $ 2,861 10,859 1,451 755 1,041 3 59,665 131,307 $ 131,310 $ Interfund balances represent (1) amounts due to and from the Internal Service Funds for goods and services rendered, and (2) cash transferred between funds for various interfund activities subsequent to the balance sheet date. The cash is recorded in the fund which initiated the transfer, and a corresponding liability is recorded. The receiving fund records an interfund receivable. The following interfund balances are not expected to be repaid within one year (expressed in thousands): Due To General Fund Due From Transportation & Aviation Planning, Highway Maintenance & Safety Fund Non-Major Enterprise Funds Total Due From $ Transportation & Aviation Planning, Highway Maintenance & Safety Fund Land Endowments Fund Non-Major Governmental Funds Internal Service Funds Non-Major Enterprise Funds Total Due To 64,518 $ - $ - $ - $ 98,900 $ - $ 163,418 150,494 $ 215,012 $ - $ - $ - $ 98,900 $ - 150,494 $ 313,912 Interfund Transfers Transfers for the year ended June 30, 2006 are as follows (expressed in thousands): Transferred To Transferred From Transportation & Aviation Planning, Land General Highway Maintenance Endowments Fund & Safety Fund Fund General Fund $ - $ Transportation & Aviation Planning, 32,383 Highway Maintenance & Safety Fund Land Endowments Fund 1,524 Non-Major Governmental Funds 177,086 Unemployment Compensation Fund 17 Lottery Fund 65,193 Non-Major Enterprise Funds 988 Internal Service Funds 791 Total Transfers In $ 277,982 $ NonMajor Non-Major Industrial Total Governmental Universities Commission Enterprise Transfers Out Fund Funds Special Fund Funds 859 $ 131 $ 65,198 $ 851,304 $ 3,067 3,926 $ 131 $ 425,474 47 9,571 2,550 27,174 30 530,044 $ 851,304 $ - 107 - - $ - 19,000 19,000 $ 110 110 $ 917,492 457,857 1,571 208,834 2,567 92,367 988 821 $ 1,682,497 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Interfund transfers represent legally authorized non-exchange transfers of funds. These transfers include: (1) Legislative appropriations from the General Fund, (2) other legislative transfers, (3) statutorily required transfers, (4) transfers related to the elimination of funds, and (5) transfers for debt service. NOTE 8. FUND DEFICIT A. INDUSTRIAL COMMISSION SPECIAL FUND The Industrial Commission Special Fund deficit decreased in the amount of $83.116 million from $192.766 million to $109.650 million during fiscal year 2006. The main contributor to the Special Fund deficit continues to be the insolvent carrier liability, which was $263.212 million at June 30, 2006. The Special Fund is responsible for paying all current and future Arizona workers’ compensation claims of insolvent insurance carriers and self-insured plans. Some of the claims expense will be recovered over a period of years as the Special Fund receives liquidation distributions from the insolvent companies. The 2006 calendar year assessments percentage for the State Compensation Fund and privately owned insurance companies that provide workers’ compensation insurance is 2.50%, the largest amount currently authorized in Arizona law. In 2005, ARS §23-1081(B) was amended to permit surplus in the Industrial Commission Administrative Fund to be transferred to the Special Fund when the Special Fund is not actuarially sound. During fiscal year 2006, $19.000 million was transferred from the Administrative Fund to the Special Fund. B. HEALTHCARE GROUP The Healthcare Group (HCG) incurred an operating loss of $6.137 million in 2006 and $4.844 million in 2005 and at June 30, 2006 had a fund deficit of $3.696 million. Additionally, current liabilities exceeded current assets by $1.723 million at June 30, 2006. Three factors were the primary contributors to the decrease in net assets in fiscal year 2006. The most significant were the $8.629 million stop-loss coverage reconciliation costs for the HMO model insurance contractors that are $4.000 million in excess of the premium revenue set aside for the HMO benefit plans’ stabilization reserve. The second was PPO model benefit claims that have been incurred but not yet received or paid in excess of the premium based reserves collected for the purpose of paying medical claims. The third factor contributing to the decrease in net assets was a continuation from fiscal year 2005 of the startup costs associated with the introduction of the new PPO product. In response to the decreases in net assets and liquidity concerns described above, HCG has started the following intensive initiatives: • HCG will conduct an organization-wide review of operating expenditures and will implement a plan which could include elimination of personnel and reengineering of job assignments and duties. • Premium increases were implemented in July, 2006 for new HMO members and in September, 2006 for renewing members. Analysis of fiscal year 2006 claims experience indicates that groups with 1 employee consume disproportionately more healthcare services than the larger groups. Therefore, HCG’s pricing strategy includes the implementation of actuarially determined premium rates for groups with 1 employee which are designed to cover the costs of their disproportionate consumption of services. HCG began implementing this strategy for PPO “groups of 1” in Maricopa County in July, 2006. A second increase will be implemented in January, 2007 at which time the “group of 1” rate will be implemented across the State in both the HMO and the PPO. • Beginning in January, 2007, co-payments associated with primary care, ambulatory care, and hospitalization will be increased. • Amend the contracted health plan contracts, effective July 1, 2006 to include PPO and HCG HMO program administrative costs and PPO claim costs as authorized allocations from the HMO stabilization reserve monies on an as needed basis. • In March, 2007, HCG will introduce a Point-of-Service plan and begin tiering its hospital network. When a member requires inpatient or outpatient care from a hospital provider, their co-insurance payment will be dependent upon the level or “tier” of the hospital they choose. Hospitals will be classified into tiers based on the discounts that they offer to HCG. Members will incur less out of pocket costs if they choose a Tier 1 hospital vs. a Tier 2 or Tier 3 hospital. - 108 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The HCG management represents that successful implementation of these operating improvements will provide sufficient cash to fund operating expenses. However, there can be no assurance that these operating improvements will occur or will provide sufficient cash to fund operating expenses. Additionally, if enrollment growth and across-the-board premium increases are not sufficient to fund the reserves for past losses and future stop-loss and claims experience costs, then the HCG will be required to scale back administrative expenditures to the level supported by actual enrollment and/or require a subsidy from the State General Fund to cover these operating costs. There can be no assurances that the Legislature will approve such a subsidy from the State General Fund. Accordingly, the accompanying financial statements have been prepared assuming that the HCG will continue as a going concern. The matters discussed above raise substantial doubt about the HCG’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the HCG be unable to continue as a going concern. C. RISK MANAGEMENT FUND Risk Management Fund (RMF) - The RMF deficit of $330.819 million is primarily due to the RMF receiving annual funding only for expected paid claims (self-insured and excess insurance expenditures, legal and other claim related expenditures, and administrative expenditures), and not being funded for non-current accrued insurance losses. Accrued insurance losses of the RMF are not considered when determining funding for each fiscal year. D. RETIREE ACCUMULATED SICK LEAVE FUND The Retiree Accumulated Sick Leave pays retirees their accumulated sick leave upon retirement from State service when they meet certain criteria. When a retiree submits an application to receive their sick leave benefits, the entire liability is recorded in the fund. The retirees receiving benefits are paid in three equal annual installments; however, State agencies pay for only one year based on a .40% charge on gross payroll. The $3.263 million fund deficit is primarily due to the above funding mechanism. NOTE 9. JOINT VENTURE The U of A is a participant in the Large Binocular Telescope Corporation (LBT). The LBT was formally incorporated as a nonprofit corporation in August 1992, pursuant to a Memorandum of Understanding, as amended, executed on February 24, 1989, between the U of A and the Arcetri Astrophysical Observatory in Florence, Italy (Arcetri). The purpose of the joint venture is to design, develop, construct, own, operate, and maintain a binocular telescope currently being constructed in Arizona. The current members of the LBT are the U of A, Arcetri Research Corporation, Ohio State University and the LBT Beteiligungsgesellschaft. The U of A has committed resources equivalent to 25.00% of the project’s construction costs and the LBT’s annual operating costs. As of June 30, 2006, the U of A has made cash contributions of $18.159 million toward the project’s construction costs. The U of A’s financial interest represents its future viewing/observation rights. Upon completion of construction, these rights will be divided among the participants in proportion to their contributions. According to the audited financial statements of the LBT for the year ended December 31, 2005, assets, liabilities, revenues, and expenses totaled $109.000 million, $2.000 million, $10.000 million, and $3.000 million, respectively. The LBT’s separate audited financial statements can be obtained from LBT Project Office, Steward Observatory, University of Arizona, Tucson, AZ 85721-0065. NOTE 10. COMMITMENTS, CONTINGENCIES, AND COMPLIANCE A. RISK MANAGEMENT INSURANCE LOSSES The Department of Administration – Risk Management Section manages the State’s property, environmental, liability, and workers’ compensation losses. The State has determined that the management of these losses can be performed effectively and efficiently through the Risk Management Section. Consequently, all agencies and the State’s three universities are required to participate in this program. The State’s Risk Management Section evaluates the proper mix of purchased commercial insurance and self-insurance annually. The Industrial Commission Special Fund provides payment of workers’ compensation losses which are not covered by the State Compensation Fund, the Department of Administration – Risk Management Section, private insurance carriers, or self-insured employers. The workers’ compensation claims paid by the Commission encompass losses against uninsured or underinsured employers and insolvent insurance carriers and would include payments for vocational rehabilitation, medical conditions incurred - 109 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 prior to 1973, apportionment claims for pre-existing industrial and non-industrial related physical impairments, and compensation for loss of earnings associated with the disability. The Commission is totally self-insured. The State records claims liability when the reported loss is probable and reasonably estimated. On an annual basis, independent actuarial firms are engaged to estimate the State’s total year-end outstanding claims liability, which takes into account recorded claims and related allocated claims adjustment expenditures, loss development factors, and an estimate for incurred but not reported claims. The management and payment of these losses is accomplished through the funding mechanism of the Risk Management Fund (Internal Service Fund) and the Industrial Commission Special Fund (Enterprise Fund). As discussed in the above paragraph, an independent annual actuarial analysis is performed to evaluate the needed funding. The Risk Management Section will assess each agency an annual portion of the necessary funding for the Risk Management Fund based on their exposures and prior loss experience. Interest and dividend earnings of investments and assessments on gross premium revenues currently fund the Commission Special Fund. To provide funding for workers’ compensation claims, the Commission may direct payment to the State Treasurer an amount not to exceed one and one-half percent of all premiums received by the State Compensation Fund, private carriers and self-insured plans during the immediately preceding calendar year. Beginning in calendar year 2004, a 1.50% assessment was levied under ARS §23-1065(A) because of a deficit net assets balance resulting from an increase in accrued insurance losses due to defunct insurance carriers. The major reason for the decrease in insolvent carrier liabilities from July 1, 2005 through June 30, 2006 was the additional 12 months of workers’ compensation case development without a significant number of new cases being assigned to the State Compensation Fund under ARS §23-966(A). The total of all three assessments for the Industrial Commission Special fund in 2006 is 2.50%. This includes the 1.50% assessment under ARS §23-1065(A), .50% assessment under ARS §23-966(D), based on the insolvent carrier losses, and .50% assessment under ARS §23-1065(F) based on the total apportionment liability. The Commission has filed pending proof of claim requests with ancillary receivers, liquidators holding deposits and surety bonds of several insolvent companies. Since the actual amount that will ultimately be received cannot be determined, the Commission will continue to recognize receipt of insolvent carrier deposits (no insurance settlement income) as revenue at the time received rather than recording a receivable. Occasionally, the Risk Management Section agrees with claimants to purchase an annuity contract to settle specific claims when it is determined that it is in the best interest of the State to do so. In these instances, the State requires the claimant to sign an agreement releasing the State from any further obligation. As a result of these requirements, the likelihood that the State will be required to make future payments on these claims is remote. There have been no significant reductions in the current fiscal year insurance coverage. There have been no settlements that have exceeded insurance premium coverage in the last three years. The following table presents the changes in claims liabilities balances (short- and long-term combined) during fiscal years ended June 30, 2005 and June 30, 2006 (expressed in thousands): Fiscal Year Risk Management Fund: 2005 2006 Industrial Commission Special Fund: 2005 2006 Current Year Claims and Changes in Estimates Beginning Balance $ 243,128 301,600 $ 384,936 461,598 127,775 135,364 101,395 (36,513) - 110 - Claims Payments $ 69,303 69,764 24,733 14,842 Ending Balance $ 301,600 367,200 461,598 410,243 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 B. LITIGATION In Ladewig vs. Arizona Department of Revenue, Ladewig is a class action tax refund case. The class members are seeking refunds for Arizona income tax paid on dividends received from corporations doing less than 50.00% of their business in Arizona during the years 1986 through 1989. The trial court held that such taxes violated the Commerce clause of the U.S. Constitution and certified the class. The class certification was upheld by the Arizona Supreme Court in 2001. The Tax Court approved a settlement in December 2002. The remaining issues concern the administration of the settlement. The Department moved to correct claim errors that were caused by computer and clerical mistakes and resulted in millions of dollars in overpayments on the first installment to approximately 3,250 class members. The Tax Court ruled in November 2005 that the Department could not recover amounts previously paid to class members, but could offset the overpayments against the amounts due for the remaining two installments. Accordingly, the State has recorded a liability in its financial statements in the amount of $76.116 million. In Kerr vs. Killian, federal employees claimed an income tax refund on taxes paid on federal employee contributions. Prior to 1990, the Arizona statutes allowed state employees to deduct mandatory employee pension contributions, but did not provide a similar deduction for federal employees. After 1990, Arizona amended the statutes to just adopt federal adjusted gross income. Contributions that are deductible at the federal level are also deductible for Arizona tax purposes. The Arizona Supreme Court held that Arizona’s tax statutes after 1990 did not discriminate against federal employees based on the source of income. The United States Supreme Court denied review. The Arizona Court of Appeals remanded the case for the earlier years to take a fresh look at the class certification issue. The parties then entered into a settlement agreement which the tax court has approved. Accordingly, the State has recorded a liability in its financial statements in the amount of $15.000 million. In Roosevelt Elementary School District No. 66 vs. State of Arizona, the plaintiffs allege the State failed to fully fund the Building Renewal Fund established by the Students FIRST legislation. On October 13, 2000, the court held that the State did not violate the statutory provisions regarding funding of the Building Renewal Fund for fiscal year 1998-99. However, the court held that neither party was entitled to summary judgment regarding funding for fiscal year 1999-00, and that in order to prevail on that claim, the plaintiffs would have to demonstrate that they were injured by the alleged under funding. On February 21, 2002, the court granted the plaintiffs’ motion to file an amended complaint, which included similar allegations regarding funding for fiscal year 2001-02. The parties both moved for summary judgment once again regarding the remaining claims in the case (fiscal years 1999-2000 and 2001-02), and on May 7, 2002, the trial court granted the plaintiffs’ motion for summary judgment as to both years. The State timely appealed the decision to the Arizona Court of Appeals. On August 14, 2003, the Court of Appeals reversed the decision of the trial court and remanded the matter back to the trial court. Plaintiffs filed a petition for review in the Arizona Supreme Court, which was denied. The matter was remanded to the Superior Court. In 2006, the parties completed discovery and the State filed a Motion for Summary Judgment in mid-2006. One of the grounds for the Motion for Summary Judgment was the plaintiff school districts’ failure to apply for funding under the Emergency Deficiencies Correction Fund (ARS §15-2022). The matter was set for trial in late October, 2006, but the Superior Court granted summary judgment in favor of the State based on the failure of the plaintiff districts to apply for emergency deficiency monies. However, because one of the plaintiffs had applied for emergency funding for some of its projects in July, 2006, and because another of the three plaintiffs submitted a request for emergency funding after the summary judgment ruling, the Superior Court has stayed the case pending the outcome of the emergency requests, and has indicated that the claims may be reinstated if the emergency requests are denied and the plaintiffs have used all their available state funding. The potential outcome is uncertain at this time. If this case were to have an unfavorable outcome, it is possible that the State could incur losses of approximately $88.000 million. However, at this time, the plaintiffs have suggested that they are only seeking a declaration that the Students FIRST legislation is unconstitutional as applied. In the Somerton Elementary School District No. 66 vs. State of Arizona, the plaintiffs’ claim is identical to that alleged in the Roosevelt Elementary School District case discussed above, except that it involves the level of State funding for the Building Renewal Fund for the fiscal year 2002-03. Because the issues raised in this case are identical to those raised in the Roosevelt Elementary School District case, it was assigned to the same trial court judge. The potential outcome is uncertain at this time. If this case were to have an unfavorable outcome, it is possible that the State could incur losses of approximately $90.000 million. However, at this time, the plaintiffs have suggested that they are only seeking a declaration that the Students FIRST legislation is unconstitutional as applied. In Smith vs. Winkelman the plaintiffs have filed an action in Maricopa County Superior Court seeking an accounting, declaratory relief, and damages for breach of trust. Damages are for the value of land disposed of by the State Land Department between 1929 and 1967 for approximately 900 rights of way that were issued to governmental entities without appraisal or auction, and without the payment of any compensation. In January 2007, the court granted motions to dismiss on the ground that the - 111 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 plaintiffs’ claims were barred by laches. Plaintiffs have announced their intention to appeal. One claim by the State against one grantee (the Flood Control District of Maricopa County) was settled in September 2006, and a separate action seeking approval of that settlement is pending. The lands at issue in that settlement comprise approximately one third of the total lands affected by the challenged right of way. Approval of the settlement is expected to significantly reduce the State’s exposure to risk of damages. The State previously moved to dismiss on statute of limitations and for lack of standing and justiciability, but that motion was denied and the Court of Appeals declined to review the statute of limitations issue on a petition for special action. The State joined in the motions leading to the dismissal order. The State will probably defend that appeal and cross-appeal the denial of the previous motions to dismiss. The potential outcome is uncertain at this time. If this case were to have an unfavorable outcome, it is possible that the State would have to pay the Land Endowments Fund between $500.000 million and $1.0 billion. In Liquid Titan vs. Arizona Department of Weights and Measures, et al., the plaintiff alleges defamation against the Arizona Department of Weights and Measures (ADWM), the former director, and the current director. The complaint arises from a press release issued by the ADWM relating to fuel quality and record violations. The complaint has been served with discovery. The State is preparing its answer and has met with the ADWM to address answering the complaint and responding to discovery. The State’s anticipated response is to admit the press release and deny allegations of wrongful intent and lack of basis for assertions in the press release. The potential outcome is uncertain at this time. If this case were to have an unfavorable outcome, the State could incur losses ranging from $9.200 million to $15.000 million. The State has a variety of claims pending against it that arose during the normal course of its activities. Management believes, based on advice of legal counsel, losses, if any, resulting from settlement of these claims will not have a material effect on the financial position of the State. All losses for any unsettled litigation or contingencies involving workers’ compensation, medical malpractice, construction and design, highway operations, employment practices, criminal justice, fidelity and surety, environmental property damage, general liability, environmental liability, building and contracts, auto liability, or auto physical damage are determined on an actuarial basis and included in the Accrued Insurance Losses of the Internal Service Funds and the Industrial Commission Special Fund. C. ACCUMULATED SICK LEAVE 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 employee’s 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 25.00% for 500 hours to a maximum of 50.00% for 1,500 hours. The maximum benefit value is $30 thousand. The benefit is paid out in annual installments over three years. The Retiree Accumulated Sick Leave Fund is accounted for on the financial statements as an Internal Service Fund and accounts for the retiree accumulated sick leave. D. UNCLAIMED PROPERTY The State of Arizona’s Uniform Unclaimed Property Act requires deposit of certain unclaimed assets into a managed Agency Fund. ARS §44-313 requires a separate trust fund of not less than $100 thousand to be retained for prompt payment of claims. The excess amount, above that which is required to be retained, is required to be deposited to the General Fund where it is included as other revenue. Under ARS §46-731, unclaimed utility deposits are deposited in the Utility Assistance Fund to help low income people make utility deposits and repairs. Fifty-five and twenty percent of the remaining net cash collected, after refunds, is transferred to the Department of Commerce Housing Fund to be used for low-cost housing and the State Treasurer for distribution as provided for in ARS §5-113, respectively. The balance is to be deposited in the General Fund. Also, per Senate Bill 1524, 47th Legislature, 1st Regular Session, notwithstanding ARS §44-313, the Department of Revenue shall deposit any unclaimed property for fiscal year 2006 that is associated with the case of Ladewig v. State of Arizona in the General Fund. Ladewig unclaimed property in the amount of $3.705 million was deposited into the General Fund during fiscal year 2006. In addition, for fiscal year 2006, $856 thousand was deposited in the Utility Assistance Fund, $26.005 million was deposited in the Housing Fund, $9.456 million was deposited in the Racing Fund and $10.256 million was deposited in the General Fund. A total of approximately $417.074 million has been remitted since inception of the fund. The State is also holding securities valued at $47.951 million, and mutual funds of $4.791 million. The remittances to the General Fund and the holdings by the State represent contingencies, as claims for refunds can be made by the owners of the property. The GASB requires that a liability be reported to the extent that it is probable that escheat property will be reclaimed and paid to claimants. This liability is also reported as a reduction of revenue. This liability is reported in the General Fund because it is the fund to which the property - 112 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 ultimately escheats in Arizona. At June 30, 2006, this amount, reported as Due to Others in the General Fund, is $102.208 million. E. CONSTRUCTION COMMITMENTS The ADOT had outstanding commitments under construction contracts of approximately $692.381 million at June 30, 2006. F. ARIZONA STATE LOTTERY Annuities are purchased for all prizes over $400 thousand for which winners will receive the jackpot in annual installments for The Pick on-line game. These annuities are purchased from qualifying insurance companies which have the highest ratings from among A.M. Best Company, Standard & Poor’s, Moody, Duff & Phelps, or Weiss. The Lottery remains contingently liable on all annuities. Aggregate future payments to prize winners on existing annuities totaled approximately $159.038 million at June 30, 2006. Approximately $118.072 million of the total aggregate future payments at June 30, 2006 relate to annuities purchased from five separate insurance companies, of which approximately $45.942 million relates to a single insurance company. NOTE 11. TOBACCO SETTLEMENT The State is one of many states participating in the settlement of litigation with the tobacco industry over the reimbursement of healthcare costs. The settlement money is intended to compensate the State for costs it has incurred in providing health and other services to its citizens that were necessitated by the use of tobacco products. The State expects to receive settlement payments through 2025. The State recorded tobacco settlement revenue of $86.231 million and $84.333 million in the fund statements and the government-wide statements in fiscal year 2006, respectively. Future settlement payments are subject to several adjustments, but the amounts are not presently determinable. These adjustments include a volume adjustment, which could reflect any decreasing cigarette production under a formula that also takes into account increased operating income from sales. Other factors that might affect the amounts of future payments include ongoing and future litigation against the tobacco industry and the future financial health of the tobacco manufacturers. Because the net realizable value of the future settlement payments is not measurable and there is no obligation for the tobacco companies to make settlement payments until cigarettes are shipped, the State did not record a receivable for the future payments related to cigarette sales after June 30, 2006. NOTE 12. PUBLIC-PRIVATE PARTNERSHIP The State has entered into a partnership agreement with Accenture. The purpose of this partnership is to fund the Department of Revenue’s technology needs. This agreement stipulates that Accenture will be paid 85.00% of the new revenue generated from the system enhancements, even if this amount is insufficient to cover the total contract cost. Accordingly, Accenture has created a system that increases the State’s efficiency in collecting tax revenues. As of June 30, 2006, the State has paid Accenture $106.525 million towards the $136.673 million contract cost. Included in the $136.673 million contract cost is capitalized interest charges of $7.000 million and application support charges of $30.138 million. NOTE 13. CONDUIT DEBT During the year ended June 30, 2006, the Greater Arizona Development Authority (GADA) issued $64.100 million Infrastructure Revenue Bonds, Series 2005B for public infrastructure projects in the communities of the Town of Queen Creek, the City of Williams, the Drexel Heights Fire District, the City of Lake Havasu, and the Town of Superior. During the year ended June 30, 2006, the GADA issued $52.060 million Infrastructure Revenue Bonds, Series 2006A for public infrastructure projects in the communities of the Town of Queen Creek, the Town of Buckeye, the City of Stafford, and the Town of Sahuarita. The GADA’s bond structure provides lower borrowing costs for Arizona’s communities by diversifying the risk to investors and by sharing financing costs among several borrowers. The GADA Fund is leveraged when GADA issues its bonds, which maximizes loan capacity for communities. An intercept mechanism for intercepting state-shared revenues for loans to political subdivisions enhances the security of the GADA bonds even further. In previous years, the State appropriated a total of $20.000 million to the GADA for the express purpose of securing bonds issued by the GADA. As of June 30, 2006, the remaining balance in the appropriations account was $17.302 million. The Series 2005B - 113 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 and 2006A bonds were issued by the GADA to make loans to the participants listed above and constitute special and limited obligations of the GADA. The principal of and interest on the bonds are payable solely from the funds which are held in Trust by the Trustee (the Trust Estate). The Trust Estate includes debt service payments required to be made by the respective participants in the Series 2005B and 2006A bond issues. The principal of and interest premium, if any, on the Series 2005B and 2006A bonds shall not constitute or give rise to a pecuniary liability on the part of the directors and officers of the GADA. The Series 2005B and 2006A bonds do not constitute a legal debt of the State and are not enforceable against the State. At June 30, 2006, the total outstanding face value of all bonds issued by the GADA was $233.785 million. NOTE 14. SUBSEQUENT EVENTS On September 21, 2006, House Bill 2206 became effective and eliminated the restriction that limited the principal amount of Highway Revenue Bonds for the ADOT that could be outstanding at one time to $1.3 billion. On September 26, 2006, the ADOT issued $325.000 million in Highway Revenue Bonds, Series 2006 to (i) finance portions of the ADOT’s Five-Year Capital Program and (ii) pay costs of issuing the Series 2006 Bonds. The 2006 Bonds are due July 1, 2012 through July 1, 2026. Net proceeds totaled $350.727 million (after receipt of $26.201 million reoffering premium and payment of $967 thousand in underwriting fees and costs of issuance). Also on September 26, Standard & Poor’s Ratings Services upgraded the rating on the ADOT’s outstanding subordinate lien Highway Revenue Bonds from AA+ to AAA. In November 2006, the GADA issued the infrastructure Revenue Bond Series 2006B. The principal amount of original issue was $36.520 million with interest rates of 4.00% to 5.00%. Maturity dates are from February 1, 2017 through February 1, 2037. Interest payment dates are February 1 and August 1 of each year. The GADA’s contribution to the bond issuance costs are $200 thousand. In addition, the GADA will reclassify from unrestricted net assets to its restricted net assets the amount of $8.055 million for the pledged collateral reserve fund. The participants in this bond issue are the cities of Show Low and Somerton, Maricopa Fire District, Drexel Heights Fire District, the Town of Quartzite, and the Apache Fire Department in the amounts of $8.370 million, $6.885 million, $3.200 million, $1.350 million, $7.215 million, and $9.500 million, respectively. NOTE 15. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – COMPONENT UNITS The accounting policies of the State’s component units conform to U.S. GAAP applicable to governmental units adopted by the GASB, except for those component units affiliated with the State's Universities. Because the component units affiliated with the Universities are not governmental entities, they follow FASB statements for not-for-profit organizations for financial reporting purposes. Each component unit has a June 30 year-end with the exception of the Law College Association, which has a May 31 year-end. A. FINANCIAL REPORTING POLICIES 1. Measurement Focus and Basis of Accounting The State's component units and component units affiliated with the Universities are presented using the economic resources measurement focus and the accrual basis of accounting. The State’s component units follow FASB Statements and Interpretations issued on or before November 30, 1989; Accounting Principles Board Opinions; and Accounting Research Bulletins, unless those pronouncements conflict with GASB pronouncements. The State has chosen the option not to follow FASB Statements and interpretations issued after November 30, 1989, except for UMC, which has elected to apply the provisions of all relevant pronouncements of the FASB, including those issued after November 30, 1989, unless those pronouncements conflict or contradict GASB pronouncements. - 114 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 2. Net Assets Component units affiliated with the Universities classify net assets, revenues, expenses, gains and losses based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the component units affiliated with the Universities and changes therein are classified and reported as follows: 3. • Unrestricted net assets include assets and contributions that are not restricted by donors or for which such restrictions have expired. • Temporarily restricted net assets include contributions for which donor imposed restrictions have not been met (either by the passage of time or by actions of the Foundations), charitable remainder unitrusts, pooled income funds, gift annuities, and pledges receivable for which the ultimate purpose of the proceeds is not permanently restricted. Donorrestricted contributions are classified as temporarily restricted if the restrictions are satisfied in the same reporting period in which the contributions are received, except for the Foundations associated with ASU, which classify such contributions as unrestricted. • Permanently restricted net assets include contributions, charitable remainder unitrusts, pooled income funds, gift annuities, and pledges receivable which require by donor restriction that the corpus be invested in perpetuity and only the board-approved payout be made available for program operations in accordance with donor restrictions. Cash and Cash Equivalents Cash and cash equivalents includes monies held in certificates of deposit, overnight money market accounts, and money market funds. Cash and cash equivalents are stated at cost, which approximates fair value. 4. Investments Investments are recorded in accordance with Statements of Financial Accounting Standards (SFAS) No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. Under SFAS No. 124, entities are required to report investments in equity securities that have readily determinable fair values, and all investments in debt securities at fair value. Equities, fixed income, and mutual funds are stated at fair market value based on quoted market prices. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in the excess of revenues over expenses in the Statement of Activities. 5. Income Taxes The Foundations qualify as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code and, accordingly, there is no provision for income taxes in the accompanying financial statements, except for the Collegiate Golf Foundation and the ACFFC. In addition, they qualify for the charitable contribution deduction and have been classified as organizations that are not private foundations. Any income determined to be unrelated business taxable income would be taxable. The ACFFC and NACFFC are exempt from taxes under the provisions of Section 501(c)(4) of the Internal Revenue Code. The ACFFC does not qualify for the charitable contribution deduction. 6. Annuities Payable and Other Trust Liabilities Annuities payable and other trust liabilities for the U of A Foundation are stated at the actuarially computed present value of future payments to the annuitants. The excess of the fair values of assets received (classified according to their nature in the Statement of Financial Position) pursuant to annuity agreements over the actuarially computed annuities payable (using market rates in effect on the contribution date) is recorded as contributions in the year received. 7. Contributions Contributions are recorded in accordance with SFAS No. 116, Accounting for Contributions Received and Contributions Made. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the - 115 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restriction. 8. Net Assets Released from Restriction Expenses are not incurred in the temporarily restricted or permanently restricted net asset categories. As the restrictions on these net assets are met, the assets are reclassified to unrestricted net assets. The total assets reclassified are reported as net assets released from restriction in the accompanying Statement of Activities. 9. Use of Estimates The preparation of the Universities-affiliated component units' financial statements in conformity with U.S. GAAP required management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. DEPOSITS AND INVESTMENTS 1. Component Units A. Deposits and Investment Policies The investments of the WIFA are stated at fair value, except guaranteed investment contracts, which are stated at cost since they are non-participating contracts. The investments of the UMC are stated at fair value. B. Custodial Credit Risk - Deposits Custodial risk for deposits is the risk that, in the event of the failure of a depository financial institution, the deposits or collateral securities may not be recovered from the outside party. The UMC holds deposits in excess of FDIC limits. At June 30, 2006, uninsured, uncollateralized deposits included in cash and cash equivalents were approximately $14.296 million. C. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The WIFA does not have a formal policy regarding interest rate risk. The following table presents the interest rate risk for the WIFA utilizing the segmented time distribution method as of June 30, 2006 (expressed in thousands): Investment Maturities (in years) Investment Type Commercial paper Corporate asset backed securities Corporate collateralized mortgage obligations Corporate notes Guaranteed investment contracts Money market mutual funds U.S. Agency Securities U.S. Agency Mortgage Backed Securities U.S. Treasury Securities Total Fair Value $ 49,206 384 2,868 14,934 80,896 126,700 57,104 8,020 1,016 Less than 1 $ 49,206 14,934 126,700 57,104 1,016 $ 341,128 $ 248,960 1-5 6-10 $ 384 13,577 - $ 67,319 - $ 13,961 $ 67,319 More than 10 $ 2,868 8,020 $ 10,888 The UMC’s investment policy limits the portfolio duration related to debt securities to the Lehman Brothers Intermediate Government/Credit Index. This is an index based on all publicly issued intermediate government and corporate debt securities with average maturities of four to five years. The following table presents the estimated maturities of the UMC’s investments, utilizing the segmented time distribution method as of June 30, 2006 (expressed in thousands): - 116 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Investment Maturities (in years) Investment Type Commercial paper Corporate bonds Corporate fixed income Guaranteed investment contracts Managed futures Money market mutual funds U.S. Treasury Securities Other Fair Value $ 15,521 5,900 25,315 4,243 3,558 14,582 127,987 19,924 Less than 1 $ 25,315 3,558 14,582 7,663 - $ 217,030 $ 51,118 Total 1-5 $ $ More than 10 $ 15,521 4,243 - 6-10 5,900 120,324 19,638 $ 286 145,862 $ 286 $ 19,764 D. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations to the holder of the investment. The WIFA does not have a formal policy regarding credit risk. The following table presents the WIFA’s investments which were rated by S & P’s and/or an equivalent national rating organization. The ratings are presented using S & P’s rating scale as of June 30, 2006 (expressed in thousands): Fair Investment Type Commercial paper Value $ Corporate securities Guaranteed investment contracts AAA 49,206 $ AA - 18,186 5,045 A $ - $ 2,811 BB - $ 8,622 A1 - $ Rated 49,206 1,708 $ - - 80,896 80,896 - - - - - 126,700 - - - - - 126,700 65,124 49,738 - - - 15,386 - $ 340,112 $ 135,679 Money market mutual funds U.S. Agency Securities Total Not $ 2,811 $ 8,622 $ 1,708 $ 64,592 $ 126,700 The UMC’s investment policy establishes ranges which limit the level of investments held in domestic and international equities, fixed income securities, and alternative investment strategies. Investment in fixed income securities is limited to investment grade securities with a credit rating of BBB, or equivalent, or better. The portfolio must maintain an average rating of A or better at all times. The following table presents the UMC’s investments which were rated by S & P’s and/or an equivalent national rating organization. The ratings are presented using S & P’s rating scale as of June 30, 2006 (expressed in thousands): Fair Security Description Commercial paper Not Value $ Corporate bonds Corporate fixed income AAA 15,521 $ AA 15,521 $ A - $ Rated - $ - 5,900 - - - 5,900 5,900 25,316 19,354 23 39 Federal agencies 43 43 - - - Managed futures 3,558 - - - 3,558 19,924 - - - 19,924 Other Totals $ 70,262 $ 34,918 $ 23 $ 39 $ 35,282 E. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s investment in a single issuer. The WIFA’s investment policy contains no limitations on the amount that can be invested in any one issuer. As of June 30, 2006, an investment in Bayerische Landesbank (fair value of $40.586 million) was approximately 11.90% of the WIFA’s total investments - 117 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 and an investment in AIG Matched Funding Corp. (fair value of $25.153 million) was approximately 7.37% of the WIFA’s total investments. F. Foreign Currency Risk The UMC’s investment policy permits it to invest a portion of its holdings in international equities and both international alternative and managed future investments. The UMC’s current holdings in international securities totaled approximately $12.000 million or 4.99% of total investments. There is no one foreign currency that comprises a material amount of these holdings. The following table summarizes the UMC’s foreign currency risk as of June 30, 2006 (expressed in thousands): Foreign Currency Risk by Investment Type at Fair Value (Expressed in Thousands) Currency Fixed Income Equities Total Argentina Peso Australian Dollar Brazil Real British Pound Sterling Canadian Dollar Chilean Peso Chinese Yuan Czech Koruna Euro Hong Kong Dollar Indonesia Rupiah Israel Shekel Japanese Yen Mexican Peso Norwegian Krone Peruvian Nuevo Sol Russian Ruble South African Rand South Korean Won Thailand Baht Other $ 2 8 95 81 1 215 1 1 84 3 17 6 4 1 64 $ 154 295 2,993 466 2,867 109 395 51 486 327 84 99 230 479 234 161 75 893 279 654 86 $ 154 297 3,001 561 2,948 110 395 51 701 327 85 100 314 482 251 161 81 897 279 655 150 Total $ 583 $ 11,417 $ 12,000 - 118 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 2. Universities-Affiliated Component Units A. Investment Summary Investments of the Universities-affiliated component units are comprised of the following amounts at June 30, 2006. All investments are stated at fair value (expressed in thousands): ASU Foundation $ 21,781 275,332 109,078 58,539 $ 464,730 Money market funds and cash equivalents U.S. Government/Agency Obligations and Mutual Funds Domestic/international equity securities and mutual funds Fixed income Corporate bonds REIT fund, real estate and timber partnerships Absolute return limited partnerships Other investments Total Investments ACFFC $ 75,038 2,700 $ 77,738 U of A Foundation $ 69,428 137,966 9,992 14,818 64,628 6,806 $ 303,638 NAU Foundation $ 12,732 30,756 5,523 525 $ 49,536 B. Endowment Trust Agreement In March 2003, the ASU Foundation and the ASU entered into a trust agreement, appointing the ASU Foundation the trustee of selected ASU endowments. In accordance with the trust agreement, the ASU Foundation receives a management fee for providing these services. Unrealized and realized gains and losses, and interest and dividends, if any, are added to or subtracted from the recorded value of the invested trust assets managed by the ASU Foundation. The invested trust assets are separate from ASU Foundation investments, and a corresponding liability is presented for the fair value of the invested trust assets managed for the ASU. C. PROGRAM LOANS The WIFA has 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 semi-annual 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 during fiscal year 2006 are as follows (expressed in thousands): Beginning Balance Clean Water Fund Drinking Water Fund Total Ending Increases Decreases Balance $ 349,094 $ 89,222 $ (22,728) $ 415,588 139,978 27,950 (8,581) 159,347 $ 489,072 $ 117,172 $ (31,309) $ 574,935 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 .30 to 4.00% 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 the WIFA to the borrowers and interest on the reserve accrues to the borrowers. - 119 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 D. PLEDGES RECEIVABLE Unconditional promises to give are included in the accompanying financial statements as pledges receivable and revenue of the appropriate net asset category. Unconditional promises to give are recorded at their net realizable value using various yields as determined by the university foundations. The following summarizes unconditional promises as of June 30, 2006 (expressed in thousands): UniversitiesAffiliated Component Units Net Pledges Receivable $ 64,907 29,230 29,445 ASU Foundation U of A Foundation Law Association E. DIRECT FINANCING LEASE AGREEMENT 1. ASU Foundation ASU Foundation leases a portion of the Fulton Center building (ASU Foundation’s headquarters) to ASU under a direct financing lease. At the end of the lease, ASU Foundation and Affiliates will gift their portion of the building to ASU and ASU will receive title to the building. The entire amount of the minimum Fulton Center lease payments receivable balance of $54.200 million will be used by ASU Foundation and Affiliates to service the principal and interest payments required for the Series 2003 Bonds. Accordingly, unearned interest will be amortized to lease revenue by the interest method using interest rates which correspond to the stated interest rates of the Series 2003 Bonds. Unearned interest at June 30, 2006 was $29.600 million. ASU Foundation’s net investment in this direct financing lease is $24.600 million and is presented in the Component Unit’s Statement of Financial Position. 2. ACFFC Pursuant to a Sub-Lease Agreement, Nanotechnology Research, LLC, a wholly owned subsidiary of ACFFC, leases its interest in the Research Park to ASU, which will pay rent at times and in amounts sufficient to pay all principal and interest (after utilization of amounts held in the Capitalized Interest Accounts) on the Series 2004 Bonds, as well as all fees and expenses related to the Series 2004 Bonds. The Sublease Agreement is a net lease, and Nanotechnology is entitled to receive the rents and all other sums payable pursuant to the Sublease Agreement free from all taxes, charges, fees, and expenses, all of which will be paid by ASU. The Sublease Agreement commenced on April 7, 2004, and continued until June 30, 2005, with successive automatic annual renewals for the period July 1 through June 30 of each year without action on the part of Nanotechnology or ASU, through the period ending March 31, 2034. The Sublease Agreement is subject to early termination by Nanotechnology or ASU upon payment in full of the Series 2004 Bonds. Upon termination of or expiration of the Sublease Agreement, Nanotechnology’s interest in the premises, including all buildings and improvements on the leased premises, transfers to ASU without further consideration. Therefore, the lease is classified as a direct financing capital lease. Lease payments are based on a variable interest rate currently determined on a weekly basis. The average interest rate approximates 4.66% at June 30, 2006. Lease payments commence once the Capitalized Interest Accounts are fully utilized, which at present interest rates is expected to be in 2007. ACFFC’s net investment in this direct financing lease is $35.000 million. - 120 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 F. CAPITAL ASSETS Capital asset activity for the UMC for the fiscal year ended June 30, 2006 was as follows (expressed in thousands): University Medical Center Beginning Balance Non-depreciable capital assets: Land Construction in progress Total Non-depreciable Capital Assets $ Additions 6,001 7,235 13,236 $ Retirements 23,771 23,771 $ Adjustments & Ending Reclassifications Balance (160) (160) $ (775) (775) $ 6,001 30,071 36,072 Depreciable capital assets: Buildings Improvements other than buildings Equipment Total Depreciable Capital Assets 149,885 881 163,981 314,747 550 11,390 11,940 (186) (56,153) (56,339) 470 (91) 396 775 150,719 790 119,614 271,123 Less accumulated depreciation for: Buildings Improvements other than buildings Equipment Total Accumulated Depreciation (90,943) (364) (131,521) (222,828) (6,638) (11,938) (18,576) 161 13 55,894 56,068 (1) 1 - (97,421) (351) (87,564) (185,336) 91,919 (6,636) (271) 775 85,787 $ 105,155 $ 17,135 $ (431) - $ 121,859 Total Depreciable Capital Assets, Net Total UMC Capital Assets, Net $ The capital asset summary for the Universities-affiliated component units for the fiscal year ended June 30, 2006 was as follows (expressed in thousands): ASU Foundation Buildings and improvements Furniture, fixtures, and equipment Construction in progress Other property and equipment Total cost or donated value Less: Accumulated Depreciation Property and Equipment, Net $ 17,183 2,127 19,310 (1,247) $ 18,063 ACFFC CRC $ 73,664 36,199 91,384 509 201,756 (9,789) $ 191,967 $ 12,571 627 13,198 (1,820) $ 11,378 NACFFC $ 17,201 17,201 $ 17,201 G. LONG-TERM OBLIGATIONS 1. Component Units A. Arizona Power Authority In prior years, the APA defeased various issues of bonds by purchasing U.S. Government securities which were deposited in an irrevocable trust with an escrow agent to provide future debt service until the call dates. As a result, those bonds are considered to be defeased and the liability has been removed from the Hoover Uprating Fund. Accordingly, these trust account assets and related liabilities are not included in the accompanying financial statements. B. University Medical Center In November 2005, the UMC issued $140.000 million of Hospital Revenue Bonds (the “Series 2005 Bonds”). The Series 2005 Bonds were issued at a discount to yield an effective interest rate of 5.01% and are to be used for the construction of a new sixstory bed tower, expansion of the emergency department, construction of a clinical decision unit, and to finance other capital needs of the UMC. - 121 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 The UMC is subject to certain financial covenants under the Master Trust Indenture (the Indenture), with which the UMC is in compliance as of and for the year ended June 30, 2006. In addition, the Indenture places certain restrictions on the incurrence of additional indebtedness and the sale or acquisition of property. The UMC has established and maintains separate funds as a bond reserve fund on outstanding bonds payable. These funds totaled $19.706 million at June 30, 2006 which are held by the trustee and are reflected as restricted investments held by trustee in the accompanying financial statements. The bonds or other obligations of the UMC do not constitute general obligations of the Arizona Board of Regents, the U of A, the State, or any political subdivision thereof. C. Water Infrastructure Finance Authority The WIFA’s bonds are callable and interest is payable semiannually. The bonds are special obligations of the WIFA payable solely from and secured by the WIFA’s assets. The bonds are not obligations, general, specific, or otherwise, of the State or any other political subdivision thereof other than the WIFA. In fiscal year 2006, the WIFA issued Water Quality Revenue Bonds, Series 2006A for $205.400 million, with interest rates ranging from 3.75% to 5.00% and maturity dates ranging from 2007 to 2026. The WIFA realized net proceeds of $215.156 million, after receipt of a reoffering premium of $11.094 million, and payment of underwriters’ discount and issuance costs totaling $1.338 million. The net proceeds will be used to fund certain loans made by the WIFA to finance water quality projects. In prior fiscal years, the WIFA refinanced various bond issues through advance-refunding arrangements. Under the terms of the refunding bond issues, sufficient assets to pay all principal, redemption premium, if any, 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 assets, liabilities, and financial transactions of these trust accounts and the liability for the defeased bonds are not reflected in the accompanying financial statements. The amount outstanding on the refunded bonds for the WIFA at June 30, 2006 totaled $106.210 million. The $8.034 million deferred amount on retirement of bonds is being amortized over the lives of the defeased bonds on a straightline basis. Annual amortization is $401 thousand and $173 thousand for Clean Water Revolving and Drinking Water Revolving Funds, respectively. Amortization has been offset against interest expense. Bond premiums are being amortized over the life of the bonds. The amortization for the year ended June 30, 2006, is $1.819 million. Further, bond issuance costs are amortized over the life of the bond and offset to interest expense. The amortization for the ended June 30, 2006, is $190 thousand. - 122 - STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 Summary of Revenue Bonds The following schedule summarizes revenue bonds outstanding at June 30, 2006 (expressed in thousands): Revenue Bonds Outstanding Component Units: Arizona Power Authority University Medical Center Water Infrastructure Finance Authority Outstanding Balance at June 30, 2006 Dates Issued Maturity Dates 2001-2004 1993-2006 2007-2018 2007-2036 5.00-5.25% 4.82-5.53% $ 54,960 232,965 1992-2006 2007-2027 2.00-6.10% 582,560 Interest Rates Principal and interest debt service payments on revenue bonds outstanding at June 30, 2006 are as follows (expressed in thousands): Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 Total Annual Debt Service Arizona Power Authority Principal Interest $ 2,825 3,120 3,450 3,815 4,220 25,405 12,125 $ 54,960 $ 2,760 2,611 2,447 2,265 2,064 6,647 645 $ 19,439 Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 2027-2031 Total Annual Debt Service University Medical Center Principal Interest Fiscal Year Total $ $ 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022-2026 2027-2031 2032-2035 Total 5,585 5,731 5,897 6,080 6,284 32,052 12,770 74,399 $ 3,835 4,040 4,145 4,295 4,515 26,280 33,630 42,915 54,780 54,530 $ 232,965 Annual Debt Service Water Infrastructure Finance Authority Principal Interest Total $ 25,110 25,900 27,420 26,845 28,020 157,895 155,520 119,100 16,750 $ 582,560 - 123 - $ 27,251 26,172 25,007 23,820 22,579 90,454 51,694 16,274 367 $ 283,618 $ $ 52,361 52,072 52,427 50,665 50,599 248,349 207,214 135,374 17,117 866,178 $ 11,689 11,491 11,289 11,082 10,863 50,617 43,265 33,974 22,116 6,983 $ 213,369 Total $ $ 15,524 15,531 15,434 15,377 15,378 76,897 76,895 76,889 76,896 61,513 446,334 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 D. Changes in Long-Term Obligations The following is a summary of changes in long-term obligations for the component units (expressed in thousands): Balance July 1, 2005 Arizona Power Authority: Long-term Debt: Revenue bonds Revenue bond premium and discounts Deferred amounts, Net Total Long-term Debt $ Other Long-term Liabilities: Compensated absences Total Other Long-term Liabilities 57,520 2,853 (1,946) 58,427 Increases Decreases $ 64 64 - $ 68 68 Balance June 30, 2006 (2,560) (379) 258 (2,681) $ (64) (64) 54,960 2,474 (1,688) 55,746 Due Within One Year $ 68 68 2,825 2,825 Due Thereafter $ 52,135 2,474 (1,688) 52,921 68 68 - Total Long-term Obligations $ 58,491 $ 68 $ (2,745) $ 55,814 $ 2,893 $ University Medical Center: Long-term Debt: Revenue bonds Revenue bond premium and discounts Total Long-term Debt $ 97,245 (807) 96,438 $ 140,000 (197) 139,803 $ (4,280) (122) (4,402) $ 232,965 (1,126) 231,839 $ 3,835 3,835 $ 229,130 (1,126) 228,004 4,751 4,751 6,125 3,014 9,139 8,586 $ 237,143 Other Long-term Liabilities: Compensated absences Other Total Other Long-term Liabilities 9,463 4,423 13,886 $ Water Infrastructure Finance Authority: Long-term Debt: Revenue bonds Revenue bond premium Deferred amounts, Net Total Long-term Debt $ 405,675 28,206 (8,608) 425,273 $ 205,400 11,093 216,493 $ (28,515) (1,820) 574 (29,761) 26 26 48 48 425,299 $ 216,541 Total Long-term Obligations $ $ 143,054 (1,838) (1,409) (3,247) Total Long-term Obligations Other Long-term Liabilities: Compensated absences Total Other Long-term Liabilities 110,324 3,251 3,251 - 124 - $ 10,876 3,014 13,890 (7,649) $ $ 245,729 $ 52,921 582,560 37,479 (8,034) 612,005 $ 25,110 25,110 $ 557,450 37,479 (8,034) 586,895 (15) (15) 59 59 59 59 - $ (29,776) $ 612,064 $ 25,169 $ 586,895 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 2. Universities-Affiliated Component Units In August 2005, McAllister Academic Village, LLC, a wholly owned subsidiary of ACFFC issued Variable Rate Revenue Bonds, Series 2005A and 2005B in the aggregate original principal amount of $96.700 million, and $48.300 million, respectively, dated August 3, 2005, due at various intervals through July 2045. The interest is payable initially in monthly installments. The principal is payable in annual installments commencing July 1, 2008 and July 1, 2009 for the Series 2005A and 2005B Variable Bonds, respectively. Variable interest rate for the Series 2005A and 2005B Bonds was 3.97% and 3.95%, respectively at June 30, 2006. These bonds are secured by leasehold deeds of trust, assignment of leases and rents, security agreements, and fixture filings. Bonds payable as of June 30, 2006 are summarized as follows (expressed in thousands): Final Maturity Amount ASU Foundation: Series 2003 Lease Revenue Term Bonds 2023 Series 2003 Lease Revenue Term Bonds 2028 $ 20,400 10,575 Series 2003 Lease Revenue Term Bonds 2034 16,625 Series 2004A Variable Rate Revenue Bonds 2034 22,420 Series 2004B Variable Rate Revenue Bonds 2022 11,690 Series 2005A Variable Rate Demand Revenue Bonds 2045 96,700 Series 2005B Variable Rate Demand Revenue Bonds 2045 48,345 Series 2005 Tax – Exempt Bonds 2035 16,005 Series 2004 Variable Rate Demand Revenue Bonds 2030 51,605 ACFFC: Series 2004A Variable Rate Demand Lease Revenue Bonds 2034 20,175 Series 2004B Variable Rate Demand Lease Revenue Bonds 2034 14,825 Series 2003 Serial and Term Bonds 2035 13,395 Series 2002 Bonds 2018 29,805 Series 2000 Serial and Term Bonds 2032 10,615 Unamortized bond premium 1,276 NACFFC: Variable Rate Demand Revenue Bonds, Series 2005 2033 35,805 Scheduled future maturities of Universities-affiliated component units' bonds payable are as follows (expressed in thousands): Fiscal ASU Year 2007 Foundation $ 415 ACFFC $ 1,830 NACFFC $ 460 2008 1,020 1,945 355 2009 1,070 3,060 400 2010 1,120 5,410 455 2011 1,170 6,025 510 76,915 284,476 33,625 81,710 $ 302,746 Thereafter Total $ - 125 - $ 35,805 STATE OF ARIZONA NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2006 H. RELATED PARTY TRANSACTIONS The UMC and the U of A both provide and receive services from each other under various contracts. Payments to the U of A by the UMC include program support, resident and intern salaries, utilities, ground maintenance, mailroom operations, and various administrative functions. Amounts paid to the U of A for these services were approximately $21.618 million for the year ended June 30, 2006. The UMC has entered into contractual agreements with the U of A to provide support for the academic mission of the U of A. Charges to the U of A for such services and facilities provided by the UMC were approximately $9.700 million for the year ended June 30, 2006. These amounts are included in other operating revenue in the accompanying combined financial statements. University Physicians Healthcare (UPH) is a not-for-profit corporation whose members are physicians employed by the U of A and who practice at the UMC. The UMC has agreements with the UPH whereby the UPH provides physician, medical directorship, and other services to the UMC. The UMC and the UPH share certain services and facilities within the hospital. Examples include information systems, medical records, and patient scheduling. The UPH reimburses the UMC for these services pursuant to written agreements between the parties at amounts that approximate actual costs. Charges to the UPH for the above services provided by the UMC were approximately $2.900 million for the year ended June 30, 2006. These amounts are included in other operating revenue in the accompanying combined financial statements. The UMC also has an agreement to provide healthcare services to members of an AHCCCS health plan owned by the UPH called University Familicare (UFC). The UFC, an AHCCCS funded HMO, manages approximately 15,000 members. The UMC provides healthcare services to the UFC members in the normal course of business. The UMC operates under a contract with the UFC at rates that are substantially the same as rates received from other unaffiliated AHCCCS HMOs. Such rates are generally at or below the maximum rates established by the AHCCCS. Net patient service revenue includes $8.636 million in 2006 from this payor, based on negotiated rates. Effective July 1, 2003, the UMC became the region’s sole Level I Trauma Center and entered into an arrangement with the UPH to pay trauma physician call pay. Funding for the physician call pay was derived primarily from funds designated by the State to cover trauma readiness costs. During 2006, amounts incurred for these services totaled $3.631 million. As of June 30, 2006, accrued expenses include approximately $300 thousand payable to the UPH for these services. - 126 - REQUIRED SUPPLEMENTARY INFORMATION REQUIRED SUPPLEMENTARY INFORMATION STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) GENERAL FUND General Accounting Office Capital Outlay - Cochise Capital Outlay - Coconino Capital Outlay - Gila Capital Outlay - Graham Capital Outlay - Maricopa Capital Outlay - Mohave Capital Outlay - Navajo Capital Outlay - Pima Capital Outlay - Pinal Capital Outlay - Yavapai Capital Outlay - Yuma/La Paz Equalization Aid - Cochise Equalization Aid - Graham Equalization Aid - Navajo Equalization Aid - Yuma/La Paz General Relief Nursing Education Demonstration Project Operating State Aid - Cochise Operating State Aid - Coconino Operating State Aid - Gila Operating State Aid - Graham Operating State Aid - Maricopa Operating State Aid - Mohave Operating State Aid - Navajo Operating State Aid - Pima Operating State Aid - Pinal Operating State Aid - Yavapai Operating State Aid - Yuma/La Paz Salary Adjustment Transfer To Tourism Fund Woolsey Flood District Department of Administration Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Annual Reversion per ARS 41-764C Arizona Financial Information System Building Renewal FY00 - 01 Building Renewal FY01 - 02 Building