Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2003 TABLE OF CONTENTS Page INTRODUCTORY SECTION Letter of Transmittal................................................................................................................................................................ i-v Certificate of Achievement for Excellence in Financial Reporting..................................................................................vi List of Principal Officials ........................................................................................................................................................vii Organizational Chart .............................................................................................................................................................. viii FINANCIAL SECTION Independent Auditors’ Report .............................................................................................................................................. 1-2 Management’s Discussion and Analysis .......................................................................................................................... 3-12 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets (Exhibit 1)...........................................................................................................................13 Statement of Activities (Exhibit 2).............................................................................................................................14 Governmental Fund Financial Statements: Balance Sheet - Governmental Funds (Exhibit 3).............................................................................................15-16 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets (Exhibit 3.1) ........................................................................................................17 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (Exhibit 4) ..................................................................................................18-21 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities (Exhibit 4.1)...............................22 Proprietary Fund Financial Statements: Statement of Net Assets (Exhibit 5)...........................................................................................................................23 Statement of Revenues, Expenses, and Changes in Fund Net Assets (Exhibit 6).. ...........................................24 Statement of Cash Flows (Exhibit 7) .........................................................................................................................25 Fiduciary Fund Financial Statement Statement of Net Assets – Agency Funds (Exhibit 8).............................................................................................26 Index of Notes to the Financial Statements ...................................................................................................................27 Notes to the Financial Statements .............................................................................................................................28-50 Required Supplementary Information (Other than MD&A): Schedule of Revenues and Expenditures - Budget and Actual – General Fund (State Highway Fund).......51-52 Notes to Required Supplementary Information................................................................. .....................................53-54 Information About Infrastructure Assets Reported Using the Modified Approach..........................................55-58 2003 Comprehensive Annual Financial Report Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2003 TABLE OF CONTENTS (continued) Page Combining and Individual Fund Statements and Schedules: Non-Major Governmental Funds: Combining Balance Sheet (Exhibit 9).............................................................................................................59-60 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Exhibit 10)........61-62 Fiduciary Fund Statement of Changes in Assets and Liabilities – Agency Funds (Exhibit 11)..................................................63 Capital Assets Used in the Operation of Governmental Funds: Schedule by Source (Exhibit 12) ................................................................................................................................64 Schedule by Function and Activity (Exhibit 13)......................................................................................................65 Schedule of Changes by Function and Activity (Exhibit 14)................................................................................66 STATISTICAL SECTION Government-wide information: Government-wide Expenses by Function (Table 1).....................................................................................................67 Government-wide Revenues (Table 2)...........................................................................................................................68 Fund information: General Governmental Expenditures by Functions/Programs (Table 3)..................................................................69 General Governmental Revenues by Source (Table 4)................................................................................................70 Expenditures of Federal Awards (Table 5)....................................................................................................................71 Fuel Tax Rates (Table 6) ...................................................................................................................................................72 Highway User Revenue Fund Collections (Table 7)....................................................................................................73 Highway User Revenue Fund Distributions (Table 8).................................................................................................74 Highway User Revenue Fund Series Bond Coverage (Table 9).................................................................................75 Regional Area Road Fund Series Bond Coverage (Table 10)....................................................................................76 Total Public Road Mileage by Highway Class and Governmental Ownership (Table 11)...................................77 Acknowledgements ........................................................................................................................................................................78 2003 Comprehensive Annual Financial Report Introduction December 4, 2003 The Honorable Janet Napolitano Governor of the State of Arizona, Members of the Legislatures, and Citizens of the State of Arizona The Arizona Department of Transportation (Department) is pleased to submit the comprehensive annual financial report of the Department for the fiscal year ended June 30, 2003. The comprehensive annual financial report (CAFR) is presented in three sections: Introductory, Financial, and Statistical. The Introductory Section includes this letter of transmittal, a list of principal officials and the Department's organizational chart. The Financial Section includes the independent auditors' report, management’s discussion and analysis , basic financial statements, notes to the financial statements, and required supplementary information. The Statistical Section includes additional financial information and transportation data presented on a multi-year comparative basis. Arizona Revised Statutes, §41-1279.03, requires the state Auditor General to "conduct or cause to be conducted at least biennial financial and compliance audits of financial transactions and accounts kept by or for all state agencies subject to the Single Audit Act Amendments of 1996 (P.L. 104-156)." In fulfillment of this requirement, the Department prepared this comprehensive annual financial report, for the fiscal year ended June 30, 2003, and contracted with the independent public accounting firm of Deloitte & Touche LLP to audit the financial statements. The objective of the independent audit was to provide a reasonable assurance that the financial statements are free from material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the Arizona Department of Transportation's financial statements for the fiscal year ended June 30, 2003, are fairly presented in conformity with accounting principles generally accepted in the United States of America (GAAP). The independent auditors’ report is presented as the first component of the financial section of this report. GAAP require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The Department's MD&A can be found immediately following the report of the independent auditors. The CAFR includes all funds used to record the financial activity of the Department. Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the Department. To provide a reasonable basis for making these representations, the Department has established a comprehensive internal control framework that is designed both to protect the Department's assets from loss, theft, or misuse and to compile sufficiently reliable information for the preparation of the financial statements in conformity with GAAP. The Department's internal control includes both automated controls, which are an integral component of the financial accounting system, and comprehensive policies and procedures. In addition, the Department's Office of Audit and Analysis is an independent unit that reviews accounting controls and performs operational audits of the various divisions and units of the Department. Because the cost of internal controls should not outweigh their benefits, the Department's comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatements. To the best of our knowledge and belief, this financial report is complete and reliable in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the various funds. All disclosures necessary to enable the reader to gain an understanding of the Department's financial activities have been included. Profile of the Department The Department was established by the state Legislature in July 1974 by combining the former Arizona Highway Department (originally established in 1927) and the state Department of Aeronautics (originally established in 1962). The Department is not legally separate from the State of Arizona's primary government. The Department's mission is to provide products and services for a safe, efficient and cost-effective transportation system that links Arizona to the global economy, promotes economic prosperity and demonstrates respect for Arizona’s environment and quality of life. The Arizona Department of Transportation serves as the state's public agency to plan, develop, maintain and operate facilities for the efficient movement of people and goods by surface and air throughout the state. The Department has statutory responsibility for carrying out its programs under Arizona Revised Statutes, Titles 28, 35 and 41. The Department receives guidance in capital planning and program development from a seven-member Transportation Board of the State of Arizona Department of Transportation (Transportation Board) appointed by the Governor. The Transportation Board is responsible for the annual update of the Five-Year Transportation Facilities Construction Program (Program) and awards contracts each month for highway projects. This Program is a result of a transportation assessment to determine how best to safely and efficiently move goods, services and people throughout Arizona. The Transportation Board also has authority for the issuance of highway revenue and transportation excise tax bonds, grant anticipation notes, board funding obligations and approval of privatization agreements for toll facilities. The Department is organized into three operating divisions plus a planning division: Intermodal Transportation Division, Motor Vehicle Division, Aeronautics Division and Transportation Planning Division. The Intermodal Transportation Division is responsible for the management and maintenance of the existing state highway system and related facilities as well as the location, design and construction of new highways and facilities that are a part of the state highway system. The Motor Vehicle Division regulates motor vehicles in the state, processes motor vehicle registrations and drivers' license applications, issues certificates of title for motor vehicles and also operates 23 port-of-entry stations. The Aeronautics Division coordinates general aviation in the state and is responsible for registering and licensing all general aviation aircraft, conducting the Local Airports Grant Program and representing the state at air service hearings. The Transportation Planning Division is responsible for the planning of the statewide transportation system including highways and airports, and produces an annually updated Five-Year Transportation Facilities Construction Program for the Transportation Board, from which the Transportation Board establishes the priorities for highway and airport projects within the state. In addition, the Department has a Transportation Services Group (TSG) that provides support to the Department's operating and planning divisions. Overall, the Department employs approximately 4,700 persons. Budgetary Controls Upon receipt of the operating budget appropriations bill, allocations are made to organizational levels within each division. The result is a detailed operating budget which guides the divisions and programs in their financial operation. State funding for the Five-Year Transportation Facilities Construction Program is included in the Capital Outlay Appropriations bill, as a lump -sum budget without identifying individual projects. In the Land, Building and Improvements portion of that bill, each separate building project is identified for control purposes. This bill also provides funding for building renewal purposes. The budgets are prepared on a cash basis except that liabilities (encumbrances) incurred before the end of the fiscal year and paid within the next calendar month are charged against that prior fiscal year's budget. With a few exceptions, such as the capital budgets , highway maintenance and special line items , state appropriations typically lapse at the end of the fiscal year. ii The Department relies on the Arizona Financial Information System (AFIS) to control total expenditures by appropriation. In addition, the Department utilizes several control features in its internal accounting system (ADVANTAGE) to ensure budgetary compliance and management control. These features include: encumbrance and pre-encumbrance capabilities, appropriation allocation and control capabilities to the expense budget and organization unit level, and management control reports from the expense budget/organizational unit level, with summary reporting capabilities by program, division or appropriation. Factors Affecting Financial Condition Arizona Economy Fiscal year 2003 was marked by a continued weak economy with little or no job growth and geopolitical issues. These factors played a key role in both consumer and business spending habits. On the plus side, interest rates hit a 45-year low, leading Arizona consumers to refinance their homes or build new homes. The low interest rates also enticed consumers to purchase new motor vehicles. The Department’s two main funding sources, the Highway User Revenue Fund (HURF) and the Maricopa County Transportation Excise Tax posted mixed results during fiscal year 2003. HURF collections totaled $1.132 billion, an increase of 3.7 percent over fiscal year 2002 and 0.3 percent above the forecast. Maricopa County Transportation Excise Tax collections totaled $268.7 million, an increase of 0.4 percent over fiscal year 2002, but 2.5 percent below the forecast. The Maricopa County Transportation Excise Tax growth was the lowest since the inception of the tax in 1985. Arizona’s economy has been struggling since spring of 2001. Historically, the Arizona economy lags behind the rest of the nation during recessionary periods but outperforms most of the nation during economic growth periods. The economic uncertainty may continue through fiscal year 2004, however, Arizona should return to being one of the top states for employment, personal income and population growth within the next few years. The Department estimates fiscal year 2004 HURF collections will reach $1.149 billion, an increase of 3.5 percent over fiscal year 2003. The distribution of HURF revenues in fiscal year 2004 is estimated to be as follows: State Highway Fund $556 million; Arizona cities and towns $336 million; Arizona counties $209 million; Department of Public Safety $46.6 million; Economic Strength Project Fund $1.0 million; and the Motor Vehicle Division for registration compliance $0.4 million. The HURF average compound growth rate for fiscal years 1994 through 2003 was 4.1 percent. For fiscal year 2004, Maricopa County Transportation Excise Tax collections are estimated to be $277 million, an increase of 3.1 percent over fiscal year 2003. Growth in the first half of the year may be slow but then should accelerate in the second half of the year. The growth during the year will rely on the creation of new jobs and consumer spending. The Maricopa County Transportation Excise Tax average compound growth rate for fiscal years 1994 through 2003 was 7.3 percent. Planned Construction Activity In June 2003, the Transportation Board approved a $3.943 b illion Highway Construction Program as part of the Five-Year Transportation Facilities Construction Program