Renewal FY02 - 03 Building Renewal FY03 - 04 Building Renewal FY04 - 05 Building Renewal FY05 - 06 Building Renewal FY97 - 98 Building Renewal FY98 - 99 Classification Pilot Program ENSCO General Fund HITF Transfer HB1464 Personnel Reform $ 965,600 383,000 61,100 535,700 10,977,900 491,000 576,900 3,268,000 768,200 686,900 865,400 3,441,800 10,417,100 2,735,700 848,800 0 0 7,828,500 3,147,700 274,600 5,370,400 54,863,300 3,710,000 4,412,300 19,593,500 5,915,800 4,738,700 5,447,800 0 0 0 0 0 0 0 0 939,800 38,044 2,154 8,303 716,190 1,563,458 3,400,000 2,103 2,345 122,454 5,310,300 0 273,045 The Notes to Required Supplementary Information are an integral part of this schedule. - 129 - FINAL BUDGET (Appropriations) $ 965,600 383,000 61,100 535,700 10,977,900 491,000 576,900 3,268,000 768,200 686,900 865,400 3,441,800 10,417,100 2,735,700 848,800 309,383 4,000,000 7,828,500 3,147,700 274,600 5,370,400 54,863,300 3,710,000 4,412,300 19,593,500 5,915,800 4,738,700 5,447,800 500,900 13,203,475 66,975 219,132 135,459 2,649 118,818 328,486 939,800 35,200 0 4,971 716,519 1,112,198 3,109,077 0 2,345 122,454 5,310,300 10,000,000 273,045 ACTUAL EXPENDITURE AMOUNTS $ 965,600 383,000 61,100 535,700 10,977,900 491,000 576,900 3,268,000 768,200 686,900 865,400 3,441,800 10,417,100 2,735,700 848,800 309,383 4,000,000 7,828,500 3,147,700 274,600 5,370,400 54,863,300 3,710,000 4,412,300 19,593,500 5,915,800 4,738,700 5,447,800 0 13,203,475 66,975 219,132 135,459 2,649 118,818 328,486 890,519 25,014 0 4,971 715,597 954,031 1,092,406 0 2,345 0 5,310,300 10,000,000 0 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) HRIS Certificate of Participation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 PLTO 1 Backfill Agency Relocations FY01 - 02 PLTO 1 Backfill Agency Relocations FY02 - 03 PLTO 1 Backfill Space Renovations PLTO 1 Backfill Space Renovations FY01 - 02 PLTO 1 Backfill Space Renovations FY02 - 03 PLTO 1 Project Management FY01 - 02 PLTO 1 Project Management FY02 - 03 PLTO 1 Project Management FY03 - 04 Relocation FY00 - 01 Relocation FY01 - 02 Relocation FY02 - 03 Relocation FY03 - 04 Relocation FY04 - 05 Relocation FY05 - 06 Relocation FY99 - 00 State Boards Lump Sum Appropriation State Surplus Property Sales Proceeds Utilities FY04 - 05 Utilities FY05 - 06 Zuni Indian Tribe Water Right Settlement Radiation Regulatory Agency Administrative Adjustments Off-Site Nuclear Emergency Response Plan Operating Lump Sum Appropriation Office of Equal Opportunity Administrative Adjustments Operating Lump Sum Appropriation Attorney General Administrative Adjustments Administrative Adjustments Crane Elementary School Case Military Installation/Planning FY04 - 05 Military Installation/Planning FY05 - 06 Operating Lump Sum Appropriation Operating Lump Sum Appropriation Property Tax Supplemental State Grand Jury Department of Agriculture Administrative Adjustments Agricultural Employment Relations Board Animal Damage Control Operating Lump Sum Appropriation Red Imported Fire Ant Arizona State University East Campus - Operating Lump Sum Appropriation The Notes to Required Supplementary Information are an integral part of this schedule. - 130 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 2,838,600 18,319,400 12,054,500 1,150,155 394,245 852,736 5,191,800 4 244,766 106,402 847 348,161 1 55,659 144,694 60,000 59,866 59,775 25,133 60,000 60,000 46,526 176,000 3,000,000 459,572 5,733,800 800,000 2,838,600 18,782,700 12,346,600 1,172,155 403,045 852,736 5,287,200 4 244,766 106,402 847 348,161 1 55,659 144,694 60,000 59,866 59,775 25,133 60,000 60,000 46,526 179,100 3,000,000 459,572 5,733,800 800,000 2,838,600 18,178,987 12,095,270 1,046,433 63,145 36,707 4,773,316 0 1,313 0 0 0 0 0 0 0 0 0 372 0 0 0 155,779 1,552,647 85,029 5,687,895 800,000 0 0 1,131,100 3,534 509,974 1,174,400 3,534 509,974 1,140,392 0 224,600 6 230,800 6 227,426 0 0 33,422 28,694 0 23,837,700 10,691,100 301 160,100 17,459 17,540 33,422 28,694 100,000 25,085,200 11,430,400 301 160,100 17,459 17,540 3,774 28,694 64,825 24,985,418 11,188,547 0 159,511 0 23,300 65,000 10,327,600 23,200 46,176 23,300 65,000 10,613,600 23,200 46,176 20,801 65,000 10,606,037 23,200 15,040,900 15,811,700 15,811,700 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Main Campus - Operating Lump Sum Appropriation Phoenix Medical Campus West Campus - Operating Lump Sum Appropriation Auditor General Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY01 - 02 Operating Lump Sum Appropriation FY02 - 03 Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Department of Financial Institutions Administrative Adjustments Operating Lump Sum Appropriation State Board of Nursing CNA Fingerprinting Fingerprinting Nursing Assistants Arizona Board of Regents Administrative Adjustments Arizona Teachers Incentive Program AZ Transfer Articulation Support System Operating Lump Sum Appropriation Student Financial Assistance Western Interstate Commission Office WICHE Student Subsidies Corporation Commission Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation Railroad Warning Systems Court of Appeals Division I Administrative Adjustments Division I - Operating Lump Sum Appropriation State Board for Charter Schools Administrative Adjustments Operating Lump Sum Appropriation Court of Appeals Division II Division II - Operating Lump Sum Appropriation Department of Corrections Administrative Adjustments Administrative Adjustments Administrative Adjustments All Other Operating Expenditures All Other Operating Expenditures Employee Related Expenditures Employee Related Expenditures Operating Lump Sum Appropriation Overtime Compensatory Time Personal Services Personal Services Private Prison Per Diem Department of Economic Security ADM Attorney General Legal Services The Notes to Required Supplementary Information are an integral part of this schedule. - 131 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 293,631,300 0 43,279,800 306,911,900 1,000,000 44,844,300 306,911,900 1,000,000 44,844,300 365,493 233,944 293,330 375,664 405,887 12,781,700 365,493 233,944 293,330 375,664 405,887 13,135,600 365,493 0 0 0 60 12,551,042 0 3,219,800 2,699 3,316,000 2,699 3,309,490 162,100 90,198 163,500 90,198 163,449 0 0 90,000 213,700 2,165,900 2,161,200 103,000 2,908,100 1,249,140 90,000 213,700 2,224,300 2,161,200 108,000 2,903,100 1,249,140 90,000 213,700 0 2,161,200 108,000 2,895,599 0 5,071,700 43,500 47,510 4,501 5,216,200 45,000 47,510 4,501 5,212,920 43,982 0 0 8,236,900 4,306 8,411,300 4,306 8,364,217 0 726,000 4,527 743,600 4,527 707,996 3,755,700 3,817,800 3,817,211 0 0 0 351,400 95,500 250,400 133,073,800 150,966,500 18,136,900 335,007,700 1,159,900 45,444,100 2,000,000 4,284,120 184,475 351,400 95,500 253,800 121,127,000 185,846,700 40,655,500 344,905,400 1,196,400 24,044,100 2,000,000 4,284,120 184,475 70,196 52,378 251,790 120,455,040 180,344,162 40,605,657 343,367,021 1,080,360 22,943,541 320,700 402,600 402,600 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) ADM Attorney General Legal Services ADM Attorney General Legal Services ADM Finger Imaging ADM Finger Imaging ADM High Performance Bonus ADM Lease Purchase Equipment ADM Lease Purchase Equipment ADM Operating Lump Sum Appropriation ADM Operating Lump Sum Appropriation ADM Operating Lump Sum Appropriation ADM Public Assistance Collections ADM Statewide Cost Allocation Plan ADM Triagency Disaster Recovery ADM Workforce Investment Act Operating Lump Sum Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Central Payment Processing Coolidge Environmental Impact Study DACS Adult Services DACS Community and Emergency Services DACS Coordinated Homeless Program DACS Coordinated Homeless Program DACS Coordinated Hunger Program DACS Coordinated Hunger Program DACS Domestic Violence Prevention DACS Domestic Violence Prevention DACS Hopi Senior Center - Kykotsmovi DACS Marriage & Communication Skills DACS Marriage & Communication Skills DACS Marriage Handbook DACS Marriage Skills Training DACS Navajo Senior Center Services DACS Navajo Senior Centers - Birdsprings DACS Navajo Senior Centers - Chilchenbento DACS Navajo Senior Centers - Chinle DACS Navajo Senior Centers - Dilcon DACS Navajo Senior Centers - Fort Defiance DACS Navajo Senior Centers - St Michael's DACS Navajo Senior Centers - White Cone DACS Operating Lump Sum Appropriation DACS TANF Operating Lump Sum Appropriation DACS TANF Short-Term Crisis Services FY00 - 01 DACS TANF Short-Term Crisis Services FY99 - 00 DACS Tribal Senior Centers - Navajo DBME General Assistance FY05 - 06 DBME Operating Lump Sum Appropriation DBME Operating Lump Sum Appropriation DBME TANF Cash Benefits 147,600 15,400 452,300 272,800 27,859 1,138,000 661,000 27,808,900 4,597,700 1,087,200 235,500 1,000,000 271,500 0 0 0 0 0 0 0 444,700 4,948 11,599,300 5,424,900 1,155,400 1,649,500 1,286,600 500,000 2,507,900 6,620,700 22,097 1,200,000 30,473 725 10,248 25,000 65,000 45,000 10,000 30,000 9,007 1,961 30,000 5,012,100 220,100 47,817 2 0 4,260,800 22,829,700 9,037,300 56,308,200 The Notes to Required Supplementary Information are an integral part of this schedule. - 132 - FINAL BUDGET (Appropriations) 152,100 15,700 454,700 123,900 27,859 1,138,000 661,000 29,703,400 4,644,800 1,096,900 240,300 1,000,000 271,500 300,000 6,359,587 6,559,318 26,924,753 361,216 445,072 9,589,821 374,700 4,948 11,599,300 5,424,900 1,155,400 1,649,500 1,286,600 500,000 2,507,900 6,620,700 22,097 1,200,000 30,473 725 10,248 25,000 65,000 45,000 10,000 30,000 9,007 1,961 30,000 5,028,900 226,400 47,817 2 0 3,060,800 26,965,400 12,467,900 47,308,200 ACTUAL EXPENDITURE AMOUNTS 91,652 15,591 454,700 50,033 3,583 1,138,000 380,141 29,703,400 4,644,256 1,043,070 135,515 0 0 0 6,359,587 6,559,318 26,924,753 361,216 444,929 9,589,821 374,700 0 10,940,279 4,078,423 1,136,214 1,401,471 1,235,794 413,066 2,229,144 5,278,976 0 1,200,000 9,490 176 947 25,000 0 0 10,000 0 9,007 0 0 5,028,900 159,016 47,817 0 135,997 2,816,023 26,961,300 9,317,900 47,288,363 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) DBME TANF Cash Benefits DBME TANF FLSA Supplemental DBME Tribal Pass-Thru Funding DBME Tuberculosis Control DCSE Attorney General Legal Services DCSE Attorney General Legal Services DCSE Central Payment Processing DCSE County Participation DCSE Genetic Testing DCSE Genetic Testing DCSE Operating Lump Sum Appropriation DCSE Operating Lump Sum Appropriation DCYF Adoption Services DCYF Adoption Services DCYF Adoption Services - Family Preservation Projects DCYF Attorney General Legal Services DCYF Attorney General Legal Services DCYF Children Support Services DCYF Children Support Services DCYF Children Support Services - SSBG DCYF Comprehensive Medical and Dental Program DCYF CPS Appeals DCYF CPS Substance Abuse Treatment DCYF Emergency Placement DCYF Emergency Placement DCYF Emergency Placement - SSBG DCYF Family Builders Program DCYF Foster Care Placement DCYF Foster Care Placement DCYF Foster Care Placement - SSBG DCYF Healthy Families DCYF Healthy Families DCYF Homeless Youth Intervention DCYF Intensive Family Services DCYF Joint Substance Abuse Treatment DCYF Operating Lump Sum Appropriation DCYF Operating Lump Sum Appropriation DCYF Permanent Guardianship Subsidy DCYF Permanent Guardianship Subsidy DCYF Residential Drug Treatment DCYF Residential Drug Treatment DCYF Residential Placement DCYF Residential Placement DCYF Residential Placement - SSBG DCYF TANF Deposit to Joint Substance Abuse Treatment Fund DDD Arizona Training Program At Coolidge DDD Case Management DDD Home and Community Based Services DDD Home and Community Based Services DDD Institutional Services DDD Operating Lump Sum Appropriation DDD State Funded Long Term Care Services 96,550,900 508,900 4,288,700 32,200 492,100 7,898,100 3,275,700 6,845,200 72,400 723,600 4,233,700 37,807,900 23,560,700 10,686,100 1,000,000 8,518,000 47,100 29,316,600 6,757,400 5,371,700 2,057,000 650,800 224,500 3,685,800 1,872,700 2,333,700 5,200,000 6,004,400 1,148,700 5,074,400 8,715,800 5,034,200 400,000 1,985,600 3,000,000 47,403,900 26,998,800 3,337,200 859,300 0 250,000 7,788,000 4,133,300 9,833,300 2,000,000 3,101,600 3,995,700 33,148,400 848,100 294,900 3,694,300 21,038,200 The Notes to Required Supplementary Information are an integral part of this schedule. - 133 - FINAL BUDGET (Appropriations) 92,050,900 508,900 4,288,700 32,200 683,600 8,664,800 2,805,700 6,845,200 42,400 393,600 4,404,700 39,643,300 24,660,700 10,686,100 1,000,000 8,746,900 48,400 34,916,600 8,257,400 5,371,700 2,057,000 669,500 224,500 5,085,800 472,700 2,333,700 5,200,000 8,304,400 848,700 5,074,400 5,715,800 5,034,200 400,000 1,985,600 3,400,000 43,872,800 31,686,700 4,337,200 859,300 75,000 0 10,088,000 1,833,300 9,833,300 2,000,000 1,755,300 4,315,900 33,219,000 848,100 294,900 3,796,500 21,041,300 ACTUAL EXPENDITURE AMOUNTS 91,959,007 441,578 4,288,700 30,665 683,600 7,245,700 1,983,701 5,285,804 42,400 221,983 4,404,700 34,236,843 24,660,700 10,686,100 0 8,746,900 48,400 34,916,600 6,588,218 5,371,700 2,057,000 669,500 224,500 5,085,800 357,057 2,333,700 4,208,126 8,304,400 750,527 4,664,594 5,715,800 5,034,000 379,700 1,985,600 3,057,694 43,872,800 27,620,936 3,684,803 859,300 0 0 10,088,000 1,509,273 9,305,584 1,699,707 640,435 4,315,900 29,068,410 0 117,588 3,796,500 19,169,597 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) DDD State Funded LTC Services DDD Training Program at Coolidge DERS Child Care Sliding Fee Scales DERS Day Care Subsidy DERS Day Care Subsidy DERS Daycare Subsidy DERS Independent Living Rehabilitation Services DERS Job Search Stipends DERS Jobs DERS Jobs DERS Operating Lump Sum Appropriation DERS Operating Lump Sum Appropriation DERS Operating Lump Sum Appropriation DERS Transitional Child Care DERS Vocational Rehabilitation Services DERS Workforce Investment Act Discretionary DERS Workforce Investment Act Operating Lump Sum DERS Workforce Investment Act Programs DES Property Conveyance LTC Arizona Training Program at Coolidge LTC Arizona Training Program at Coolidge LTC Case Management LTC Case Management LTC Home and Community Based Services LTC Home and Community Based Services LTC Institutional Services LTC Institutional Services LTC Medical Services LTC Medical Services LTC Operating Lump Sum Appropriation LTC Operating Lump Sum Appropriation Statewide Building Renewal FY04 - 05 Statewide Building Renewal FY05 - 06 Statewide Building Renewal FY92 - 93 Summer Youth Program FY00 - 01 Department of Juvenile Corrections Administrative Adjustments Ams Health Facility Upgrades Building Renewal FY91 - 92 Building Renewal FY94 - 95 DOA Building Renewal - Restore Fire Pump FY04 - 05 DOA Building Renewal - Restore Fire Pump FY05 - 06 Operating Lump Sum Appropriation Operating Lump Sum Appropriation Department of Transportation Operating Lump Sum Appropriation Department of Education Accountability Measures FY00 - 01 Achievement Testing FY04 - 05 Achievement Testing FY05 - 06 Additional State Aid To Schools Administrative Adjustments The Notes to Required Supplementary Information are an integral part of this schedule. - 134 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 762,900 2,515,700 1,076,118 73,066,900 8,020,300 67,632,900 784,200 1,823,500 2,000,000 17,618,800 7,982,200 5,140,300 8,979,900 32,911,900 3,285,100 3,614,000 2,029,500 48,040,600 0 3,926,000 11,967,700 10,305,000 31,143,300 152,268,500 461,024,800 5,411,700 16,477,000 28,213,100 87,725,500 9,385,800 28,524,500 0 0 20 32,446 762,900 0 1,076,118 69,066,900 8,020,300 67,632,900 784,200 1,823,500 2,000,000 17,618,800 8,084,000 5,310,100 9,264,300 36,911,900 3,285,100 3,614,000 2,081,500 47,740,600 150,000 5,279,900 16,228,200 10,382,100 30,879,800 152,300,100 461,167,600 5,434,800 14,585,200 28,226,600 91,087,700 9,500,200 28,971,300 84,000 112,000 20 32,446 739,662 0 0 63,019,497 5,384,069 66,982,660 638,386 1,823,500 826,096 17,618,756 8,084,000 5,309,268 9,264,300 33,534,708 3,285,100 2,711,773 0 36,458,548 0 5,279,900 13,975,809 10,268,600 26,367,932 152,300,100 386,341,646 5,434,800 12,464,273 28,226,600 84,402,059 9,500,200 27,158,719 64,000 112,000 0 0 0 0 39 3,794 34,763 0 68,330,100 2,265,900 338,431 0 39 3,794 34,763 32,175 70,925,200 2,301,500 73,800 76,400 76,400 50 5,301,295 4,827,600 297,213,200 0 50 5,301,295 6,231,800 294,126,200 18,727,811 0 0 6,231,800 294,126,200 18,727,811 338,431 (13,041) 0 0 407 0 70,562,322 2,301,500 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Adult Education Assistance Aims Intervention; Dropout Prevention Arizona Teacher Evaluation Assistance to Schools - Child of State Employee Basic Aid and Additional State Aid Entitlement Basic State Aid Entitlement Certificates of Educational Convenience Chemical Abuse English Learner FTE FY02 - 03 English Learner FTE FY03 - 04 English Learner FTE FY04 - 05 English Learner Instruction FY02 - 03 English Learner Instruction FY03 - 04 English Learner Instruction FY04 - 05 English Learner Materials & Supplies FY02 - 03 English Learner Materials & Supplies FY03 - 04 English Learner Materials & Supplies FY04 - 05 English Learner Monitoring English Learner Pilot FY03 - 04 English Learner Pilot FY04 - 05 English Learner Teacher FY02 - 03 English Learner Teacher FY03 - 04 English Learner Teacher FY04 - 05 Extended School Year Family Literacy Program FY05 - 06 Family Literacy Program FY98 - 99 Full-Day Kindergarten Gifted Support Operating Lump Sum Appropriation Operating Lump Sum Appropriation Optional Performance Incentive Programs Parental Choice For Reading Success Residential Placement School Report Cards School Safety Program School Safety Program FY00 - 01 School Safety Program FY01 - 02 School Safety Program FY02 - 03 School Safety Program FY03 - 04 School Safety Program FY04 - 05 Small Pass-Through Programs Special Education Audit Special Education Fund State Block Grant For Early Childhood Education State Block Grant For Vocational Education Teacher Certification Vocational Education Extended Year Department of Commerce Administrative Adjustments Agriculture Preservation District Apprenticeship Services Office International Trade Offices FINAL BUDGET (Appropriations) 4,447,900 5,550,000 202,800 99,500 0 2,714,552,500 269,900 803,700 2,389 2,634 262,971 272,587 4,146 1,043,785 0 108,925 394,641 328,000 0 13,510 4,500,000 4,499,709 4,500,291 500,000 1,004,300 1,373 0 1,306,500 619,200 8,272,600 120,000 1,000,000 10,000 446,700 6,707,700 2,044 2,810 67,484 85,167 2,288,436 581,600 296,800 33,129,700 19,420,500 11,232,200 1,422,500 600,000 4,454,786 5,550,000 205,706 99,500 191,293,800 2,731,970,600 852,000 809,146 2,389 2,634 262,971 272,587 4,146 1,043,785 0 108,925 394,641 337,415 0 13,510 4,500,000 4,499,709 4,500,291 500,000 1,005,782 1,373 38,050,000 1,311,075 632,619 8,482,990 0 1,000,000 10,000 449,400 6,712,429 2,044 2,810 67,484 85,167 2,288,436 581,600 301,354 33,130,500 19,428,873 11,287,266 1,458,159 600,000 0 32,514 162,500 347,300 43,190 32,514 167,400 357,500 The Notes to Required Supplementary Information are an integral part of this schedule. - 135 - ACTUAL EXPENDITURE AMOUNTS 4,454,786 5,358,844 203,122 87,445 191,293,800 2,726,699,133 533,465 790,289 0 0 156,732 (10,953) (4,122) 56,145 (70) (108,884) 165,295 336,967 (342) 1,997 3,395,844 0 253,593 500,000 1,005,782 0 38,050,000 1,283,841 546,473 8,472,091 0 965,050 2,640 438,757 5,060,532 0 2,810 0 85,167 2,242,983 581,600 248,490 33,130,500 19,428,873 11,287,263 1,429,724 356,148 43,190 5,767 135,390 335,719 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Military Installation Gf Transfer Military Installation Operating FY04 - 05 Military Installation Operating FY05 - 06 Motion Picture Development NAFTA Agreement Projects FY95 - 96 NAFTA Projects - Initial Phase FY95 - 96 Operating Lump Sum Appropriation Operating Lump Sum Appropriation Rural Economic Development State Board of Equalization Designing & Programming Computer System Operating Lump Sum Appropriation Department of Environmental Quality Administrative Adjustments Administrative Adjustments Aquifer Protection Permit Program Operating Lump Sum Appropriation Operating Lump Sum Appropriation Water Infrastructure Finance Authority Arizona Geological Survey Operating Lump Sum Appropriation Government Information Technology Agency Operating Lump Sum Appropriation Governor's Office Administrative Adjustments Arizona - Sonora Study Border Volunteer Corps FY94 - 95 Border Volunteer Corps FY95 - 96 Governor's Telecommunication Office of Sonora Operating Lump Sum Appropriation - OSPB Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY01 - 02 Operating Lump Sum Appropriation FY02 - 03 Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Arizona Health Care Cost Containment System Administrative Adjustments Administrative Adjustments Administrative Adjustments Board of Nursing Breast and Cervical Cancer Breast and Cervical Cancer FY01 - 02 Breast and Cervical Cancer FY05 - 06 Breast and Cervical Cancer Treatment Fed Administration Breast and Cervical Cancer Treatment Fed Program Capitation Capitation Chip - Parents Chip - Services Critical Access Hospitals FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 0 24,830 0 304,100 37,777 19,874 2,820,800 129,700 300,500 4,825,000 24,830 75,000 313,600 37,777 19,874 2,894,100 132,600 308,300 4,825,000 0 68,828 248,790 0 0 2,663,538 108,697 281,887 0 577,300 323,200 591,700 0 574,574 0 0 761,900 9,989,800 12,013,600 2,445,100 913 51,542 778,600 10,286,600 12,213,200 2,445,100 913 51,542 771,259 10,277,933 3,090,097 2,445,100 807,100 827,000 825,132 2,578,600 2,636,300 2,393,965 0 5,200 34,705 65,374 504 7,783 2,051,800 1 33,017 196,358 101,011 86,206 6,218,200 388 5,200 34,705 65,374 504 7,783 2,103,900 1 33,017 196,358 101,011 86,206 6,360,600 388 0 0 0 0 0 2,096,543 0 30,496 115,359 3,121 61,626 6,101,561 0 0 0 209,700 565,100 73 167,200 52,730 745,860 433,284,800 1,200,554,600 8,035,700 18,246,900 559,300 36,384,222 41,634,198 31,107,921 339,200 565,100 73 137,166 52,730 745,860 419,593,300 1,200,554,600 8,935,700 18,937,500 561,340 36,384,222 41,634,198 31,107,921 339,200 426,816 0 127,166 0 0 419,489,644 1,200,366,124 8,877,956 18,833,560 561,266 The Notes to Required Supplementary Information are an integral part of this schedule. - 136 - (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Critical Access Hospitals DES Eligibility DES Eligibility DES Title XIX Pass Through DES Title XIX Pass Through Disproportionate Share Payments Disproportionate Share Payments DOA Data Center Charges DOA Data Center Charges Fee For Service Fee For Service Graduate Medical Education Graduate Medical Education Indian Advisory Council Indian Advisory Council Kidscare Administration Medicare Clawback Payments Medicare Premiums Medicare Premiums Mental Health - Adults FY91 - 92 Office of Administrative Hearings Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Proposition 204 - Administration Proposition 204 - Capitation Proposition 204 - Capitation Proposition 204 - Capitation Proposition 204 - Capitation Proposition 204 - Fee-for-Service Proposition 204 - Fee-for-Service Proposition 204 - Fee-for-Service Proposition 204 - Medicare Premiums Proposition 204 - Pass Through Administration Proposition 204 - Pass-Through Administration Proposition 204 - Reinsurance Proposition 204 - Reinsurance Proposition 204 AHCCCS Administration Proposition 204 Pass Through Administration Reinsurance Reinsurance Rural Hospital Reimbursement Rural Hospital Reimbursement Ticket To Work Ticket to Work Office of Administrative Hearings Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Historical Society Administrative Adjustments Field Services and Grants The Notes to Required Supplementary Information are an integral part of this schedule. - 137 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 1,140,700 22,091,600 24,655,300 137,200 182,100 40,347,600 81,843,900 1,724,700 3,992,800 89,975,500 346,364,900 7,179,300 14,640,700 104,800 104,500 1,880,600 0 20,512,700 50,037,200 45,368 199,500 25,249,900 107,156,600 37,132,700 892,290,800 5,029,000 170,347,100 29,872,800 683,316,300 89,553,200 2,000,000 28,765,200 108,394,900 15,972,200 14,046,300 2,395,400 26,198,300 54,156,000 5,088,900 17,486,200 30,685,700 62,573,700 4,000,000 8,158,100 1,670,700 3,405,200 1,140,700 26,563,700 25,973,500 139,900 185,900 45,684,623 92,669,778 2,623,300 5,110,800 88,843,000 346,364,900 7,204,964 14,615,036 107,600 107,300 2,008,100 13,013,377 22,883,784 56,557,110 45,368 246,400 27,951,500 106,238,036 37,437,000 887,701,100 5,906,700 139,920,696 29,872,800 635,866,600 89,553,200 7,867,700 28,765,200 124,394,900 16,097,200 14,887,100 2,395,400 39,393,846 69,866,000 4,438,100 14,388,200 37,740,668 68,089,476 4,000,000 8,158,100 1,688,600 3,620,200 1,138,509 26,007,217 23,198,917 124,353 146,455 37,050,652 75,156,048 2,328,561 4,675,908 84,046,184 319,379,128 7,204,964 14,615,036 80,082 70,851 1,973,233 13,013,377 22,879,098 56,551,225 0 220,946 27,795,641 106,238,036 35,928,575 818,592,584 5,691,378 138,163,726 29,872,800 635,866,600 86,364,790 465,714 28,711,689 101,639,032 15,961,866 12,458,000 0 26,054,236 53,103,163 4,405,425 14,388,200 27,934,490 57,065,654 4,000,000 8,158,100 1,687,857 3,453,468 1,124,000 0 14,000 1,151,800 100 14,100 1,151,800 100 14,100 0 80,000 643 80,000 643 80,000 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Operating Lump Sum Appropriation Papago Park Museum Papago Park Museum House of Representatives Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY01 - 02 Operating Lump Sum Appropriation FY02 - 03 Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Operating Lump Sum Appropriation FY99 - 00 Department of Health Services Abstinence Funding ADM Assurance and Licensure Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Adult Cystic Fibrosis Adult Sickle Cell Anemia AHCCCS Children's Rehabilitative Services AHCCCS Children's Rehabilitative Services Aids Reporting and Surveillance Alzheimer Disease Research Arizona State Hospital Accreditation Arnold v. Sarn Arnold v. Sarn ASH Condensate Receiver Assurance and Licensure Assurance and Licensure Assurance and Licensure Attorney General Legal Services AZ Statewide Immunization Information System Breast and Cervical Cancer Screening Building Renewal - Tucson FY00 - 01 Building Renewal - Tucson FY98 - 99 Building Renewal - Tucson FY99 - 00 Building Renewal FY91 - 92 Building Renewal FY96 - 97 Children's Behavioral Health - Tobacco Settlement Account Children's Behavioral Health Services Children's Behavioral State Match for Title XIX Children's Behavioral Health State Match for Title XIX Children's Rehabilitative Services Cholla - Sexual Predator Community Health Centers Community Placement Treatment Community Placement Treatment Corrective Action Plan FY04 - 05 Corrective Action Plan FY05 - 06 County Nutrition Services County Prenatal Services Grant The Notes to Required Supplementary Information are an integral part of this schedule. - 138 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 2,046,450 1,902,950 193,700 2,111,550 1,923,050 193,700 2,111,550 1,923,050 193,700 853,257 425,012 841,747 593,397 1,038,121 12,262,100 360,028 853,257 425,012 841,747 593,397 1,038,121 12,592,400 360,028 (184) (301) (307) (279) 25,535 10,690,094 360,028 1,000,000 742,600 0 0 0 0 105,200 33,000 17,745,900 36,189,000 1,125,000 1,000,000 3,140 27,500,000 10,196,400 4,700 7,636,700 299,000 636,900 362,800 467,600 1,090,600 6,109 2,221 37,168 3,548 30 260,641 9,351,800 87,498,400 178,433,800 3,587,000 11,655 10,420,800 5,574,100 1,130,700 398,060 3,564,600 330,300 1,148,500 1,000,000 760,900 3,224,416 50,289 44,364 371,317 105,200 33,000 17,745,900 36,189,000 1,125,000 1,000,000 3,140 27,500,000 10,196,400 4,700 7,884,259 307,800 655,954 394,900 478,247 1,092,644 6,109 2,221 37,168 3,548 30 260,641 9,351,800 87,498,400 178,433,800 3,587,000 11,655 10,433,316 5,574,100 1,130,700 398,060 3,564,600 330,300 1,148,500 638,026 727,227 3,224,416 50,289 44,364 371,317 105,200 33,000 17,745,900 0 1,061,804 1,000,000 0 27,500,000 0 0 7,802,578 152,083 0 394,900 472,453 909,873 0 0 0 0 0 101,002 9,351,800 87,498,400 0 3,587,000 0 10,243,350 5,574,100 1,130,700 0 651,176 316,566 938,807 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) County Public Health County Tuberculosis Provider Care & Control Court Monitoring Diabetes Prevention and Control Direct Grants Environmental Assess Phoenix FY91 - 92 Health Start Hearing and Speech Professionals Regulation Hepatitis C Surveillance High Risk Prenatal Services Indirect Cost Fund Indirect Costs AHCCCS - Children's Rehabilitative Services Kidney Program Laboratory Services Laboratory Services Operating Medicaid Special Exemption Payments Medicaid Special Exemption Payments Medicaid Special Exemption Payments Behavioral Health Medicaid Special Exemption Payments Medicare Clawback Payments Mental Health and Substance Abuse State Match Title XIX Mental Health and Substance Abuse State Match Title XIX Mental Health Non-Title XIX Nonrenal Disease Management Program Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Poison Control Center Funding Proposition 204 Administration Proposition 204 - Administration Title XIX Match Proposition 204 Children's Behavioral Health Services Proposition 204 - CBH Title XIX Match Proposition 204 MH/SA Title XIX Proposition 204 - MH/SA Title XIX Match Proposition 204 Seriously Mentally Ill Services Proposition 204 - SMI Title XIX Match Reimbursement To Counties Renal & Non-Renal Disease Management Rural Modular Dental Buildings Scorpion Antivenom Seriously Emotionally Handicapped Child Seriously Mentally Ill Non-Title XIX Seriously Mentally Ill State Match for Title XIX Seriously Mentally Ill State Match for Title XIX Sexually Violent Persons 200,000 1,010,500 197,500 100,000 460,300 8,849 226,600 62,243 366,900 3,180,600 7,250,900 350,000 50,500 3,097,600 0 387,200 789,700 5,215,200 10,635,100 0 26,598,200 54,241,100 2,447,300 0 14,090,100 37,832,600 4,232,900 4,555,600 3,357,700 1,966,300 5,030,900 6,469,300 41,807 1,576,100 0 2,012,700 4,161,700 1,035,400 2,111,500 24,871,900 50,720,600 52,252,900 106,558,600 67,900 468,000 0 150,000 500,000 30,691,900 53,013,200 108,108,800 10,178,500 The Notes to Required Supplementary Information are an integral part of this schedule. - 139 - FINAL BUDGET (Appropriations) 200,000 1,010,500 338,767 100,000 460,300 8,849 226,600 62,243 375,556 3,180,600 7,379,200 350,000 50,500 3,206,530 175,000 387,200 789,700 5,215,200 10,635,100 3,715,200 26,598,200 54,241,100 2,447,300 50,000 14,472,844 38,839,533 4,190,064 4,636,483 3,496,953 2,009,788 5,228,010 6,469,300 41,807 1,576,100 175,000 2,054,994 4,235,775 706,375 2,111,500 24,082,240 50,720,600 53,371,585 106,558,600 67,900 468,000 200,000 150,000 500,000 30,691,900 53,013,200 108,108,800 10,365,483 ACTUAL EXPENDITURE AMOUNTS 200,000 816,400 338,767 80,073 460,300 0 226,467 0 303,854 2,685,739 6,635,401 244,502 50,500 3,054,811 18,228 387,200 0 5,215,200 0 2,812,910 26,598,200 0 2,374,020 0 14,249,746 38,277,639 4,167,215 0 3,207,277 0 5,174,770 5,844,657 41,796 1,406,232 175,000 2,054,994 0 706,375 0 24,082,240 0 53,371,585 0 67,900 429,493 200,000 111,835 0 30,326,765 53,013,200 0 9,919,242 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Standard Control Subventions Substance Abuse Non-Title XIX TANF Prenatal Services FY99 - 00 Telemedicine Title XIX Behavioral Health Support Title XIX Behavioral Health Support U of A Poison Center Funding Vaccines Vital Records Arizona Commission on the Arts Arts Endowment Fund Community Service Projects Operating Lump Sum Appropriation Arizona Commission of Indian Affairs Administrative Adjustments Operating Lump Sum Appropriation Occupational Safety & Health Review Board Employee Related Expenditures FY91 - 92 Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY01 - 02 Operating Lump Sum Appropriation FY02 - 03 Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY98 - 99 Operating Lump Sum Appropriation FY99 - 00 Personal Services FY91 - 92 Department of Insurance Managed Care and Dental Plan Oversight NCOIL Participation Operating Lump Sum Appropriation Arizona Criminal Justice Commission Administrative Adjustments Operating Lump Sum Appropriation Rural State Aid To County Attorneys Rural State Aid To Indigent Defense Joint Legislative Budget Committee Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Department of Library, Archives and Public Records Grants-In-Aid FY01 - 02 Grants-In-Aid FY02 - 03 Grants-In-Aid FY03 - 04 Grants-In-Aid FY04 - 05 Grants-In-Aid FY05 - 06 Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY01 - 02 Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Operating Lump Sum Appropriation FY05 - 06 Statewide Radio Reading Svc For Blind The Notes to Required Supplementary Information are an integral part of this schedule. - 140 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 26,300 12,135,400 46,969 260,000 0 7,600,000 0 3,784,300 