for fiscal years 2004 through 2008. This program provides funding for highway facilities on both the National Highway System and the statewide system. The Five-Year Transportation Facilities Construction Program includes approximately: $972 million for freeway and expressway construction in Maricopa County funded in large part from the Maricopa County Regional Area Road Fund; $1.877 billion for system improvements, which includes $212 million to advance freeway and expressway construction in Maricopa County; $744 million for system preservation; and $350 million for system management. The Regional Freeway Program in Maricopa County that was redefined in 1995 to complete 107 miles of freeways by 2006 has been advanced and expanded to include 40 additional miles on the Santan, South Mountain (Interim), Grand Avenue and Red Mountain freeways. Under the "2007 Acceleration Plan," 147 miles of new freeways are planned to be opened by the end of 2007. Currently 99 miles have been opened to traffic and 10 more miles are under construction. As part of the Five-Year Transportation Facilities Construction Program, the Transportation Board also adopted a $609 million Five-Year Airport Development Program that includes 820 projects at general aviation and air carrier airports located throughout the state. iii Retirement Plan The Arizona State Retirement System Board administers the Arizona State Retirement Plan (Plan), a cost sharing multi-employer public employee defined benefit plan, for the benefit of Arizona employees and employees of certain other governmental entities. Plan provisions, including death, disability, and retirement benefits, are established by state statute. Substantially all employees of the Department are covered by the Plan. Cash Management The Cash Management unit has responsibility for the Department's investment program in cooperation with the State Treasurer's Office. The Department's policy is to invest public funds for maximum return, while maintaining the safety of investment principal and adequate liquidity to meet cash flow requirements in conformity with state statutes governing investment of the Department's funds. The emphasis of the investment program has focused on maintaining 99.5 percent of cash invested and maximizing the investment yield. During fiscal year 2003, the Department earned over $22.2 million in interest from its investment program. On average, 99.7 percent of the Department's average cash balance was invested during the year earning an average yield of 2.37 percent. Risk Management The Department continues to place emphasis in the area of risk management in order to control exposure and losses. The Office of Risk Management is responsible for the coordination of all activities necessary within the Department, and, in conjunction with the state's Risk Management Division and Attorney General's Office, to investigate and defend the Department from all losses arising from tort liability claims. The state has a self-insured retention workers' compensation program. The Department's Safety Office has increased its emphasis on training, accident investigation, and the handling of hazardous materials to minimize exposure and injury to employees. The Department has property insurance coverage for all real property and contents with a deductible of $100. Other Information Single Audit The Department is required to undergo an annual Single Audit in accordance with the provisions of the Single Audit Act Amendments of 1996 and the U.S. Office of Management and Budget Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations." The Department's Single Audit information is included in the Single Audit of the State of Arizona for the fiscal year ended June 30, 2003. A requirement of the Single Audit is to ensure that adequate internal control is in place and that the Department is in compliance with applicable Federal laws and regulations. The United States Department of Transportation's (U.S. DOT) Inspector General has reviewed the internal controls on several occasions. The U.S. DOT auditors typically rely on the Department's internal audit staff in determining the scope of their review. Awards The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Arizona Department of Transportation for its comprehensive annual financial report for the fiscal year ended June 30, 2002. This was the thirteenth consecutive year that the Department has achieved this prestigious award. In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized CAFR. This report must satisfy both GAAP and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current CAFR continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. iv Acknowledgements We would like to express our sincere appreciation to the many individuals whose dedicated efforts have made this report possible. A special note of thanks is extended to the staff of Fiscal Operations and Resource Administration whose commitment, professionalism, and dedicated efforts contributed to the timely preparation of the fiscal year 2003 comprehensive annual financial report. Respectfully Submitted, Victor M. Mendez, Director Arizona Department of Transportation John E. McGee, Chief Financial Officer Arizona Department of Transportation v Arizona Department of Transportation List of Principal Officials Victor M. Mendez Director Debra Brisk Deputy Director John A. Bogert Chief of Staff William J. Higgins Acting State Engineer Intermodal Transportation Division Stacey K. Stanton Assistant Director Motor Vehicle Division Dale Buskirk Assistant Director Transportation Planning Division Gary Adams Assistant Director Aeronautics Division John E. McGee Chief Financial Officer Arizona State Transportation Board Name Ingo Radicke, Chairman Bill Jeffers, Vice Chairman Richard I-Eleman Dallas Gant James W. Martin Joe Lane S. L. Schorr Counties District 4 (Gila, Graham and Pinal Counties) District 5 (Navajo, Apache and Coconino Counties) District 6 (Yavapai, Yuma, Mohave, and LaPaz Counties) District 1 (Maricopa County) District 3 (Cochise, Greenlee and Santa Cruz Counties) District 1 (Maricopa County) District 2 (Pima County) 2003 Comprehensive Annual Financial Report vii Term Expires 2004 2005 2006 2006 2007 2008 2009 Financial Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 As management of the Arizona Department of Transportation (Department), we offer readers of the Department’s financial statements this narrative overview and analysis of the financial activities of the Department for the fiscal year ended June 30, 2003. We encourage readers to consider the information presented here in conjunction with the letter of transmittal, which can be found on pages i-v, and the Department’s financial statements, which begin on page 13, with the accompanying notes and required supplementary information (RSI). Financial Highlights Government-wide: • The net assets of the Department exceeded its liabilities at the close of the fiscal year by $10.3 billion, compared to $9.7 billion for fiscal year 2002, an increase of 6.5 percent. Of this amount, $212.6 million represents unrestricted net assets and may be used to meet the Department’s ongoing obligations to citizens and creditors as compared to $221.2 million in 2002. • The Department’s investment in capital assets, net of related debt, is $9.6 billion, compared to $9.0 billion for fiscal year 2002, an increase of 6.7 percent. The Department’s capital assets are $11.4 billion, compared to $10.7 billion for fiscal year 2002, an increase 6.6 percent. This increase is primarily attributable to the building of additional highways. • The Department’s non-current liabilities was $2.0 billion, compared to $1.9 billion for fiscal year 2002, an increase of 4.7 percent. The bonded debt increased by $70.9 million (4.7 percent) as a result of new issuances, refundings and repayments. Fund Level: • As of the close of the fiscal year, the governmental funds of the Department reported combined ending fund balances of $452.9 million, as compared to $413.0 million in 2002, a 9.7 percent increase over the prior fiscal year. Approximately $65.1 million (14.4 percent) is available for spending at the government’s discretion (unreserved fund balance) as compared to $90.6 (22.0 percent) in 2002. At the end of the fiscal year, the unreserved fund balance for the General Fund was $48.7 million. • The proprietary funds reported net assets at year-end of $65.1 million, as compared to $86.3 million, a decrease of $21.1 million over the prior year. This decrease was due to distributions to other state agencies. Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction of the Department’s basic financial statements. The Department’s basic financial statements consist of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other required supplementary information in addition to the basic financial statements. Government-wide Financial Statements (Reporting the Department as a Whole) The government-wide financial statements are designed to present an overall picture of the financial position of the Department. These statements consist of the statement of net assets and the statement of activities and are prepared using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid. The statement of net assets combines and consolidates the Department’s current financial resources with capital assets and long-term obligations. This statement includes all of the Department’s non-fiduciary assets and liabilities. Net assets are the difference between the Department’s assets and liabilities, and represent one measure of the Department’s financial health. • An increase or decrease in the Department’s net assets from one year to the next is an indicator of whether its financial health is improving or declining. 2003 Comprehensive Annual Financial Report 3 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 • Other indicators of the Department’s financial health include the condition of its roads and highways (infrastructure), and economic trends affecting the Department’s future tax revenues. The statement of activities focuses on both the gross and net cost of various activities (governmental and businesstype); these costs are paid by the Department’s general tax and other revenues. This statement summarizes the cost of providing specific Department services, and includes all current year revenues and expenses. The statement of net assets and the statement of activities divide the Department’s activities into two types: Governmental Activities The Department’s basic services are reported here, including administration, aeronautics, highway, highway maintenance, motor vehicle division and other activities. Taxes, fees, and federal grants finance most of these activities. Business-Type Activities Activities for which the Department charges a fee to customers to pay most or all of the costs of certain services it provides are reported as business-type activities. The Department’s Arizona Highways Magazine and Highway Expansion and Extension Loan Program (HELP) are reported here. The government-wide financial statements can be found on pages 13-14 of this report. This report includes two schedules (Exhibit 3.1 and Exhibit 4.1) that reconcile the amounts reported on the governmental fund financial statements (prepared using the modified accrual basis of accounting and current financial resources measurement focus) with governmental activities (prepared using the accrual basis of accounting and economic resources measurement focus) on the appropriate government-wide statements. The following summarizes the impact of converting to GASB 34 reporting: • Capital assets used in governmental activities are not reported on governmental fund statements. • Other long-term assets that are not available to pay for current period expenditures are not reported on governmental fund statements. • Internal service fund activities are reported as governmental activities, but reported as proprietary funds in the fund financial statements. • Deferred issuance costs are capitalized and amortized to expense as governmental activities, but reported as expenditures in the governmental fund statements. • Unless due and payable, long-term liabilities, such as capital lease obligations, compensated absences, notes payable and others, only appear as liabilities on the government-wide statements. • Capital outlay spending results in capital assets on the government-wide statements, but are reported as expenditures on the governmental fund statements. • Bond and note proceeds result in liabilities on the government-wide statements, but are recorded as other financing sources on the governmental fund statements. • Certain other outflows represent either increases or decreases in liabilities on the government-wide statements, but are reported as expenditures on the governmental fund statements. 2003 Comprehensive Annual Financial Report 4 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 Fund Financial Statements (Reporting the Department’s Major Funds) The fund financial statements begin on page 15 and provide detailed information about the major individual funds. A fund is an accounting entity with a self-balancing set of accounts that the Department uses to keep track of specific sources of funding and spending for a particular purpose. The Department, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the Department can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds. A majority of the Department’s activities are reported in governmental funds. Reporting of these funds focuses on how financial resources flow in to and out of the funds, and amounts remaining at year-end for future spending. Governmental funds are accounted for using the modified accrual basis of accounting, which measures cash and other assets that can be readily converted to cash. The governmental fund statements provide a detailed short-term view of the Department’s general governmental operations and the basic services it provides. This information should help determine whether there are more or less current financial resources available for the Department’s programs. The reconciliation following the fund financial statements explains the differences between the government’s activities, reported in the governmentwide statement of activities, and the governmental funds. The Department maintains sixteen individual governmental funds. Information is presented separately in the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances for the General Fund (State Highway Fund), Maricopa Regional Area Road Construction Fund, Motor Vehicle Division Clearing Fund, Highway User Revenue Fund, Debt Service Fund and Capital Projects Fund which are considered to be major funds. Data from the other ten governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds are provided in the form of combining statements elsewhere in this report. The legislature appropriates an annual budget for the Department’s General Fund. The Schedule of Revenues and Expenditures – Budget and Actual has been provided for the General Fund to demonstrate compliance with this budget and is presented as required supplementary information. The governmental funds financial statements can be found on pages 15-22 of this report. Proprietary Funds. When the Department charges customers for the services it provides – whether to outside customers, other agencies or to other divisions of the Department – these services are generally reported in proprietary funds. Proprietary funds (enterprise and internal service) utilize full accrual accounting, the same method used by private sector businesses. Enterprise funds report activities that provide supplies and services to the general public. The Department’s enterprise funds are the Arizona Highways Magazine Fund and Highway Expansion and Extension Loan Program Fund. The internal service fund reports activities that provide supplies and services for the Department’s other programs and activities and other state agencies. The Equipment Fund is the Department’s only internal service fund. Internal service fund activities are reported as governmental activities on the government-wide statements. The proprietary funds financial statements can be found on pages 23-25 of this report. Fiduciary Funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the Department’s own programs. The fiduciary fund financial statement can be found on page 26. Notes to the Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 27-50 of this report. 2003 Comprehensive Annual Financial Report 5 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 Required Supplementary Information. In addition to the basic financial statements including accompanying notes, this report presents certain required supplementary information concerning the Department’s Schedule of Revenues and Expenditures – Budget and Actual for the General Fund and the modified approach to reporting infrastructure assets. Required supplementary information can be found on pages 51-58 of this report. Other Supplementary Information. Other supplementary information includes the combining statements for the non-major governmental funds, agency funds and capital assets and is presented immediately following the required supplementary information on budget and infrastructure assets. Combining and individual fund statements and schedules can be found on pages 59-66 of this report. Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of the Department’s financial health. The following tables, graphs and analysis discuss the financial position and changes to financial position for the Department as a whole as of and for the fiscal year ended June 30, 2003. The Department’s combined net assets increased by $632.1 million over the course of this fiscal year’s operations, an increase of 6.5 percent. The net assets of the governmental activities increased by $653.3 million or 6.8 percent and business-type activities decreased by $21.1 million or 24.5 percent. The following table reflects the condensed Statement of Net Assets as of June 30: Governmental Activities 2003 2002 Business-type Activities 2003 2002 Total 2003 2002 Assets: Current and other assets Capital assets Total assets Liabilities: Other liabilities Non-current liabilities Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets $ 851,633,105 11,438,563,961 12,290,197,066 $ 833,488,297 10,733,547,800 11,567,036,097 $ 220,185,188 1,125,754 221,310,942 $ 235,245,607 1,439,057 236,684,664 $ 1,071,818,293 11,439,689,715 12,511,508,008 $ 1,068,733,904 10,734,986,857 11,803,720,761 200,791,918 1,817,359,577 2,018,151,495 213,447,052 1,734,806,233 1,948,253,285 4,484,163 151,696,446 156,180,609 4,760,226 145,670,558 150,430,784 205,276,081 1,969,056,023 2,174,332,104 218,207,278 1,880,476,791 2,098,684,069 9,621,204,384 439,045,246 211,795,941 $10,272,045,571 8,998,741,567 400,315,381 219,725,864 $ 9,618,782,812 1,125,754 63,224,779 779,800 $ 65,130,333 1,439,057 83,292,829 1,521,994 $ 86,253,880 9,622,330,138 502,270,025 212,575,741 $10,337,175,904 9,000,180,624 483,608,210 221,247,858 $ 9,705,036,692 The total assets of the Department were $12.5 billion, while total liabilities were $2.2 billion, resulting in a net assets balance of $10.3 billion. By far, the largest portion of the Department’s net assets, $9.6 billion (93.1 percent), was invested in capital assets (e.g., land, infrastructure, buildings, machinery and equipment), net of any related debt used to acquire those assets. The Department uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the Department’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other resources, since the capital assets themselves cannot be used to liquidate these liabilities. As of June 30, 2003, the Department is able to report positive balances in all three categories of net assets, both for the governmental and business-type activities. The same situation held true for the prior fiscal year. There was a decrease of $20.1 million in restricted net assets for the Department’s business-type activities. The bulk of this decrease was due to a $20.0 million distribution from the Highway Expansion and Extension Loan Program Fund to other state agencies. 2003 Comprehensive Annual Financial Report 6 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 The following condensed financial information was derived from the government-wide Statement of Activities and reflects how the Department’s net assets changed during the year: Governmental Activities 2003 2002 Business-type Activities 2003 2002 Total 2003 2002 Revenues: Program revenues: Charges for services Operating grants and contributions Capital grants and contributions General revenues: Transportation excise taxes Vehicle, registration, title, license and related taxes Fuel and motor carrier taxes and fees Flight property taxes Interest on investments Other Total revenues Expenses: Administration Aeronautics Highway Highway Maintenance Motor Vehicle Other Highway Maintenance - asset preservation Transportation - not appropriated by State legislature $ 117,412,098 34,160,325 453,757,521 $ 112,724,784 56,480,747 470,771,977 $ 13,477,401 - $ 11,840,350 - $ 130,889,499 34,160,325 453,757,521 $ 124,565,134 56,480,747 470,771,977 268,720,901 267,563,343 - - 832,492,117 691,003,491 6,026,213 899,092,103 547,129,189 6,528,347 - - 268,720,901 832,492,117 691,003,491 6,026,213 19,802,902 21,303,653 2,444,679,221 29,862,802 26,484,086 2,416,637,378 2,440,375 425,219 16,342,995 5,624,632 381,360 17,846,342 22,243,277 21,728,872 2,461,022,216 35,487,434 26,865,446 2,434,483,720 52,533,318 3,848,091 45,643,844 96,352,820 83,090,207 8,460,021 57,864,409 3,750,673 46,543,229 91,569,523 82,904,097 6,844,145 - 52,533,318 3,848,091 45,643,844 96,352,820 83,090,207 8,460,021 57,864,409 3,750,673 46,543,229 91,569,523 82,904,097 6,844,145 268,383,806 89,146,668 - - 9,590,932 7,482,406 - - 268,383,806 9,590,932 89,146,668 7,482,406 267,563,343 899,092,103 547,129,189 6,528,347 Distributions to Arizona counties and cities Distributions to other state agencies Intergovernmental Interest on long-term debt Arizona Highways Magazine Highway Expansion and Extension Loan Program Total expenses 957,056,532 192,536,424 30,235,385 84,083,940 - 915,219,274 149,340,401 24,791,275 89,604,704 - 11,118,003 10,710,728 957,056,532 192,536,424 30,235,385 84,083,940 11,118,003 915,219,274 149,340,401 24,791,275 89,604,704 10,710,728 1,831,815,320 1,565,060,804 26,348,539 37,466,542 5,264,722 15,975,450 26,348,539 1,869,281,862 5,264,722 1,581,036,254 Change in net assets before accounting change Cumulative effect of accounting change 612,863,901 40,398,858 851,576,574 - <21,123,547> - 1,870,892 - 591,740,354 40,398,858 853,447,466 - 653,262,759 9,618,782,812 $ 10,272,045,571 851,576,574 8,767,206,238 $9,618,782,812 <21,123,547> 1,870,892 86,253,880 84,382,988 $ 65,130,333 $ 86,253,880 632,139,212 9,705,036,692 $ 10,337,175,904 853,447,466 8,851,589,226 $ 9,705,036,692 Change in net assets Net assets - July 1 Net assets - June 30 2003 Comprehensive Annual Financial Report 7 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 Governmental Activities: The following chart depicts revenues of the governmental activities for the fiscal year ended June 30, 2003: Revenues - Governmental Activities Interest on investments 0.8% Fuel and motor carrier taxes and fees Other revenues 28.3% including flight property taxes 1.1% Transportation excise taxes 11.0% Charges for services 4.8% Capital grants and contributions 18.6% Vehicle, registration, title, license and related taxes 34.1% Operating grants and contributions 1.4% $2.2 billion (or 91.9 percent) of the Department’s revenues are from the following four revenue sources: • Vehicle, registration, title, license and related taxes represent the Department’s largest revenue source of $832.5 million (34.1 percent). • Fuel and motor carrier taxes and fees represent the Department’s second largest revenue source of $691.0 million (28.3 percent). • Capital grants and contributions represent the Department’s third largest revenue source of $453.8 million (18.6 percent). • Transportation excise taxes represent the Department’s fourth largest revenue source of $268.7 million (11.0 percent). 2003 Comprehensive Annual Financial Report 8 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 The following chart depicts expenses of the governmental activities for the fiscal year ended June 30, 2003: Expenditures - Governmental Activities Distributions to other state agencies 10.5% Distributions to Arizona counties and cities 52.2% Intergovernmental 1.7% Interest on longterm debt 4.6% Administration 2.9% Highway 2.5% Highway Maintenance 5.3% Highway Maintenance - asset preservation 14.7% Other * 1.2% Motor Vehicle 4.5% *Other includes expenditures for Aeronautics and Transportation – not appropriated by State legislature $1.4 billion (or 77.4 percent) of the Department’s expenditures were for the following: • Distributions to Arizona counties and cities $957.0 million (52.2 percent). • Highway Maintenance – asset preservation $268.4 million (14.7 percent). • Distributions to other state agencies $192.5 million (10.5 percent). Business-type Activities: Net assets for business-type activities decreased by $21.1 million during the fiscal year. Of the total revenues of $16.3 million, charges for services represented 82.5 percent and interest on investments 14.9 percent. The total expenses for business-type activities were $37.5 million. Factors contributing to these results included: 2003 Comprehensive Annual Financial Report 9 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 • The Arizona Highways Magazine’s deficit of $1.1 million. Half of this deficit is due to a distribution to other state agencies and the remaining deficit is attributable to a decrease in magazine sales as a result of the down turn in the economy. • The Highway Expansion and Extension Loan Program’s decline of $20.1 million. This deficit also is due to a distribution to other state agencies. Financial Analysis of the Department’s Funds As previously mentioned, the Department uses fund accounting to ensure and demonstrate compliance with budgetary and legal requirements. The following is a brief discussion of financial highlights from the fund financial statements. Governmental Funds. The focus of the Department’s governmental funds financial statements (pages 15-22) is to provide information on near-term inflows, outflows, and balances of spendable resources. All major governmental funds are discretely presented on these financial statements, while the nonmajor governmental funds are combined into a single column. Combining statements for the non-major governmental funds may be found on pages 59-62. As of the end of the fiscal year, the fund balances of the governmental funds totaled $452.9 million, an increase of $39.9 million over the previous fiscal year. Of this balance, $65.1 million or 14.4 percent constitutes unreserved fund balance, which was available for spending for the general purposesof the Department. The remaining fund balance of $387.8 million, or 85.6 percent, was reserved for the following: 1) $4.7 million for inventories, 2) $20.0 million to liquidate an interfund receivable to the HELP, 3) $20.8 million to pay debt service, and 4) $342.3 million to pay for capital projects. The General Fund is the main operating fund of the Department. At the end of the current fiscal year, the unreserved fund balance of the General Fund was $48.7 million and the reserved fund balance was $134.9 million. As a measure of the General Fund’s liquidity, it may be useful to compare both the unreserved fund balance and the total fund balance to the total fund expenditures. Unreserved fund balance represents 5.1 percent of total General Fund expenditures, while total fund balance represents 19.2 percent of the same amount. Capital Assets and Debt Administration Capital Assets (Note 5A): The Department’s investment in capital assets for its governmental and business-type activities as of June 30, 2003, amounts to $11.4 billion (net of accumulated depreciation), a $.7 billion increase over the previous fiscal year. Governmental Activities 2003 2002 Land Buildings and improvements Improvements other than buildings Mobile fleet and aircraft Machinery and equipment Infrastructure Construction in progress Total $ 1,839,172,464 $ 1,715,941,418 96,966,010 97,635,066 31,619,008 31,703,310 37,739,350 41,995,018 15,757,141 16,280,578 7,564,772,978 7,444,327,275 1,852,537,010 1,385,665,135 $ 11,438,563,961 $10,733,547,800 Business-type Activities 2003 2002 $ Total 2003 7,900 $ 7,900 $ 1,839,180,364 311,784 345,600 97,277,794 31,619,008 37,739,350 806,070 1,085,557 16,563,211 7,564,772,978 1,852,537,010 $ 1,125,754 $ 1,439,057 $ 11,439,689,715 2002 $ 1,715,949,318 97,980,666 31,703,310 41,995,018 17,366,135 7,444,327,275 1,385,665,135 $10,734,986,857 As provided by GASB 34, the Department has elected to record its infrastructure assets using the modified approach. Assets accounted for under the modified approached include approximately 6,801 centerline miles (18,129 travel lane miles) and 4,463 bridges that the Department is responsible for maintaining. 2003 Comprehensive Annual Financial Report 10 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 The Department 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 Department’s serviceability rating goal is 3.23 for the overall system. The most recent assessment indicated that an overall rating of 3.6 was achieved for fiscal year 2003. The Department manages its bridges using the Arizona Bridge Information and Storage System (ABISS). The Department determines the condition rating based on standards developed by the Federal Highway Administration and additional internal criteria. It is the policy of the Department to maintain a Condition Rating Index (CRI) of 92.5 percent or better. In fiscal year 2003, a CRI of 93.9 percent was obtained. In addition to many smaller projects, each of the following major highway construction projects in excess of $20 million were started during fiscal year 2003: Project Description Construction on State Route 260 in the vicinity of Camp Verde Construction of a four lane divided highway on the Kohl's Ranch section of State Route 260 Construction of two overpasses on Grand Avenue (US 60); one at 43rd Avenue and Camelback Road and another at 51st Avenue and Bethany Home Road Construction of the Santan Freeway (Loop 202) from Dobson Road to Arizona Avenue Construction of HOV lanes, roadway and drainage improvements on SR 51, from Interstate 10 to Shea Boulevard Contract Start 10/24/2002 Contract Amount $23,376,195 5/13/2003 $22,785,441 12/24/2002 $20,180,265 6/25/2003 $31,919,593 1/22/2003 $84,925,003 Non-Current Liabilities (Note 5G): Governmental Activities Highway revenue bonds Transportation excise tax revenue bonds Grant anticipation notes Premium on bonds Compensated absences Capital leases Notes payable Total governmental activities Business-type Activities Compensated absences Notes payable Total Business-type Activities Total Non-Current Liabilities $ 932,700,000 488,400,000 169,145,000 34,422,663 11,337,254 916,184 180,438,476 1,817,359,577 151,380 151,545,066 151,696,446 $ 1,969,056,023 As of June 30, 2003, the Department had $1.59 billion in outstanding bonds payable. This total includes $932.7 million in Highway Revenue Bonds (HURF), $488.4 million in Transportation Excise Tax Revenue Bonds (RARF) and $169.1 million in Grant Anticipation Notes (GANs). The Department has $34.4 million in unamortized 2003 Comprehensive Annual Financial Report 11 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2003 premium on bonds. The Department had capital leases outstanding of $.9 million for acquisition of data processing equipment and notes payable of $332.0 million for the following: 1. General Fund - $108,270,286 for loans from the HELP Fund and $61,867,175 for principal and interest for Board Fund Obligations (BFO) for highway construction. 2. Maricopa Regional Area Road Construction Fund - $8,031,335 for a loan from the City of Mesa for advance construction of a section of Loop 202. 3. Equipment Fund - $2,269,680 for purchase of snow plows using capital leases. 4. HELP Fund - $151,545,066 for principal and interest for BFO used for capitalizing Arizona’s State Infrastructure Bank. The bonds have been sold in 30 separate issues between 1986 and 2003. All bonds outstanding as of June 30, 2003, are scheduled to mature not later than July 1, 2022. The bonds are obligations of the Transportation Board and are not obligations of the State of Arizona. Of the $4.6 billion total in bonds issued between 1986 and 2003, $1.3 billion, or approximately 28 percent, have been refunding issues to lower debt service costs. These efforts have resulted in cumulative debt service savings of $67.0 million in current dollars and $47.8 million on a present value basis. The senior lien HURF bonds have been rated AAA/Aa1 by Standard & Poor’s Rating Services Group and Moody’s Investors Service, respectively. The Department’s subordinate lien HURF bonds are rated AA/Aa2. The senior lien RARF bonds are rated AA/Aa2, while the subordinate lien RARF bonds are rated A/Aa3. The Grant Anticipation Notes are rated AA-/Aa3/AA with the additional rating provided by Fitch Ratings. Laws 1999, Chapter 189 (SB 1201), Arizona Revised Statute 28-7678, authorized the Transportation Board to issue nonnegotiable Board Funding Obligations (BFOs) for purchase by the Arizona State Treasurer. The law restricts the Transportation Board to issuing $100 million in fiscal years 2000, 2001 and 2004. The BFOs are used to capitalize Arizona’s State Infrastructure Bank, which allows the Department and political subdivisions to apply for loans from the HELP Fund established by this legislation. Laws 2001, Chapter 238 (HB 2636), Arizona Revised Statute 28-7510, increased the HURF bonding cap to $1 billion from $800 million. Additionally, the legislation authorized the Transportation Board to issue an additional $100 million in BFOs in fiscal year 2002 and increased the BFO authority in fiscal year 2004 to $200 million from $100 million. The distribution of this additional BFO authority is $60 million to the State Highway Fund and $40 million to the HELP Fund in fiscal years 2002 and 2004. Laws 2003, Chapter 4 (HB 2588), Arizona Revised Statute 28-7510, increased the HURF bonding cap to $1.3 billion from $1.0 billion. Requests for Information This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with an overview of the Department’s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Controller, Arizona Department of Transportation, 206 S. 17th Avenue, Phoenix, Arizona, 85007 or by visiting our website at http://www.dot.state.az.us/ABOUT/fms/cafr/cindex.htm. 2003 Comprehensive Annual Financial Report 12 Basic Financial Statements Government-wide Financial Statements include the Statement of Net Assets and Statement of Activities and uses the accrual basis of accounting for financial reporting. Governmental Fund Financial Statements include the Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances for the major governmental funds and uses the modified basis of accounting for financial reporting. Also includes the reconciliation to the government-wide financial statements. Proprietary Fund Financial Statements include the Statement of NetAssets, Statement of Revenues, Expenses and Changes in Fund Net Assets and Statement of Cash Flows for the business-type activities and uses the accrual basis accounting for financial reporting. Statement of Fiduciary Net Assets include the Statement of Net Assets for assets being held for parties outside of the Department. Notes to the Financial Statements Exhibit 1 Arizona Department of Transportation Statement of Net Assets June 30, 2003 Governmental Activities ASSETS Unrestricted cash on deposit with the State Treasurer $ 154,330,482 Business-type Activities $ Total 1,559,016 Receivables: Notes and loans Subscriptions, net of allowance for doubtful accounts Accrued interest Taxes and fees Other, net of allowance for doubtful accounts Due from U.S. Government for reimbursable construction costs 9,854,413 2,294,300 68,682,711 8,512,849 69,928,896 136,882,915 438,764 256,740 45,322 - Due from other state agencies Internal balances Inventories Prepaid items Deferred charges 303,917 18,731,249 7,064,928 3,049,126 380,496 <18,731,249> 2,659,047 683,969 - Restricted cash on deposit with the State Treasurer Capital assets not subject to depreciation (Note 5A) Capital assets subject to depreciation, net of accumulated depreciation (Note 5A) Total assets $ 155,889,498 146,737,328 438,764 2,551,040 68,682,711 8,558,171 69,928,896 684,413 9,723,975 683,969 3,049,126 508,880,234 11,256,482,452 96,010,168 7,900 604,890,402 11,256,490,352 182,081,509 12,290,197,066 1,117,854 221,310,942 183,199,363 12,511,508,008 6,154,254 5,279,742 122,789 118,243 6,277,043 5,397,985 Contracts and retainage payable 86,041,430 - 86,041,430 Due to Arizona counties and cities Due to other state agencies Deferred revenues (Note 5C) 96,472,721 6,843,771 - 4,243,131 96,472,721 6,843,771 4,243,131 417,689,304 1,399,670,273 2,018,151,495 151,696,446 156,180,609 569,385,750 1,399,670,273 2,174,332,104 9,621,204,384 1,125,754 9,622,330,138 21,602,726 63,224,779 - 63,224,779 21,602,726 417,442,520 211,795,941 10,272,045,571 779,800 65,130,333 417,442,520 212,575,741 10,337,175,904 LIABILITIES Accounts payable and other current liabilities Accrued payroll and other accrued expenses Non-current liabilities (Note 5H): Due within one year Due in more than one year Total liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Loans and other financial assistance Debt service Capital projects Unrestricted Total Net Assets $ $ The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 13 $ Exhibit 2 Arizona Department of Transportation Statement of Activities For the fiscal year ended June 30, 2003 Program Revenues Expenses Functions/Programs Governmental Activities: Administration Aeronautics Highway Highway Maintenance Motor Vehicle Other Highway Maintenance - asset preservation Transportation - not appropriated by State legislature Distributions to Arizona counties and cities Distributions to other state agencies Intergovernmental Interest on long-term debt Total governmental activities Business-type Actvities: Arizona Highways Magazine Highway Expansion and Extension Loan Program Total business-type actvities Total $ 52,533,318 3,848,091 45,643,844 96,352,820 83,090,207 8,460,021 268,383,806 $ Charges for Services Operating Grants and Contributions Capital Grants and Contributions 717,168 107,395,461 4,219,205 - $ $ 8,721,239 - 241,996 453,515,525 - Net Revenues $ <52,533,318> <2,888,927> 416,592,920 <96,352,820> 24,305,254 <4,240,816> <268,383,806> 9,590,932 - - - <9,590,932> 957,056,532 192,536,424 30,235,385 84,083,940 1,831,815,320 5,080,264 117,412,098 25,439,086 34,160,325 453,757,521 <957,056,532> <192,536,424> 283,965 <84,083,940> <1,226,485,376> 11,118,003 9,596,162 - - <1,521,841> 26,348,539 37,466,542 $ 1,869,281,862 3,881,239 13,477,401 $ 130,889,499 34,160,325 $ 453,757,521 <22,467,300> <23,989,141> $ <1,250,474,517> Business-type Activities Total $ Governmental Activities Net General revenues: Transportation excise taxes Vehicle, registration, title, license and related taxes Fuel and motor carrier taxes and fees Flight property taxes Interest on investments Other Total general revenues $ <1,226,485,376> $ <23,989,141> $ <1,250,474,517> 268,720,901 832,492,117 691,003,491 6,026,213 19,802,902 21,303,653 1,839,349,277 Change in net assets before accounting change Cumulative effect of accounting change (Note 4B) 612,863,901 40,398,858 Change in net assets Net assets - July 1 Net assets - June 30 653,262,759 9,618,782,812 $ 10,272,045,571 The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 14 2,440,375 425,219 2,865,594 <21,123,547> - 268,720,901 832,492,117 691,003,491 6,026,213 22,243,277 21,728,872 1,842,214,871 591,740,354 40,398,858 <21,123,547> 632,139,212 86,253,880 9,705,036,692 $ 65,130,333 $ 10,337,175,904 Governmental Fund Financial Statements MAJOR FUNDS General Fund (State Highway Fund) This fund is used to account for all financial transactions applicable to the general operations of the Department. The fund receives money from the Highway User Revenue Fund for vehicle registration, title, license and related fees and fuel and motor carrier taxes. Reimbursements for certain construction expenditures are received from the federal government, Arizona cities and counties, and other state agencies. The fund also receives interest and other revenues. The fund disburses money primarily for the engineering, construction, improvement and maintenance of state highways, parts of highways forming state routes and highways under cooperative agreements with the United States. Maricopa Regional Area Road Construction Fund This fund receives Maricopa County transportation excise tax monies collected by the Department of Revenue. These monies are used for the construction of certain state highways within Maricopa County. Motor Vehicle Division Clearing Fund This fund accounts for the collection and disbursement of Motor Vehicle Division revenues. Highway User Revenue Fund This fund collects motor vehicle and liquid use fuel taxes and receives certain Motor Vehicle Division revenues from the Motor Vehicle Division Clearing Fund. These monies are distributed to the State Highway Fund, the Department of Public Safety, the Arizona State Parks, the Economic Strength Project Fund, and incorporated cities and counties. Debt Service Fund This fund is used to administer all payments of principal and interest on bonds and notes issued by Arizona Department of Transportation Board for Highway Revenue Bonds, Arizona Transportation Excise Tax Revenue Bonds, and Grant Anticipation Notes. Capital Projects Fund This fund is used to administer bond proceeds for Arizona Transportation Board Highway Revenue Bonds, Arizona Transportation Excise Tax Revenue Bonds, Grant Anticipation Notes and Board Funding Obligations. These monies are expended for the construction of federal, state and local highways within the state. NON-MAJOR FUNDS Other Governmental Funds are the non-major funds and are all special revenue funds. These funds can be found on Exhibit 9 and Exhibit 10. Arizona Department of Transportation Balance Sheet Governmental Funds June 30, 2003 General Fund (State Highway Fund) ASSETS Unrestricted cash on deposit with the State Treasurer Receivables: Accrued interest Interfund Taxes and fees Notes and loans Other Amounts due from: U.S. Government Other state agencies Inventories Restricted cash on deposit with the State Treasurer Total assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Accrued payroll and other accrued expenditures Contracts and retainage payable Interfund payables Amounts due to: Arizona counties and cities Other state agencies Surety and rental deposits Deferred revenue Notes payable Total liabilities Fund balances: Reserved for: Inventories Interfund receivables Debt service Capital projects Unreserved reported in: General fund Non-major special revenue funds Total fund balances Total liabilities and fund balances $ 135,587,075 Special Revenue Funds Motor Vehicle Division Clearing Fund Maricopa Regional Area Road Construction Fund $ - $ - Highway User Revenue Fund $ Debt Service Fund - $ - 519,719 103,504,830 1,872,566 4,376,755 70,867 2,988,149 584,969 9,898,405 - 140,336 19,855,426 58,784,306 - 951,906 - $ 67,767,176 250,696 4,692,945 110,244,788 428,816,550 $ 26,867 81,824,091 85,494,943 $ 25,833,363 35,731,768 $ 86,341,112 165,121,180 $ 17,593,100 18,545,006 $ 1,700,008 $ 2,244 $ 1,877,823 $ - $ - $ 6,926,653 62,204,676 1,401,209 7,704,197 - 19,936,487 83,386,196 - 331,374 608,440 1,872,566 170,137,461 245,182,387 2,988,149 8,031,334 18,725,924 11,925,878 920,880 1,070,700 35,731,768 81,734,984 165,121,180 - 4,692,945 20,000,000 110,244,788 66,769,019 - - 18,545,006 - 48,696,430 183,634,163 428,816,550 66,769,019 85,494,943 35,731,768 165,121,180 18,545,006 18,545,006 $ The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 15 $ $ $ Exhibit 3 Other Governmental Funds (See Exhibit 9) Capital Projects Fund $ - $ 15,838,121 Total Governmental Funds $ 151,425,196 470,103 - 130,358 93,720 4,993,698 3,551,125 2,283,289 123,453,976 68,682,711 9,854,413 8,512,849 $ 173,152,912 173,623,015 $ 2,134,853 53,221 13,890,868 40,685,964 $ 69,928,896 303,917 4,692,945 508,880,234 948,018,426 $ 511,907 $ 166,347 $ 4,258,329 $ 13,424,316 - 98,648 2,774,381 - 7,025,301 86,107,570 104,723,892 13,936,223 2,811,859 5,591,517 4,993,698 16,436,450 96,472,721 6,843,771 1,679,140 9,854,413 178,168,795 495,133,932 159,686,792 2,240,673 5,623,184 4,692,945 20,000,000 20,785,679 342,323,783 159,686,792 173,623,015 16,385,657 24,249,514 40,685,964 48,696,430 16,385,657 452,884,494 948,018,426 $ $ 2003 Comprehensive Annual Financial Report 16 Exhibit 3.1 Arizona Department of Transportation Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets June 30, 2003 Total fund balances - governmental funds (Exhibit 3) Amounts reported for governmental activities in the Statement of Net Assets (Exhibit 1) are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds (Note 4C). Internal service funds are used by management to charge the costs of equipment rentals to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the Statement of Net Assets (Exhibit 5). Other long-term assets are not available to pay for current-period expenditures and therefore are deferred in the funds (Note 4C). Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds (Note 4C). Net assets of governmental activities (Exhibit 1) The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 17 $ 452,884,494 11,399,871,230 40,733,349 9,854,413 <1,631,297,915> $ 10,272,045,571 Arizona Department of Transportation Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the fiscal year ended June 30, 2003 General Fund (State Highway Fund) Revenues: Transportation excise taxes Vehicle registration, title, license and related taxes and fees Fuel and motor carrier taxes and fees Reimbursement of construction expenditures - federal aid Other federal grants and reimbursements Reimbursements from Arizona counties and cities Reimbursements from other state agencies Distributions from other state agencies Interest on loans receivable Interest on investments Flight property taxes Grand Canyon National Park Airport Sale of capital assets Rental income Insurance recovery Other Total revenues Expenditures: Current: Transportation - appropriated by State legislature: Administration Highway Highway maintenance Motor Vehicle Aeronautics Other Total Transportation - appropriated by State legislature $ Maricopa Regional Area Road Construction Fund Special Revenue Funds Motor Vehicle Highway Division User Clearing Revenue Fund Fund - $268,720,901 235,005,553 306,039,653 - 187,081,179 265,376,535 471,691,029 117,811,745 380,890,972 6,895,652 15,943,303 1,284,044 1,626,928 8,600,892 1,713,913 1,184,752 1,081,803 3,237,952 963,505,417 31,053,085 3,794,763 608,611 1,265,657 5,514,666 447,243 360,869 311,765,795 92,001 452,549,715 1,101,748 2,118,629 592,723,151 51,484,986 44,008,345 94,977,822 77,487,708 1,747,235 431,569 - - 269,706,096 431,569 - - The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 18 $ - $ - Exhibit 4 Debt Service Fund $ Capital Projects Fund - $ - Other Governmental Funds (See Exhibit 10) Total Governmental Funds $ - $ 268,720,901 - - 46,244,728 1,640,647 940,022,489 690,868,580 4,753,138 4,753,138 3,486,931 3,486,931 47,514,484 5,080,264 250,137 493,168 6,026,213 717,168 211,096 108,177,905 459,458,541 6,895,652 15,943,303 8,875,027 1,284,044 2,485,676 19,701,534 6,026,213 717,168 7,228,579 1,631,995 1,081,803 6,020,547 2,436,962,052 121,748 - 30,235,385 4,029,702 3,579,192 3,283 51,484,986 74,243,730 94,977,822 81,517,410 3,579,192 2,303,835 121,748 - 37,847,562 308,106,975 (continued) 2003 Comprehensive Annual Financial Report 19 Arizona Department of Transportation Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the fiscal year ended June 30, 2003 General Fund (State Highway Fund) Transportation - not appropriated by State legislature Distributions to Arizona counties and cities Distributions to other state agencies Interest on notes payable Debt service: Principal Interest Bond issuance costs Highway maintenance - asset preservation Capital outlay Total expenditures $ 9,594,090 40,302,383 2,779,516 Maricopa Regional Area Road Construction Fund $ Special Revenue Funds Motor Vehicle Highway Division User Clearing Revenue Fund Fund 7,502,057 - $ 410,049,076 42,500,639 - $ 526,536,488 66,186,663 - 125,327,622 507,292,216 955,001,923 12,445,854 93,775,472 114,154,952 452,549,715 592,723,151 8,503,494 197,610,843 - - Excess of revenues over expenditures Other financing sources : Interfund transfers in Interfund transfers out for debt service Interfund transfers out other Proceeds from sale of bonds Proceeds from sale of refunding bond Premium from sale of bonds Payment to refunded bond escrow agent Total other financing sources Net change in fund balances before 45,685,409 16,124,075 <83,157,218> <216,335,971> <16,124,075> <24,089,732> <53,595,884> <224,301,628> - - accounting change Cumulative effect of accounting change (Note 4B) <45,092,390> 40,398,858 - - Net change in fund balances Fund balances - July 1 Fund balances - June 30 <4,693,532> <26,690,785> 188,327,695 93,459,804 183,634,163 $ 66,769,019 $ - - $ <26,690,785> - The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 20 $ Exhibit 4 Debt Service Fund $ Capital Projects Fund - $ - Other Governmental Funds (See Exhibit 10) Total Governmental Funds $ $ 12,968,911 40,794,189 - 9,594,090 957,056,532 189,783,874 2,779,516 248,055,000 82,147,870 13,508 330,338,126 2,410,400 8,392,477 231,295,985 242,098,862 2,392 1,367,724 92,980,778 248,055,000 82,147,870 2,423,908 146,168,345 833,731,397 2,779,847,507 <325,584,988> <238,611,931> 15,197,127 <342,885,455> 321,326,591 90,530,000 17,218,635 <107,735,127> 321,340,099 <21,501,401> 331,475,000 10,928,704 320,902,303 <21,833,402> <94,276> <21,927,678> 383,136,075 <321,326,591> <61,809,484> 331,475,000 90,530,000 28,147,339 <107,735,127> 342,417,212 82,290,372 - <6,730,551> - <468,243> 40,398,858 <4,244,889> - <4,244,889> 82,290,372 22,789,895 77,396,420 $ 18,545,006 $ 159,686,792 $ <6,730,551> 39,930,615 30,980,065 412,953,879 24,249,514 $ 452,884,494 2003 Comprehensive Annual Financial Report 21 Exhibit 4.1 Arizona Department of Transportation Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities For the fiscal year ended June 30, 2003 Net change in fund balance - total governmental funds (Exhibit 4) Amounts reported for governmental activities in the Statement of Activities (Exhibit 2) are different because: Capital outlays are reported as expenditures in governmental funds (Note 4D). Bond proceeds provide current financial resources to governmental funds. However, issuing debt increases long-term liabilities in the statement of net assets. Governmental funds report the effect of issuance costs, premiums, discounts, and similar items when the debt is first issued, whereas these amounts are deferred and amortized in the statement of activities (Note 4D). Repayment of long-term debt is reported as an expenditure in governmental funds, but the repayment reduces long-term liabilities in the statement of net assets (Note 4D). Internal service funds are used by management to charge the cost of equipment rentals to individual funds. The net loss of the internal service funds is reported with governmental activities (Note 4D). Some items reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds (Note 4D). Change in net assets of governmental activities (Exhibit 2) The notes to the financial statements are an integral part of this statement. 