25,526 26,300 12,135,400 46,969 260,000 2,500,000 7,600,000 175,000 3,784,300 25,526 24,936 12,135,400 (301) 221,479 0 0 175,000 3,782,911 1,741 2,000,000 1,263,100 565,900 2,000,000 1,263,100 584,600 2,000,000 1,263,100 584,600 0 207,600 1,630 212,900 1,630 204,065 75 1,000 6,947 4,800 4,800 4,800 6,023 1,000 53 75 1,000 6,947 4,800 4,800 4,800 6,023 1,000 53 0 0 0 0 0 0 2,669 0 0 525,600 25,000 5,948,400 533,800 25,000 6,130,100 533,800 25,000 6,101,534 0 994,200 157,700 150,100 162,722 994,200 157,700 150,100 162,722 810,187 157,700 150,100 1,523,281 2,743,300 1,523,281 2,811,300 1,523,281 1,152,926 1,343 4,400 66,381 115,400 651,400 38,021 72,917 9,487 56,842 137,011 6,227,800 620,500 97,000 1,343 4,400 66,381 115,400 651,400 38,021 72,917 9,487 56,842 137,011 6,411,200 634,200 97,000 1,343 4,400 57,644 60,000 560,829 38,021 15,732 5,103 29,220 111,809 6,406,800 634,200 97,000 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Legislative Council Juvenile Study FY97 - 98 Ombudsman Citizens Aid Office FY04 - 05 Ombudsman Citizens Aid Office FY05 - 06 Ombudsman Citizens Aid Office FY93 - 94 Ombudsman Citizens Aid Office FY94 - 95 Operating Lump Sum Appropriation FY00 - 01 Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Operating Lump Sum Appropriation FY99 - 00 State Archives and History Building Land Department Administrative Adjustments Administrative Adjustments Cap User Fees Environmental County Grants In/Out of State Fire Costs Inmate Fire Crews Natural Resource Conservation Districts New Fire Suppression Services Operating Lump Sum Appropriation Operating Lump Sum Appropriation Outstanding Fire Suppression Expenses Department of Liquor Licenses and Control Improvement of Data Processing System Operating Lump Sum Appropriation Law Enforcement Merit System Council Administrative Adjustments Operating Lump Sum Appropriation Division of Emergency Management & Military Affairs Apache Cnty River Reservoir Dam Emerg Aspen Fire Emergency AZ Pre-Suppression Wildfire Resources AZ/Mexico International Border Security Bellemont/Prescott Boilers Brins Wildfire Emergency Civil Air Patrol Clifton Flash Flood Emergency EUZ701 Search & Rescue EUZ701 Search & Rescue EUZHAZ - Hazard Material Contingency February 2005 Winter Storms & Flooding February 2005 Winter Storms & Flooding Forest Heath Emergency-Pine Bark Beetle Forest Heath Emergency-Pine Bark Beetle Glassy-Winged Sharpshooter Emergency Hazard Materials Contingency Kinishba Fire Emergency La Paz County Summer Monsoon Emergency La Paz/Maricopa Counties Storm Emergency La Paz/Maricopa Counties Storm Emergency La Paz/Maricopa Counties Storm Emergency - 141 - ACTUAL EXPENDITURE AMOUNTS 19,520 16,159 371,700 43,000 95,169 158,981 325,116 4,720,700 886,420 15,000,000 19,520 16,159 371,700 43,000 95,169 158,981 325,116 4,824,000 886,420 15,000,000 0 16,159 344,290 0 0 0 135,199 4,649,733 0 0 0 0 1,859,300 125,000 0 1,156,400 180,000 0 16,339,400 319,600 0 56,555 51,081 1,859,300 125,000 3,000,000 1,191,600 180,000 2,200,000 16,663,400 319,600 4,000,000 56,555 51,081 1,859,300 125,000 3,000,000 1,191,501 180,000 2,200,000 16,650,796 318,600 4,000,000 0 2,851,400 1,250,000 2,924,000 0 2,923,880 0 70,400 0 72,600 0 70,805 57,141 745,010 0 0 8,724 0 54,200 0 0 50,996 11,485 0 1,059,934 452,696 264,480 0 48,319 0 0 105,785 61,593 21 The Notes to Required Supplementary Information are an integral part of this schedule. FINAL BUDGET (Appropriations) 1,306 745,010 200,000 1,500,000 8,724 25,000 54,200 41,965 125,000 50,996 11,485 450,000 1,059,934 452,696 264,480 200,000 48,319 (30,603) 350,000 105,785 61,593 21 1,306 24,770 162,997 863,238 0 1,292 54,200 41,965 113,652 50,996 5,940 0 676,869 406,817 251,857 0 33,725 (30,603) 50,670 449 1,920 21 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Mediterranean Fruit Fly Emergency Mitigation Projects 2004 Emergency Funds Navajo County Severe Weather Emergency Navajo, Gila & Coconino Cts Rodeo Fire Navajo, Gila & Coconino Cts Rodeo Fire Nogales and 52nd Street Building Renewal Northern Arizona Winter Storm Emergency Northern Arizona Winter Storm Emergency Nuclear Emergency Management Fund Nuclear Emergency Mgmt Fund - Buckeye Nuclear Emergency Mgmt Fund - Maricopa Nuttall Complex and Willow Fire Emergency Off Site Nuclear Emergency FY89 - 90 Operating Lump Sum - Administration Operating Lump Sum - DEMA Operating Lump Sum - Military Affairs Operation Good Neighbor Pima County Flash Flood Emergency Project Challenge Construction Project Challenge Program Queen Valley Flash Flood Emergency Replace Cooling Tower at Roosevelt Re-Roofing Mesa Armory Safford and Sunnyslope Building Renewal September Terrorism Incident Emergency Service Contracts - FY04 - 05 Service Contracts - FY05 - 06 Mine Inspector Operating Lump Sum Appropriation Department of Building and Fire Safety Administrative Adjustments Operating Lump Sum Appropriation Mines and Mineral Resources Administrative Adjustments Operating Lump Sum Appropriation Medical Student Loans Board Medical Student Loans Medical Student Scholarships Northern Arizona University Main Campus - Operating Lump Sum Appropriation Yuma Campus - Operating Lump Sum Appropriation Navigable Streams Adjudication Commission Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation Personnel Board Administrative Adjustments Operating Lump Sum Appropriation Commission for Postsecondary Education Leveraging Educational Assistance Prtshp Private Postsecondary Education Student Financial Assistance The Notes to Required Supplementary Information are an integral part of this schedule. - 142 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 3,541 923,542 69,942 333,254 3 12,032 464,271 0 0 0 0 352,031 1,708 1,846,252 835,741 3,092,581 0 0 0 2,076,126 99,105 0 1,325 141 107,024 246,488 1,215,000 962 923,542 5,493 333,254 3 12,032 464,271 508,035 305,043 53,907 299,626 73,329 1,708 1,881,234 860,633 3,143,340 250,000 350,000 500,000 1,614,393 58,640 50,000 1,325 0 107,024 246,488 1,215,000 962 578,048 5,493 2,476 3 0 252,461 0 305,043 53,907 299,626 73,329 0 1,880,527 858,890 2,954,910 167,633 81,122 0 1,606,221 58,640 0 0 0 47 246,488 813,644 1,137,500 1,162,400 1,161,930 0 3,335,000 250 3,421,700 250 3,187,444 0 801,500 2,939 814,300 2,939 798,827 13,200 0 13,200 1,500,000 9,256 323,148 118,166,400 2,192,300 122,314,100 2,192,300 122,314,100 2,192,300 0 50,000 163,200 9,332 50,000 166,700 9,332 0 164,930 0 341,600 50 346,700 50 301,897 1,220,800 170,700 1,220,800 171,000 1,220,800 170,500 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Prescott Historical Society Administrative Adjustments Building Renewal - Sharlot Hall Reroof Operating Lump Sum Appropriation Board of Executive Clemency Operating Lump Sum Appropriation State Parks Board Acquisition and Development Administrative Adjustments Administrative Adjustments Growing Smarter Transfer to Land Conservation Fund Kartchner Caverns Operating Lump Sum Appropriation Operating Lump Sum Appropriation Tonto Lodge Roof Replacement Department of Public Safety Administrative Adjustments Building Renewal FY00 - 01 Building Renewal FY01 - 02 Building Renewal FY03 - 04 Building Renewal FY03 - 04 Building Renewal FY04 - 05 Building Renewal FY04 - 05 Building Renewal FY04 - 05 Building Renewal FY05 - 06 GITEM GITEM Supplemental Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Safety Equipment Statewide Interoperability - Phase II Statewide Interoperability Design Department of Racing Operating Lump Sum Appropriation Independent Redistricting Commission Operating Lump Sum Appropriation FY03 - 04 Real Estate Department Operating Lump Sum Appropriation Ranger's Pension Operating Lump Sum Appropriation Department of Revenue Administrative Adjustments Administrative Adjustments Administrative Adjustments Kerr v. State of Arizona Lawsuit Ladewig v. AZ - Administrative Costs Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Revenue Generating Program The Notes to Required Supplementary Information are an integral part of this schedule. - 143 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 0 19 655,200 10,236 19 678,000 10,236 0 652,773 974,400 1,000,100 919,252 107,100 0 0 0 1,719,400 2,421,500 9,019,500 0 107,100 8,398 7,256 20,000,000 1,747,500 2,662,100 9,121,100 100,000 0 8,398 7,256 20,000,000 1,444,298 2,526,610 8,952,918 34 0 0 77 10 221 2 924 0 0 4,988,600 0 30,888,800 296,200 205,000 354,500 0 3,000,000 1,249,300 4,034 2,844 77 10 221 2 26,924 9,000 96,748 5,055,900 3,897,000 31,901,200 296,200 205,000 355,500 3,000,000 3,000,000 1,258,100 4,034 2,844 77 10 221 0 21,121 5,682 45,399 5,052,499 1,373,880 31,901,200 209,988 153,750 85,000 2,802,245 12,500 621,331 2,538,100 2,606,800 2,606,784 2,021,370 2,021,370 423,404 3,610,900 3,718,800 3,694,436 12,800 12,800 12,800 0 0 0 0 1,424,700 57,053,500 1,513,100 390,300 6,788,900 42,857 275 0 975,000 1,424,700 65,576,600 1,677,500 398,000 0 42,857 275 0 342,621 807,697 65,191,447 1,564,478 316,285 0 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Schools for the Deaf and the Blind Administrative Adjustments Capital and Building Renewal Projects Operating Lump Sum Appropriation - Administration Operating Lump Sum Appropriation - Phoenix Operating Lump Sum Appropriation - Tucson Schools Facilities Board Full Day Kindergarten Capital Grants New School Facilities Debt Service Operating Lump Sum Appropriation Senate Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Supreme Court 4th Floor Chiller Administrative Adjustments Adult Intensive Probation Adult Standard Probation Automation Automation Commission on Judicial Conduct Community Punishment County Reimbursements Domestic Relations Foster Care Review Board HVAC Piping and Pump - Courts Building HVAC Storage Tank Interstate Compact Judges Compensation Judicial Nomination and Performance Review Juvenile Family Counseling Juvenile Intensive Probation Juvenile Standard Probation Juvenile Treatment Services Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Progressively Increasing Consequences Repair/Rehab Cooling Tower - Courts Building Rural State Aid to the Courts Special Water Master State Aid Secretary of State Administrative Adjustments Election Services Help America Vote Act Help America Vote Act - Federal Funds Operating Lump Sum Appropriation State Treasurer Administrative Adjustments Community College Reimbursement Corporate Income Tax Transfer The Notes to Required Supplementary Information are an integral part of this schedule. - 144 - FINAL BUDGET (Appropriations) ACTUAL EXPENDITURE AMOUNTS 0 2,000,000 5,356,446 2,143,357 8,496,697 959,141 2,000,000 5,533,172 2,332,528 8,836,800 959,141 1,890,527 5,278,499 2,049,387 8,479,581 1,315,352 50,940,100 1,623,800 1,315,352 50,940,100 1,666,000 591,980 50,757,370 1,643,660 500,486 8,023,600 500,486 8,224,600 62,393 7,619,985 2,528 0 10,289,100 11,599,900 4,969,000 9,886,100 355,300 424,000 246,000 720,500 1,938,400 329 1,211 578,800 15,813,100 288,900 660,400 13,360,000 7,734,600 22,141,900 8,456,900 759,500 4,893,600 9,465,300 195,078 418,500 20,000 84,700 2,528 25,888 11,113,047 12,249,253 4,992,700 9,893,800 365,800 480,600 634,700 731,000 1,997,600 0 1,211 625,400 15,213,100 297,300 660,400 13,697,500 7,998,800 22,239,400 8,660,600 770,500 4,900,700 9,674,900 427,338 418,500 20,000 84,700 0 25,888 11,080,148 12,220,466 3,313,730 8,288,931 362,545 477,517 507,799 701,774 1,995,373 0 0 622,472 15,107,698 287,879 622,078 13,570,505 7,981,526 22,085,024 8,299,242 529,667 4,269,124 9,674,900 316,851 418,500 20,000 21,560 0 794,100 697,317 40,000,000 2,245,700 8,450 809,600 697,317 40,000,000 2,306,000 8,450 796,336 277,792 9,588,662 2,230,055 0 0 0 143,201 3,063,541 11,000,000 143,201 3,063,541 11,000,000 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Justice of the Peace Salaries Operating Lump Sum Appropriation Tax Appeals Board Administrative Adjustments Operating Lump Sum Appropriation University of Arizona Agriculture Clinical Rural Rotation Clinical Teaching Support Liver Research Institute Main Campus - Operating Lump Sum Appropriation Operating Lump Sum Appropriation Phoenix Medical Campus Sierra Vista Campus Telemedicine Network Uniform State Law Commission Operating Lump Sum Appropriation Department of Veterans' Services Administrative Adjustments Nursing Home Project FY91 - 92 Nursing Home Project FY91 - 92 Nursing Home Project FY91 - 92 Operating Lump Sum Appropriation Southern Arizona Cemetery Veterans' Organizations Contracts Water Resources Department Operating Lump Sum Appropriation Rural Water Studies Weights & Measures Department Administrative Adjustments Operating Lump Sum Appropriation Total General Fund Budgetary Expenditures before Adjustments Less: Department of Health Services appropriations for Children's Rehabilitative Services, Arnold v. Sarn, Assurance and Licensure, Title XIX State Match, and Medicaid Special Exemption that were duplicate expenditure authorizations Total General Fund Budgetary Expenditures after Adjustments FINAL BUDGET (Appropriations) 2,775,500 2,584,300 2,775,500 2,650,400 2,361,979 2,615,180 0 281,900 314 289,900 314 276,088 40,787,700 471,100 9,573,100 501,200 239,671,100 44,428,200 0 2,335,100 1,185,400 41,436,700 489,900 9,733,000 517,400 249,967,300 46,314,800 6,006,900 2,381,200 1,199,300 41,436,700 489,900 9,733,000 517,400 249,967,300 46,314,800 6,006,900 2,381,200 1,199,300 52,300 52,300 44,784 0 3,605 13,284 18,934 2,142,500 134,700 29,200 77 3,605 13,284 18,934 2,214,752 141,448 29,200 77 0 0 0 2,201,313 141,447 29,200 16,722,200 1,900,000 17,085,800 1,900,000 17,007,372 1,891,539 0 1,556,200 12,843 1,595,200 12,843 1,590,146 13,210,557,642 13,867,632,771 12,747,104,700 (576,905,100) $ ACTUAL EXPENDITURE AMOUNTS 12,633,652,542 The Notes to Required Supplementary Information are an integral part of this schedule. - 145 - (577,122,600) $ 13,290,510,171 0 $ 12,747,104,700 STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES TRANSPORTATION AND AVIATION PLANNING, HIGHWAY MAINTENANCE AND SAFETY FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) TRANSPORTATION AND AVIATION PLANNING, HIGHWAY MAINTENANCE AND SAFETY FUND Department of Transportation Airport Planning and Development FY04 - 05 Airport Planning and Development FY05 - 06 Alternate Truck Route - Douglas Chino Road Arizona-Mexico Border Points FY97 - 98 Asbestos and Lead Inspections FY01 - 02 Asbestos and Lead Inspections FY02 - 03 Building Renewal FY03 - 04 Building Renewal FY04 - 05 Building Renewal FY04 - 05 Building Renewal FY04 - 05 Building Renewal FY05 - 06 Building Renewal FY05 - 06 Certified Ignition Interlock Devices De-Icer Buildings Douglas Maintenance Yard Admin Adjustment FY90 - 91 Douglas Weigh Station East Valley Maintenance Yard FY02 - 03 Fee Accounting and Revenue Management System Grants - Sm Comm Air Service and Airport Upgrade Highway Construction FY04 - 05 Highway Construction FY05 - 06 Highway Maintenance Integrated Inventory System Lump Sum Appropriation - Highway Maintenance Lump Sum Appropriation - Highway Maintenance FY04 - 05 Lump Sum Appropriation - Highway Maintenance FY04 - 05 Modular Trailer Operating Expenses Motor Carrier Towing Regulation Motor Vehicle - Electronic Certificate of Title System FY01 - 02 Motor Vehicle - Electronic Certificate of Title System FY02 - 03 Motor Vehicle - Nogales Port Facility FY00 - 01 Motor Vehicle - Nogales Port Facility FY99 - 00 Motor Vehicle - One-Time Trailer Fees Implementation Motor Vehicle - Security Enhancement Issues FY01 - 02 Motor Vehicle - Security Enhancement Issues FY02 - 03 Nogales Cyber Port Study Nogales Port of Entry FY98 - 99 Oil Storage Tanks On-Line Verification of Social Security Numbers Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation - Administration Operating Lump Sum Appropriation - Highway Operating Lump Sum Appropriation - Motor Vehicle Operating Lump Sum Appropriation - Motor Vehicle Operating Lump Sum Appropriation - Motor Vehicle Operating Lump Sum Appropriation - Motor Vehicle Operating Lump Sum Appropriation - Motor Vehicle $ 7,221,852 16,956,000 250,000 569 211,173 598,039 26,502 65,900 4,969 1,769,796 75,800 3,627,100 0 1,089,000 2,000 178,000 351,456 2,902 0 66,310,936 275,000,000 109,263,500 50 558,700 1 3,214,512 7,519 11,108 4,852 13,488 5,481 3,338 43,724 1,151 1,539,584 300,000 2 637,600 797 2,014,200 60,800 41,360,100 120,578,700 88,955,100 1,575,200 1,935,500 383,300 1,456,000 The Notes to Required Supplementary Information are an integral part of this schedule. - 146 - FINAL BUDGET (Appropriations) $ 7,221,852 16,956,000 250,000 569 211,173 598,039 26,502 65,900 4,969 1,769,796 75,800 3,627,100 444,600 1,089,000 2,000 178,000 351,456 2,902 500,000 66,310,936 275,000,000 110,818,700 50 558,700 2 3,214,512 7,519 11,108 4,852 13,488 5,481 3,338 43,724 1,151 1,539,584 300,000 2 637,600 797 2,057,800 62,800 42,887,800 122,952,400 91,267,800 1,604,400 1,980,200 383,300 1,487,700 ACTUAL EXPENDITURE AMOUNTS $ 7,221,852 14,645,980 0 0 82,994 8,574 26,502 65,900 4,969 1,294,073 33,887 553,536 309,425 364,076 0 0 39,685 2,902 500,000 66,310,936 211,685,690 107,975,542 50 558,507 0 3,159,335 0 0 0 0 5,481 3,338 0 1,150 456,013 0 0 76 0 2,056,235 62,800 42,874,701 122,368,429 91,042,771 1,240,749 1,233,978 383,192 1,208,549 (Continued) STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE, EXPENDITURES TRANSPORTATION AND AVIATION PLANNING, HIGHWAY MAINTENANCE AND SAFETY FUND FOR THE YEAR ENDED JUNE 30, 2006 ORIGINAL (Expressed in Dollars) BUDGET (Appropriations) Payson Equipment Shop Payson MVD Service Center Safety, Security, Traffic Management, and Control San Luis Poe Connector Road Site Improvement - Nogales Inspection Station Special Projects FY98 - 99 Sprinklers and Fire Alarms Third Party for Driver License Exams Traffic Safety Improvement Agreements Transfer to Department of Public Safety Transfer to Department of Public Safety Transfer to Department of Public Safety Vehicles and Heavy Equipment Fuel Surcharge Total Transportation and Aviation Planning, Highway Maintenance and Safety Fund Budgetary Expenditures FINAL BUDGET (Appropriations) 1,536,500 915,900 18,000 200,000 54,000 30,868 1,265,000 0 600,000 41,187,500 1,333,600 62,617,300 1,000,000 $ 858,424,969 The Notes to Required Supplementary Information are an integral part of this schedule. - 147 - ACTUAL EXPENDITURE AMOUNTS 1,536,500 915,900 18,000 200,000 54,000 30,868 1,265,000 254,600 600,000 42,197,600 1,372,000 63,999,300 1,000,000 $ 869,975,170 653,963 19,425 0 0 0 0 61,200 254,600 400,000 42,197,600 1,372,000 63,999,300 1,000,000 $ 787,739,965 STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION NOTES TO REQUIRED SUPPLEMENTARY INFORMATION – BUDGETARY COMPARISON SCHEDULES JUNE 30, 2006 A. RECONCILIATION OF BUDGETARY TO GAAP EXPENDITURES The accompanying Budgetary Comparison Schedules for the General Fund and the Transportation and Aviation Planning, Highway Maintenance and Safety Fund present comparisons of the legally adopted budget with actual expenditure data on the budgetary basis. The original budget represents any appropriation bills passed by June 30, 2005 that affect available appropriations during fiscal year 2006. The final budget represents any appropriation bills passed during fiscal year 2006 for fiscal year 2006 plus the original budget. Appropriation bills passed after the end of fiscal year 2006 for fiscal year 2006 would also be included in the final budget. The Budgetary Comparison Schedules present actual amounts on the State’s budgetary basis for expenditures only. The Schedules include appropriations authorized in one fund and transferred, by legislation, to another fund. The State does not have a legally adopted budget for revenues; therefore, only expenditures are presented on the Budgetary Comparison Schedule, Expenditures for the General Fund and the Transportation and Aviation Planning, Highway Maintenance and Safety Fund. As the budgetary and GAAP presentations of actual data differ, a reconciliation of the two follows (amounts expressed in thousands): Transportation & Aviation Planning, Highway Maintenance & Safety Fund General Fund Uses/outflows of resources Actual expenditure amounts (budgetary basis) "total charges to appropriations" from the budgetary comparison schedule $ 12,747,105 $ 787,740 Differences - budget to GAAP: Increase in unpaid incurred expenditures from fiscal year end 2005 to fiscal year end 2006. 30,152 411,470 Increase in unpaid payroll expenditures from fiscal year end 2005 to fiscal year end 2006. For budgetary reporting, final June 2006 payroll expenditures were charged to fiscal year 2007 budget. 5,180 - Distributions to counties and cities of sales taxes are recognized as expenditures on the modified accrual basis, but have no effect on budgetary expenditures. 1,045,702 - Distribution to counties and cities for Urban Revenue Sharing, derived from the State's income tax collections, is recognized as an expenditure on the modified accrual basis, but has no effect on budgetary expenditures. 425,229 - Capital leases and installment purchase contracts initiated during the fiscal year, which are not reported in budgetary expenditures. 2,729 - Programs which are not controlled by legislative appropriations but have disbursed cash or incurred obligations during fiscal year 2006. 3,646,467 1,553,788 Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes. Total expenditures, as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances (917,492) $ 16,985,072 (457,857) $ There were no expenditures in excess of appropriations or allotments in the individual budget accounts for the year. - 148 - 2,295,141 STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION NOTES TO REQUIRED SUPPLEMENTARY INFORMATION – BUDGETARY COMPARISON SCHEDULES JUNE 30, 2006 B. BUDGETARY BASIS OF ACCOUNTING Formulation of the budget begins with the preparation of estimates of expenditure requirements by the head of each budgeted agency and institution. These estimates are submitted no later than September 1 of each year to the Governor’s Office of Strategic Planning and Budgeting. The budget is prepared by line item and/or program elements for each agency. The budget document, as finally developed by the Governor, must be submitted to the Legislature no later than five days after the regular session convenes. The Legislature must approve the budget by passing a general and a capital outlay appropriation bill. The Governor may veto any item in an appropriation bill. Such vetoes are subject to legislative overrides. The budget can be amended throughout the year by special legislative appropriations and/or budget transfers. The State’s Constitution prohibits the appropriation of certain state revenues (primarily tax and fee collections) from exceeding 7.41 percent of Arizona personal income as estimated by the Economic Estimates Commission. The State prepares its operating budget on the cash basis of accounting. Encumbrances as of June 30 can be liquidated during a four-week administrative period known as the 13th month. At the time of the appropriation bill’s passage, estimates prepared by legislative and executive branch professional staff assure the State Legislature that adequate revenues will be available to meet the level of appropriations approved. Anticipated revenue is estimated on the cash basis but is not part of the legally adopted budget. Consequently, the accompanying Budgetary Comparison Schedules only present budget to actual expenditure comparisons. The Budgetary Comparison Schedules present all appropriation line items as passed by the State Legislature in order to demonstrate compliance with the legal level of budgetary control. The State budgets on both an annual and biennial basis. Laws 1997, Chapter 210 required appropriated biennial budgets for all state agencies. In biennial budgets, an agency receives a separate appropriation for each of two fiscal years. For “small” regulatory agencies, comprised of five to ten people, whose budgets were merely amended for technical adjustments in Laws 2002, Chapter 327, the first year appropriations do not lapse until the end of the second year. Except where specifically noted by the appropriation bills, the appropriations for all other agencies lapse at the end of each fiscal year. For the “large” seventeen state agencies, Laws 2002, Chapter 210 returned their budgets to a “one” year cycle beginning with the 2003 Legislative Session (fiscal year 2004 budget request). In prior years the “large” agencies have accounted for approximately ninety percent or more of the appropriations for the General Fund. The budget format used by the State Legislature determines how an agency’s appropriation appears in the General Appropriation Act. A less detailed format provides an agency with more discretion in implementing the budget. Conversely, a more detailed format may require an agency to use formal processes for redirecting appropriated funding. Among the possible format choices are the following: Lump Sum – The appropriation of an agency for each fiscal year consists of a single dollar amount, thereby allowing the agency to shift funds among line items, programs and subprograms without further Legislative or Executive Branch review. Within this format, any programs or Special Line Items may be listed separately. Modified Lump Sum – The appropriation of an agency for each fiscal year consists of at least three lines: Personal Services, Employee Related Expenditures, and All Other Operating Expenditures. Any Special Line Items would be listed separately. Under this format, pursuant to ARS §35-173, an agency must seek approval of the Joint Legislative Budget Committee before moving any funding into or out of the Personal Services and Employee Related Expenditures line items. Any other funding transfers would require approval by the Arizona Department of Administration (ADOA), but not the Joint Legislative Budget Committee. Detailed Line Item – The agency appropriation for each fiscal year consists of each line item listed in the Appropriations Report including Professional and Outside Services, Travel, Other Operating Expenditures, Equipment, Food, and any Special Line Items. The same rules govern Personal Services and Employee Related Expenditures funding transfers as noted in the Modified Lump Sum description. This appropriation format requires an agency to seek ADOA approval before initiating funding transfers between all other line items. - 149 - STATE OF ARIZONA REQUIRED SEPPLEMENTARY INFORMATION NOTES TO REQUIRED SUPPLEMENTARY INFORMATION – BUDGETARY COMPARISON SCHEDULES JUNE 30, 2006 During the fiscal year, $807.848 million in supplemental appropriations, net of increases and reversions, were provided to major and non-major governmental funds to enhance various programs. The General Fund and the Transportation and Aviation Planning, Highway Maintenance and Safety Fund received $657.075 and $11.550 million, respectively, and those amounts are included in the Budgetary Comparison Schedules. State agencies are responsible for exercising budgetary control and ensuring that expenditures do not exceed appropriations. The State Department of Administration – General Accounting Office exercises oversight and does not disburse funds in excess of appropriations. The Governor shall have in continuous process of preparation and revision a tentative budget report for the next two ensuing years for which a budget report is required to be prepared. Whenever the expenses of any fiscal year shall exceed the income, the Legislature may provide for levying a tax for the ensuing fiscal year sufficient, with other sources of income, to pay the deficiency, as well as the estimated expenses of the ensuing fiscal year. All expenditure of the State’s money must be authorized by law. Authorization can be granted directly by law or contingent upon appropriation from the State Legislature. Periodically, the State Legislature may appropriate monies for program expenditures already authorized by law, resulting in duplicate spending authority. In appropriating monies, the State Legislature has, in some cases, included external funding sources as a portion of an agency’s total program expenditure authorization (budget) and has identified the external funding sources as an offset against the program appropriations total in order to reflect the State funding amount. An example of this is found in the $178.434 million Department of Health Services Children’s Behavioral Health State Match for Title XIX on page 138. Accordingly, sometimes program expenditures may not exhaust specific legislative appropriations. To properly present the total budget (appropriation) information, in relationship to “actual” expenditure amounts, duplicate expenditure authorizations have been eliminated from general fund budget (appropriation) totals on page 145. - 150 - STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION INFRASTRUCTURE ASSETS JUNE 30, 2006 Information About Infrastructure Assets Reported Using the Modified Approach As allowed by Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments (GASB 34), the State of Arizona reports its roads and bridges using the modified approach. Assets accounted for under the modified approach include 6,922 center lane miles (18,668 travel lane miles) of roads and 4,676 bridges that the State is responsible to maintain. In order to utilize the modified approach, the State is required to: • Maintain an asset management system that includes an up to date inventory of eligible infrastructure assets • Perform condition assessments of eligible assets and summarize the results using a measurement scale • Estimate each year the annual amount to maintain and preserve the assets at the condition level established and disclosed by the State • Document that the assets are being preserved approximately at or above the established condition level As adopted by the State Transportation Board on an annual basis, the Five-Year Transportation Facilities Construction Program (Program) contains estimated expenditures for highway system improvements and the preservation of existing roadways and bridges. Both of these factors impact the condition assessment of the roads and bridges as described in the following sections. The Program in effect for fiscal year 2007 and beyond was adopted by the Transportation Board on June 23, 2006. This Program is a dynamic instrument and adjustments are made to the annual plans based on the needs of the State to maintain the condition level of the roads and bridges at a level equal to, or greater than, the goals established by the State. In addition, not only are adjustments made during the life of the Program, circumstances may require that refinements to the individual components of the Program be made during the fiscal year. In comparing Estimated to Actual Expenditures in the tables that follow, significant variances can occur. These variances are primarily due to the methodology used in the preparation of the Program. In this Program, the Estimated Expenditures for the current year are based on “programmed” projects which may or may not be spent in the current year of the Program. “Programmed” expenditures consist of those items that are planned for the future and contracts that have not yet been awarded. Furthermore, the Actual Expenditures will include projects that were “programmed” for a prior year’s Estimated Expenditures but which did not occur, or were not completed, in the prior year. The following information pertains to the condition assessment and maintenance of infrastructure assets and reflects the State’s success in achieving condition levels that exceed the established levels. Roads The mission of the Arizona Department of Transportation’s (ADOT) Pavement Management Section (PMS) is to develop and provide a cost effective pavement rehabilitation construction program that preserves the State’s investment in its highway system and enhances public transportation and safety. The requirements of GASB 34 and the ADOT PMS both work toward the same basic goal, the efficient, effective management of the State’s assets to produce long term benefits, while minimizing expenditures. The PMS has developed performance goals for the condition level of the pavement in the State’s highway system. These goals require periodic assessment of pavement conditions and the budget level needed to meet that goal. The goal is expressed as a measure called “Serviceability”, which can be defined as the ability of a pavement to serve the traveling public (as documented in 1961 after AASHTO Road Test, 1956-1961). Serviceability is based on detailed measurements of objective features of the pavement and many surveys since the original road test have shown that these measurements closely track the subjective opinion of the traveling public. Most commonly, this - 151 - STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION INFRASTRUCTURE ASSETS JUNE 30, 2006 number is called “Present Serviceability Rating” (PSR). PSR is a five-point scale (5 excellent, 0 impassable), similar to the Weaver/AASHTO Scale shown as follows: Numerical Rating 5 4 3 2 1 0 Weaver/AASHTO Scale Perfect Very Good Good Fair Poor Very Poor PSR Excellent Good Fair Poor Very Poor Impassable The goal of the State is to maintain a condition level (PSR) rating of 3.23 or better for all roads in the State’s highway system. Annually, Transportation Material Technicians drive over the system with inertial profiling equipment and measure the roughness of the pavement. This process is continuous throughout the year in order to assess the condition level of all pavement on an annual basis. As of the end of fiscal year 2006, an overall rating of 3.52 was achieved, as shown in the following graph: Condition Level - Roads 5.00 PSR 4.00 3.00 Actual Level Desired Level 2.00 1.00 0.00 2002 2003 2004 2005 2006 Fiscal Year Figure 1 Preservation of the roads is accomplished through programs managed primarily by the ADOT PMS, as well as other units within ADOT. The estimated (as specified in the Program as programmed amounts) and actual expenditures for fiscal years 2002 through 2006 were as follows: Fiscal Year 2002 2003 2004 2005 2006 Estimated Expenditures (in millions) $227.4 $243.5 $198.5 $235.7 $218.5 - 152 - Actual Expenditures (in millions) $234.8 $220.8 $215.5 $196.0 $214.5 STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION INFRASTRUCTURE ASSETS JUNE 30, 2006 Bridges Bridges constitute a significant portion of all infrastructure assets in Arizona. As of June 30, 2006, the State owns and maintains 4,676 bridges with an approximate total deck area of 44,212,631 square feet. Bridges, for purposes of this report, include all structures erected over an opening or depression with a centerline of 20 feet or more. Information related to these bridges is stored and updated in the Arizona Bridge Information and Storage System (ABISS). This system is used to efficiently manage the bridge inventory through storing all bridge related data and assist bridge engineers in arriving at appropriate bridge preservation decisions. Also, ABISS is used for reporting bridge inventory and condition, on a biennial basis, to the Federal Highway Administration (FHWA). A Condition Rating Index (CRI) is used to track the condition of the bridge network. The CRI is based on four selected bridge inspection condition ratings, which in turn are based on standards established in the FHWA’s “Recording and Coding Guide for the Structural Inventory of the Nation’s Bridges”. The four selected condition ratings that are included in the CRI computation are: the bridge joints condition, the deck condition, the superstructure condition, and the substructure condition. The bridge joints condition rating is an Arizona specific rating item not included in the FHWA condition rating guidelines, whereas the three other condition ratings are federally mandated condition ratings. The CRI is computed by subtracting from one, the ratio of the sum of the deck areas of all bridges with a condition rating of four or less, which indicates that the rated element is at best in a poor condition, to the total sum of the deck areas. The rating system in this guide is as follows: Numerical Rating 9 8 7 6 5 4 3 2 1 Condition Rating Excellent Very Good Good Satisfactory Fair Poor Serious Critical Imminent Failure Management of the bridge inventory is a major function of ADOT’s Bridge Group and regularly scheduled biennial inspections are made of all bridges. A civil or structural engineer, licensed to practice in Arizona, performs these inspections. It is the policy of the State to maintain State highway bridges so that the CRI exceeds 92.5%. In fiscal year 2006, the CRI was computed at 93.8%. - 153 - STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION INFRASTRUCTURE ASSETS JUNE 30, 2006 Condition Levels - Bridges 95% CRI 94% 93% Actual Level Desired Level 92% 91% 90% 2002 2003 2004 2005 2006 Fiscal Year Figure 2 Bridges represent a major public investment and their inspection and maintenance is an essential function of the State in its mission of products and services for a safe, efficient, and cost effective transportation system. Figure 3 indicates that approximately 62% of the bridges in the State were constructed prior to the 1970s while only 16% have been constructed in the last two decades. Age of ADOT's Bridge Population 35 % of bridges built in corresponding decade 30 25 20 15 10 5 0 < 1930 30s 40s 50s 60s Figure 3 - 154 - 70s 80s 90s 2000s STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION INFRASTRUCTURE ASSETS JUNE 30, 2006 Preservation of the bridges is accomplished through programs managed by the Bridge Group. The estimated (as specified in the Program as programmed amounts) and actual expenditures for fiscal years 2002 through 2006 were as follows: Fiscal Year 2002 2003 2004 2005 2006 Estimated Expenditures (in millions) $14.4 $13.6 $12.1 $ 9.4 $ 8.8 - 155 - Actual Expenditures (in millions) $18.2 $15.8 $12.2 $10.0 $ 8.3 STATE OF ARIZONA REQUIRED SUPPLEMENTARY INFORMATION AGENT RETIREMENT PLANS’ FUNDING PROGRESS JUNE 30, 2006 Analysis of the funding progress for each of the agent, multiple-employer defined benefit plans, as of the most recent actuarial valuations, is as follows (expressed in thousands). Plan PSPRS CORP Actuarial Valuation Date 6/30/2006 6/30/2005 6/30/2004 Actuarial Value of Plan Assets $ 569,832 573,536 588,237 6/30/2006 6/30/2005 6/30/2004 703,316 674,749 649,029 Actuarial Accrued Liability $ 764,616 718,353 635,120 (Unfunded)/ Funding Excess $ (194,783) (144,817) (46,883) Funded Ratio 74.5% 79.8% 92.6% Annual Covered Payroll $ 80,887 73,779 69,576 (Unfunded)/ Funding Excess as Percentage of Covered Payroll (240.8)% (196.3)% (67.4)% 743,593 696,396 618,373 (40,277) (21,647) 30,656 94.6% 96.9% 105.0% 311,118 295,772 296,028 (12.9)% (7.3)% 10.4% - 156 - COMBINING FINANCIAL STATEMENTS AND SCHEDULES COMBINING FINANCIAL STATEMENTS AND SCHEDULES NON-MAJOR GOVERNMENTAL FUNDS Special Revenue Funds Special Revenue Funds account for the proceeds of specific revenue sources (other than major capital projects) that are legally restricted to expenditures for specified purposes. Debt Service Funds The Debt Service Funds account for the accumulation of resources for, and the payment of, long-term debt principal, interest, and related costs. Capital Projects Funds Capital Projects Funds account for financial resources used to acquire or construct major capital facilities (other than those financed by Proprietary Funds, Pension Trust Funds or Component Units). STATE OF ARIZONA COMBINING BALANCE SHEET NON-MAJOR GOVERNMENTAL FUNDS JUNE 30, 2006 (Expressed in Thousands) SPECIAL REVENUE FUNDS ASSETS Cash Cash and pooled investments with State Treasurer Receivables, net of allowances: Taxes Interest Other Due from others Due from other Funds Inventories, at cost Restricted assets: Cash and pooled investments with State Treasurer Cash held by trustee Other Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and other current liabilities Accrued liabilities Due to local governments Due to others Due to other Funds Unavailable deferred revenue Unearned deferred revenue Total Liabilities $ $ CAPITAL PROJECTS FUNDS - $ TOTAL - $ 5,814 814,349 35,467 2,555 852,371 19,592 2,450 25,353 1 59,665 369 315 - 81 - 19,592 2,846 25,353 1 59,665 369 1,295 1 1,997 13 - 20,363 3,746 - 23,655 3,759 1 $ 928,889 $ 37,792 $ 26,745 $ 993,426 $ 33,057 77,983 50,977 51 28,941 1,389 959 193,357 $ - $ 45 45 $ 33,102 77,983 50,977 51 28,941 1,389 959 193,402 Fund Balances: Reserved for: Highway construction Other construction Continuing appropriations Debt service Other fund balance reservations Unreserved Total Fund Balances Total Liabilities and Fund Balances 5,814 DEBT SERVICE FUNDS 38,341 140 697,051 735,532 $ 928,889 37,792 37,792 $ 37,792 - 160 - 20,444 6,256 26,700 $ 26,745 20,444 6,256 38,341 37,792 140 697,051 800,024 $ 993,426 STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NON-MAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) SPECIAL REVENUE FUNDS REVENUES Taxes: Sales Income Tobacco Property Motor vehicle and fuel Other Intergovernmental Licenses, fees, and permits Earnings on investments Sales and charges for services Fines, forfeitures, and penalties Gaming Other Total Revenues $ EXPENDITURES Current: General government Health and welfare Inspection and regulation Education Protection and safety Transportation Natural resources Debt service: Principal Interest and other fiscal charges Capital outlay Total Expenditures Excess (Deficiency) of Revenues Over Expenditures OTHER FINANCING SOURCES (USES) Transfers in Transfers out Refunding bonds issued Payment to refunded bond escrow agent Bonds issued Premium on bonds issued Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning Fund Balances - Ending $ 503,081 38 184,044 232 24 108,518 33,881 182,646 17,633 43,992 120,267 78,786 144,333 1,417,475 $ DEBT SERVICE FUNDS CAPITAL PROJECTS FUNDS 65,805 17,207 13,520 96,532 $ 2,949 2,949 TOTAL $ 568,886 38 184,044 232 24 108,518 33,881 182,646 37,789 57,512 120,267 78,786 144,333 1,516,956 111,353 331,367 103,979 538,590 112,277 111,940 - 3,169 - 111,353 331,367 103,979 538,590 112,277 3,169 111,940 196 5 13,666 1,323,373 243,220 134,147 377,367 694 235,998 239,861 243,416 134,846 249,664 1,940,601 94,102 (280,835) (236,912) (423,645) 234,582 (206,259) 28,323 122,425 613,107 295,262 (359) 596,160 (646,689) 52,261 296,635 15,800 21,992 200 (2,216) 118,250 7,450 123,684 (113,228) 139,928 530,044 (208,834) 596,160 (646,689) 118,250 59,711 448,642 24,997 775,027 735,532 $ 37,792 - 161 - $ 26,700 $ 800,024 NON-MAJOR GOVERNMENTAL FUNDS SPECIAL REVENUE FUNDS The School Facilities Revenue Bond Proceeds Fund accounts for the receipt of the Education Transaction Privilege Revenue Bond proceeds. Funds are restricted to be expended to (1) pay the costs of correcting existing deficiencies in public school facilities for grades K-12, (2) pay bond related expenses, and (3) fully or partially fund any reserves or sinking fund accounts established by the bond resolution. The Public Safety and Correctional Programs Fund accounts for law enforcement, military, custody, and related services provided to the general public. The Environmental Protection Fund accounts for the protection of the State’s public health by administering the State’s environmental quality laws and delegating federal programs to prevent, control, and abate pollution of our air, water, and land resources. The Healthcare and Social Services Fund accounts for health and welfare services provided to the general public. The Tobacco Tax and Healthcare Fund accounts for the receipt of monies levied on tobacco products. The monies are used for health education programs; research, prevention and treatment of tobacco related diseases; and medically needy healthcare programs. The Judicial and Legal Services Fund accounts for the anti-racketeering, consumer protection, consumer fraud, anti-trust, and collections enforcement programs of the Attorney General’s Office and statewide court improvement functions supervised by the Arizona Supreme Court. The Regulating and Licensing Fund accounts for inspection and regulatory services provided to the general public. The Game and Fish Fund accounts for the receipt of monies collected by the Department of Game and Fish for various hunting and fishing licenses, for the purpose of conserving, enhancing, and restoring Arizona’s diverse wildlife resources and habitats, as well as providing safe watercraft and off-highway vehicle recreation. The State Parks Development Fund accounts for the receipt of monies collected by the State Parks Fund for the purpose of acquiring and developing State park lands, sites and facilities. The Business Development Fund accounts for the promotion of statewide economic and community development, which supports a globally competitive Arizona. The Educational Programs Fund accounts for supplemental building needs and instructional improvement programs specifically identified in a voter initiative that enacted a six-tenth of one percent statewide sales tax dedicated to education functions. The Educational Programs Fund supports programs from the kindergarten through university educational levels. The Groundwater Protection and Conservation Fund accounts for statewide water protection planning; storage of Colorado River water; statewide water and groundwater conservation; county and metropolitan areas water use and dam repairs. All of these programs are the responsibility of the Department of Water Resources. The Clean Elections System Fund accounts for fines and fees collected to pay for campaign expenses of statewide candidates and State legislative candidates who choose not to accept private source campaign funds. The fund was established as a result of a voter initiative. STATE OF ARIZONA COMBINING BALANCE SHEET NON-MAJOR SPECIAL REVENUE FUNDS JUNE 30, 2006 (Expressed in Thousands) PUBLIC SAFETY & CORRECTIONAL ENVIRONMENTAL PROTECTION PROGRAMS SCHOOL FACILITIES PROCEEDS ASSETS Cash Cash and pooled investments with State Treasurer Receivables, net of allowances: Taxes Interest Other Due from others Due from other Funds Inventories, at cost Restricted assets: Cash and pooled investments with State Treasurer Other Total Assets $ - $ 5,741 $ 14 HEALTHCARE & SOCIAL SERVICES $ - TOBACCO TAX & HEALTHCARE $ - JUDICIAL & LEGAL SERVICES $ - - 97,057 109,872 43,039 24,476 43,066 - 4,440 265 7 1 7,908 369 429 1 7,190 - 528 63 7,867 2,726 - 14,624 100 - 105 2,591 - - - - 1,295 - - - $ - $ 115,788 $ 117,506 $ 55,518 $ 39,200 $ 45,762 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and other current liabilities $ Accrued liabilities Due to local governments Due to others Due to other Funds Unavailable deferred revenue Unearned deferred revenue Total Liabilities - $ 6,831 565 31 10 48 7,485 $ 5,567 59,177 10,225 74,969 $ 3,052 12,783 337 1,389 906 18,467 $ 2,148 43 16,726 18,917 $ 2,318 742 446 3,506 Fund Balances: Reserved for: Continuing appropriations Other fund balance reservations Unreserved Total Fund Balances Total Liabilities and Fund Balances $ - 2,980 81 105,242 108,303 $ 115,788 1,334 41,203 42,537 $ - 164 - 117,506 711 36,340 37,051 $ 55,518 132 42,124 42,256 20,283 20,283 $ 39,200 $ 45,762 REGULATING & LICENSING $ 26 GROUNDWATER STATE PARKS BUSINESS EDUCATIONAL PROTECTION & DEVELOPMENT DEVELOPMENT PROGRAMS CONSERVATION GAME & FISH $ 30 $ 3 $ - $ - $ - CLEAN ELECTIONS SYSTEM $ - TOTAL $ 5,814 109,724 35,268 63,089 59,493 107,350 89,608 32,307 814,349 143 2,649 61 - 179 1,920 606 - 310 340 - 353 21 26,915 - 43 12,888 10,859 - 460 - 469 - 19,592 2,450 25,353 1 59,665 369 - - - 1 - - - 1,295 1 $ 112,603 $ 38,003 $ 63,742 $ 86,783 $ 131,140 $ 90,068 $ 32,776 $ 928,889 $ 3,166 2,632 20 840 6,658 $ 1,776 1,449 346 3,571 $ 2,119 178 5 2,302 $ 284 190 3 5 482 $ 5,686 151 50,977 2 56,816 $ 110 49 1 160 $ 24 24 $ 33,057 77,983 50,977 51 28,941 1,389 959 193,357 5,033 26 100,886 105,945 $ 112,603 4,723 30 29,679 34,432 $ 38,003 2,435 3 59,002 61,440 $ 63,742 6 86,295 86,301 $ 86,783 20,987 53,337 74,324 $ - 165 - 131,140 89,908 89,908 $ 90,068 32,752 32,752 $ 32,776 38,341 140 697,051 735,532 $ 928,889 STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) PUBLIC SCHOOL FACILITIES PROCEEDS REVENUES Taxes: Sales Income Tobacco Property Motor vehicle and fuel Other Intergovernmental Licenses, fees, and permits Earnings on investments Sales and charges for services Fines, forfeitures, and penalties Gaming Other Total Revenues $ EXPENDITURES Current: General government Health and welfare Inspection and regulation Education Protection and safety Natural resources Debt service: Principal Interest and other fiscal charges Capital outlay Total Expenditures Excess (Deficiency) of Revenues Over Expenditures OTHER FINANCING SOURCES (USES) Transfers in Transfers out Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning Fund Balances - Ending SAFETY & CORRECTIONAL ENVIRONMENTAL PROTECTION PROGRAMS 1 1 $ $ - $ 2,404 268 45,777 3,189 62 1,563 (88) 53,175 4,877 13,034 7,508 6,214 550 518 11,341 21,029 4,344 69,415 TOBACCO TAX & HEALTHCARE $ 176,887 599 113 177,599 JUDICIAL & LEGAL SERVICES $ 1,629 6,728 800 8,800 38,641 815 57,413 - 28,403 112,277 16,727 1,206 100,279 1,261 590 4,067 66,909 - 485 164,091 - 45,511 37 - - 28 3,306 160,741 90 103,426 125 71,101 164,576 5 167 45,720 1 37,526 (50,251) (1,686) 13,023 11,693 125,231 (144,179) (18,948) 18,578 89,725 63,630 (9,414) 54,216 3,965 38,572 6,757 (3,527) 3,230 1,544 35,507 (6,607) (6,607) 6,416 13,867 3,183 (6,696) (3,513) 8,180 34,076 (5,387) (5,387) (5,386) 5,386 $ 26,406 7,157 50,360 1,904 15,639 2,251 31,851 56,973 5,726 198,267 HEALTHCARE & SOCIAL SERVICES - $ 108,303 - 166 - $ 42,537 $ 37,051 $ 20,283 $ 42,256 REGULATING & LICENSING $ $ 2 42,720 1,592 70,967 1,036 658 2,978 7,272 4,246 131,471 GAME & FISH $ 232 17,442 26,567 1,302 348 149 6,008 3,315 55,363 GROUNDWATER STATE PARKS BUSINESS EDUCATIONAL PROTECTION & DEVELOPMENT DEVELOPMENT PROGRAMS CONSERVATION $ 2,753 2,330 248 5,331 $ 1,951 2,861 2,176 303 27,337 34,628 $ 471,796 38 24 1,587 75 409 1,368 44,477 18,254 538,028 $ 5,065 2,990 84 74,594 82,733 CLEAN ELECTIONS SYSTEM $ 8,622 5,429 14,051 TOTAL $ 503,081 38 184,044 232 24 108,518 33,881 182,646 17,633 43,992 120,267 78,786 144,333 1,417,475 1,192 88 102,681 283 - 54,311 18,000 26,675 196 538,307 - 22,116 3,814 - 111,353 331,367 103,979 538,590 112,277 111,940 79 763 105,086 89 7,428 61,828 1,763 19,763 4 26,875 14 538,321 6 22,122 3,814 196 5 13,666 1,323,373 26,385 (6,465) (14,432) 7,753 (293) 60,611 10,237 94,102 406 (24,789) (24,383) 2,002 103,943 10,883 (1,800) 9,083 2,618 31,814 19,916 (878) 19,038 4,606 56,834 4,027 (2,549) 1,478 9,231 77,070 47 (394) (347) (640) 74,964 500 500 61,111 28,797 2 (39) (37) 10,200 22,552 234,582 (206,259) 28,323 122,425 613,107 105,945 $ 34,432 $ 61,440 $ 86,301 $ - 167 - 74,324 $ 89,908 $ 32,752 $ 735,532 STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) OTHER GOVERNMENTAL FUNDS Board of Accountancy Operating Lump Sum Appropriation Department of Administration Administrative Adjustments Administrative Adjustments Archives and History Building Arizona Pioneers' Home Plumbing Renovations Department of Corrections Fort Grant Landfill Closure Department of Juvenile Corrections Building Renewal FY01 - 02 Employee Bus Subsidy Government Building Defibrillators FY01 - 02 Government Building Defibrillators FY02 - 03 New Prison Complex FY99 - 00 Operating Lump Sum Appropriation Pioneers' Home Plumbing Renovations Prison Planning and Sitting Radiation Regulatory Agency Administrative Adjustments MRTB Assistant Operating Lump Sum Appropriation Attorney General Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Risk Management Interagency Service Agreement Victims' Rights Implementation Fund Victims' Rights/Non Revert HB2427 Department of Agriculture Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Wine Promotion $ 2,219,800 ACTUAL EXPENDITURE AMOUNTS $ 1,629,379 1,594 4,158 525,882 2,590 43,123 0 574,100 16 293 260,698 676,800 262,957 0 1,594 4,158 293,126 0 0 0 574,100 0 0 0 619,443 0 0 569 11,375 259,200 569 0 243,618 116,972 15,745 2,410 102 2,732,100 379,700 4,341,200 8,738,500 3,236,100 222,450 116,972 15,745 2,410 102 1,748,865 307,443 4,339,345 7,987,286 3,019,798 90,752 228 751 16 9,660 54 19 113 67,800 279,900 681,600 259,900 21,400 51,300 79,400 278,300 972,900 9,200 172,000 54,858 228 751 16 9,660 54 19 113 67,439 277,705 564,422 259,331 21,400 35,694 57,289 277,594 828,124 6,727 160,632 0 (Continued) - 168 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Acupuncture Board of Examiners Administrative Adjustments Operating Lump Sum Appropriation State Board of Appraisal Administrative Adjustments Operating Lump Sum Appropriation FY04 - 05 Operating Lump Sum Appropriation FY05 - 06 Payment of FY 2001-2002 Expenses Automobile Theft Authority Auto Theft Authority Grants Operating Lump Sum Appropriation Reimbursable Programs Board of Barbers Administrative Adjustments Operating Lump Sum Appropriation Board of Behavioral Health Examiners Administrative Adjustments Operating Lump Sum Appropriation State Board of Nursing Administrative Adjustments Operating Lump Sum Appropriation Board of Cosmetology Administrative Adjustments Operating Lump Sum Appropriation Corporation Commission Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Annual Reversion per ARS 10-122 Annual Reversion per ARS 44-3298 Corporations Division Staffing Costs Investigation and Prosecution of Security Fraud Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Utility Audits, Studies, Investigations, and Rate Hearing FY00 - 01 Utility Audits, Studies, Investigations, and Rate Hearing FY01 - 02 Utility Audits, Studies, Investigations, and Rate Hearing FY02 - 03 Utility Audits, Studies, Investigations, and Rate Hearing FY03 - 04 Utility Audits, Studies, Investigations, and Rate Hearing FY04 - 05 Utility Audits, Studies, Investigations, and Rate Hearing FY05 - 06 State Board of Chiropractic Examiners Administrative Adjustments Operating Lump Sum Appropriation Department of Corrections Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments All Other Operating Expenditures All Other Operating Expenditures All Other Operating Expenditures ACTUAL EXPENDITURE AMOUNTS 2,314 101,900 2,314 83,275 156 4,922 625,400 800 156 0 550,380 775 4,373,600 619,200 25,000 4,371,426 602,240 0 418 241,800 418 201,359 3,600 1,416,200 3,600 1,144,175 65 3,175,900 65 3,169,752 2,246 1,635,200 2,246 1,554,642 24,270 5,100 8,354 7,722 1,734,871 828,734 157,466 165,599 11,844,700 3,547,900 3,156,700 841,600 101,773 369,620 380,000 380,000 380,000 380,000 24,270 5,100 8,354 7,722 1,734,871 828,734 157,465 0 11,690,826 3,118,755 3,056,077 828,990 101,773 0 1 1 0 0 3,504 483,400 3,504 460,259 52,501 731,349 278,659 872,172 599,300 500,000 10,250,000 52,501 731,349 278,659 872,172 193,919 66,649 10,230,203 (Continued) - 169 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) All Other Operating Expenditures Drug Treatment Pilot Program Employee Related Expenditures Operating Lump Sum Appropriation Personal Services Private Prison Per Diem Relief Bill State Charitable, Penal, and Reformatory Land Earnings Department of Economic Security ADM Attorney General Legal Services ADM Operating Lump Sum Appropriation ADM Operating Lump Sum Appropriation ADM Operating Lump Sum Appropriation ADM Public Assistance Collections Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments DACS Community and Emergency Services DACS Domestic Violence Prevention DCYF Child Abuse Prevention DCYF Children Support Services DCYF Operating Lump Sum Appropriation DERS Independent Living Rehabilitation Services DERS Jobs DERS Operating Lump Sum Appropriation DERS Operating Lump Sum Appropriation DERS Vocational Rehabilitation Services Commission for the Deaf and Hard of Hearing Administrative Adjustments Interpreters for Certification and Licensure Operating Lump Sum Appropriation Department of Juvenile Corrections Operating Lump Sum Appropriation Operating Lump Sum Appropriation State Board of Dispensing Opticians Administrative Adjustments Operating Lump Sum Appropriation State Board of Dental Examiners Administrative Adjustments Operating Lump Sum Appropriation Department of Education Achievement Testing - Proposition 301 FY04 - 05 Achievement Testing - Proposition 301 FY05 - 06 Additional School Days - Prop 301 FY05 - 06 Additional School Days- Prop 301 FY 01 - 02 Additional School Days- Prop 301 FY02 - 03 Administrative Adjustments Basic State Aid Entitlement Character Education - Proposition 301 FY05 - 06 Failing School Tutoring Fund FY03 - 04 Failing School Tutoring Fund FY04 - 05 ACTUAL EXPENDITURE AMOUNTS 2,070,000 229,372 47,500 869,200 302,500 28,674,300 94,110 1,014,763 2,031,361 0 47,500 534,366 302,500 25,060,888 94,110 237,033 96,900 579,800 130,000 87,000 251,400 1,580,953 12,845 49,728 42,029 227,581 158,582 500,000 1,700,000 820,600 750,000 209,600 1,707,700 1,500,000 85,000 516,700 204,700 28,310 0 12,598 87,000 201,922 1,580,953 12,845 49,728 42,029 227,581 158,582 266,413 1,700,000 97,894 0 52,764 1,435,918 656,250 5,752 388,974 150,408 8,929 624,247 5,315,400 8,929 135,746 4,202,830 585,300 3,360,000 585,300 3,360,000 1,059 98,300 1,059 98,258 6,134 1,052,900 6,134 972,633 2,340,300 2,340,300 86,280,500 1,275,492 2,267,304 0 50,295,000 200,000 1,393,695 1,379,250 2,340,300 429,392 79,090,458 1,275,492 2,267,304 0 50,295,000 0 5,259 (8,096) (Continued) - 170 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Failing School Tutoring Fund FY05 - 06 School Accountability - Proposition 301 FY01 - 02 School Accountability - Proposition 301 FY02 - 03 School Accountability - Proposition 301 FY03 - 04 School Accountability - Proposition 301 FY04 - 05 School Accountability - Proposition 301 FY05 - 06 School Acct - School Safety Proposition 301 FY02 - 03 School Acct - School Safety Proposition 301 FY03 - 04 School Acct - School Safety Proposition 301 FY04 - 05 School Acct - School Safety Proposition 301 FY05 - 06 School Improvement Revenue Bond Debt Service Fund School Safety/Character Education FY04 - 05 Department of Commerce Administrative Adjustments Advertising and Promotion Arizona Sonora Economic Development Study Arizona Sonora Trade Office CEDC Commission Economic Development Matching Funds International Trade Offices Lottery 1989 Main Street Minority and Women Owned Business National Law Center/Free Trade Oil Overcharge Administration Operating Lump Sum Appropriation REDI Matching Grants Small Business Advocate Williams Gateway Airport Authority Department of Environmental Quality Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Air Permits Administration Program Air Quality Program Air Quality Program - Continuing FY01 - 02 Air Quality Program - Continuing FY02 - 03 Clean Air in Lieu Department of Administration Travel Reduction Transfer Emissions Cap & Trading Program FY01 - 02 Emissions Cap & Trading Program FY02 - 03 Emissions Control Contractor Payment Emissions Control Program - Administration Fuel Formulation General Fund Transfer 2nd Regular Session Chapter 242 Hazardous Waste Program Hazardous Waste Reserve FY94 - 95 Hazardous Waste Reserve FY95 - 96 Operating Lump Sum Appropriation Pima County Air Quality Program Political Subdivisions Assistance FY01 - 02 Roadside Diesel Emissions Testing Program FY01 - 02 ACTUAL EXPENDITURE AMOUNTS 1,500,000 649,488 1,194,733 2,883,968 1,600,965 4,698,100 0 7,479 1,049,450 7,800,000 318,000 129,000 67,075 649,488 1,182,206 10,564 875,678 1,325,044 0 7,475 1,009,644 7,475,955 0 0 28,584 659,200 10,000 25,000 260,500 104,000 966,800 5,001 130,000 111,900 200,000 166,900 629,600 45,000 109,700 4,000,000 28,584 620,800 3,861 25,000 219,102 71,995 776,313 5,000 123,006 100,417 200,000 108,557 564,678 45,000 103,570 0 276,434 876 5,294 360 320,741 5,558,300 4,661,300 186,035 182,451 2,528,300 400,000 70,576 266,582 31,739,600 4,042,700 12,272 10,000,000 752,200 64,000 29,273 500,000 165,000 18,500 200,000 276,434 876 5,294 360 320,741 4,826,630 2,238,856 0 0 2,068,040 400,000 0 0 29,487,812 2,346,078 0 10,000,000 103,963 0 0 414,959 165,000 0 0 (Continued) - 171 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Roadside Diesel Emissions Testing Program FY02 - 03 Solid Waste Program Solid Waste Program Solid Waste Program Underground Storage Tank Policy Comm FY00 - 01 Underground Storage Tank Policy Comm FY99 - 00 Underground Storage Tank Program Underground Storage Tank Technical Appeals FY00 - 01 Visibility Index Development FY01 - 02 Visibility Index Development FY02 - 03 Waste Tire Program Water Quality Program State Board of Funeral Directors & Embalmers Administrative Adjustments Operating Lump Sum Appropriation Game and Fish Department Administrative Adjustments Administrative Adjustments Bellemont Shooting Range Improvement Black Canyon Dam Modifications FY05 - 06 Building Renewal FY02 - 03 Building Renewal FY03 - 04 Building Renewal FY04 - 05 Building Renewal FY05 - 06 Canyon Creek Hatchery Improvements Facility Improvements FY00 - 01 Facility Improvements FY01 - 02 Facility Improvements FY02 - 03 Facility Improvements FY99 - 00 Flagstaff Shooting Range Development FY00 - 01 Flagstaff Shooting Range Development FY99 - 00 Flagstaff Shooting Range Planning FY01 - 02 Flagstaff Shooting Range Planning FY02 - 03 Headquarters Expansion and Renovation FY02 - 03 Headquarters Paving Headquarters Security System FY03 - 04 Lake Havasu Shooting Range Development FY03 - 04 Mesa Office Security System Migratory Waterfowl Development FY00 - 01 Migratory Waterfowl Development FY01 - 02 Migratory Waterfowl Development FY02 - 03 Migratory Waterfowl Development FY03 - 04 Migratory Waterfowl Development FY99 - 00 Migratory Waterfowl Habitat FY05 - 06 Migratory Waterfowl Habitat FY93 - 94 Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Performance Based Incentives Program FY00 - 01 Performance Based Incentives Program FY01 - 02 Performance Based Incentives Program FY02 - 03 Performance Based Incentives Program FY05 - 06 ACTUAL EXPENDITURE AMOUNTS 200,000 2,144,300 1,205,100 136,600 1 18,857 22,000 7,500 80,589 10,099 219,800 3,879,300 0 956,318 709,193 8,185 0 0 4,188 0 0 0 42,326 1,699,973 1,415 317,900 1,415 313,753 57,173 45 800,000 500,000 2,489 78,832 328,558 388,900 148,067 2,453 70,891 145,982 1 73,859 11,584 460,711 499,900 800,000 49,254 186,067 298,464 29,898 99,025 80,000 87,378 97,486 42,694 100,000 1,302 21,634,100 2,224,600 313,500 43,400 16,000 13 2 322 300,000 57,173 45 0 0 2,488 78,711 306,051 141,214 148,067 2,453 0 145,848 0 0 0 1,532 0 336,715 49,253 186,000 0 14,403 8,049 3,500 1,447 0 24,964 0 0 18,835,120 1,885,976 156,125 18,286 0 0 0 0 300,000 (Continued) - 172 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Performance Based Incentives Program FY97 - 98 Performance Incentive Pay Program FY03 - 04 Performance Incentive Pay Program FY05 - 06 Pinetop Warehouse and Paving FY03 - 04 Pittman - Robertson/Dingell - Johnson Act Shade Canopies Shooting Range Development FY01 - 02 Shooting Range Development FY02 - 03 Shooting Range Development/Grants Program FY03 - 04 Shooting Range Development/Grants Program FY04 - 05 Shooting Range Development/Grants Program FY05 - 06 Sierra Vista Shooting Range Improvement Silver Creek Hatchery Improvement Statewide Preventive Maintenance FY04 - 05 Statewide Preventive Maintenance FY05 - 06 Tonto Creek Hatchery Improvements Tri-State Shooting Range Development Department of Gaming Casino Operation Certification Operating Lump Sum Appropriation Problem Gambling Problem Gambling Arizona Health Care Cost Containment System Administrative Adjustments Capitation Children's Health Insurance Program - Children Children's Health Insurance Program - Parents Kidscare Administration Proposition 204 - Capitation Proposition 204 - Capitation Proposition 204 - County Hold Harmless Proposition 204 - Medicare Arizona Department of Housing Operating Lump Sum Appropriation Homeopathic Medical Examiners Administrative Adjustments Operating Lump Sum Appropriation Department of Health Services Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Administrative Adjustments Alzheimer Disease Research Alzheimer Research - Biotechnology Assurance and Licensure Assurance and Licensure Attorney General Legal Services Child Fatality Review Team County Poison Control Center EMS Operations Folic Acid High Risk Prenatal Services Laboratory Services ACTUAL EXPENDITURE AMOUNTS 0 1,076 46,800 294,661 2,808,000 149,490 26,460 13,783 16,088 97,920 100,000 31,883 79,728 358 30,000 199,927 300,000 0 0 46,800 293,888 2,080,000 64,807 23,859 0 7,683 27,427 7,750 299 3,024 (566) 29,999 15,119 0 1,921,000 8,000,000 300,000 1,512,800 1,920,829 7,686,270 300,000 1,482,100 490,172 61,772,100 69,699,700 33,095,300 6,761,700 17,356,700 15,389,500 4,825,600 7,707,800 490,172 61,772,100 69,491,321 32,942,803 6,656,438 17,356,700 15,389,500 4,825,600 7,707,800 697,300 697,300 500 82,100 500 81,691 201,796 49,676 13,344 2,801 21,921 1,000,000 3,000,000 38,000 200,000 50,000 100,000 31,250 3,026,220 200,000 450,000 895,900 201,796 49,676 13,344 2,801 21,921 1,000,000 3,000,000 0 196,201 50,000 99,583 0 2,875,879 185,548 345,893 842,086 (Continued) - 173 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Loan Repayment Loan Repayment Services Mental Health Research Institute Grant Newborn Screening Fund - Indirect Costs Newborn Screening Program Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Poison Control Center Funding Rural Medical Services FY01 - 02 Seriously Mentally Ill Non-Title XIX Statewide Emergency Medical Trauma System Substance Abuse - Non-Title XIX Trauma Advisory Board University of Arizona Poison Control Center University of Arizona Poison Control Center Industrial