2002 Comprehensive Annual Financial Report 22 $ 39,930,615 826,535,416 <450,152,339> 356,277,965 <1,809,171> <117,519,727> $ 653,262,759 Proprietary Fund Financial Statements MAJOR FUNDS Arizona Highways Magazine Fund The Department uses this fund in the publishing and marketing of the Arizona Highways Magazine and various other products that promote the State of Arizona. Highway Expansion and Extension Loan Program Fund This fund is an innovative financing mechanism to administer funds designated to provide loan and credit enhancement assistance to sponsors of local transportation projects. NON-MAJOR FUNDS Internal Service Fund The Department's own internal service fund, known as the Equipment Fund, purchases and maintains equipment and materials to be used by other funds and state agencies. Exhibit 5 Arizona Department of Transportation Statement of Net Assets Proprietary Funds June 30, 2003 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund ASSETS Current assets: Unrestricted cash on deposit with the State Treasurer Restricted cash on deposit with the State Treasurer Receivables: $ Subscriptions, net of allowance for doubtful accounts Accrued interest Loans Other, net allowance for doubtful accounts Due from other Arizona Department of Transportation funds Due from Arizona counties and cities Inventories Prepaid items Total current assets 96,010,168 Arizona Highways Magazine Fund $ 1,559,016 - Total $ 1,559,016 96,010,168 Governmental Activities Internal Service Fund $ 2,905,285 - 249,902 52,903,160 - 438,764 6,838 45,323 438,764 256,740 52,903,160 45,323 11,011 - 1,269,916 380,496 150,813,642 2,659,047 505,469 5,214,457 1,269,916 380,496 2,659,047 505,469 156,028,099 2,371,983 5,288,279 Noncurrent assets: Prepaid items Loans receivable Capital assets not subject to depreciation Capital assets subject to depreciation, net of accumulated depreciation Total noncurrent assets Total assets 83,979,755 - 178,500 7,900 178,500 83,979,755 7,900 - 83,979,755 234,793,397 1,117,854 1,304,254 6,518,711 1,117,854 85,284,009 241,312,108 38,692,731 38,692,731 43,981,010 LIABILITIES Current liabilities: Accounts payable Accrued payroll and other accrued expenses Compensated absences Deferred revenue Notes payable Total current liabilities 4,867 18,685 151,545,066 151,568,618 122,789 113,376 132,695 4,243,131 4,611,991 122,789 118,243 151,380 4,243,131 151,545,066 156,180,609 150,645 249,724 484,973 885,342 Noncurrent liabilities: Compensated absences Interfund payables Notes payable Total noncurrent liabilities Total liabilities 20,000,000 20,000,000 171,568,618 4,611,991 20,000,000 20,000,000 176,180,609 92,639 2,269,680 2,362,319 3,247,661 63,224,779 63,224,779 1,125,754 780,966 1,906,720 1,125,754 63,224,779 780,966 65,131,499 36,423,051 4,310,298 40,733,349 NET ASSETS Invested in capital assets, net of related debt Restricted for loans and other financial assistance Unrestricted Total net assets $ $ The notes to the financial statements are an integral part of this statement. 2002 Comprehensive Annual Financial Report 23 $ $ Exhibit 6 Arizona Department of Transportation Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the fiscal year ended June 30, 2003 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Operating revenues: Sales and charges for services (net of write off $34,932) Interest on loans receivables Other Total operating revenues Operating expenses: Publication and promotional cost Repair and maintenance Fuel and lubricants Salaries and related benefits Shipping and postage Supplies Equipment purchase and rental Professional and outside services Insurance Travel Interest on notes payable Depreciation Other Total operating expenses 3,881,239 3,881,239 217,411 1,388 118,463 1,561 6,008,600 1,116 6,348,539 Operating income Non-operating revenues : Interest on investments Distributions to other state agencies (Note 5F) Loss on sale/disposal of capital assets Total non-operating revenues Changes in net assets Total net assets - July 1 Total net assets - June 30 $ Arizona Highways Magazine Fund $ 9,596,162 425,219 10,021,381 4,667,864 99,164 2,982,854 1,709,927 100,472 44,313 374,460 15,440 319,900 298,064 10,612,458 Total $ Governmental Activities Internal Service Fund 9,596,162 3,881,239 425,219 13,902,620 $ 31,265,968 651,227 31,917,195 4,667,864 99,164 3,200,265 1,709,927 101,860 44,313 492,923 17,001 6,008,600 319,900 299,180 16,960,997 5,614,396 5,104,897 10,773,916 317,614 103,860 600,637 605,300 84,740 253,489 6,652,725 963,612 31,075,186 <2,467,300> <591,077> <3,058,377> 2,399,250 <20,000,000> <17,600,750> 41,125 <500,720> <4,825> <464,420> 2,440,375 <20,500,720> <4,825> <18,065,170> 842,009 101,370 <2,752,550> <2,651,180> <20,068,050> <1,055,497> <21,123,547> <1,809,171> 2,962,217 86,255,046 42,542,520 83,292,829 $ 63,224,779 $ 1,906,720 $ 65,131,499 $ 40,733,349 The notes to the financial statements are an integral part of this statement. 2003 Comprehensive Annual Financial Report 24 Exhibit 7 Arizona Department of Transportation Statement of Cash Flows Proprietary Funds For the fiscal year ended June 30, 2003 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Arizona Highways Magazine Fund Total Governmental Activities Internal Service Fund Cash flows from operating activities: Receipts from customers Receipts from other funds Receipts from other agencies Payments to suppliers Payments to employees Payments to other funds Payments to other agencies Other receipts Net cash provided by operating activities $ Cash flows from noncapital financing activities: Distribution to other state agencies Net cash provided by noncapital financing activities 2,961,231 $ 82,185,273 3,270,000 <32,873> <216,637> <96,475,705> <19,829,986> <1,116> <28,139,813> <20,000,000> <20,000,000> Cash flows from capital and related financing activities: Proceeds from sale of capital assets Acquisition of capital assets Net cash used by capital and related financing activities - Cash flows from investing activities: Interest on investments Net cash provided by investing activities 2,815,383 2,815,383 Net increase in cash Cash - July 1 Cash - June 30 Reconciliation of operating income to net cash provided by operating activities: Operating income Adjustment to reconcile operating income to net cash provided by operating activities: Depreciation Net changes in assets and liabilities: Receivables Due from other Arizona Department of Transportation funds Due from other state agencies Due from Arizona counties and cities Inventories Prepaid items Accounts payable Accrued payroll and other accrued expenses Compensated absence Due to other Arizona Department of Transportation funds Due to other state agencies Notes payable Deferred revenue Net cash provided by operating activities $ <45,324,430> 141,334,598 96,010,168 $ $ <2,467,300> $ - $ <30,763,439> <716,791> <203,217> 962 1,372 6,008,600 <28,139,813> $ The notes to the financial statements are an integral part of this statement. 2002 Comprehensive Annual Financial Report 25 9,447,107 $ 12,408,338 $ 82,185,273 27,213,061 3,270,000 4,257,455 <7,231,503> <7,264,376> <13,753,880> <2,913,301> <3,129,938> <10,875,551> <25> <96,475,730> <157> <19,830,143> 426,680 425,564 663,243 <271,199> <28,411,012> 7,504,328 <500,720> <500,720> <20,500,720> <20,500,720> <2,752,550> <2,752,550> <11,422> <11,422> <11,422> <11,422> 292,836 <5,951,949> <5,659,113> 41,125 41,125 2,856,508 2,856,508 <742,216> <46,066,646> 2,301,232 143,635,830 1,559,016 $ 97,569,184 $ <591,077> $ 319,900 <3,058,377> $ 319,900 20,694 <30,742,745> <716,791> <203,217> 150,657 150,657 89,761 89,761 <162,217> <162,217> 53,637 54,599 15,916 17,288 <25> <25> <157> <157> 6,008,600 <168,288> <168,288> <271,199> $ <28,411,012> $ 101,370 101,370 <805,965> 3,711,250 2,905,285 842,009 6,652,725 12,016 167,818 38,250 <62,761> <127,314> 24,275 <41,170> <1,520> 7,504,328 Fiduciary Fund Financial Statements Highway Properties - Privilege Tax Fund This fund collects monies from renters of properties previously acquired by the Department for use in future highway development. Monies collected are distributed to the Department of Revenue. Highway Properties - 24% Lieu Tax Fund This fund collects 24 percent of the Department's rental income from properties for use in future highway development. Monies collected are distributed to the local counties. Exhibit 8 Arizona Department of Transportation Statement of Net Assets Agency Funds June 30, 2003 ASSETS Restricted cash on deposit with the State Treasurer Total assets LIABILITIES Due to Department of Revenue Due to Arizona counties Total liabilities Highway Properties Privilege Tax Fund Highway Properties 24 % Lieu Tax Fund $ $ 253 253 $ 588,121 $ 588,121 $ 253 253 $ $ The notes to the financial statements are an integral part of this statement. 2003 Comprehsive Annual Financial Report 26 588,121 $ 588,121 Notes to the financial Statements Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2003 Index Notes to the Financial Statements Page Note 1 - Summary of Significant Accounting Policies ...................................................................................................................... .28 A - Reporting Entity………………………………………………………………………………………………………………....28 B - Government-wide and Fund Financial Statements .....................................................................................................................28 C - Measurement Focus, Basis of Accounting, and Financial Statement Presentation ....................................................................29 D - Assets, Liabilities, and Net Assets/Fund Balance .......................................................................................................................32 E - Revenues and Expenditures/Expenses .........................................................................................................................................35 F - Interfund Activity and Balances ..................................................................................................................................................35 Note 2 - Funds by Classification .........................................................................................................................................................36 Note 3 - Budgeting, Budgetary Control, and Legal Compliance ........................................................................................................36 Note 4 - Accounting Changes ..............................................................................................................................................................37 A - New Accounting Pronouncements ..............................................................................................................................................37 B - Cumulative Effect of Change in Accounting Policy . .................................................................................................................37 C - Explanations of Reconciling Items of the Balance Sheet of Governmental Fund to the Statement of Net Assets ……………………………….……………………………………………………………………….38 D - Explanations of Reconciling Items of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Fund to Statement of Activities ......................................................................... 38 Note 5 - Detailed Notes on all Funds ................................................................................................................................................. 40 A - Capital Assets ............................................................................................................................................................................ 40 B - Construction Commitments ....................................................................................................................................................... 41 C - Deferred Revenues ..................................................................................................................................................................... 42 D - Securities Held in Lieu of Retention .......................................................................................................................................... 42 E - Interfund Receivables, Payables, and Transfers ......................................................................................................................... 42 F - Leases……………………………………………………………………………………………………………………………43 G - Non-Current Liabilities . ..............................................................................................................................................................44 H - Short-term Debt ..........................................................................................................................................................................48 I - Fund Balances ...............................................................................................................................................................................49 Note 6 - Other Information ..................................................................................................................................................................49 A - Subsequent Events ......................................................................................................................................................................49 B - Contingent Liabilities ..................................................................................................................................................................49 C - Retirement Plan . ..........................................................................................................................................................................50 2003 Comprehensive Annual Financial Report 27 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Arizona Department of Transportation (Department) conform in all material respects to accounting principles generally accepted in the United States of America (GAAP) as applicable to governments. The Governmental Accounting Standards Board (GASB) is the primary standard setting body for establishing governmental accounting and financial reporting principles, which are primarily set forth in the GASB’s Codification of Governmental and Financial Reporting Standards (GASB Codification). Following is a summary of the Department’s significant accounting policies. A. Reporting Entity The Department is a department of the State of Arizona (State) and is not a legally separate entity. The Department has no component units. The Director of the Department serves as the Chief Administrative Officer and is directly responsible to the Governor. The Governor appoints a seven-member Transportation Board of the State of Arizona Department of Transportation (Transportation Board) which has responsibility for establishing a complete system of state highway routes, approving all highway construction contracts, and distributing monies for local airport facilities’ projects through a grant program. The Department is responsible for the construction and maintenance of all state highways. The Department cooperates with the various cities and counties within the state in the construction and maintenance of state roads and with the Federal Highway Administration in the construction and maintenance of interstate and other highways. Assistance in the development of local airports, registering motor vehicles and aircraft, licensing drivers and the publishing of the Arizona Highways Magazine are also responsibilities of the Department. B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the non-fiduciary activities of the government. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by federal reimbursement, taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for services. The Statement of Net Assets presents the reporting entity’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 consists 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 asset use are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions, or enabling legislation. Unrestricted net assets consist of net assets which do not meet the definition of the two preceding categories. Unrestricted net assets often are designated to indicate that management does not consider them to be available for general operations. Unrestricted net assets often have constraints on resources which are imposed by management, but can be removed or modified by management or the Transportation Board. The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identified with a specific function. Program revenues include: 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services or privileges provided by a given function and 2) grants and contributions that are restricted to meeting the operational or capital 2003 Comprehensive Annual Financial Report 28 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements Separate statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major proprietary funds are reported as separate columns in the fund financial statements, with non-major funds being reported in a single column. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting, as are the proprietary funds. Revenues are recorded when earned and expenses are recorded when the liability is incurred, regardless of the timing of related cash flows. Taxes are recognized as revenues in the year they are levied for transportation excise, aircraft licensing, aviation and motor fuel, flight property, and underground storage tanks. Motor carrier and vehicle license taxes are recognized when received. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. As allowed by GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, the Department’s proprietary funds follow GASB pronouncements and those Financial Accounting Standard Board Statements (FASB) and Interpretations, Accounting Principle Board Opinions, and Accounting Research Bulletins that were issued on or before November 30, 1989, except those that conflict with a GASB pronouncement. The proprietary funds do not follow any FASB Statements and Interpretations issued after November 30, 1989. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Department considers revenues to be available if they are collected within 60 days of the end of the fiscal year, e.g. federal revenue reimbursements, vehicle license taxes and highway user revenue taxes. Expenditures generally are recorded when a liability is incurred as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgements, are recorded only when payment is due and payable. Financial Statement Presentation The Department reports the following major governmental funds: The General Fund, known as the State Highway Fund, is the primary operating fund. It accounts for all financial resources except for those required to be accounted for in another fund. Expenditures are reported for general operations of the Department, including road and bridge repairs, maintenance and construction, planning and development, engineering, and administration. Revenues are received from the following primary sources: fuel and motor carrier taxes and fees; vehicle registrations, titles, licenses and related fees; and federal grants. The Maricopa Regional Area Road Construction Fund is a special revenue fund that receives Maricopa County transportation excise tax monies collected by the Department of Revenue. These monies are used for the construction of certain state highways within Maricopa County. The Motor Vehicle Division Clearing Fund is a special revenue fund which accounts for the collection and disbursement of certain Motor Vehicle Division revenues. 2003 Comprehensive Annual Financial Report 29 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 The Highway User Revenue Fund is a special revenue fund which collects motor vehicle and liquid use fuel taxes and receives certain Motor Vehicle Division revenues from the Motor Vehicle Division Clearing Fund. These monies are distributed to the State Highway Fund, the Department of Public Safety, the Arizona State Parks, the Economic Strength Project Fund, and incorporated cities and counties. The Debt Service Fund is used to account for the accumulation of resources for, and the payments of, general long-term debt principal and interest of the governmental funds. The Capital Projects Fund is used to account for financial resources to be used for the acquisition or construction of major capital facilities of the governmental funds. The Department reports the following major proprietary funds: The Highway Expansion and Extension Loan Program Fund (HELP) is an innovative financing mechanism to administer funds designated to provide loan and credit enhancement assistance to sponsors of local transportation projects. The Arizona Highways Magazine Fund publishes and markets the Arizona Highways Magazine and various other products that promote the State of Arizona. Additionally, the Department reports the following fund types: The Internal Service Fund which accounts for purchases and maintenance of equipment and materials to be used by other divisions in the Department and other government agencies. The Equipment Fund is the Department’s only internal service fund. The Agency Funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The Department has two agency funds, the Highway Properties – Privilege Tax and the Highway Properties – 24% Lieu Tax (not included in the government-wide statements). As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges for services by the Equipment Fund to the other governmental functions. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include: 1) charges for services, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than program revenues. Likewise, general revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues are charges for services and magazine subscriptions. The Department also recognizes as operating revenues interest on loan receivables and other revenues intended to recover the cost of services. Operating expenses for the enterprise funds and the internal service fund 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. When both restricted and unrestricted resources are available for use, the Department generally expends the restricted resources first, then unrestricted resources as they are needed to maintain appropriate cash balances and finance the construction program. 2003 Comprehensive Annual Financial Report 31 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 D. Assets, Liabilities, and Net Assets/Fund Balance Deposits and Investments The Department’s cash includes petty cash, bank accounts, and deposits with the State Treasurer for pooled investments. All investments are carried in the name of the State of Arizona. State statutes require the State Treasurer to invest these pooled funds in collateralized time certificates of deposit, repurchase agreements or obligations of the U.S. Government. All investments are carried at fair value. These balances are not subject to GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, classification because they are included in the state’s investment pool. State statutes require the State Treasurer to maintain separate investment accounts for the portions of the Highway Revenue Bond Proceeds Fund relating to the highway revenue bond issues and the Maricopa Regional Area Road Bond Proceeds Fund relating to the transportation excise tax revenue bond issues. These funds may be invested by the Treasurer in the state’s investment pool. The Department’s investments are included in the state investment pool and these investments are not shown in the Department’s name. Therefore, the Department presents its equity in the internal pool as required in GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Receivables and Payables Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as interfund receivables/payables. All other outstanding balances between U.S. Government, Arizona counties and cities, and other state agencies are reported as “due to/from”. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as “internal balances”. The other receivables and subscriptions receivables are shown net of allowance for doubtful accounts. Other receivables in excess of 180 days comprise the insurance claims net of allowance for doubtful accounts. The subscriptions receivable allowance for doubtful accounts is equal to two (2) percent of outstanding subscriptions at June 30, 2003. Notes receivable represents real estate mortgage loans made to individuals purchasing homes previously owned by the Department for highway construction purposes. The loans were made at a fixed rate and mature ten years from the date of origination. Inventories and Prepaid Items The governmental activities inventory is valued at cost, which approximates market, using the moving average method. This inventory is accounted for using the consumption method. Under this method, inventories are recorded as expenditures as they are used. The fund financial statement shows a reservation for inventory for the like amount indicating it does not constitute available expendable resources. No reservation of net assets is shown in the government-wide statements for inventories. The business-type activities’ inventories are stated at the lower of cost or market. Costs of proprietary fund inventories consisting of resale products and supplies are generally determined by moving average cost and specific identification methods, respectively. Costs of the internal service fund’s inventories (consisting of vehicle parts and supplies, fuels and lubricants, and other supplies) are determined by moving average cost methods. 2003 Comprehensive Annual Financial Report 32 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both the government-wide and fund financial statements. Restricted Assets Certain proceeds of the Department’s governmental revenue bonds, as well as certain resources of the General Fund and the Highway Extension and Expansion Loan Program Fund (enterprise fund) are classified as restricted assets on the balance sheet because they are maintained in separate bank accounts and their use is limited by applicable bond covenants or state statutes. Effective July 1, 1981, state law required accumulation of at least 15 percent, which in fiscal year 1996 was modified to 12.6 percent, of the revenues allocated each year to the General Fund from the Highway User Revenue Fund for the design, purchase of right-of-way or construction of controlled-access highways which are included in the regional transportation plan of counties with populations in excess of 400,000 (Maricopa and Pima counties). The debt service fund is used to report the resources set aside for payment of future debt service. Bond proceeds are deposited in the capital projects fund and are restricted for acquisitions of right-of-way and construction of federal, state and local highways. Capital Assets Capital assets, which include land, buildings and improvements, improvements other than buildings, machinery and equipment, infrastructure and construction in progress are reported in the applicable governmental or business-type columns in the government-wide financial statements. Capital assets are defined by the Department as assets with an initial, individual cost of $5,000 or more and an estimated useful life in excess of one year. Purchased capital assets are recorded at historical cost or estimated historical cost if historical cost is not available. Donated capital assets are recorded at estimated fair value at the date of donation. Costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the assets’ lives are not capitalized. Outlays for capital assets are capitalized at the time of the purchase or, in the case of infrastructure, at the time of final acceptance by the Department from the contractor. Asset preservation costs are expensed as incurred. The Department depreciates non-infrastructure capital assets on a straight-line basis using the following estimated useful lives. Modular buildings are included on the Statement of Net Assets under the machinery and equipment category, however, modular buildings have an estimated useful life of fifteen (15) years. Assets Buildings and improvements Improvements other than building Machinery and equipment Mobile fleet and aircraft Years 40 40 5-15 5-15 Infrastructure was capitalized for the first time in fiscal year 2002. The infrastructure assets are reported in the governmental-type activities column of the Statement of Net Assets. The Department’s infrastructure assets consist of roads and bridges and are presented using the modified approach and, therefore, are not depreciated. Deferred Revenues In the government-wide statements and proprietary fund financial statements, deferred revenues are recognized when cash, receivables, or other assets are received prior to being recognized. In the governmental funds, amounts are reported as deferred revenues until they are available to liquidate liabilities of the current period. Deferred revenues are reported in the government-wide statements for the business-type activities and in the fund statements for both the governmental and proprietary funds. In the government-wide statements, the deferred revenues relate to unearned 2003 Comprehensive Annual Financial Report 33 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 subscriptions’ income for the Arizona Highways Magazine. Unearned subscription income is recorded when subscription orders are received and is amortized as income over the terms of the related subscriptions. Costs associated with the selling of subscriptions are expensed in the year incurred. In the fund statements, the deferred revenues represent the amount for the notes receivable for real estate mortgage loans made to individuals who purchased homes previously owned by the Department for highway construction purposes. The loans were made at a fixed rate and mature ten years from the date of origination. Compensated Absences It is the Department’s policy to permit employees to accumulate earned but unused sick leave and vacation benefits. There is no liability for unpaid accumulated sick leave for the Department. All vacation pay is accrued when incurred in the government-wide and proprietary fund financial statements. Effective July 1, 1998, state employees are eligible to receive payment for an accumulated sick leave balance of 500 hours or more with a maximum of 1,500 hours, upon retirement directly from state service. The benefit value is calculated by taking the state hourly rate of pay at the retirement date, multiplied by the number of sick hours at the retirement date, times the eligibility percentage. The eligibility percentage varies based upon the number of accumulated sick hours from 25 percent for 500 hours to a maximum of 50 percent for 1,500 hours. The maximum benefit value is $30,000. The benefit is paid out in annual installments over three years. The Retiree Accumulated Sick Leave Fund is accounted for on the State’s financial statements as an Internal Service Fund. Employees are allowed to accumulate up to 240 hours of vacation leave (320 hours for exempt employees) which is paid when vacation is taken or upon termination of employment at the individual’s then current rate of pay. The liabilities for vacation outstanding as of June 30 for both the governmental and proprietary funds are reported on the Statement of Net Assets. Long-term Obligations In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Net Assets/Fund Balance The difference between assets and liabilities is “Net Assets” on the government-wide and proprietary statements and “Fund Balance” on the governmental fund statements. Reservations Fund balances for governmental funds are classified as either reserved or unreserved in the fund financial statements. Reserved fund balances reflect either: 1) funds legally segregated for a specific purpose, or 2) assets, which by their nature, are not available for expenditure. Unreserved fund balances reflect the balances available for appropriation for the general purposes of the fund. Note 5I provides a disaggregation of reserved fund balances. 2003 Comprehensive Annual Financial Report 34 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 E. Revenues and Expenditures/Expenses In the government-wide Statement of Activities, revenues and expenses are segregated by activity (governmental or business-type), then further by function (e.g. Administration, Aeronautics, Highway, etc). Additionally, revenues are classified between program and general revenues. Program revenues include: 1) charges for services, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenue rather than as program revenue. General revenues include all taxes and interest on investments. In the governmental fund financial statements, revenues are reported by source. Expenditures are reported by function (e.g., Administration, Distributions to Arizona counties and cities, and Distributions to other state agencies, Debt service, Capital outlay, etc.). The Distributions to Arizona counties and cities, and Distributions to other state agencies are shared tax revenues that are distributed based on statutory requirements. Debt service includes both interest and principal outlays related to bonds. Capital outlay includes expenditures for real property or infrastructure (e.g. bridges and roads). Revenues and expenses of proprietary funds are classified as operating and non-operating and as sub-classified by object (e.g., salaries, equipment rental, depreciation, etc). Operating revenues and expenses generally result from providing services and producing and delivering goods. All other revenues and expenses are reported as nonoperating. Other Financing Sources Other financing sources are additions to the governmental fund balances in the fund financial statements and include resources and financing provided by bond proceeds and transfers from other funds. Other financing uses are reductions of governmental fund resources in fund financial statements normally resulting from transfers to other funds. F. Interfund Activity and Balances Interfund Activity As a general rule, the effect of interfund activity has been eliminated from the government-wide statements. Exceptions to this rule are activities between the funds reported as governmental activities and the funds reported as business-type activities (e.g. the transfer of the loss from the Equipment Fund). Interfund Balances Interfund receivables and payables have been eliminated from the Statement of Net Assets, except for the residual amounts due between governmental and business-type activities. 