Commission of Arizona Operating Lump Sum Appropriation Arizona Criminal Justice Commission Administrative Adjustments Crime Victim Compensation Special AG Transfer FY00 - 01 Drug and Gang Prevention Resource Center Operating Lump Sum Appropriation State Aid to County Attorneys State Aid to Indigent Defense Victim Compensation and Assistance Land Department Natural Resource Conservation Districts Division of Emergency Management & Military Affairs Operating Lump Sum Appropriation Medical Examiners Board Administrative Adjustments Operating Lump Sum Appropriation Performance Based Incentive Program Medical Student Loans Board Medical Student Loans Naturopathic Physicians Board of Medical Examiners Administrative Adjustments Operating Lump Sum Appropriation Nursing Care Examiners Board Administrative Adjustments Operating Lump Sum Appropriation State Board of Optometry Administrative Adjustments Operating Lump Sum Appropriation Arizona Board of Osteopathic Examiners Administrative Adjustments Operating Lump Sum Appropriation Board of Occupational Therapy Examiners Administrative Adjustments Operating Lump Sum Appropriation Commission for Postsecondary Education Arizona College and Career Guide Arizona Minority Educational Policy Analysis Center ACTUAL EXPENDITURE AMOUNTS 150,000 100,000 638,776 478,600 3,262,200 199,500 808,465 350,000 750,000 71,377 30,424,800 100,000 2,500,000 373,015 1,100,000 56,250 32,625 66,229 0 258,016 3,009,250 169,719 685,325 300,944 518,750 71,377 30,371,862 55,315 2,500,000 341,164 1,100,000 0 17,998,100 17,386,627 1,628 8,202 278,000 601,000 847,800 805,000 3,900,000 1,628 0 278,000 578,321 847,800 805,000 3,457,646 266,100 266,100 132,700 78,000 91,544 5,387,200 155,501 91,544 5,226,594 108,717 283,400 283,400 5,297 515,100 5,297 483,487 4,070 388,400 4,070 232,719 200 198,200 200 146,858 16,904 670,900 16,904 576,535 1,933 227,100 1,933 180,684 21,200 150,300 19,142 39,273 (Continued) - 174 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Family College Savings Program Leveraging Educational Assistance Partnership Operating Lump Sum Appropriation Twelve Plus Partnership Arizona Pioneers' Home Employee Related Expenses Employee Related Expenses Equipment Food Other Operating Expenditures Other Operating Expenditures Personal Services Personal Services Prescription Drugs Professional and Outside Services Travel - In State State Board of Pharmacy Operating Lump Sum Appropriation State Board of Podiatry Examiners Administrative Adjustments Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY05 - 06 State Parks Board FY88 - 89 Pass Thru Grants FY89 - 90 Pass Thru Grants FY90 - 91 Pass Thru Grants Land, Buildings and Improvement Control FY89 - 90 Land, Buildings and Improvement Control FY89 - 90 Land, Buildings and Improvement Control FY90 - 91 Land, Buildings and Improvement Control FY90 - 91 Land, Buildings and Improvement Control FY90 - 91 Off Highway Vehicle Parks Operations Operating Lump Sum Appropriation Operating Lump Sum Appropriation Department of Public Safety DNA Testing FY02 - 03 DNA Testing FY03 - 04 Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Operating Lump Sum Appropriation Patrol Officers FY02 - 03 Remote Officer Housing Sworn Officer Salary Adjustments Physical Therapy Examiners Board Administrative Adjustments Operating Lump Sum Appropriation Private Postsecondary Education Administrative Adjustments Operating Lump Sum Appropriation ACTUAL EXPENDITURE AMOUNTS 86,900 2,143,700 361,500 119,600 74,050 1,568,943 349,729 117,538 1,044,157 498,443 12,000 202,200 421,976 94,824 2,277,021 970,479 294,700 129,300 25,000 1,044,154 498,409 12,000 173,218 404,078 94,824 2,271,620 964,946 238,554 74,678 21,518 1,544,600 1,446,507 3,773 3,000 116,200 3,773 0 101,358 10,436 40,191 2,067,639 4,388 258,697 1,500 19,258 32,684 692,100 489,500 2,063,992 0 0 0 0 0 0 0 0 679,711 324,537 2,063,992 1,423,518 994,119 42,197,600 20,041,400 1,372,000 4,527,900 2,454,400 2,613,100 60,999,300 2,636,900 41,570 271,158 3,000,000 80,669 0 42,197,600 19,282,673 1,372,000 4,527,900 2,190,487 2,613,100 60,999,300 2,636,900 0 249,847 3,000,000 1,866 280,500 1,866 269,930 1,935 294,200 1,935 273,083 (Continued) - 175 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Board of Respiratory Care Examiners Administrative Adjustments Operating Lump Sum Appropriation Department of Racing Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation Registrar of Contractors Incentive Pay Office of Administrative Hearings Operating Lump Sum Appropriation FY03 - 04 Operating Lump Sum Appropriation FY05 - 06 Department of Revenue Administrative Adjustments Operating Lump Sum Appropriation Structural Pest Control Commission Administrative Adjustments Operating Lump Sum Appropriation Schools for the Deaf and the Blind Administrative Adjustments Administrative Adjustments Operating Lump Sum Appropriation - Administration Operating Lump Sum Appropriation - Administration Operating Lump Sum Appropriation - Phoenix Operating Lump Sum Appropriation - Phoenix Operating Lump Sum Appropriation - Tucson Operating Lump Sum Appropriation - Tucson School Facilities Board Building Inspections Supreme Court Case Processing - State Aid Community Punishment Community Punishment Confidential Intermediary FY02 - 03 Court Appointed Special Advocate Drug Study Foster Care Review Board Juvenile Crime Reduction Model Court Operating Lump Sum Appropriation State Aid to the Courts State Board of Psychologist Examiners Administrative Adjustments Operating Lump Sum Appropriation State Board of Technical Registration Administrative Adjustments Operating Lump Sum Appropriation Residential Utility Consumer Office Administrative Adjustments Operating Lump Sum Appropriation Professional Witnesses FY00 - 01 Professional Witnesses FY01 - 02 Professional Witnesses FY02 - 03 ACTUAL EXPENDITURE AMOUNTS 3,677 198,000 3,677 197,941 0 45,000 300,000 0 44,999 298,885 113,500 882,200 0 9,035,600 113,500 882,200 0 8,603,382 515 476,100 515 474,975 24,604 2,021,500 24,604 1,955,165 96,146 53,000 331,895 2,787,533 139,437 5,740,332 520,068 5,289,035 96,146 53,000 187,106 2,656,923 114,163 5,145,003 520,068 4,976,076 0 0 3,099,100 1,830,400 500,000 175,744 3,255,800 38,514 236,600 5,172,700 514,300 494,800 2,445,600 1,387,527 594,250 500,000 27,904 3,073,627 0 229,861 3,256,922 508,813 327,415 2,444,710 1,210 360,500 1,210 298,952 32,556 1,451,300 32,556 1,392,772 528 1,074,500 2,270 32,293 9,943 528 1,034,638 0 0 0 (Continued) - 176 - STATE OF ARIZONA BUDGETARY COMPARISON SCHEDULE, EXPENDITURES NON-MAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Dollars) FINAL BUDGET (Appropriations) Professional Witnesses FY03 - 04 Professional Witnesses FY04 - 05 Professional Witnesses FY05 - 06 Professional Witnesses FY97 - 98 Professional Witnesses FY98 - 99 Professional Witnesses FY99 - 00 Department of Veterans' Services Administrative Adjustments Operating Lump Sum Appropriation Veterinary Medical Examiners Board Administrative Adjustments Operating Lump Sum Appropriation Weights and Measures Department Administrative Adjustments Operating Lump Sum Appropriation Operating Lump Sum Appropriation - Oxygenated Fuel Operating Lump Sum Appropriation - Vapor Recovery Total Other Governmental Funds Budgetary Expenditures $ - 177 - ACTUAL EXPENDITURE AMOUNTS 40,564 137,091 145,000 10,604 11,977 49,324 11,510 0 16,627 10,604 9,782 8,262 31 690,800 31 659,155 12,440 421,400 12,440 386,359 3,229 68,500 830,500 507,000 3,229 63,085 774,860 456,411 939,003,994 $ 851,904,174 NON-MAJOR GOVERNMENTAL FUNDS DEBT SERVICE FUNDS The Department of Transportation Fund administers the payment of principal and interest on the Highway Revenue Bonds issued by the Arizona Department of Transportation Board and the retirement of previously issued revenue bonds. The Maricopa Regional Area Road Fund (RARF) administers the payment of principal and interest on the Arizona Transportation Excise Tax Revenue Bonds issued by the Arizona Department of Transportation Board and the retirement of previously issued revenue bonds. The Certificates of Participation Fund administers the payment of principal and interest on the certificates of participation issued by the State of Arizona (acting by and through the Director of the Department of Administration) and the retirement of previously issued certificates of participation. The School Facilities Debt Instrument Fund administers the payment of principal and interest on revenue bonds issued by the State of Arizona’s School Facilities Board and the retirement of previously issued revenue bonds. The Grant Anticipation Notes Fund administers the payment of principal and interest on grant anticipation notes issued by the Arizona Department of Transportation Board and the retirement of previously issued grant anticipation notes. STATE OF ARIZONA COMBINING BALANCE SHEET NON-MAJOR DEBT SERVICE FUNDS JUNE 30, 2006 (Expressed in Thousands) DEPARTMENT OF TRANSPORTATION ASSETS Cash and pooled investments with State Treasurer Interest receivable Restricted assets: Cash and pooled investments with State Treasurer Cash held by trustee Total Assets FUND BALANCES Reserved for debt service Total Fund Balances $ 162 MARICOPA RARF $ CERTIFICATES OF PARTICIPATION - 1,898 - SCHOOL FACILITIES DEBT INSTRUMENT $ - 3,192 - $ 13 GRANT ANTICIPATION NOTES 32,275 153 $ - - 99 - $ 2,060 $ - $ 3,205 $ 32,428 $ 99 $ 2,060 $ - $ 3,205 $ 32,428 $ 99 $ 2,060 $ - $ 3,205 $ 32,428 $ 99 - 180 - TOTAL $ 35,467 315 1,997 13 $ 37,792 $ 37,792 $ 37,792 - 181 - STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NON-MAJOR DEBT SERVICE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) DEPARTMENT OF TRANSPORTATION REVENUES Taxes: Sales Earnings on investments Sales and charges for services Total Revenues $ 1,862 1,862 MARICOPA RARF $ SCHOOL FACILITIES DEBT INSTRUMENT CERTIFICATES OF PARTICIPATION 396 396 $ 20 20 $ 65,805 14,845 13,520 94,170 GRANT ANTICIPATION NOTES $ 84 84 EXPENDITURES Debt service: Principal Interest and other fiscal charges Total Expenditures Excess (Deficiency) of Revenues Over Expenditures 54,830 62,828 117,658 80,375 1,581 81,956 21,555 10,001 31,556 47,920 43,257 91,177 38,540 16,480 55,020 (115,796) (81,560) (31,536) 2,993 (54,936) OTHER FINANCING SOURCES (USES) Transfers in Transfers out Refunding bonds issued Payment to refunded bond escrow agent Premium on bonds issued Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning 115,421 (180) 147,400 (161,726) 14,957 115,872 76 1,984 81,450 (179) 81,271 (289) 289 33,424 33,424 1,888 1,317 Fund Balances - Ending $ 2,060 $ - 182 - - $ 3,205 9,947 448,760 (484,963) 37,304 11,048 14,041 18,387 $ 32,428 55,020 55,020 84 15 $ 99 TOTAL $ 65,805 17,207 13,520 96,532 243,220 134,147 377,367 (280,835) 295,262 (359) 596,160 (646,689) 52,261 296,635 15,800 21,992 $ 37,792 - 183 - NON-MAJOR GOVERNMENTAL FUNDS CAPITAL PROJECTS FUNDS The Department of Transportation Financed Fund administers the proceeds from the Highway Revenue Bonds issued by the Arizona Department of Transportation Board. These monies are expended for the construction of federal, state, and local highways. The Grant Anticipation Notes Financed Fund administers the proceeds from the grant anticipation notes issued by the Arizona Department of Transportation Board. These monies are expended for the acquisition of right-of-way purchases or the construction of certain controlled access highways within Maricopa County. Certificates of Participation Financed Fund administers the proceeds from the certificates of participation issued by the State of Arizona (acting by and through the Director of the Department of Administration). These monies are expended on various projects including new building construction and the development of the Human Resource Information System. STATE OF ARIZONA COMBINING BALANCE SHEET NON-MAJOR CAPITAL PROJECTS FUNDS JUNE 30, 2006 (Expressed in Thousands) GRANT ANTICIPATION NOTES FINANCED DEPARTMENT OF TRANSPORTATION FINANCED ASSETS Cash and pooled investments with State Treasurer Interest receivable Restricted assets: Cash and pooled investments with State Treasurer Cash held by trustee Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and other current liabilities Total Liabilities $ $ - 20,363 - $ - 2,555 - TOTAL $ 3,746 2,555 81 20,363 3,746 $ 20,444 $ - $ 6,301 $ 26,745 $ - $ - $ 45 45 $ 45 45 Fund Balances: Reserved for: Highway construction Other construction Total Fund Balances Total Liabilities and Fund Balances 81 CERTIFICATES OF PARTICIPATION FINANCED 20,444 20,444 $ 20,444 $ - - 186 - 6,256 6,256 $ 6,301 20,444 6,256 26,700 $ 26,745 STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NON-MAJOR CAPITAL PROJECTS FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) GRANT ANTICIPATION NOTES FINANCED DEPARTMENT OF TRANSPORTATION FINANCED REVENUES Earnings on investments Total Revenues $ EXPENDITURES Current: Transportation Debt service: Interest and other fiscal charges Capital outlay Total Expenditures (Deficiency) of Revenues Over Expenditures OTHER FINANCING SOURCES (USES) Transfers in Transfers out Bonds issued Premium on bonds issued Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning Fund Balances - Ending $ 2,521 2,521 $ CERTIFICATES OF PARTICIPATION FINANCED 289 289 $ 139 139 TOTAL $ 2,949 2,949 56 3,113 - 3,169 683 192,790 193,529 41,829 44,942 11 1,379 1,390 694 235,998 239,861 (191,008) (44,653) (1,251) (236,912) (1,333) 118,250 7,450 124,367 (66,641) 87,085 (883) (883) (45,536) 45,536 200 200 (1,051) 7,307 200 (2,216) 118,250 7,450 123,684 (113,228) 139,928 20,444 $ - - 187 - $ 6,256 $ 26,700 NON-MAJOR ENTERPRISE FUNDS Enterprise Funds account for operations (a) financed and operated in a manner similar to private business enterprises, where the State intends that the cost of providing goods or services to the general public be financed or recovered primarily through service charges, or (b) where the State decides that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. The Arizona Industries for the Blind Fund accounts for the manufacturing, sale, distribution, and marketing of products manufactured by employees at training centers, workshops, business enterprises and home industries programs for the training and employment of adaptable visually impaired persons. The Arizona Correctional Industries Fund employs prison inmates in its manufacturing, service, and agricultural operations for the sale of goods and services primarily to other State agencies (including the Arizona Department of Corrections) and political subdivisions. The Arizona Highways Magazine Fund publishes and markets the Arizona Highways Magazine and various other products that promote the State of Arizona. The Coliseum & Exposition Center Fund provides rental space to a variety of entertainment and promotional lessees, and sponsors the annual State Fair. Highway Expansion & Extension Loan Program provides the State and communities in Arizona a new financing mechanism to stretch limited transportation dollars and bridge the gap between needs and available revenues. The Healthcare Group of Arizona administers prepaid medical coverage primarily to small, uninsured businesses with 2 to 50 employees and employees of political subdivisions. The Healthcare Group of Arizona processes premium billing, collections and fund disbursements, and data analysis and is responsible for the regulatory oversight of the health plans. The Other Enterprise Funds consist of the State Hospital Revolving Fund, the State Home for Veterans Trust Fund, and the Arizona Beef Council. STATE OF ARIZONA COMBINING STATEMENT OF NET ASSETS NON-MAJOR ENTERPRISE FUNDS JUNE 30, 2006 (Expressed in Thousands) ASSETS Current Assets: Cash Cash and pooled investments with State Treasurer Restricted cash and pooled investments with State Treasurer Short-term investments Receivables, net of allowances: Interest Loans and notes Other Due from U.S. Government Due from local governments Due from other Funds Inventories, at cost Other current assets Total Current Assets ARIZONA ARIZONA COLISEUM & INDUSTRIES CORRECTIONAL HIGHWAYS EXPOSITION & EXTENSION FOR THE BLIND INDUSTRIES MAGAZINE CENTER LOAN PROGRAM $ Noncurrent Assets: Restricted assets: Cash and pooled investments with State Treasurer Loans and notes receivable, net of allowances Capital assets: Infrastructure, land, and other non-depreciable Depreciable buildings, property and equipment, net of accumulated depreciation Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities: Accounts payable and other current liabilities Accrued liabilities Due to others Due to other Funds Unearned deferred revenue Current portion of other long-term liabilities Total Current Liabilities Noncurrent Liabilities: Contracts Payable Long-term debt Other long-term liabilities Total Noncurrent Liabilities Total Liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Loans and other financial assistance: Expendable Other Unrestricted (deficit) Total Net Assets HIGHWAY ARIZONA $ 182 $ 168 $ - $ EXPANSION 21 $ - 2,753 3,052 2,324 6,084 - - - - - 88,486 - 3 917 71 3 2,375 6,304 14 3,120 3,655 81 10,090 10 371 1,024 299 4,028 68 252 6,425 431 7,486 120 131,305 227,828 - - - 872 - 10,107 182 716 8 2,436 - 1,371 1,553 7,857 2,364 3,080 13,170 241 249 4,277 3,335 6,643 13,068 10,107 237,935 860 184 167 1,211 2,069 117 263 2,449 239 107 3,592 122 4,060 458 128 229 815 5 170,494 13 170,512 68 68 1,279 2,449 4,060 40 40 855 170,512 1,553 3,080 249 5,731 - 5,025 7,641 (32) 6,482 67,423 - 6,578 $ 10,721 $ - 190 - 217 $ 12,213 $ 67,423 HEALTHCARE GROUP OF ARIZONA $ OTHER - $ 297 $ 668 14,310 570 29,093 - 42 88,486 42 15 14,325 5 1,768 2 2,684 463 7,486 6,259 71 120 131,310 7,054 632 271,684 - - 872 10,107 - 980 4,322 152 152 14,477 9,244 10,224 12,908 16,707 32,008 303,692 456 7,378 65 8,097 52 16,048 244 376 135 1 756 4,326 8,295 135 170,560 11,689 846 195,851 2,125 2,125 18,173 756 2,125 40 68 2,233 198,084 152 10,224 20,989 1,928 67,423 62 17,134 62 (3,910) $ TOTAL (3,696) $ 12,152 $ 105,608 - 191 - STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS NON-MAJOR ENTERPRISE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) HIGHWAY OPERATING REVENUES Sales and charges for services Intergovernmental Licenses, fees, and permits Earnings on investments Other Total Operating Revenues ARIZONA ARIZONA ARIZONA COLISEUM & INDUSTRIES CORRECTIONAL HIGHWAYS EXPOSITION & EXTENSION FOR THE BLIND INDUSTRIES MAGAZINE CENTER LOAN PROGRAM $ OPERATING EXPENSES Cost of sales and benefits Interest on notes payable Personal services Contractual services Depreciation and amortization Insurance Other Total Operating Expenses Operating Income (Loss) NON-OPERATING REVENUES (EXPENSES) Gain (Loss) on sale of capital assets Investment income Other non-operating revenue Interest expense Total Non-Operating Revenues (Expenses) Income (Loss) Before Contributions and Transfers Transfers in Transfers out Change in Net Assets Total Net Assets - Beginning Total Net Assets - Ending 14,390 588 95 15,073 $ 26,547 26,547 7,579 433 8,012 $ 12,371 1,691 14,062 $ 3,281 3,281 8,866 4,364 1,096 397 769 15,492 (419) 21,988 2,207 90 444 1,251 25,980 567 4,866 2,364 444 256 241 8,171 (159) 2,042 5,241 3,371 879 347 1,024 12,904 1,158 15 10 (1) 24 184 88 272 (2) 86 84 293 399 692 3,541 3,541 (395) 839 (75) 1,850 2,548 110 - (988) - - 1,850 10,363 2,548 64,875 (285) 6,863 $ $ EXPANSION 6,578 - (149) 10,870 $ 10,721 - 192 - (75) 292 $ 217 $ 12,213 1 4,040 134 96 3 4,274 (993) $ 67,423 HEALTHCARE GROUP OF ARIZONA $ OTHER 50,392 50,392 $ 51,354 2,462 2,019 26 668 56,529 (6,137) (96) 310 188 402 (5,735) - $ TOTAL 11,187 723 338 12,248 $ 377 10,162 240 320 156 2,288 13,543 (1,295) 89,494 4,040 26,934 7,356 2,322 503 6,244 136,893 (7,278) 48 48 86 4,381 597 (1) 5,063 (1,247) (2,215) - (5,735) 2,039 (1,247) 13,399 (3,696) $ 12,152 122,466 588 723 3,281 2,557 129,615 110 (988) (3,093) 108,701 $ 105,608 - 193 - STATE OF ARIZONA COMBINING STATEMENT OF CASH FLOWS NON-MAJOR ENTERPRISE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 ARIZONA (Expressed in Thousands) INDUSTRIES FOR THE BLIND CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Receipts from federal and local governments Receipts from other Funds Payments to suppliers or insurance companies Payments to employees Payments to other Funds Other receipts (payments) Net Cash Provided (Used) by Operating Activities $ CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Transfers from other Funds Transfers to other Funds Grants and contributions received Other receipts Net Cash Provided (Used) by Non-capital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Principal paid on capital debt, installment purchase contracts, and capital leases Net Cash (Used) by Capital and Related Financing Activities ARIZONA CORRECTIONAL INDUSTRIES ARIZONA HIGHWAYS MAGAZINE HIGHWAY EXPANSION & EXTENSION LOAN PROGRAM COLISEUM & EXPOSITION CENTER 15,276 $ 621 (7,610) (4,443) (1,769) 2,075 26,022 $ (22,137) (2,401) 1,484 93 9 - (988) - - 399 - 102 (988) - 399 - (47) (781) (8) - - 7,687 $ 40 (5,318) (2,366) 429 472 - 12,326 $ (6,499) (5,186) 1,691 2,332 (2,685) - (18) - (2,703) - (47) (781) (8) CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends from investments Purchase of investments Net Cash Provided by Investing Activities 12 12 90 90 86 86 293 293 Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning 2,142 793 550 1,774 321 6,656 Cash and Cash Equivalents - Ending Reconciliation of operating income (loss) to net cash provided (used) by operating activities: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation and amortization Net changes in assets and liabilities: (Increase) decrease in receivables, net of allowances Decrease in due from U.S. Government Decrease in due from local governments (Increase) decrease in due from other Funds Decrease in inventories, at cost (Increase) decrease in other assets Increase in accounts payable Increase (decrease) in accrued liabilities Increase in due to others Increase in due to other Funds Increase in deferred revenue Increase in contracts payable Increase (decrease) in other liabilities Net Cash Provided (Used) by Operating Activities $ $ 2,935 (195) 3,415 $ 3,220 $ (419) $ 567 $ 2,324 7,090 19,192 (31) (131) (35,921) (2) (9,803) 3,383 3,383 (6,420) 94,906 $ 6,977 $ (159) $ 1,158 $ 397 444 256 879 886 33 1,020 275 (32) (85) (525) 73 59 1,060 (94) (100) 124 (4) 113 (8) 128 24 (2) (45) (38) 323 27 28 88,486 (993) 83 (12,936) 4,040 3 $ 2,075 $ 1,484 $ 472 $ 2,332 $ SCHEDULE OF NONCASH INVESTING, CAPITAL AND NON-CAPITAL FINANCING ACTIVITIES Change in fair value of investments $ Total Noncash Investing, Capital and Non-capital Financing Activities $ - $ - $ - $ - $ 109 - $ - $ - $ - $ 109 - 194 - (9,803) HEALTHCARE GROUP OF ARIZONA $ OTHER 51,769 $ (48,493) (2,491) 785 TOTAL 11,625 $ (2,900) (10,070) 338 (1,007) 131,795 621 19,232 (92,988) (27,088) (35,921) 687 (3,662) 3,480 188 - - 3,573 (988) 197 399 3,668 - 3,181 (1) (3,604) (82) - - (18) (82) (1) (3,622) 310 310 46 (1) 45 4,220 (1) 4,219 4,681 9,629 (963) 1,830 $ $ 14,310 $ (6,137) $ (1,295) $ (7,278) 26 320 2,322 (326) 41 2 119 92 40 - 114 33 83 (12,899) 1,208 13 2,026 3,295 40 4,040 1,401 2,125 (185) (1,007) $ (3,662) 121 3,302 1,377 2,125 (29) $ 785 $ 867 116 119,003 $ 119,119 $ (3) $ - $ 106 $ (3) $ - $ 106 - 195 - INTERNAL SERVICE FUNDS Internal Service Funds account for the financing of goods and services provided by one State department or agency to other State departments or agencies on a cost-reimbursement basis. The Risk Management Fund provides insurance coverage to all State agencies using an optimal combination of self-insurance and private excess insurance. It includes the Workers' Compensation section that receives monies from State agencies and uses these monies to pay for insurance and risk management services including loss control services and self-insured liability losses. The Transportation Equipment Fund administers the purchase, storage and distribution of supplies, equipment and furniture for other Department of Transportation Funds. The Employee Benefits Fund (HITF) administers the State’s benefits program available to State employees and retirees. The Telecommunications Fund receives monies from State agencies for services related to administering the State’s contracts for the installation and maintenance of telecommunications equipment through the telecommunications program office. The Technology Fund receives monies from State agencies for services related to the implementation and operation of automation programs throughout the State. The Retiree Accumulated Sick Leave Fund (RASL) accounts for monies paid out to retirees for their accumulated sick leave. The Motor Pool Fund receives monies from State agencies for the use of State vehicles and uses these monies for operation of the State Motor Pool. STATE OF ARIZONA COMBINING STATEMENT OF NET ASSETS INTERNAL SERVICE FUNDS JUNE 30, 2006 (Expressed in Thousands) ASSETS Current Assets: Cash and pooled investments with State Treasurer Receivables, net of allowances: Interest Other Due from other Funds Inventories, at cost Other current assets Total Current Assets RISK TRANSPORTATION EMPLOYEE TELE- MANAGEMENT EQUIPMENT BENEFITS COMMUNICATION $ Noncurrent Assets: Capital assets: Depreciable buildings, property and equipment, net of accumulated depreciation Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities: Accounts payable and other current liabilities Accrued liabilities Due to other Funds Current portion of accrued insurance losses Current portion of long-term debt Current portion of other long-term liabilities Total Current Liabilities Noncurrent Liabilities: Accrued insurance losses Long-term debt Other long-term liabilities Total Noncurrent Liabilities Total Liabilities NET ASSETS Invested in capital assets, net of related debt Unrestricted (deficit) Total Net Assets $ 33,936 $ 5,157 $ 47,021 $ 1,601 TECHNOLOGY $ 7,731 57 474 4,920 39,387 11 2,925 8,093 3,886 72 50,979 353 1,954 1,880 2,141 13 2,178 13,943 93 93 39,480 53,382 53,382 61,475 27 27 51,006 1,268 1,268 3,222 2,057 2,057 16,000 2,626 197 29 53,366 247 56,465 234 1,130 2,579 3,943 49,372 77 1,011 119 50,579 134 1,076 53 1,263 3,223 2 499 3,724 313,834 313,834 370,299 8,551 8,551 12,494 50,579 1,263 3,724 93 (330,912) 42,252 6,729 27 400 1,268 691 2,057 10,219 (330,819) $ 48,981 - 198 - $ 427 $ 1,959 $ 12,276 $ $ RETIREE MOTOR SICK LEAVE POOL 8,132 $ TOTAL 10,848 $ 114,426 8,132 723 852 35 6 12,464 11 6,899 3,467 2,973 7,176 134,952 8,132 12,884 12,884 25,348 69,711 69,711 204,663 6,940 6,940 560 33 593 56,149 1,404 2,118 53,366 2,579 7,891 123,507 4,455 4,455 11,395 593 313,834 8,551 4,455 326,840 450,347 (3,263) 12,884 11,871 (3,263) $ 24,755 58,581 (304,265) $ (245,684) - 199 - STATE OF ARIZONA COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS INTERNAL SERVICE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) OPERATING REVENUES Sales and charges for services Other Total Operating Revenues RISK TRANSPORTATION EMPLOYEE TELE- MANAGEMENT EQUIPMENT BENEFITS COMMUNICATION $ OPERATING EXPENSES Cost of sales and benefits Personal services Contractual services Depreciation and amortization Insurance Other Total Operating Expenses Operating Income (Loss) $ 37,790 626 38,416 4,956 27,693 71 114,553 903 148,176 (53,543) NON-OPERATING REVENUES (EXPENSES) Gain on sale of capital assets Investment income Interest expense Other non-operating revenue Total Non-Operating Revenues (Expenses) Income (Loss) Before Contributions and Transfers $ 3,903 - (54,218) (276,601) 2,989 45,992 (330,819) $ 48,981 - 200 - $ (5,239) 5,666 427 $ $ 19,937 19,937 8,402 8,629 608 1,471 187 1,939 21,236 (1,299) - (5,239) $ 1,972 55 2,027 97 855 165 924 26 1,334 3,401 (1,374) - (914) (814) 547,167 547,167 552,406 552,406 (5,239) 199 188 (356) 31 (53,404) Change in Net Assets Total Net Assets - Beginning $ 16,421 12,584 222 8,013 605 1,516 39,361 (945) 139 139 Capital grants and contributions Transfers out Total Net Assets - Ending 94,633 94,633 TECHNOLOGY - (1,374) (1,299) (4) (1) (1,378) 3,337 (1,300) 13,576 1,959 $ 12,276 $ RETIREE MOTOR SICK LEAVE POOL 12,149 12,149 $ 11,084 11,084 $ 724,732 681 725,413 11,219 98 2 4 11,323 826 5,164 696 158 2,511 1,429 613 10,571 513 593,709 27,818 28,848 12,990 116,804 6,305 786,474 (61,061) - 154 154 353 188 (356) 139 324 826 667 (60,737) - $ TOTAL 793 (2) 826 (4,089) 1,458 23,297 (3,263) $ 24,755 4,696 (821) (56,862) (188,822) $ (245,684) - 201 - STATE OF ARIZONA COMBINING STATEMENT OF CASH FLOWS INTERNAL SERVICE FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Receipts from interfund services / premiums Payments to suppliers or insurance companies Payments to employees Payments to retirees Other receipts Net Cash Provided (Used) by Operating Activities RISK MANAGEMENT $ CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Transfers from other Funds Interest paid Transfers to other Funds Other receipts Net Cash Provided (Used) by Non-capital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from sale of capital assets Acquisition and construction of capital assets Net Cash Provided (Used) by Capital and Related Financing Activities 37,790 $ (18,706) (12,542) 626 7,168 (814) 139 (675) (356) (356) - 859 (10,874) (10,015) (18) 748 (6,152) 10 - (697) (18) (5,404) 10 (697) - 188 188 Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning 4,303 29,633 1,596 3,561 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income (loss) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization Net changes in assets and liabilities: (Increase) decrease in receivables, net of allowances (Increase) decrease in due from other Funds (Increase) in inventories, at cost (Increase) decrease in other assets Increase (decrease) in accounts payable Increase in accrued liabilities Increase (decrease) in due to other Funds Increase in accrued insurance losses Increase (decrease) in other liabilities Net Cash Provided (Used) by Operating Activities SCHEDULE OF NONCASH INVESTING, CAPITAL AND NON-CAPITAL FINANCING ACTIVITIES Assets acquired under capital leases Contribution of capital assets from other funds Total Noncash Investing, Capital and Non-capital Financing Activities $ $ TELECOMMUNICATION 94,203 $ (84,449) (4,758) 4,996 CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends from investments Net Cash Provided by Investing Activities Cash and Cash Equivalents - Ending EMPLOYEE BENEFITS TRANSPORTATION EQUIPMENT 33,936 $ (53,543) $ 71 5,157 - $ (945) $ 47,021 (8,370) 9,971 $ (5,239) $ - (128) 84 713 (569) 4,374 (750) (1,349) 67 2,342 - (2,716) 49,737 8,013 (430) (3,340) (3,566) 197 6 65,600 1 552,214 $ (554,940) (2,726) 1,601 (1,374) 924 5,047 (72) (2,900) 77 350 11 1,103 1,573 562 (979) 1,071 (538) (2,726) $ 2,342 $ 4,996 $ 7,168 $ $ - $ 5,220 3,903 $ - $ - $ - $ 9,123 $ - $ - - 202 - RETIREE SICK LEAVE TECHNOLOGY $ $ $ 17,320 $ (11,321) (8,091) (2,092) 12,149 $ (98) (9,785) 2,266 TOTAL 11,381 $ (7,471) (696) 3,214 729,431 (677,637) (27,534) (9,785) 693 15,168 10,010 (10) 10,000 - (2) (2) 10,869 (356) (11,700) 139 (1,048) (177) - (2,996) 758 (10,040) (177) - (2,996) (9,282) - - - 188 188 7,731 - 2,266 5,866 216 10,632 5,026 109,400 7,731 $ 8,132 $ 10,848 $ 114,426 (1,299) $ 826 $ 513 $ (61,061) 1,471 $ MOTOR POOL - 2,511 12,990 (1,656) (2,141) (13) (2,178) 3,223 2 499 1,440 8 289 (14) (91) (2) - 4,502 (709) (155) (5,028) (4,229) 987 1,427 65,600 844 (2,092) $ 2,266 $ 3,214 $ 15,168 $ - $ - $ - $ 5,220 3,903 $ - $ - $ - $ 9,123 - 203 - PENSION TRUST FUNDS Pension Trust Funds account for transactions of the four public employee retirement systems for which the State acts as trustee. The Arizona State Retirement System is a cost-sharing, multiple-employer pension system that benefits employees of public schools, the State and its political subdivisions. The Public Safety Personnel Retirement System is an agent multiple-employer pension system that benefits fire fighters and police officers employed by the State and its political subdivisions. The Elected Officials' Retirement Plan is a cost-sharing, multiple-employer pension plan that benefits all elected State and county officials and judges and certain elected city officials. The Corrections Officer Retirement Plan is an agent multiple-employer pension plan that benefits town, city and county detention officers and certain employees of the State’s Department of Corrections and Department of Juvenile Corrections. STATE OF ARIZONA COMBINING STATEMENT OF FIDUCIARY NET ASSETS PENSION TRUST FUNDS JUNE 30, 2006 (Expressed in Thousands) ASSETS Cash Prepaid benefits $ Receivables, net of allowances: Accrued interest and dividends Securities sold Forward contract receivable Contributions Court fees Due from other Funds Miscellaneous receivables Total receivables Investments, at fair value: Temporary investments Temporary investments from securities lending U.S. Government securities Corporate bonds