2003 Comprehensive Annual Financial Report 35 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 2. FUNDS BY CLASSIFICATION The following table lists all of the funds whose balances are reflected in this financial report. MAJOR FUNDS Governmental Funds : General Fund (State Highway Fund) NON-MAJOR FUNDS Other Governmental Funds: Special Revenue Funds: State Aviation Fund Safety Enforcement and Transportation Infrastucture Fund Motor Vehicle Liabitity Insurance Enforcement Fund Vehicle Inspection and Title Enforcement Fund Motor Carrier Safety Revolving Fund Motorcycle Safety Education Fund Underground Storage Tank Fund Economic Strength Project Fund Grant Anticipation Notes Fund Local Agency Deposits Fund Special Revenue Funds: Maricopa Regional Area Road Construction Fund Motor Vehicle Division Clearing Fund Highway User Revenue Fund Debt Service Fund Capital Projects Fund Proprietary Funds: Arizona Highway Magazine Fund Highway Expansion and Extension Loan Program Fund FIDUCIARY FUNDS Agency Funds: Highway Properties - Privilege Tax Fund Highway Properties - 24% Lieu Tax Fund Internal Service Fund 3. BUDGETING, BUDGETARY CONTROL, AND LEGAL COMPLIANCE Annual budgets for the operating expenditures and capital outlay including land, building and improvements for the General Fund (State Highway Fund) are submitted to the Governor in accordance with state law. The budgets are legally enacted as appropriations after approval by the state legislature and signature by the Governor. The legal level of control for operating expenditures is at the program level and expenditure budgets are appropriated using a lump sum format with special line items. Expenditure details for personal services, employee related expenditures and all other operating expenditures are specifically budgeted within all divisions. In certain divisions, other specific programs are budgeted in addition to these categories. Revenue budgets are developed internally by the Department and are not a part of the appropriation process. Amendments to the approved appropriations require legislative approval. However, since the Department’s appropriation is a lump sum appropriation by program, the allocation of funds between personal services, employeerelated expenses, and other operating expenses is an internal decision for the program manager. Accordingly, transfers between line items such as personal services and other operating expenses within a particular program may be made by the program manager. Transfers of funds between programs require the approval of the Director of the Department of Administration. Expenditures may not exceed appropriations. All transfers of funds are reported to the Department’s Office of Strategic Planning and Budgeting for monitoring purposes. Budgets are prepared on the cash basis except that liabilities incurred before the end of the fiscal year and paid within the first month of the subsequent fiscal year are charged against the prior fiscal year’s budget. The Department’s appropriations lapse at year-end unless exempted by the legislature. 2003 Comprehensive Annual Financial Report 36 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 The capital outlay appropriation includes state highway construction and land, buildings and improvements for the General Fund. A legal limitation is adopted for land, buildings and improvements; however, legislation allows the Department to spend in excess of its appropriation for state highway construction up to the current fund balance. The Department monitors expenditures through an internal budgetary process and the Five-Year Transportation Facilities Construction Program approved by the Transportation Board. A legal limitation is not adopted for the other special revenue funds, the debt service funds, capital projects funds, proprietary funds and fiduciary funds. 4. ACCOUNTING CHANGES A. New Accounting Pronouncements Statement No. 40, Deposit and Investment Risk Disclosures – an amendment to GASB Statement No. 3 In March 2003, GASB adopted Statement No. 40. This Statement addresses common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in this Statement also should be disclosed. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2004. Earlier application is encouraged. The Department has not adopted this statement, but does not believe it will have a material impact. Statement No. 41, Budgetary Comparison Schedules – Perspective Differences – an amendment to GASB Statement No 34. In May 2003, GASB issued Statement No. 41, an amendment to Statement 34, which clarifies the budgetary presentation requirements for governments with significant budgetary perspective differences that result in their not being able to present budgetary comparison information for their general fund and major special revenue funds. These governments are required to present budgetary comparison schedules as required supplementary information (RSI) based on the fund, organization, or program structure that the government uses for its legally adopted budget. The provisions of this Statement should be implemented simultaneously with Statement 34. For governments that have implemented Statement 34 prior to the issuance of this Statement, the requirements of this Statement are effective for financial statements for periods beginning after June 15, 2002. B. Cumulative Effect of Change in Accounting Policy It has been the Department’s policy to record state appropriated funds to the State Highway Fund (General Fund) as expenditures in the General Fund. The accumulation of these funds has reduced the cash balance held with the State Treasurer’s Office and the General Fund’s unrestricted fund balance by $40,398,858. During 2003 the state determined that it would no longer require the Department to record these appropriations as expenditures. In addition, the state made the decision that the Department would be credited for the previously recorded $40,398,858. This change in policy has been reflected in the statements as a “Cumulative Effect of Accounting Change”. 2003 Comprehensive Annual Financial Report 37 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 C. Explanations of Reconciling Items of the Balance Sheet of Governmental Funds to the Statement of Net Assets The governmental fund balance sheet includes a reconciliation between fund balance – total governmental funds and net assets – government activities as reported on the government-wide Statement of Net Assets. The following explanations are necessary to explain these differences between the governmental fund balance sheet and the government-wide Statement of Net Assets: 1. Capital assets are not included on the fund statements but are included on the government-wide statement as follows: Capital assets not subject to depreciation Capital assets subject to depreciation $ 11,256,482,452 182,081,509 11,438,563,961 <38,692,731> less Internal Service Fund (Equipment Fund) assets $ 11,399,871,230 2. Deferred revenues for assets shown in fund statements for the following funds: General Fund (State Highway Fund) Maricopa Regional Area Road Construction Fund State Aviation Fund $ 1,872,566 2,988,149 4,993,698 $ 9,854,413 3. Long-term liabilities including bonds payable are not due and payable in the current period and are not reported in the current period on the fund statements. The detail for the $<1,631,297,915> difference are as follows: Bonds payable Deferred charges - issuance costs $ <1,624,667,663> 3,049,126 Capital leases <916,184> Compensated absences <8,763,194> $ <1,631,297,915> D. Explanations of Reconciling Items of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Fund to Statement of Activities The governmental fund statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes in fund balances – total governmental funds and changes in net assets of governmental activities as reported on the government-wide Statement of Activities. The following explanations are necessary to explain these differences between the governmental fund statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities: 1. Governmental funds report capital outlay as expenditures. However, in the Statement of Activities, these costs are removed; some cost are capitalized as assets while other costs are expensed as follows: Capital outlay less depreciation expense $ 833,731,397 <7,195,981> $ 826,535,416 2003 Comprehensive Annual Financial Report 38 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 2. The issuance of long-term debt (e.g. bonds) provides current financial resources to governmental funds, while the repayment of principal of long-term debt consumes current financial resources of the governmental funds. Neither transaction, however, has any effect on net assets. Also, the government reports the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are amortized in the Statement of Activities. The details of this $<93,874,374> difference are as follows: Debt issued or incurred: Issuance of Highway Revenue Bonds Issuance of Transportation Excise Tax Revenue Bonds Issuance of Highway Revenue Bonds Premium on bonds $ <156,475,000> <80,475,000> <185,055,000> <28,147,339> <450,152,339> Principal repayments: Highway Revenue Bonds Transportation Excise Tax Revenue Bonds 44,490,000 190,415,000 Grant Anticipation Notes Amortization of premium and discount 13,150,000 2,754,057 Bond issuance costs Payment to refunded bond escrow agent 2,423,908 103,045,000 356,277,965 $ <93,874,374> 3. The Internal Service Fund is used by the Department to charge the cost for purchases and maintenance of equipment and material to be used by other funds and state agencies. The adjustment for the Internal Service Fund close those funds by charging additional amounts to participating governmental activities to completely cover the Internal Service Fund costs for the year. Internal Service Fund (Equipment Fund): Changes in net assets 4. $ <1,809,171> 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. The details are as follows: Asset Preservation Disposal of Capital Assets $ <122,215,462> 5,113,035 Capital lease 641,293 Notes & Loans Compensated absences <1,716,451> 657,858 $ <117,519,727> 2003 Comprehensive Annual Financial Report 39 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 5. DETAILED NOTES ON ALL FUNDS A. Capital Assets Capital asset activity for the year ended June 30, 2003, was as follows: Governmental Activities Capital assets, not being depreciated: Land Infrastructure Construction in progress Total capital assets, not being depreciated July 1, 2002 Beginning Balance Increases $ 1,715,941,418 7,444,327,275 1,385,665,135 10,545,933,828 $ 127,127,909 120,749,615 587,621,490 835,499,014 142,715,993 32,948,803 44,812,530 112,290,754 332,768,080 2,590,789 219,780 4,489,692 2,578,794 9,879,055 <59,117> <6,404,626> <1,868,462> <8,332,205> 145,247,665 33,168,583 42,897,596 113,001,086 334,314,930 <45,080,927> <1,245,493> <28,531,952> <70,295,736> <145,154,108> <3,221,703> <304,082> <3,860,004> <6,462,917> <13,848,706> 20,975 5,251,501 1,496,917 6,769,393 <48,281,655> <1,549,575> <27,140,455> <75,261,736> <152,233,421> 187,613,972 <3,969,651> <1,562,812> 182,081,509 Capital assets, being depreciated: Buildings Improvements other than buildings Machinery and equipment Mobile fleet and aircraft Total capital assets, being depreciated Less accumulated depreciation for: Buildings Improvements other than buildings Machinery and equipment Mobile fleet and aircraft Total accumulated depreciation Total capital assets, being depreciated, net Governmental activities capital assets, net $ 10,733,547,800 Business-type Activities Capital assets, not being depreciated: Land Capital assets, being depreciated: Buildings Machinery and equipment Total capital assets, being depreciated $ Less accumulated depreciation for: Buildings Machinery and equipment Total accumulated depreciation Total capital assets, being depreciated, net Business-type activities capital assets, net $ 7,900 Decreases $ 831,529,363 July 1, 2002 Beginning Balance $ $ Increases $ June 30, 2003 Ending Balance <3,896,863> $ 1,839,172,464 <303,912> 7,564,772,978 <120,749,615> 1,852,537,010 <124,950,390> 11,256,482,452 <126,513,202> $ 11,438,563,961 June 30, 2003 Ending Balance Decreases - $ - $ 7,900 981,157 2,424,705 3,405,862 12,427 12,427 <58,305> <58,305> 981,157 2,378,827 3,359,984 <635,557> <1,339,148> <1,974,705> <33,816> <286,085> <319,901> 52,476 52,476 <669,373> <1,572,757> <2,242,130> 1,431,157 <307,474> <5,829> 1,117,854 <307,474> $ <5,829> $ 1,125,754 1,439,057 $ 2003 Comprehensive Annual Financial Report 40 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 Depreciation expense was charged to functions/programs as follows: Governmental Activities: Administration Aeronautics Highway Highway Maintenance Motor Vehicle Capital assets held by the Department's internal service fund are charged to the various functions based on their usage of the assets Total depreciation expense - governmental activities Business-type Activities Arizona Highways Magazine Fund $ 1,127,674 268,300 2,527,077 1,462,070 1,810,860 6,652,725 $ 13,848,706 $ 319,901 B. Construction Commitments The Department’s outstanding commitments for contracts at June 30, 2003, was $650,737,726. Spent-to-Date Remaining Commitment $ 279,036,945 113,632,415 40,089,268 400,803,319 $128,967,342 42,351,345 30,001,730 245,064,386 833,561,947 446,384,803 722,092,515 110,804,363 $ 1,666,458,825 117,999,340 86,353,583 $650,737,726 Construction Contracts: Rural Roadways Small Urban Roadways Urban Roadways Large Urban Roadways Sub-total Design Contracts Other Commitments Total 2003 Comprehensive Annual Financial Report 41 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 C. Deferred Revenues In the fund financial statements, the deferred revenues represent the amount for notes receivable for real estate mortgage loans made to individuals who purchased homes previously owned by the Fund for highway construction purposes. The loans were made at a fixed rate and mature ten years from the date of origination. The State Aviation Fund amount represents loans to various local governments for construction of hangars, taxiways extension, runways, etc. These loans were made at a fixed rate and with various maturities. The proprietary fund includes the amount for unearned subscriptions. The following schedule is a summary of the amounts outstanding as of June 30, 2003: Governmental Funds: General Fund (State Highway Fund) Maricopa Regional Area Road Construction Fund State Aviation Fund Proprietary Fund: Arizona Highways Magazine Fund $ 1,872,566 2,988,149 4,993,698 $ 9,854,413 $ 4,243,131 D. Securities Held in Lieu of Retention In accordance with Arizona law, a contractor may assign to the Department securities in lieu of retention and will deposit with the bank, cash, time certificates of deposit in federally insured banks licensed by the State of Arizona (Certificates of Deposit), securities of or guaranteed by the United States of America (Treasury Bills), or other eligible securities as defined in the Arizona Revised Statutes, Title 35, Chapter 2, Article 2, Section 35-313 (Eligible Investments). At June 30, 2003, the bank held assignment on securities aggregating approximately $23 million in lieu of contractor retentions for construction. These additional securities are not reflected in the accompanying financial statements. E. Interfund Receivables, Payables, and Transfers The balances of current interfund receivables and payables as of June 30, 2003, were: Receivables Payables General Fund (State Highway Fund) Highway Expansion and Extension Loan Program Fund Highway User Revenue Fund Non-major governmental funds Highway User Revenue Fund Motor Vehicle Division Clearing Fund Highway Expansion and Extension Loan Program Fund General Fund Motor Vehicle Division Clearing Fund General Fund Motor Vehicle Division Clearing Fund Amount $ 83,386,196 118,634 20,000,000 1,269,916 19,724,133 131,293 93,720 $124,723,892 The General Fund receivable of $83,386,196 is an accrual for fuel tax revenues imposed in fiscal year 2003 from the Highway User Revenue Fund that were collected in fiscal year 2004. The Highway User Revenue Fund receivable of $19,724,133 is an accrual for vehicle license taxes due in fiscal year 2003 from the Motor Vehicle Division Clearing Fund that were collected in fiscal year 2004. 2003 Comprehensive Annual Financial Report 42 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 In a prior fiscal year, the General Fund loaned $20 million to the Highway Expansion and Extension Loan Program Fund to increase its loan capacity. The loan is due no later than December 31, 2008. Interfund transfers for the year ended June 30, 2003, consisted of the following: Interfund Transfer In: Maricopa Regional Interfund Transfer Out: General Fund Capital Projects Fund Maricopa Regional Area Road Construction Fund Other Governmental Funds General Fund Area Road Construction Fund Debt Service Fund Total 21,501,401 $ 16,124,075 - $ 83,157,218 - $ 99,281,293 21,501,401 24,089,732 94,276 - 216,335,971 21,833,402 240,425,703 21,927,678 $ 45,685,409 $ 16,124,075 $321,326,591 $ 383,136,075 $ Total The General Fund ($83,157,218), the Maricopa Regional Area Road Construction Fund ($216,335,971) and Other Governmental Funds - Grant Anticipation Notes Fund ($21,833,402) made transfers to the Debt Service Fund to pay bond debt service. F. Leases Operating Leases The Department leases data processing equipment, other equipment, and certain facilities from various lessors. The majority of these leases are for a one-year term, renewable annually. Total rental expenditures (excluding interfund transactions) for the fiscal year ended June 30, 2003, approximated $4,157,000. In fiscal year 2002, the Department renegotiated its long-term lease with the City of Phoenix for a facility located on Washington Street in Phoenix. The future operating lease commitments are as follows: Year Ending June 30 Amount 2004 2005 2006 2007 $ Future operating lease commitments $ 3,027,155 2003 Comprehensive Annual Financial Report 43 695,427 736,335 777,243 818,150 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 In fiscal year 2003, the Department entered into a long-term lease to build a structure to house lab facilities in Gilbert, Arizona. The future operating lease commitments are as follows: Year Ending June 30 Amount 2004 2005 2006 2007 2008 Thereafter $ 101,820 101,820 101,820 101,820 101,820 587,472 Future operating lease commitments $ 1,096,572 Capital Leases The Department has entered into lease agreements as lessee for financing the acquisition of modular buildings. These lease agreements qualify as capital leases for accounting purposes and, therefore, have been recorded at the present value of their future minimum lease payments as of the inception date. The assets acquired through capital leases are as follows: Governmental Activities Assets: Machinery and equipment Less accumulated depreciation $ 1,838,444 <228,964> Total $ 1,609,480 The future minimum lease obligations and the net present value of these minimums lease payments as of June 30, 2003, were as follows: Governmental Activities Year Ending June 30 2004 2005 2006 2007 $ Total minimum lease payments Less amount representing interest Present value of minimum lease payments 405,025 307,506 186,142 86,672 985,345 <69,161> $ 916,184 G. Non-Current Liabilities Arizona Transportation Board Highway Revenue Bonds The Transportation Board 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 $734,155,000. During the year, Highway Revenue Bonds totaling $341,530,000 were issued to (i) finance portions of the Transportation Board’s Five-Year 2003 Comprehensive Annual Financial Report 44 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 Transportation Facilities Construction Program, (ii) pay costs of issuing the Bonds, and (iii) refund portions of the Board’s outstanding Senior 1993 Refunding Bonds in the aggregate principal amount of $98,495,000. The Highway Revenue Bonds are secured by a prior lien on and a pledge of motor vehicle and related fuel fees and taxes of the General Fund. Arizona Revised Statutes prohibit the total principal amount of Arizona Highway Revenue Bonds, excluding refunded bonds, from exceeding $1.3 billion. Highway Revenue Bonds currently outstanding are as follows: Purpose Govermental activities Govermental activities - refunding Interest Rates 2.0% - 8.8% 2.3% - 6.0% Amount $ 571,320,000 361,380,000 $ 932,700,000 Annual debt service requirements to maturity for Highway Revenue Bonds are as follows: Fiscal year ending June 30 2004 2005 2006 2007 2008 2009-2013 2014-2018 2019-2022 Highway Revenue Bonds Principal Interest $ 49,665,000 51,645,000 54,985,000 57,955,000 60,645,000 284,715,000 221,480,000 151,610,000 $ 932,700,000 $ 50,257,999 45,865,500 43,076,792 40,161,540 37,424,558 137,273,648 74,326,434 17,595,052 $ 445,981,523 Arizona Transportation Board Transportation Excise Tax Revenue Bonds 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 the Transportation Board. These bonds are secured by transportation excise taxes collected by the Arizona Department of Revenue on behalf of Maricopa County. The outstanding amount of Transportation Excise Tax Revenue Bonds issued in prior years was $407,925,000. During the year, Transportation Excise Tax Revenue Bonds totaling $80,475,000 were issued to (i) finance the acquisition of land and the design and construction of certain controlled access highways within Maricopa County, Arizona, (ii) pay costs of issuing the Bonds and (iii) refund in advance of maturity portions of the Board’s outstanding Senior 1998 Series A Revenue Bonds in the aggregate principal amount of $4,550,000. 