Corporate notes Corporate stocks Real estate mortgages and contracts Collateral investment pool Other investments Total investments Property and equipment, net of accumulated depreciation Total Assets LIABILITIES Accounts payable and other current liabilitites Payable for securities purchased Obligation under securities loan agreements Due to other Funds Total Liabilities STATE PUBLIC ELECTED RETIREMENT SAFETY OFFICIALS' 27,066 120,076 $ 584 - $ CORRECTIONS OFFICER 915 - $ TOTAL 84 - $ 28,649 120,076 57,466 371,018 1,889,592 31,388 4,571 19,980 6,149 214 1,315 240 341 320 - 3,582 1,909 - 82,343 371,018 1,889,592 39,686 341 320 4,785 2,354,035 26,343 2,216 5,491 2,388,085 1,876,609 - - - 1,876,609 2,265,754 3,858,714 1,972,262 16,743,086 245,787 - 449,168 592,358 235,731 3,436,622 912,039 162,164 27,927 41,363 13,343 230,181 72,192 11,013 75,553 107,348 44,788 600,804 137,547 27,531 2,265,754 4,411,362 2,713,331 293,862 21,010,693 245,787 1,121,778 200,708 26,962,212 5,788,082 396,019 993,571 34,139,884 - 3,582 239 626 4,447 29,463,389 5,818,591 399,389 999,772 36,681,141 1,916,492 895,749 153 - 45 - 122 - 1,916,812 895,749 2,265,754 - 912,039 - 72,192 - 137,547 320 3,387,532 320 5,077,995 912,192 72,237 137,989 6,200,413 NET ASSETS Held in Trust for Pension Benefits $ 24,385,394 $ 4,906,399 - 206 - $ 327,152 $ 861,783 $ 30,480,728 STATE OF ARIZONA COMBINING STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS PENSION TRUST FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) STATE RETIREMENT ADDITIONS: Member contributions Employer contributions Member purchase of service credit Court fees $ Investment income: Net increase in fair value of investments Interest income Dividends Real estate $ 1,758,899 271,299 232,692 8,150 Other investment income Securities lending income Total investment income Less investment expenses: Investment activity expenses Security lending expenses Net investment income Other additions Total Additions DEDUCTIONS: Retirement and disability benefits Death benefits Refunds to withdrawing members, including interest Administrative expense Other deductions Total Deductions Change in net assets held in trust for pension benefits Net Assets - Beginning Net Assets - Ending 612,121 612,121 124,024 - PUBLIC SAFETY $ ELECTED OFFICIALS' 75,616 127,219 9,409 - $ 237,239 86,613 55,502 - CORRECTIONS OFFICER 3,811 7,625 2,430 3,855 $ 14,718 5,883 3,781 - 37,134 24,028 994 - TOTAL $ 39,303 15,359 9,514 - 728,682 770,993 136,857 3,855 2,050,159 379,154 301,489 8,150 6,062 - - - 6,062 89,084 2,366,186 972 380,326 87 24,469 190 64,366 90,333 2,835,347 51,957 83,290 2,230,939 814 379,512 61 24,408 168 64,198 53,000 83,290 2,699,057 1,727 1,125 1,704 1,234 5,790 3,580,932 592,881 43,833 127,588 4,345,234 1,686,090 17,125 284,028 - 27,909 - 36,709 - 2,034,736 17,125 60,313 32,145 7,250 7,225 2,980 291 7 248 11 15,741 674 1,555 83,286 36,047 9,107 1,802,923 294,524 28,175 54,679 2,180,301 1,778,009 22,607,385 298,357 4,608,042 15,658 311,494 72,909 788,874 2,164,933 28,315,795 24,385,394 $ 4,906,399 - 207 - $ 327,152 $ 861,783 $ 30,480,728 INVESTMENT TRUST FUNDS Investment Trust Funds account for assets held by the State in a trustee capacity for local governments and political subdivisions of the State of Arizona which have elected to invest idle cash with the State Treasurer’s Office. The Treasurer acts as trustee for the deposits made by participants. Central Arizona Water Conservation District is an Investment Trust Account composed of corporate debt and United States Government securities. The Central Arizona Water Conservation District is the only participant in the account. Local Government Investment Pool is an Investment Trust Account composed of corporate debt, negotiable certificates of deposit and United States Government securities. Local Government Investment Pool-Government is an Investment Trust Account composed of repurchase agreements and United States Government securities. All investments of the fund are backed by the full faith and credit of the United States Government. STATE OF ARIZONA COMBINING STATEMENT OF FIDUCIARY NET ASSETS INVESTMENT TRUST FUNDS JUNE 30, 2006 (Expressed in Thousands) LOCAL CENTRAL ARIZONA WATER ASSETS Receivables, net of allowances: Accrued interest and dividends Total receivables Total Assets LIABILITIES Due to local governments Total Liabilities GOVERNMENT GOVERNMENT INVESTMENT CONSERVATION INVESTMENT POOL- DISTRICT POOL GOVERNMENT $ Investments, at fair value: U.S. Government securities Corporate bonds Repurchase agreements Money market mutual funds Total investments LOCAL 817 817 $ 4,463 4,463 $ 3,495 3,495 TOTAL $ 8,775 8,775 89,570 11,535 3,065 104,170 544,668 861,678 40,716 5,638 1,452,700 447,646 1,223,980 1,671,626 1,081,884 873,213 1,264,696 8,703 3,228,496 104,987 1,457,163 1,675,121 3,237,271 943 2,250 2,041 5,234 943 2,250 2,041 5,234 NET ASSETS Held in trust for pool participants $ Net assets consist of: Participant shares outstanding Participants' net asset value (net assets/shares outstanding) 104,044 $ 104,044 $ 1.00 1,454,913 $ 1,454,913 $ 1.00 - 210 - 1,673,080 1,673,080 $ 1.00 $ 3,232,037 3,232,037 STATE OF ARIZONA COMBINING STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS INVESTMENT TRUST FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) LOCAL ADDITIONS: Investment income: Net increase (decrease) in fair value of investments Interest income Total investment income $ Less: Investment activity expenses Net investment income LOCAL GOVERNMENT INVESTMENT WATER GOVERNMENT CONSERVATION INVESTMENT POOL- DISTRICT POOL GOVERNMENT (1,563) $ 4,307 2,744 85 2,659 Capital share and individual account transactions: Shares sold Reinvested interest income Shares redeemed Net capital share and individual account transactions Total Additions DEDUCTIONS: Dividends to investors Total Deductions Change in net assets held in trust for pool participants Net Assets - Beginning Net Assets - Ending CENTRAL ARIZONA $ 1,330 68,473 (833) $ 56,854 56,021 (16) 128,584 128,568 1,178 54,843 2,593 125,975 161 4,079 (5,212) 2,371,828 61,197 (2,628,541) (972) (195,516) 263,600 67,112 1,687 (127,043) 318,443 193,087 2,659 68,473 54,843 125,975 2,659 68,473 54,843 125,975 263,600 1,409,480 67,112 3,164,925 (972) 105,016 $ 2,380 67,423 69,803 TOTAL 104,044 2,176,554 52,474 (1,965,428) (195,516) 1,650,429 $ - 211 - 1,454,913 $ 1,673,080 4,548,543 117,750 (4,599,181) $ 3,232,037 AGENCY FUNDS Agency Funds account for the receipt and disbursement of various taxes, deposits, deductions, and property collected by the State, where the State acts as an agent for distribution to other governmental units or organizations. The Treasurer Custodial Securities Fund consists of securities held by the State Treasurer for various State agencies as required by statute. The Other Treasurer Funds account for other various deposits that are required to be made by other governmental units or organizations with the State Treasurer. The Other Funds consist of various funds where the State acts as an agent for distribution to other governmental units or organizations. STATE OF ARIZONA COMBINING STATEMENT OF ASSETS AND LIABILITIES AGENCY FUNDS JUNE 30, 2006 (Expressed in Thousands) TREASURER CUSTODIAL SECURITIES FUND ASSETS Cash Cash and pooled investments with State Treasurer Short-term investments Receivables, net of allowances: Accrued interest and dividends Due from others Custodial securities in safekeeping Other assets Total Assets LIABILITIES Accounts payable and other current liabilities Accrued liabilities Due to local governments Due to others Total Liabilities $ - OTHER TREASURER FUNDS $ OTHER FUNDS - $ 41,132 TOTAL $ 41,132 - 38,059 - 338,740 5,906 376,799 5,906 2,578,150 - 111 - 675 92,983 63,426 4,072 786 92,983 2,641,576 4,072 $ 2,578,150 $ 38,170 $ 546,934 $ 3,163,254 $ 2,578,150 $ 392 18,210 19,568 $ 187,882 8,112 845 350,095 $ 188,274 8,112 19,055 2,947,813 $ 2,578,150 $ 38,170 $ 546,934 $ 3,163,254 - 215 - STATE OF ARIZONA COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) BALANCE JULY 1, 2005 TREASURER CUSTODIAL SECURITIES FUND Assets: Custodial securities in safekeeping Total Assets Liabilities: Due to others Total Liabilities OTHER TREASURER FUNDS Assets: Cash and pooled investments with State Treasurer Interest receivable Total Assets Liabilities: Accounts payable and other current liabilities Due to local governments Due to others Total Liabilities ADDITIONS BALANCE JUNE 30, 2006 DELETIONS $ 2,486,435 $ 2,765,190 $ 2,673,475 $ 2,578,150 $ 2,486,435 $ 2,765,190 $ 2,673,475 $ 2,578,150 $ 2,486,435 $ 2,765,190 $ 2,673,475 $ 2,578,150 $ 2,486,435 $ 2,765,190 $ 2,673,475 $ 2,578,150 $ 18,412 36 $ 512,745 111 $ 493,098 36 $ 38,059 111 $ 18,448 $ 512,856 $ 493,134 $ 38,170 $ 301 5,377 12,770 $ 60,722 410,295 46,246 $ 60,631 397,462 39,448 $ 392 18,210 19,568 $ 18,448 $ 517,263 $ 497,541 $ 38,170 (Continued) - 216 - STATE OF ARIZONA COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES AGENCY FUNDS FOR THE YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) BALANCE JULY 1, 2005 OTHER FUNDS Assets: Cash Cash and pooled investments with State Treasurer Short-term investments Receivables, net of allowances: Interest Other Due from others Custodial securities in safekeeping Other assets Total Assets Liabilities: Accounts payable and other current liabilities Accrued liabilities Due to local governments Due to others Total Liabilities COMBINED TOTAL ALL AGENCY FUNDS Assets: Cash Cash and pooled investments with State Treasurer Short-term investments Receivables, net of allowances: Interest Other Due from others Custodial securities in safekeeping Other assets Total Assets Liabilities: Accounts payable and other current liabilities Accrued liabilities Due to local governments Due to others Total Liabilities $ 43,439 298,106 2,353 ADDITIONS $ 668,283 5,498,223 5,906 267 207 90,945 57,118 3,609 BALANCE JUNE 30, 2006 DELETIONS $ 671 92,983 63,426 4,072 670,590 5,457,589 2,353 $ 263 207 90,945 57,118 3,609 41,132 338,740 5,906 675 92,983 63,426 4,072 $ 496,044 $ 6,333,564 $ 6,282,674 $ 546,934 $ 159,493 5,512 741 330,298 $ 7,648,836 8,112 1,933 959,303 $ 7,620,447 5,512 1,829 939,506 $ 187,882 8,112 845 350,095 $ 496,044 $ 8,618,184 $ 8,567,294 $ 546,934 $ 43,439 316,518 2,353 $ 668,283 6,010,968 5,906 $ 670,590 5,950,687 2,353 $ 41,132 376,799 5,906 303 207 90,945 2,543,553 3,609 782 92,983 2,828,616 4,072 299 207 90,945 2,730,593 3,609 786 92,983 2,641,576 4,072 $ 3,000,927 $ 9,611,610 $ 9,449,283 $ 3,163,254 $ 159,794 5,512 6,118 2,829,503 $ 7,709,558 8,112 412,228 3,770,739 $ 7,681,078 5,512 399,291 3,652,429 $ 188,274 8,112 19,055 2,947,813 $ 3,000,927 $ 11,900,637 $ 11,738,310 $ 3,163,254 - 217 - NON-MAJOR UNIVERSITIES – AFFILIATED COMPONENT UNITS Component units affiliated with the Universities are legally separate, tax-exempt organizations controlled by separate Boards of Directors that meet the criteria established in GASB 39, with the exception of the Collegiate Golf Foundation and University of Arizona Campus Research Corporation (CRC). The Collegiate Golf Foundation is included because it is a legally separate organization that the State believes would be misleading to exclude due to its financial relationship to the State. The CRC is included because the U of A appoints a majority of the board of directors and approves the budget; the U of A can thus impose its will on the CRC. The Northern Arizona University Foundation receives gifts and bequests, administers and invests securities and property, and disburses payments to and on behalf of the NAU for advancement of its mission. The Northern Arizona Capital Facilities Finance Corporation was established for the purpose of acquiring, developing, constructing, maintaining and operating student housing and other capital facilities and equipment for the use and benefit of the NAU's students. Mesa Student Housing, LLC provides facilities for either the use by students of ASU or ASU itself. Sun Angel Foundation receives funds primarily through donations and dues, and contribute funds to ASU for support of various programs. Sun Angel Endowment receives funds primarily through donations and dues, and contribute funds to ASU for support of various programs. The Collegiate Golf Foundation operates an ASU-owned golf course. Arizona State University Research Park, Inc. is developing a research park to promote and support research activities in coordination with ASU. The Arizona State University Alumni Association receives funds primarily through donations and dues, and contribute funds to ASU for support of various programs. The University of Arizona Law College Association was established to provide support and financial assistance to the College of Law at the U of A. The Law Association funds provide support to the College on many levels, from endowed student scholarships to named faculty professorships. The University of Arizona Campus Research Corporation was established to assist the U of A in the acquisition, improvement, and operation of the U of A Science and Technology Park (Park) and related properties. The CRC currently leases from the U of A the remaining 32% of building space of the Park not leased to the Arizona Research Park Authority. The CRC is responsible for assisting in the development of the presently undeveloped portions of the Park and for subleasing unoccupied space, newly developed space, and space now occupied by IBM or its subtenants once the current subleases expire. The U of A is responsible for payment of operational expenses associated with the space occupied by the U of A departments, offices and programs. The University of Arizona Alumni Association was established to serve the U of A and its graduates, former students, and friends by attracting, organizing and encouraging them to advance the U of A's missions - teaching, research, and public service. STATE OF ARIZONA COMBINING STATEMENT OF FINANCIAL POSITION NON-MAJOR UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) NORTHERN ARIZONA UNIVERSITY FOUNDATION ASSETS Cash and cash equivalent investments $ Receivables: Pledges receivable Other receivables Total receivables Investments: Investments in securities Investments held in trust for Universities Other investments Total investments Net direct financing leases Property and equipment, net of accumulated depreciation Other assets Total Assets LIABILITIES Liability under Universities' endowment trust agreements Bonds payable Unearned revenue Other liabilities Total Liabilities NET ASSETS Permanently restricted Temporarily restricted Unrestricted Total Net Assets $ 2,726 NORTHERN ARIZONA CAPITAL FACILITIES FINANCE CORP. MESA STUDENT HOUSING SUN ANGEL FOUNDATION SUN ANGEL ENDOWMENT $ $ $ $ - 684 1,278 - 3,013 233 3,246 450 450 - 2,145 36 2,181 - 49,536 1,359 50,895 3,662 3,662 3,317 3,317 - 11,136 11,136 - 13,110 - - - 1 467 17,201 2,450 14,869 919 4,536 14 26 57,335 36,873 19,789 8,009 11,162 5,441 665 35,391 347 19,880 95 1,375 2,497 52 6,106 35,738 21,350 2,497 52 26,666 15,668 8,895 1,135 (1,561) 1,800 3,712 1,792 567 8,751 51,229 $ 1,135 - 220 - $ (1,561) $ 5,512 $ 11,110 COLLEGIATE GOLF FOUNDATION ARIZONA STATE UNIVERSITY RESEARCH PARK, INC. ARIZONA STATE UNIVERSITY ALUMNI ASSOCIATION $ $ $ $ 415 484 823 UNIVERSITY OF ARIZONA LAW COLLEGE ASSOCIATION $ 2,237 UNIVERSITY OF ARIZONA CAMPUS RESEARCH CORPORATION UNIVERSITY OF ARIZONA ALUMNI ASSOCIATION $ $ 2,155 1,168 TOTALS $ 11,970 79 79 5,485 5,485 30 30 29,445 29,445 801 801 1,541 1,541 34,603 8,655 43,258 - 1,493 1,493 13,371 13,371 4,341 229 4,570 - 4,073 4,073 87,267 5,021 229 92,517 - - - - - - 13,110 161 175 8,179 2,570 342 121 - 11,378 5,382 57 156 56,503 12,501 830 18,211 14,566 36,373 19,716 6,995 229,859 74 670 12,975 13,991 526 2,163 128 31 11,076 412 1,376 29 3,432 56 5,441 79,351 20,167 7,723 744 27,492 2,291 31 12,864 3,517 112,682 86 (9,281) 96 12,179 3,052 32,081 1,209 6,852 3,478 31,510 50,212 35,455 86 $ (9,281) $ 12,275 $ 36,342 - 221 - $ 6,852 $ 3,478 $ 117,177 STATE OF ARIZONA COMBINING STATEMENT OF ACTIVITIES NON-MAJOR UNIVERSITIES - AFFILIATED COMPONENT UNITS JUNE 30, 2006 (Expressed in Thousands) NORTHERN ARIZONA UNIVERSITY FOUNDATION REVENUES Contributions Rental revenue Sales and services Net investment income Capital lease revenue Other revenues $ Total Revenues EXPENSES Program services: Payments to Universities Leasing related expenses Payments on behalf of Universities Other program services Personal services, operations, and administrative expenses Fundraising expenses Interest Other expenses Total Expenses Increase (Decrease) in Net Assets Net Assets - Beginning, as restated Net Assets - Ending $ 7,014 2,763 1,253 NORTHERN ARIZONA CAPITAL FACILITIES FINANCE CORP. $ 93 828 92 864 MESA STUDENT HOUSING $ 5,234 162 154 115 SUN ANGEL FOUNDATION $ 9,333 980 326 1,796 SUN ANGEL ENDOWMENT $ 197 1,286 1 11,030 1,877 5,665 12,435 1,484 4,386 - - 7,415 - 382 270 1,311 - 189 820 25 3,432 1,241 947 1,663 1,067 40 108 - 5,967 1,034 5,620 10,185 490 5,063 46,166 843 292 45 (1,606) 2,250 3,262 994 10,116 (1,561) $ 5,512 51,229 $ 1,135 - 222 - $ $ 11,110 ARIZONA STATE UNIVERSITY RESEARCH PARK, INC. COLLEGIATE GOLF FOUNDATION $ 4,455 4 - $ $ 1,548 2,377 1,002 33 UNIVERSITY OF ARIZONA LAW COLLEGE ASSOCIATION $ 2,800 400 64 UNIVERSITY OF ARIZONA CAMPUS RESEARCH CORPORATION $ 7,331 32 815 UNIVERSITY OF ARIZONA ALUMNI ASSOCIATION $ 216 657 357 2,725 TOTALS $ 21,108 17,715 8,631 7,464 92 7,737 4,459 5,440 4,960 3,264 8,178 3,955 62,747 - - - 4,140 - 6,265 1,249 - 2,627 - 7,415 6,265 8,016 4,768 4,278 12 65 1,421 657 1,566 3,881 - 171 116 36 1,056 - 761 173 - 17,230 2,667 2,730 2,679 4,355 3,644 3,881 4,463 8,570 3,561 51,770 1,796 (11,077) 1,079 11,196 (1,199) 37,541 (392) 7,244 394 3,084 10,977 106,200 104 (18) $ 5,057 312 71 ARIZONA STATE UNIVERSITY ALUMNI ASSOCIATION 86 $ (9,281) $ 12,275 $ 36,342 - 223 - $ 6,852 $ 3,478 $ 117,177 STATISTICAL SECTION (Not Covered by the Independent Auditors’ Report) STATISTICAL SECTION STATISTICAL SECTION This part of the State of Arizona’s Comprehensive Annual Financial Report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the State’s overall financial health. Financial Trends – Schedules 1 thru 4 contain trend information to help the reader understand how the State’s financial performance and well-being have changed over time. Revenue Capacity – Schedules 5 thru 6 contain information to help the reader assess the State’s most significant own-source revenue, the sales tax. Debt Capacity – Schedules 7 thru 15 present information to help the reader assess the affordability of the State’s current levels of outstanding debt and the State’s ability to issue additional debt in the future. Demographic and Economic Information – Schedules 16 thru 17 offer demographic and economic indicators to help the reader understand the environment within which the State’s financial activities take place and to help make comparisons over time and among other governments. Operating Information – Schedules 18 thru 20 contain service and infrastructure data to help the reader understand how the information in the State’s financial report relates to the services the State provides and the activities it performs. STATE OF ARIZONA SCHEDULE 1 NET ASSETS BY COMPONENT (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2006 GOVERNMENTAL ACTIVITIES: Invested in capital assets, net of related debt (3) $ Restricted for: Federal grants Capital projects Debt service Permanent funds: Expendable Nonexpendable Other purposes Unrestricted Total Governmental Activities Net Assets BUSINESS-TYPE ACTIVITIES: Invested in capital assets, net of related debt Restricted for: Capital projects Unemployment compensation Debt service University funds: Expendable (4) Nonexpendable (4) Loans and other financial assistance (4) Other purposes (4) Unrestricted Total Business-type Activities Net Assets PRIMARY GOVERNMENT: Invested in capital assets, net of related debt Restricted for: Federal grants Capital projects Unemployment compensation Debt service Permanent funds / University funds: Expendable (4) Nonexpendable (4) Loans and other financial assistance (4) Other purposes (4) Unrestricted Total Primary Government Net Assets 12,878,151 2005 $ 11,825,961 63,219 561,795 44,846 19,244 2,785,419 86,345 784,520 $ 2004, as 2003, as 2002, as restated restated restated (2) 11,226,325 $ 10,690,782 102,794 548,488 28,708 73,466 414,113 31,302 108,268 495,663 30,470 5,106 2,164,200 88,992 (412,450) 1,550,247 31,447 (633,427) 20,082 1,395,750 21,080 (748,522) $ 10,043,985 158,424 589,996 51,861 56,697 1,243,389 24,132 409,871 $ 17,223,539 $ 14,351,799 $ 12,693,473 $ 12,013,573 $ 12,578,355 $ 1,144,374 $ 1,166,954 $ 1,163,539 $ 1,147,769 $ 1,159,647 6,106 949,919 9,198 2,657 820,383 8,203 3,023 796,119 16,940 21,842 893,470 24,715 33,515 1,055,543 30,153 189,746 178,001 67,423 62 201,015 171,976 163,922 64,875 105,739 157,595 153,073 63,500 137,477 143,683 141,281 63,249 2,763 272,906 258,954 95,146 298,686 $ 2,745,844 $ 2,504,709 $ 2,491,266 $ 2,711,678 $ 2,931,644 $ 14,022,525 $ 12,992,915 $ 12,389,864 $ 11,838,551 $ 11,203,632 63,219 567,901 949,919 54,044 208,990 2,963,420 67,423 86,407 985,535 $ 19,969,383 $ 102,794 551,145 820,383 36,911 73,466 417,136 796,119 48,242 108,268 517,505 893,470 55,185 158,424 623,511 1,055,543 82,014 177,082 2,328,122 64,875 88,992 (306,711) 157,595 1,703,320 63,500 31,447 (495,950) 163,765 1,537,031 63,249 23,843 (475,616) 56,697 1,243,389 258,954 119,278 708,557 16,856,508 $ 15,184,739 (1) This schedule reports using the accrual basis of accounting. (2) The State implemented GASB Statement 34 in fiscal year 2002. Therefore, ten years of data is not available, but will be accumulated over time. (3) For fiscal year 2006, net assets for governmental activities were increased by the capitalization of $302,375 of capital assets that were previously recorded as transportation expenses. (4) For fiscal year 2002, net assets restricted for expendable University funds of $130,735 and for nonexpendable University funds of $137,854 were classified as net assets restricted for loans and other financial assistance of $175,661 and for other purposes of $92,928. - 228 - $ 14,725,251 $ 15,509,999 STATE OF ARIZONA SCHEDULE 2 CHANGES IN NET ASSETS (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2006 EXPENSES Governmental Activities: General government Health and welfare Inspection and regulation Education Protection and safety Transportation (8) Natural resources Intergovernmental revenue sharing Interest on long-term debt Total Governmental Activities Expenses $ Business-type Activities: Universities Unemployment compensation Industrial Commission special fund (6) Lottery Other Total Business-type Activities Expenses Total Primary Government Expenses 781,542 9,057,733 159,766 5,304,555 1,279,129 386,777 187,947 2,658,636 172,439 19,988,524 2005 $ 2,759,142 226,171 (18,300) 377,104 136,894 3,481,011 646,452 8,494,206 149,238 4,853,458 1,171,340 589,966 184,538 2,335,828 182,852 18,607,878 $ 2,540,193 292,127 106,295 317,226 120,629 3,376,470 2004, as 2003, as 2002, as restated restated restated (2) 726,525 7,717,148 138,281 4,703,685 1,059,047 731,522 162,366 2,144,438 176,035 17,559,047 $ 2,355,418 397,657 167,331 303,996 109,944 3,334,346 694,173 6,848,087 141,673 4,795,566 982,839 598,375 175,312 2,159,691 135,775 16,531,491 $ 2,181,311 455,685 73,586 263,321 107,740 3,081,643 852,417 5,960,399 135,784 4,277,635 931,292 411,108 152,772 2,190,160 131,206 15,042,773 2,039,832 406,406 57,503 239,648 95,164 2,838,553 $ 23,469,535 $ 21,984,348 $ 20,893,393 $ 19,613,134 $ 17,881,326 PROGRAM REVENUES Governmental Activities: Charges for services: General government $ Inspection and regulation Transportation (7) Other activities Operating grants and contributions (5) Capital grants and contributions Total Governmental Activities Program Revenues 161,664 146,191 134,068 279,836 7,941,223 388,646 9,051,628 $ 139,486 133,073 88,296 256,804 7,544,370 497,140 8,659,169 $ 140,791 133,510 114,097 248,446 6,981,748 421,251 8,039,843 $ 106,876 120,045 112,466 192,332 5,940,007 460,364 6,932,090 $ 120,514 117,606 112,725 230,409 4,996,539 471,020 6,048,813 Business-type Activities: Charges for services: Universities Lottery Other activities (4) Operating grants and contributions (9) Capital grants and contributions Total Business-type Activities Program Revenues 962,967 468,697 474,801 852,788 30,056 2,789,309 Total Primary Government Program Revenues $ NET (EXPENSE) REVENUE Governmental activities Business-type activities $ Total Primary Government Net (Expense) $ 11,840,937 863,042 397,561 440,646 834,421 19,774 2,555,444 $ 778,047 366,582 305,221 836,076 18,513 2,304,439 675,089 322,267 259,676 810,549 23,090 2,090,671 639,050 294,848 254,984 737,170 48,180 1,974,232 11,214,613 $ 10,344,282 $ 9,022,761 $ 8,023,045 (10,936,896) $ (691,702) (9,948,709) (821,026) $ (9,519,204) (1,029,907) $ (9,599,401) (990,972) $ (8,993,960) (864,321) (11,628,598) $ (10,769,735) $ (10,549,111) $ (10,590,373) $ (9,858,281) (Continued) - 229 - STATE OF ARIZONA SCHEDULE 2 CHANGES IN NET ASSETS (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2006 GENERAL REVENUES AND OTHER CHANGES IN NET ASSETS Governmental Activities: Taxes: Sales Income Tobacco (3) Property Motor vehicle and fuel (7) Other (3) Unrestricted investment earnings Unrestricted grants and contributions Miscellaneous general revenues (5) Gain on sale of trust land Transfers Total Governmental Activities $ Business-type Activities: Sales taxes Unrestricted investment earnings Unrestricted grants and contributions (9) Miscellaneous general revenues (4) Contributions to permanent endowments Special items Transfers Total Business-type Activities 2005 6,322,311 $ 4,548,843 248,122 43,035 1,857,293 575,946 172,311 12,293 235,610 567,364 (774,492) 13,808,636 54,550 49,050 58,816 3,803 (7,874) 774,492 932,837 5,421,949 3,562,916 237,430 46,148 1,758,950 493,501 106,362 11,624 387,269 288,483 (707,597) 11,607,035 $ 57,584 40,311 5 26,017 2,955 707,597 834,469 2004, as 2003, as 2002, as restated restated restated (2) 5,016,585 2,800,461 223,804 50,455 1,613,952 539,218 24,227 8,502 281,109 319,517 (678,726) 10,199,104 $ 50,050 38,753 46,615 2,231 (6,880) 678,726 809,495 11,008,599 4,551,804 2,371,005 37,470 1,563,876 632,896 77,914 7,222 319,873 137,563 (665,004) 9,034,619 $ 43,450 32,527 3 26,985 3,037 665,004 771,006 $ 9,805,625 4,450,691 2,442,320 49,611 1,493,259 544,514 116,614 8,518 186,917 137,565 (709,916) 8,720,093 41,367 29,327 83,108 12,447 2,723 709,916 878,888 Total Primary Government $ 14,741,473 $ 12,441,504 $ CHANGE IN NET ASSETS Governmental activities (8) Business-type activities $ 2,871,740 241,135 $ 1,658,326 13,443 $ 679,900 (220,412) $ (564,782) (219,966) $ (273,867) 14,567 Total Primary Government $ 3,112,875 $ 1,671,769 $ 459,488 $ (784,748) $ (259,300) (1) This schedule reports using the accrual basis of accounting. (2) The State implemented GASB Statement 34 in fiscal year 2002. Therefore, ten years of data is not available, but will be accumulated over time. (3) Prior to fiscal year 2004, tobacco tax revenue was included in other tax revenue. (4) Beginning in fiscal year 2005, settlement income for the Industrial Commission Special Fund is classified as a program revenue, charges for services. Prior to this, it was classified as a miscellaneous general revenue. In fiscal year 2005, settlement income was $41,554. (5) Beginning in fiscal year 2004, operating grants and contributions included Indian gaming revenue and tobacco settlement revenue. For fiscal year 2004, gaming revenue was $57,517 and this was the first year that gaming revenue was earned, as a result of Proposition 202. For fiscal year 2004, tobacco settlement revenue was $91,601. Prior to fiscal year 2004, tobacco settlement revenue was included in miscellaneous general revenues. (6) The Industrial Commission Special Fund's cost of sales and benefits expense decreased $125,828 during fiscal year 2006, primarily due to a decrease in insolvent carrier liabilities. During fiscal years 2005 and 2004, insolvent carrier liability increased, primarily as the result of $67,423 and $107,600, respectively, in Arizona workers' compensation claims from the defunct California domiciled Fremont Companies. (7) $31,804 of transportation's charges for services for fiscal year 2005 were classified as motor vehicle and fuel tax revenues. (8) For fiscal year 2006, net assets for governmental activities were increased by the capitalization of $302,375 of capital assets that were previously recorded as transportation expenses. (9) In fiscal year 2002, private gifts not restricted for capital purposes of $83,100 for the Universities were classified as general revenues. In future fiscal years, these gifts are classified as program revenues. - 230 - $ 9,598,981 STATE OF ARIZONA SCHEDULE 3 FUND BALANCES, GOVERNMENTAL FUNDS (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2002, as 2006 GENERAL FUND: Reserved for: Budget stabilization fund School facilities improvements Continuing appropriations Other fund balance reservations Unreserved Total General Fund 2004 2003 restated (2) $ 651,020 110,149 69,861 302 1,434,806 $ 160,873 107,260 55,727 374 986,168 $ 13,545 96,714 74,973 377 561,029 $ 13,737 101,944 87,131 598 343,012 $ 67,700 105,816 611 574,146 $ 2,266,138 $ 1,310,402 $ 746,638 $ 546,422 $ 748,273 426,015 6,256 2,043,591 118,671 37,792 5,145 $ 419,072 7,307 5,386 1,716,404 120,752 21,992 25,375 $ 321,401 41,165 17,808 1,361,366 114,948 27,693 25,138 $ 342,324 33,477 33,893 1,123,523 90,238 23,273 38,945 $ 277,321 53,088 262,654 1,082,018 103,312 61,123 38,382 ALL OTHER GOVERNMENTAL FUNDS: Reserved for: Highway construction $ Other construction School facilities improvements Permanent funds Continuing appropriations Debt service Other fund balance reservations Unreserved, reported in: Special revenue funds Capital projects funds Total All Other Governmental Funds 2005 $ 657,371 3,294,841 574,938 $ 2,891,226 463,738 $ 2,373,257 444,301 $ 2,129,974 (1) This schedule reports using the modified accrual basis of accounting. (2) Due to changes in the State's fund structure initiated when GASB Statement 34 was implemented, the fund balance information is available only beginning in fiscal year 2002. - 231 - 634,710 29,661 $ 2,542,269 STATE OF ARIZONA SCHEDULE 4 CHANGES IN FUND BALANCES, GOVERNMENTAL FUNDS (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2002, as 2006 REVENUES Taxes: Sales Income Tobacco (3) Property Motor vehicle and fuel Other (3) Intergovernmental Licenses, fees, and permits Earnings on investments Sales and charges for services Fines, forfeitures, and penalties Gaming (4) Tobacco settlement (5) Other (5) Total Revenues EXPENDITURES Current: General government Health and welfare Inspection and regulation Education Protection and safety Transportation (6) Natural resources Intergovernmental revenue sharing Debt service: Principal Interest and other fiscal charges Capital outlay (6) Total Expenditures Excess (Deficiency) of Revenues Over Expenditures $ 6,313,090 4,535,492 248,122 43,035 1,857,293 575,946 8,019,509 410,069 247,250 162,048 138,354 84,794 86,231 269,411 22,990,644 2005 $ 5,410,383 3,528,565 237,430 46,148 1,758,950 493,501 7,714,012 335,760 190,499 154,251 121,123 67,658 93,933 430,097 20,582,310 2004 $ 4,985,424 2,818,778 223,804 50,455 1,613,952 539,218 7,159,976 349,938 131,715 161,170 120,032 57,517 92,550 313,220 18,617,749 2003 $ 4,555,389 2,387,369 37,470 1,563,876 632,896 6,141,218 320,564 111,771 111,438 96,192 337,930 16,296,113 restated (2) $ 4,424,528 2,410,342 49,611 1,493,259 543,055 5,182,770 330,041 136,761 157,912 98,791 324,433 15,151,503 861,373 8,995,430 157,401 5,302,942 1,247,508 373,603 178,832 2,661,894 758,149 8,419,913 146,523 4,852,099 1,132,473 564,574 175,593 2,335,828 718,229 7,733,516 136,189 4,702,609 1,028,134 717,463 153,533 2,144,438 689,603 6,652,661 139,863 4,882,516 925,667 463,756 163,946 2,159,691 511,167 5,788,774 133,584 4,188,501 892,986 401,372 140,600 2,190,211 261,277 176,933 1,066,815 21,284,008 381,512 200,731 710,688 19,678,083 327,595 188,247 695,289 18,545,242 297,508 140,613 1,041,038 17,556,862 270,912 125,594 1,127,411 15,771,112 1,706,636 904,227 72,507 (1,260,749) (619,609) (Continued) - 232 - STATE OF ARIZONA SCHEDULE 4 CHANGES IN FUND BALANCES, GOVERNMENTAL FUNDS (1) FOR THE LAST FIVE FISCAL YEARS (2) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2002, as 2006 OTHER FINANCING SOURCES (USES) Transfers in Transfers out Proceeds from sale of trust land Proceeds from sale of capital assets Capital lease and installment purchase contracts Refunding bonds issued Payment to refunded bond escrow agent Bonds issued Premium on bonds issued Refunding grant anticipation notes issued Grant anticipation notes issued Premium on grant anticipation notes issued Refunding certificates of participation issued Payment to refunded certificates of participation escrow agent Certificates of participation issued Premium on certificates of participation issued Total Other Financing Sources (Uses) NET CHANGE IN FUND BALANCES DEBT SERVICE AS A PERCENTAGE OF NONCAPITAL EXPENDITURES $ 2005 2004 2003 restated (2) 812,083 (1,585,754) 284,293 11,118 3,543 596,160 (646,689) 118,250 59,711 - 1,011,456 (1,714,562) 274,127 5,350 224,283 (247,417) 210,577 38,651 104,385 11,551 334,225 940,050 (1,616,105) 149,001 24,349 107,940 (145,965) 389,746 22,024 22,633 177,322 9,623 16,725 1,053,862 (1,690,443) 88,066 101,473 90,530 (107,735) 662,975 46,377 75,295 848,252 (1,549,833) 51,265 4,167 74,250 (77,135) 148,350 10,142 71,051 (347,285) (363,052) 237,625 50,307 177,506 (17,273) 273,735 17,187 370,992 (80,713) 372,730 34,186 646,603 (65,087) 68,203 4,674 (411,701) 1,359,351 $ 1,081,733 2.2% 3.1% $ 443,499 $ 2.9% (1) This schedule reports using the modified accrual basis of accounting. (2) Due to changes in the State's fund structure initiated when GASB Statement 34 was implemented, the changes in fund balance information is available only beginning in fiscal year 2002. (3) Prior to fiscal year 2004, tobacco tax revenue was included in other tax revenue. (4) Beginning in fiscal year 2004, Indian gaming revenue was earned as a result of Proposition 202. (5) Prior to fiscal year 2004, tobacco settlement revenue was included in other revenue. (6) For fiscal year 2006, transportation expenditures were reduced and capital outlay was increased by $302,375 for addition of capital assets that were previously recorded as transportation expenditures. - 233 - (614,146) $ 2.7% (1,031,310) 2.7% STATE OF ARIZONA SCHEDULE 5 NET TAXABLE SALES BY CLASSIFICATION (1) FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2006 CLASSIFICATION (9) Transporting (6) Mining, oil and gas Mining severance Timber severance (3) Utilities Communications Private car and pipelines Publishing Job printing Local advertising (7) Restaurants and bars Amusements Commercial lease (4) Personal property rentals Contracting Feed wholesale (2) Retail Hotel/motel Rental occupancy tax Use tax Membership camping Agriculture equipment (5) Other Total Direct sales tax rate (8) $ $ 2005 59,801 321,538 1,219,984 7,679,982 3,220,062 25,751 133,680 403,686 8,933,459 998,767 (120) 3,633,374 20,487,917 53,147,971 2,268,776 3,471 6,155,959 2,785 108,696,843 2004 2003 2002 2001 $ 53,371 317,202 656,631 6,828,179 2,934,858 14,832 134,925 367,010 7,939,964 872,520 919 3,242,363 16,044,847 46,378,344 2,063,973 2,414 5,218,535 2,897 - $ 67,486 287,787 261,623 6,430,306 2,809,508 15,920 128,911 348,924 7,202,034 813,489 (6,518) 3,174,945 13,156,490 (8) 42,409,055 1,831,153 4,202 4,644,319 2,998 119 $ 26,106 268,073 45,049 5,940,826 2,869,499 12,493 133,229 427,730 6,655,028 782,670 (7,579) 3,319,778 11,563,726 (67) 39,408,769 1,698,499 1,428 3,793,691 2,406 - $ 96,356 208,310 (4,264) 766 5,919,273 2,945,681 7,134 82,843 351,142 6,428,712 743,800 36,913 3,607,519 11,820,597 (1,806) 38,432,860 1,659,761 5,968 3,240,460 2,741 2,107 - $ 138,656 224,834 168,695 5,814,282 2,870,089 15,486 124,462 402,934 6,300,820 760,838 182,691 3,658,549 11,250,538 (42) 38,282,337 1,871,009 4,897 3,922,953 2,420 1,213 - $ 93,073,784 $ 83,582,743 $ 76,941,354 $ 75,586,873 $ 75,997,661 5.60% 5.60% 5.60% 5.60% 5.60% 5.00% N/A = Not available (1) Net taxable sales are based upon tax receipts. (2) Feed wholesale dropped to 0% effective July 17, 1994 and was repealed effective October 1, 1994. (3) Effective July 13, 1995, the tax rate on timber severance was changed to a dollar amount per 1,000 board feet. Timber severance includes only sales subject to the repealed rate. (4) Commercial lease rate dropped to 0% effective July 1, 1997. (5) Agriculture equipment was phased out on July 1, 1988 and is not a current business classification. (6) The transporting/towing and railroads/aircraft business classifications have been combined into one category and renamed "transporting." (7) Local advertising was phased out on January 1, 1986. (8) A significant portion of the revenue base was subject to a sales tax rate of 5.6% for fiscal years 2002 thru 2006 and 5.0% for most of fiscal year 2001 (rate increased to 5.6% during fiscal year 2001 on June 1, 2001). For fiscal years 2000 thru 2006, the tax rate for non-metal mining, oil and gas was 3.125%, the mining severance was 2.5%, the timbering severance for ponderosa and other was $2.13 and $1.51 per thousand board feet, respectively, the hotel/motel tax was 5.5%, the rental occupancy tax was 3.0%, and the jet fuel and jet fuel use tax was $.0305 per gallon. Tax rates for fiscal years 1997 thru 1999 are not available. (9) The names of the ten largest revenue payers are not available. Therefore, the categories are intended to provide alternative information regarding the sources of the State's revenue. Source: Arizona Department of Revenue Annual Report. - 234 - Fiscal Year 2000 $ 1999 89,506 193,934 481,583 5,268,208 2,453,094 5,612 112,358 418,678 27 5,976,371 758,823 659,199 3,412,996 10,847,157 382 36,403,862 1,818,474 3,734 3,514,613 1,411 72,420,022 5.00% 1997 $ 94,360 204,731 749,257 5,066,644 2,153,028 15,556 119,042 418,740 (2) 5,476,713 680,141 (133,064) 3,170,338 10,021,561 270 32,964,475 1,679,515 3,931 2,951,224 1,682 - $ 100,970 190,473 1,082,898 (1) 4,923,558 1,919,237 12,774 110,593 405,093 5,095,504 672,757 386,200 2,909,346 8,568,022 (6,707) 30,469,141 1,609,506 4,211 2,729,476 1,622 - $ 87,696 169,156 1,082,132 1 4,662,480 1,649,990 19,794 110,799 389,732 24 4,779,738 622,831 3,541,062 2,550,875 7,777,804 (11,278) 28,256,623 1,527,986 3,292 2,392,016 1,479 - $ 65,638,142 $ 61,184,673 $ 59,614,232 $ 1998 N/A N/A N/A - 235 - (This page intentionally left blank) STATE OF ARIZONA SCHEDULE 6 SALES TAX REVENUE PAYERS BY CLASSIFICATION CURRENT YEAR AND NINE YEARS AGO (Expressed in Thousands) Fiscal Year 2006 CLASSIFICATION Transporting (3) Non-metal mining, oil and gas Mining severance Timbering severance - ponderosa Timbering severance - other Utilities Communications Railroads and aircraft (3) Private car and pipelines Publishing Printing Restaurants and bars Amusements Commercial lease (2) Personal property rentals Contracting Feed wholesale (1) Retail Hotel/motel Rental occupancy tax Use tax utilities Use tax License fees Membership camping Jet fuel tax Jet fuel use tax Non sufficient funds Telecommunications service assistance Education tax (4) Total Fiscal Year 1997 Tax Percentage Tax Percentage Collections (4) of Total Collections (5) of Total $ 2,984 10,022 30,440 33 (1) 382,991 160,610 1,284 6,666 20,136 445,591 49,829 (3) 181,224 1,017,224 2,650,935 124,483 104 828 306,199 1,039 139 6,060 724 1 (262) 628,471 $ 6,027,751 0.05 % 0.17 0.50 6.35 2.66 0.02 0.11 0.33 7.39 0.83 3.01 16.88 43.98 2.07 0.01 5.08 0.02 0.10 0.01 - $ 10.43 100.00 % 2,898 5,286 27,053 37 4 233,124 82,500 1,487 990 5,540 19,487 238,986 31,139 43,000 127,544 388,889 (53) 1,412,827 84,039 99 119,601 523 74 4,624 532 74 (112) - $ 2,830,192 0.10 % 0.19 0.96 8.24 2.91 0.05 0.03 0.20 0.69 8.44 1.10 1.52 4.51 13.74 49.92 2.97 4.23 0.02 0.16 0.02 100.00 % (1) Feed wholesale dropped to 0% effective July 17, 1994 and was repealed effective October 1, 1994. (2) Commercial lease rate dropped to 0% effective July 17, 1997. (3) Transporting/towing was combined with railroads/aircraft for confidentiality purposes beginning in fiscal year 2004. (4) The education tax is .6% of net taxable sales for most classifications. The ones that do not collect the education tax are nonmetal mining, oil and gas, mining and timbering severances, hotel/motel, rental occupancy, and jet fuel taxes. The Arizona Department of Revenue's annual report does not include the amount of education tax collected from each classification, rather it reports the total collected from all classifications. The education tax became effective June 1, 2001. (5) Does not reflect the balance of undistributed estimated payments of $10,550 at the end of fiscal year 1997. Source: Arizona Department of Revenue Annual Report. - 237 - STATE OF ARIZONA SCHEDULE 7 RATIOS OF OUTSTANDING DEBT BY TYPE FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Fiscal Year 2006 2005 2004 GOVERNMENTAL ACTIVITIES: Revenue bonds $ Grant anticipation notes Certificates of participation Capital leases Installment purchase contracts Notes payable Premiums and discounts on debt Deferred amount on refundings Total Governmental Activities 2,106,700 $ 325,430 1,020,810 129,808 6,815 219,958 (17,832) 3,791,689 2,170,845 363,970 1,054,677 126,676 6,926 197,479 3,920,573 BUSINESS-TYPE ACTIVITIES: Revenue bonds Certificates of participation Capital leases Installment purchase contracts Notes payable Premiums and discounts on debt Deferred amount on refundings Total Business-type Activities 802,600 946,766 113,388 10,279 38,331 (21,606) 1,889,758 768,000 860,759 120,361 7,276 30 36,133 (20,821) 1,771,738 Total Primary Government $ Debt as a Percentage of Personal Income (3) Amount of Debt per Capita (3) 5,681,447 $ 3.2% $ 957 5,692,311 $ 992 2,278,225 308,585 845,804 125,974 4,602 562 144,759 3,708,511 $ 756,781 641,315 80,338 5,038 80 28,184 (10,970) 1,500,766 $ 3.5% $ 2003 5,209,277 934 $ 597,238 429,144 31,923 3,823 129 21,686 (11,305) 1,072,638 $ 3.5% $ 2,173,055 169,145 582,511 104,644 6,188 10,301 108,732 3,154,576 4,227,214 777 2001, as restated (2) 1,782,510 182,295 231,904 8,517 10,228 38,859 32,700 2,287,013 $ 3,358,811 $ 634 (1) The State of Arizona implemented GASB 34 in fiscal year 2002. (2) For fiscal years 2001 and prior, any premiums, discounts, or deferred amounts on refundings are combined in the respective revenue bond, grant anticipation note, or certificate of participation line items. (3) See Schedule 16 for personal income and population data. These ratios are calculated using personal income and population data for the calendar year that ends during that fiscal year. For example, fiscal year 2005 contains data for the calendar year ending December 31, 2004. 1,882,765 182,295 186,447 9,390 9,767 19,766 2,290,430 540,019 244,934 29,259 1,634 815,846 $ 2.4% Note: Details regarding the State's outstanding debt can be found in the notes to the financial statements. - 238 - $ 596,403 422,010 37,758 3,832 20,794 (8,999) 1,071,798 2.9% $ 2002, as restated (1) 3,106,276 2.3% $ 601 Fiscal Year 1997, as 2000 (2) $ 1999 (2) 1,337,108 201,639 21,115 6,415 1,566,277 $ 567,659 191,899 12,525 9,835 781,918 $ 2,348,195 467 1,257,492 215,989 10,317 11,917 1,495,715 $ 559,109 110,884 4,931 2,156 677,080 $ 1.9% $ 1998 (2) 2,172,795 445 1,257,156 242,052 11,883 15,107 1,526,198 $ 585,413 118,129 5,711 2,085 711,338 $ 1.9% $ restated (2) 2,237,536 580,399 121,715 9,107 2,898 714,119 $ 2.2% $ 472 1,379,836 278,662 12,113 20,335 1,690,946 2,405,065 2.5% $ 524 - 239 - STATE OF ARIZONA SCHEDULE 8 LEGAL DEBT MARGIN INFORMATION ARIZONA TRANSPORTATION BOARD HIGHWAY REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) Total Principal Outstanding Debt Limit (1) Highest Annual Principal and Interest Payment Debt Limit (1), (2) Highest Total Principal Fiscal Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Total Applicable to Principal the Limit as Applicable Debt Limit $ 1,300,000 1,300,000 1,300,000 1,300,000 1,000,000 800,000 800,000 800,000 800,000 800,000 $ to Limit 1,223,425 1,161,355 1,017,360 932,700 734,155 700,280 608,500 524,345 568,150 611,555 Legal Debt $ Margin 76,575 138,645 282,640 367,300 265,845 99,720 191,500 275,655 231,850 188,445 Highest Annual Annual Principal and (3) Principal Interest Payment a Percentage Debt and Interest of Debt Limit 94.11 % 89.34 78.26 71.75 73.42 87.54 76.06 65.54 71.02 76.44 Limit 312,204 230,882 278,927 270,270 261,663 256,945 264,361 254,968 234,120 234,271 $ Payment $ 121,025 115,633 106,220 99,923 86,496 82,712 N/A N/A N/A N/A Legal Debt $ Margin 191,179 115,249 172,707 170,347 175,167 174,233 N/A N/A N/A N/A (1) Arizona Revised Statutes restrict the total principal amount of Arizona Highway Revenue Bonds that may be outstanding at any time, excluding refunded bonds, from exceeding $1.3 billion. Also, the monies subject to pledge for the preceding twelve months must exceed, by two times, the highest annual principal and interest payments on all of the outstanding Arizona Highway Revenue Bonds for the highest one year period during the life of the outstanding bonds. Also, as stated in House Bill 2206 of the Second Regular Session of the Forty-seventh Legislature, the $1.3 billion debt limit is eliminated from ARS §28-7510 and the amount that pledged monies are required to exceed the highest annual principal and interest payments is amended from two to three times. The general effective date of this change is September 21, 2006. (2) For fiscal years 1997 to 2000, information for calculating the legal debt margin information for the highest annual principal and interest payment limit is unavailable. (3) The debt limit is calculated by dividing pledged revenues for the Arizona Highway Transportation Board Highway Revenue Bonds (see schedule 9) by two. Fiscal year 2005 pledged revenues are net of a $118 million distribution to the State General Fund. - 240 - as a Percentage $ of Debt Limit 38.76 % 50.08 38.08 36.97 33.06 32.19 N/A N/A N/A N/A STATE OF ARIZONA SCHEDULE 9 PLEDGED-REVENUE COVERAGE ARIZONA TRANSPORTATION BOARD HIGHWAY REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (1), (2) Fiscal Pledged Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Revenue 624,408 461,763 557,854 540,540 523,326 513,890 528,721 509,935 468,240 468,542 $ Debt Service Principal $ 54,830 44,265 51,155 44,490 45,365 52,055 46,270 43,805 43,405 40,970 $ Interest 62,222 60,459 53,149 41,932 38,534 36,581 33,994 31,090 33,266 36,148 $ Total 117,052 104,724 104,304 86,422 83,899 88,636 80,264 74,895 76,671 77,118 Coverage 5.3 4.4 5.3 6.3 6.2 5.8 6.6 6.8 6.1 6.1 (1) The Highway Revenue Bonds are secured by a prior lien on and pledge of motor vehicle and related fuel fees and taxes. (2) Includes vehicle license tax revenues distributed directly to the State Highway Fund. Fiscal year 2005 is net of a $118 million distribution to the State General Fund. STATE OF ARIZONA SCHEDULE 10 PLEDGED-REVENUE COVERAGE ARIZONA TRANSPORTATION BOARD TRANSPORTATION EXCISE TAX REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (1) Fiscal Pledged Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Revenue 316,491 316,806 288,600 268,721 267,563 264,722 248,596 229,470 209,263 192,257 $ Debt Service Principal $ 80,375 208,625 199,400 190,415 163,455 156,865 128,805 106,765 82,765 78,015 $ Interest 1,566 14,318 23,553 31,533 35,445 40,035 42,609 43,251 40,512 45,248 $ Total 81,941 222,943 222,953 221,948 198,900 196,900 171,414 150,016 123,277 123,263 (1) The Bonds are secured by transportation excise taxes collected by the Arizona Department of Revenue on behalf of Maricopa County. - 241 - Coverage 3.9 1.4 1.3 1.2 1.3 1.3 1.5 1.5 1.7 1.6 STATE OF ARIZONA SCHEDULE 11 PLEDGED-REVENUE COVERAGE SCHOOL FACILITIES BOARD STATE SCHOOL IMPROVEMENT REVENUE BONDS FOR THE LAST FIVE FISCAL YEARS (1) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (2) Fiscal Year 2006 2005 2004 2003 2002 (3) Pledged Debt Service Revenue $ 628,471 538,346 487,215 447,841 439,005 Principal $ 34,480 28,485 27,215 25,010 43,035 Interest $ 30,052 36,060 37,568 36,901 26,962 Total $ 64,532 64,545 64,783 61,911 69,997 Coverage 9.74 8.34 7.52 7.23 6.27 (1) No debt service payments were due prior to fiscal year 2002. (2) Pledged revenues consist of education transaction privilege tax revenues. These revenues result from a .6% increase in the State transaction privilege and use tax rate rate that was approved by a statewide vote at the November 2000 election. (3) Principal does not include sinking fund deposits of $1,270 each year, beginning in fiscal year 2003 and ending in fiscal year 2007, that will be sufficient to retire bonds with a par amount of $6,350 upon maturity, in fiscal year 2016. STATE OF ARIZONA SCHEDULE 12 PLEDGED-REVENUE COVERAGE SCHOOL FACILITIES BOARD STATE SCHOOL TRUST REVENUE BONDS FOR THE LAST THREE FISCAL YEARS (1) FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (2) Fiscal Year 2006 2005 2004 (3) Pledged $ Revenue 90,097 85,195 64,903 Debt Service $ Principal 13,440 13,740 - $ Interest 12,061 11,960 8,634 $ Total 25,501 25,700 8,634 Coverage 3.53 3.31 7.52 (1) No debt service payments were due prior to fiscal year 2004. (2) Pledged revenues consist of expendable revenue from the State School Trust. This revenue includes the State Treasurer's formula distribution of earnings on permanent fund investments as specified in the Arizona Constitution. Additionally, the State Land Commissioner distributes interest received from financed sales of trust lands and revenue received from land trust leases. (3) Principal does not include sinking fund deposits of $1,538 each year, beginning in fiscal year 2006 and ending in fiscal year 2018, that will be sufficient to retire bonds with a par amount of $20,000 upon maturity, in fiscal year 2018. - 242 - STATE OF ARIZONA SCHEDULE 13 PLEDGED-REVENUE COVERAGE ARIZONA STATE UNIVERSITY REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (1) Fiscal Pledged Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Revenue $ 458,177 383,756 325,626 297,691 274,596 261,328 242,764 233,404 210,397 196,143 Debt Service Principal $ 11,205 1,340 9,695 9,785 8,995 9,640 9,205 8,780 8,330 $ Interest 16,307 16,260 13,754 9,575 12,139 11,766 12,245 12,685 13,113 13,563 $ Total 27,512 17,600 13,754 19,270 21,924 20,761 21,885 21,890 21,893 21,893 Coverage 16.65 21.80 23.68 15.45 12.52 12.59 11.09 10.66 9.61 8.96 (1) Pledged revenues include student tuition and fees, auxiliary enterprises revenue, investment income, and indirect cost recovery revenue. - 243 - STATE OF ARIZONA SCHEDULE 14 PLEDGED-REVENUE COVERAGE UNIVERSITY OF ARIZONA REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (1) Fiscal (1), (2) Direct Net Revenue Gross Operating Available for Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 Revenues $ 897,706 830,077 778,939 726,258 670,326 710,423 674,330 650,201 605,197 Expenses $ 836,657 774,014 727,161 667,627 625,664 663,284 625,318 580,292 555,733 1997 577,412 535,178 Debt Service $ 61,049 56,063 51,778 58,631 44,662 47,139 49,012 69,909 49,464 Debt Service $ 42,234 Principal 12,355 11,815 10,970 12,625 9,946 12,415 11,700 10,714 9,830 $ 9,360 Interest 13,433 11,817 11,706 12,156 15,500 16,359 13,081 14,869 14,463 $ 14,935 Total 25,788 23,632 22,676 24,781 25,446 28,774 24,781 25,583 24,293 Coverage 2.37 2.37 2.28 2.37 1.76 1.64 1.98 2.73 2.04 24,295 1.74 (1) Gross Revenues and Direct Operating Expenses include current operating unrestricted funds only since these are the funds that are pledged for debt service payments under the System Revenue Bond Indentures. Also excluded from expenses is interest, depreciation, and amortization. Fiscal year 2002 Gross Revenues and Direct Operating Expenses include accounting changes applied to scholarship and allowance due to implementation of GASB Statements 34 and 35. (2) Payment of principal and interest on revenue bonds are secured by a pledge of tuition and fees, sales and services, auxiliary enterprises, and other charges. STATE OF ARIZONA SCHEDULE 15 PLEDGED-REVENUE COVERAGE NORTHERN ARIZONA UNIVERSITY REVENUE BONDS FOR THE LAST TEN FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 (Expressed in Thousands) (1) Fiscal Gross Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Revenues $ 129,608 110,981 103,192 85,294 82,839 78,907 75,852 73,467 71,743 70,036 Debt Service Principal $ 10,310 10,065 10,294 9,426 6,932 6,214 6,119 6,075 5,743 5,677 $ Interest 6,603 6,060 5,778 5,066 3,949 5,246 5,488 5,810 6,145 4,859 $ Total 16,913 16,125 16,072 14,492 10,881 11,460 11,607 11,885 11,888 10,536 Coverage 7.66 6.88 6.42 5.89 7.61 6.89 6.54 6.18 6.03 6.65 (1) Revenue bonds are repaid from pledged gross revenues that primarily consist of student tuition and fees and certain auxiliary revenues. - 244 - STATE OF ARIZONA SCHEDULE 16 DEMOGRAPHIC AND ECONOMIC STATISTICS FOR THE LAST TEN CALENDAR YEARS Calendar Personal Year Ended Income Personal Unemployment (in thousands) $ 179,113,939 164,413,154 150,846,681 144,150,287 138,853,800 132,557,859 120,857,125 113,370,224 103,557,083 95,514,037 Income (2) $ 30,157 28,644 27,044 26,507 26,219 25,660 24,057 23,216 21,861 20,823 Rate (3) 4.7 5.0 5.7 6.1 4.7 4.0 4.5 4.3 4.6 5.5 December 31 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Population (1) 5,939,292 5,739,879 5,577,784 5,438,159 5,295,929 5,165,993 5,023,823 4,883,342 4,736,990 4,586,940 Per Capita (1) Population has been revised to show midyear population estimates of the Bureau of the Census. (2) Per capita personal income is total personal income divided by total midyear population estimates of the Bureau of the Census. Years 2001 through 2004 have been revised to incorporate newly available source data. (3) The unemployment rate for 2002 was revised. Sources: Bureau of Economic Analysis (for population, personal income, and per capita personal income figures). Arizona Department of Economic Security's website, www.workforce.az.gov (for unemployment rates). STATE OF ARIZONA SCHEDULE 17 PRINCIPAL EMPLOYERS CURRENT YEAR AND NINE YEARS AGO Calendar Year Ended December 31, 2005 Employer State of Arizona Wal-Mart Stores Inc. Banner Health (1) City of Phoenix U.S. Army Intelligence Center and Fort Huachuca Maricopa County Wells Fargo & Co. Arizona State University U.S. Postal Service Raytheon Missile Systems Motorola University of Arizona Allied Signal Tucson Unified School District Total Calendar Year Ended December 31, 1996 Full-Time Percentage Full-Time Percentage Equivalent of Total State Equivalent of Total State Employment 1.84 % 1.04 0.71 0.51 Employees 60,592 10,800 11,393 Rank 1 11,193 12,025 10,833 19,350 10,311 8,750 8,362 5 3 Employees 49,958 28,246 19,250 13,844 Rank 1 2 3 4 13,098 13,002 11,533 11,202 11,000 10,756 - 5 6 7 8 9 10 181,889 0.48 0.48 0.43 0.41 0.41 0.40 6.71 % 7 4 Employment 2.83 % 0.50 0.53 6 2 8 9 10 163,609 (1) Formerly known as Samaritan Health Systems. Sources: The Business Journal, Book of Lists 2006 and 1997 (for Maricopa County employers). The Arizona Daily Star, Star 200, March 2006 and March 1997 (for Pima County employers, which include the U.S. Army Intelligence Center and Fort Huachuca, Raytheon Missile Systems, University of Arizona, and Tucson Unified School District). Arizona Department of Economic Security's website, www.workforce.az.gov (for annual State employment). - 245 - 0.52 0.56 0.50 0.91 0.48 0.41 0.39 7.63 % (This page intentionally left blank) STATE OF ARIZONA SCHEDULE 18 STATE EMPLOYEES BY FUNCTION (1) FOR THE LAST THREE FISCAL YEARS FISCAL YEAR ENDED JUNE 30, 2006 FULL-TIME EQUIVALENT EMPLOYEES General government: Lottery Arizona State Retirement System Department of Revenue All other Health and welfare: Department of Economic Security Arizona Health Care Cost Containment System Department of Health Services All other Inspection and regulation Education: Universities All other Protection and safety: Department of Corrections Department of Juvenile Corrections Department of Public Safety All other Transportation: Department of Transportation Natural resources Total Fiscal Year 2006 2005 2004 (2) 110.0 221.0 1,146.0 2,898.6 110.0 199.0 1,024.0 2,944.3 110.0 197.0 1,134.0 3,003.0 3,953.7 1,583.5 1,735.5 858.5 1,827.3 3,902.7 1,574.5 1,734.5 924.2 1,818.5 3,592.9 1,530.1 1,701.5 933.2 1,815.3 16,419.5 913.8 16,027.5 949.5 15,467.4 948.1 9,726.9 1,160.5 1,901.8 127.4 10,322.4 1,151.5 1,872.0 120.6 10,295.4 1,214.4 1,853.0 149.6 4,649.0 926.9 4,626.0 903.2 4,605.0 856.9 50,159.9 50,204.4 49,406.8 (1) Full-time equivalent employees are categorized by the function of government that their respective agency generally serves. Information is not available to distinguish between governmental, business-type, or fiduciary activities. (2) Ten years of data is not available, but will be accumulated over time. Source: The Executive Budget (Detail). - 247 - STATE OF ARIZONA SCHEDULE 19 OPERATING INDICTORS BY FUNCTION FOR THE LAST TEN FISCAL YEARS (1) FISCAL YEAR ENDED JUNE 30, 2006 2006 FUNCTIONS/PROGRAMS General government: Number of tax returns received (in millions) Health and welfare: Arizona Health Care Cost Containment System membership (6) Average monthly number of recipients of temporary assistance for needy families Average monthly number of persons receiving food stamp benefits Inspection and regulation: Nonfatal occupational injuries and illnesses: Total recordable cases (in thousands) (9) Incident rate per 100 full-time workers (9) Education: Public school enrollment, grades K-12 (2) Protection and safety: Number of miles patrolled by the Highway Patrol State prison adult inmate population Transportation: Number of registered vehicles (3) Number of driver licenses issued (4) Natural resources: Game and Fish Department's license and tag sales (7) Universities: University full-time equivalent students (5) Unemployment compensation: Number of initial unemployment claims filed Industrial Commission special fund: No-insurance awards issued Number of vocational rehabilitation awards issued Lottery: Total lottery sales (in millions) Other business-type activities: Arizona Health Care Cost Containment System's Healthcare Group membership (8) 2005 Fiscal Year 2003 2004 2002 2001 2000 6.1 6.0 6.0 5.3 6.3 1,065,444 1,075,873 971,292 955,600 791,000 609,000 N/A 105,517 122,577 121,193 109,547 93,857 89,770 N/A 546,369 521,992 442,320 355,722 277,192 257,989 97.0 4.9 87.1 4.7 85.7 4.8 95.9 5.1 113.1 5.9 112.8 6.0 111.8 6.1 1,084,247 1,043,704 1,002,630 970,283 915,656 878,987 866,626 19,922,704 32,710 19,229,079 31,937 18,363,977 30,898 18,160,134 29,273 5,945,131 1,158,223 5,638,799 1,122,893 5,311,590 1,039,780 5,118,115 1,072,245 4,639,405 973,476 4,407,098 967,086 808,055 835,669 865,634 898,453 986,691 918,038 107,765 104,685 102,461 100,258 96,603 92,725 92,211 161,869 200,282 227,585 255,579 255,303 187,697 155,675 2,744 124 3,281 102 3,300 139 2,954 150 3,986 121 468.7 397.6 366.6 322.3 294.8 21,600 14,626 11,218 11,400 12,100 N/A 34,864 6,318,402 1,205,068 N/A N/A = Not available (1) Ten years of data may not available for some statistics, but will be accumulated over time. Also, some figures may represent time periods other than a fiscal year (such as an academic or calendar year), as indicated in the notes below. (2) These enrollment counts represent a head count of all active enrollments on October 1st of each school year. The fiscal years above contain data for the academic year that occurs during that fiscal year. For example, fiscal year 2005 contains data from the October 1, 2004 enrollment figures. Please note that these counts are not unduplicated counts; concurrently enrolled students are counted as having an active membership in each school. Also, be aware there was a change in data collection in 2003. From 2003 forward, concurrent enrollments in technology schools are included, which may additionally overstate aggregated enrollment figures. (3) Count represents the total number of vehicles registered as of the end of the fiscal year. Starting with fiscal year 2002, a new category for "unassigned vehicles" was added to more fully reflect the total count of all registered vehicles. (4) Count represents the number of driver licenses issued during that fiscal year, beginning July 1 and ending June 30. The drop in count from fiscal year 1999 to fiscal year 2000 was due to the change from a five-year driver license to an extended driver license, where expiration occurs on the licensee's 65th birthday. Although the extended driver license was fully implemented at all offices in July 1993, it was not until the end of 1999 that the last of the licenses with five-year expirations were converted to extended licenses. (5) Enrollment figures represent the number of full-time equivalent students for the fall semester. The fiscal years above contain data for the fall semester that occurs during that fiscal year. For example, fiscal year 2005 contains data for the fall 2004 semester. These figures are generated by calculating one full-time equivalent student for each 15 student credit hours produced in lower-division undergraduate courses, each 12 student credit hours produced in upper-division undergraduate courses, and each 10 student credit hours produced in graduate courses. (6) Approximate number of members enrolled as of June 1. Excludes membership in the Healthcare Group, which is listed separately as other business-type activities, beginning in fiscal year 2002. In November 2000, Arizona voters approved Proposition 204, the Healthy Arizona Initiative, which expanded eligibility to 100% of the federal poverty level. This added 142,800 members and accounted for 28.5% of the overall growth since March 1, 2001. (7) Numbers represent sales for licenses, stamps, and tags for the calendar year ended December 31. The fiscal years above contain data for the calendar year that ends during that fiscal year. For example, fiscal year 2005 contains data for the calendar year ending December 31, 2004. (8) Approximate number of members enrolled as of June 1. (9) Numbers represent total recordable cases and incident rates for the calendar year ended December 31. The fiscal years above contain data for the calendar year that ends during that fiscal year. For example, fiscal year 2005 contains data for the calendar year ending December 31, 2004. One hundred full-time workers represent 200,000 hours worked (100 times 40 hours per week times 50 weeks per year). Sources: The State Departments of Transportation, Public Safety, Corrections, Education, Game and Fish, Economic Security, and Revenue, the Industrial Commission of Arizona, Arizona Lottery, Arizona Health Care Cost Containment System, Arizona Board of Regents, and the U.S. Department of Labor. - 248 - N/A N/A 27,451 N/A N/A 272.7 N/A N/A N/A N/A 26,402 N/A N/A 255.6 N/A Fiscal Year 1998 1999 1997 N/A N/A N/A N/A N/A N/A 95,556 119,011 155,037 260,736 311,142 385,061 111.4 6.2 111.7 6.6 126.1 7.7 833,301 766,152 786,827 N/A 26,169 4,159,576 1,293,425 N/A N/A 23,884 4,013,987 1,144,700 N/A N/A 22,383 N/A 1,599,773 N/A 91,163 90,691 87,827 161,006 158,243 154,998 N/A N/A 268.3 N/A N/A N/A 250.7 N/A N/A N/A 249.8 N/A - 249 - STATE OF ARIZONA SCHEDULE 20 CAPITAL ASSET STATISTICS BY FUNCTION FOR THE LAST TEN FISCAL YEARS (1) FISCAL YEAR ENDED JUNE 30, 2006 Fiscal Year 2006 FUNCTIONS/PROGRAMS Protection and safety: Number of adult prison facilities (3) Transportation: Public road mileage (center lane miles) (2) Number of bridges (2) Natural resources: State Trust acres 2005 2004 2003 2002 2001 10 10 10 10 10 6,922 4,676 6,816 4,608 6,912 4,488 6,801 4,463 6,650 4,378 9,267,377 9,269,723 9,271,580 9,279,243 9,266,158 2000 10 10 N/A N/A N/A N/A 9,271,921 N/A = Not available Note: No capital asset indicators are available for the general government, health and welfare, inspection and regulation, education, universities, unemployment compensation, Industrial Commission special fund, Lottery, and other business-type activity functions. (1) Ten years of data may not available for some statistics, but will be accumulated over time. Also, some figures may represent time periods other than a fiscal year (such as a calendar year), as indicated in the notes below. (2) These are the number of center lane miles and bridges that the Arizona Department of Transportation accounts for under the modified approach, which is discussed in the Required Supplementary Information portion of this report. The number of center lane miles are for the calendar year ended December 31. The fiscal years above contain the number of center lane miles for the calendar year that ends during that fiscal year. For example, fiscal year 2005 contains the number of center lane miles for the calendar year ending December 31, 2004. (3) The Arizona Department of Corrections also contracts with private prison facilities to provide custody and treatment. Sources: The State Departments of Transportation, Land, and Corrections. - 250 - 9,273,846 Fiscal Year 1999 1998 1997 10 9 9 N/A N/A N/A N/A N/A N/A 9,277,496 9,280,421 9,363,889 - 251 - ACKNOWLEDGMENTS The Comprehensive Annual Financial Report was prepared by the Department of Administration, Financial Services Division, Financial Reporting Section: Ron Santa Cruz Chris Freitag Evan Chang Michael J. Kallaur, CPA Dale Stomberg Gary Kern Cody Johnson Amanda Bennett Kelly Page Danielle Gilmore Special acknowledgment goes to: All fiscal and accounting personnel throughout the Arizona State government, whose dedicated efforts and cooperation contributed to the compilation of financial information that appears in the report.