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 Transportation Excise Tax Revenue Bond Resolution adopted by the Transportation Board on September 22, 1988, gives the Transportation 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 reflected in the accompanying financial statements. The policies (aggregating $70,063,698 at June 30, 2003) 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 noncancelable 2003 Comprehensive Annual Financial Report 45 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 and insure payment, up to the policy amount, of the bond interest on their respective payment dates. The policies shall terminate on the earlier of July 1, 2005, or the date when no respective bonds are outstanding under the bond resolution. The premiums on these insurance policies are recorded as expenditures in the year of payment. The carrying basis of the 1988 Series A Capital Appreciation Bonds increases as a result of accretion of the original issuance discount. At June 30, 2003, the carrying basis was $27,329,152. At June 30, 2003, the outstanding balance was $30,000,000. All Transportation Excise Tax Revenue Bonds mature no later than December 15, 2005. Transportation Excise Tax Revenue Bonds currently outstanding are as follows: Purpose Govermental activities Govermental activities - capital appreciation Govermental activities - refunding Interest Rates Amount 3.0% - 6.5% 7.3% - 7.5% 4.5% - 6.5% $301,200,000 30,000,000 157,200,000 $488,400,000 Annual debt service requirements to maturity for Transportation Excise Tax Revenue Bonds are as follows: Fiscal year ending June 30 2004 2005 2006 Transportation Excise Tax Revenue Bonds Principal Interest $ 199,400,000 208,625,000 80,375,000 $ 23,553,235 14,318,152 1,566,542 $ 488,400,000 $ 39,437,929 Arizona Transportation Board Grant Anticipation Notes The Grant Anticipation Notes Fund administers all payments of principal and interest for notes issued by the Transportation Board and is secured by revenues received from the Federal Highway Administration under grant agreements and certain other federal-aid revenues. The original amount of grant anticipation notes issued was $182,295,000. Grant Anticipation Notes currently outstanding are as follows: Purpose Govermental activities Interest Rates Amount 4.0% - 5.3% $ 169,145,000 2003 Comprehensive Annual Financial Report 46 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 Annual debt service requirements to maturity for Grant Anticipation Notes are as follows: Fiscal year ending June 30 2004 2005 2006 2007 2008 Grant Anticipation Notes Principal Interest $ 36,755,000 49,000,000 38,540,000 37,000,000 7,850,000 $ 7,488,470 5,400,850 3,209,175 1,307,500 196,250 $ 169,145,000 $ 17,602,245 Notes Payable The Department’s outstanding notes payable as of June 30, 2003, was $331,983,542. The governmental activities notes payable was $180,438,476 and business-type activities was $151,545,066. The notes payable represent the General Fund loan payable to HELP for $108,270,285, the Maricopa Regional Area Road Construction Fund loan payable to the City of Mesa for $8,031,335, the Equipment Fund loan payable to creditors for $2,269,680 and the Board Funding Obligations for loans from the State Treasurer for $213,412,241. The total outstanding for Board Funding Obligations are as follows: 1. Laws 1999, Chapter 189 (SB 1201) authorized a Board Funding Obligation (BFO) of $100,000,000 to HELP in fiscal year 2000. Both the principal and interest of the BFO are due on March 14, 2004 ($55,524,200) and June 27, 2004 ($54,616,614) respectively. 2. Laws 2001, Chapter 238 (HB 2636) authorized a Board Funding Obligation (BFO) of $40,000,000 to HELP in fiscal year 2002. Interest accrued to date is $1,404,252. Both the principal and interest of the BFO are due no later than May 30, 2004. 3. Laws 2001, Chapter 238 (HB 2636) authorized a Board Funding Obligation (BFO) of $60,000,000 to the State Highway Fund in fiscal year 2002. Interest accrued to date is $1,867,175. Both the principal and interest of the BFO are due no later than June 27, 2004. Refunded Bonds Deposited with Escrow Agents In prior years ($132,346,156) and fiscal year 2003 ($103,045,000), the Transportation Board refinanced various bond issues through 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 financial statements of the Department. The Department refunded the Highway Refunding Senior Series 1993 Bonds ($98,495,000) and the Transportation Excise Tax Senior 1998 Series A Revenue Bonds ($4,550,000) to reduce its total debt service payments by $7,455,370 and to obtain an economic gain (difference between the present values of the debt service payments on the old and new debt) of $6,269,294. 2003 Comprehensive Annual Financial Report 47 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 Refunded bonds of the Department deposited with escrow agents at June 30, 2003, are as follows: Original Issue Escrow Maturity Date Type Balance 1993 Senior Highway Refunding Bonds July 1, 2003 $ 98,495,000 1999 Senior 1998 Series A Senior 1988 Series A Highway Refunding Bonds Transportation Excise Tax Revenue Bonds Transportation Excise Tax Revenue Bonds Capital Appreciation Bonds Total refunded bonds deposited with July 1, 2009 July 1, 2005 64,130,000 4,550,000 July 1, 2005 8,996,156 escrow agents $ 176,171,156 Changes in non-current liabilities The activity for the year ended June 30, 2003, was as follows: Governmental Activities: Bonds and Notes: Highway Revenue Bonds Transportation Excise Tax Tax Revenue Bonds Grant Anticipation Notes Premium on Bonds Total bonds and notes Capital leases Compensated absences Notes payable Total governmental activities Business-type Activities: Compensated absences Notes payable Total business-type activities Total non-current liabilities Beginning Balance July 1, 2002 Additions $ 734,155,000 $ 341,530,000 602,890,000 182,295,000 9,357,653 80,475,000 28,147,339 <194,965,000> <13,150,000> <3,082,329> 488,400,000 169,145,000 34,422,663 199,400,000 36,755,000 3,860,449 1,528,697,653 1,557,477 11,701,814 192,849,289 1,734,806,233 450,152,339 468,838 10,328,278 73,197,680 534,147,135 <354,182,329> <1,110,131> <10,692,838> <85,608,493> <451,593,791> 1,624,667,663 916,184 11,337,254 180,438,476 1,817,359,577 289,680,449 367,436 9,195,933 118,445,486 417,689,304 134,092 145,536,466 145,670,558 173,438 6,008,600 6,182,038 <156,150> <156,150> 151,380 151,545,066 151,696,446 151,380 151,545,066 151,696,446 $ 1,880,476,791 $ 540,329,173 $ <451,749,941> $ 1,969,056,023 $ 569,385,750 Reductions Ending Balance June 30, 2003 $ <142,985,000> $ 932,700,000 Due Within One Year $ 49,665,000 Internal service funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. At year-end, $577,612 of internal service funds compensated absences and $2,269,680 of notes payable are included in the above amounts. H. Short-term Debt The Department had no short-term debt activity for the fiscal year ended June 30, 2003. 2003 Comprehensive Annual Financial Report 48 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 I. Fund Balances Reservations The line entitled “Reserved Fund Balances” on the Governmental Funds Balance Sheet at June 30, 2003, consisted of the following: General Fund Reserved Fund Balances: Inventories Interfund receivables Debt Service Capital Projects Fund Total Reserved Fund Balances $ 4,692,945 20,000,000 110,244,788 $ 134,937,733 Maricopa Regional Area Road Construction Fund $ 66,769,019 $ 66,769,019 Debt Service Fund $ 18,545,006 $18,545,006 Capital Projects Fund $ 159,686,792 $ 159,686,792 Other Governmental Funds $ 2,240,673 5,623,184 $ 7,863,857 Total $ 4,692,945 20,000,000 20,785,679 342,323,783 $387,802,407 Effective July 1, 1981, State law required accumulation of at least 15 percent, which in fiscal year 1996 was modified to 12.6 percent, of the revenues allocated each year to the General Fund from the Highway User Revenue Fund for the design, purchase of right-of-way or construction of controlled-access highways which are included in the regional transportation plan of counties with populations in excess of 400,000 (Maricopa and Pima counties). At June 30, 2003, approximately $107.5 million was reserved in the General Fund for this purpose. The remaining $2.7 million was restricted for highway construction from Federal Highway Fatality monies. The loan to the General Fund for $20.0 million is reserved for the receivable from the Highway Expansion and Extension Loan Program Fund. The Maricopa Regional Area Road Construction Fund is reserved for capital projects. Capital Projects Fund is reserved for capital projects based on the debt covenants. The Debt Service Fund reserve is for future debt service payments. 6. OTHER INFORMATION A. Subsequent Events On August 6, 2003, the Transportation Board issued $148,955,000 in Grant Anticipation Notes, Series 2003A to (i) finance a portion of the costs of various projects on the Maricopa County Regional Freeway System, (ii) refund all the Board’s Outstanding Series 2000A Notes and (iii) pay a portion of the costs of issuing the Notes. The Series 2003A Notes are due January 1, 2004, through July 1, 2015. Net proceeds totaled $134,181,000 (after receipt of $10,162,013 reoffering premium and payment of $249,072 in underwriting fees and costs of issuance). In August 2003, the Department repaid in advance of scheduled maturity $100,000,000 of the BFOs deposited to the HELP in fiscal year 2000, and $60,000,000 of the BFOs deposited to the General Fund in fiscal year 2002. With interest, the total amount repaid was $172,693,633. Concurrent with these repayments, the Department borrowed $160,000,000 ($100,000,000 deposited to HELP and $60,000,000 deposited to the General Fund) under a new series of BFOs that are payable no later than August 2007. B. Contingent Liabilities Risk Management Insurance Losses The Department is exposed to various risks of loss related to torts; thefts of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Department is a participant in the state’s self- 2003 Comprehensive Annual Financial Report 49 Arizona Department of Transportation Notes to the Financial Statements June 30, 2003 insurance program, and, in the opinion of the Department’s management, any unfavorable outcomes from these claims and actions would be covered by the self-insurance program. Accordingly, the Department has no risk of loss beyond adjustments to future years’ premium payments to the state’s self-insurance program. All estimated losses for unsettled claims and actions of the state are determined on an actuarial basis and are included in the State of Arizona’s Comprehensive Annual Financial Report. Claims The Department has a variety of claims pending against it that arose during the normal course of its activities. Management of the Department believes, based on the advice of legal counsel, that losses, if any, resulting from settlement of these claims will not have a material effect on the financial position of the Department. Grants Amounts received or receivable from grant agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenditures which may be disallowed by the grantor cannot be determined at this time although the Department expects such amounts, if any, to be immaterial. C. Retirement Plan The Arizona State Retirement System Board administers the Arizona State Retirement Plan (Plan), a cost sharing multi-employer public employee defined benefit plan, for the benefit of Arizona employees and employees of certain other governmental entities. Plan provisions, including death, disability, and retirement benefits, are established by state statute. Substantially all employees of the Department are covered by the Plan. The Arizona State Retirement System (System) issues a Comprehensive Annual Financial Report that includes financial statements and required supplementary information. The most recent report may be obtained by writing the System, 3300 North Central Avenue, P. O. Box 33910, Phoenix, Arizona 85067-3910 or by calling (602) 240-2000 or (800) 621-3778. Arizona Revised Statutes provide statutory authority for employee and employer contributions. The employee and employer contribution rate for the year ended June 30, 2003, was computed to be 2.49 percent of covered payroll by an actuarial valuation performed at June 30, 2001. Contributions for the years ended June 30, 2001, 2002 and 2003 were $4,032,399, $3,959,972 and $4,093,262, respectively, for both the employees and the Department, which were equal to the required contributions for each year. The Department's total payroll for fiscal year 2003 was $165.0 million. The Plan is funded through payroll deductions from employees' gross earnings and amounts contributed by the Department. Retirement benefits are obligations of the Plan and not of the Department. The Arizona Revised Statutes provide statutory authority for employee and employer contributions. The contribution requirement for fiscal year 2003 was $4.1 million by both the employees and the Department. 2003 Comprehensive Annual Financial Report 50 Required Supplementary Information [Other than MD&A] Arizona Department of Transportation Required Supplementary Information June 30, 2003 Schedule of Revenues and Expenditures Budget and Actual - General Fund (State Highway Fund) For the fiscal year ended June 30, 2003 Budgeted Amounts Original Final Revenues: Vehicle registration, title, license and related fees Fuel and motor carrier taxes Total revenues Expenditures appropriated by state Actual Amounts Variance with Final Budget Positive $ 232,704,500 300,487,300 533,191,800 $ 232,704,500 300,487,300 533,191,800 $ 234,054,397 301,520,791 535,575,188 19,154,500 3,845,100 18,071,000 4,394,700 18,075,962 4,395,092 <4,962> <392> 24,857,700 2,116,000 49,973,300 26,224,400 2,116,000 50,806,100 26,167,571 2,116,000 50,754,625 56,829 51,475 Personal services Employee related expenditures Other operating expenditures Total Highway 33,176,900 7,502,500 2,493,900 43,173,300 30,954,500 7,486,700 6,080,000 44,521,200 30,954,335 7,486,557 5,930,035 44,370,927 165 143 149,965 150,273 Highway Maintenance: Personal services Employee related expenditures Other operating expenditures Maintenance carryover Total Highway Maintenance 28,086,900 7,535,500 55,692,600 3,521,651 94,836,651 29,400,000 10,400,000 53,353,900 3,521,651 96,675,551 28,599,295 10,210,487 51,761,804 3,520,647 94,092,233 800,705 189,513 1,592,096 1,004 2,583,318 Motor Vehicle: Personal services Employee related expenditures 45,831,200 12,045,700 45,644,000 14,088,200 45,525,147 14,005,259 118,853 82,941 Other operating expenditures Fee Accounting and Revenue Management System Integrated Inventory System Judicial Fee Programming 20,136,300 12,870,500 12,556,595 313,905 398,229 320,411 250,000 398,229 320,411 250,000 54,692 43,514 150,000 343,537 276,897 100,000 Security Enhancement Security Enhancement Issue License plates and tabs 2,687,700 2,174,462 2,295,300 2,687,700 2,174,462 2,295,300 5,245 1,186,773 2,295,299 2,682,455 987,689 1 legislature in 2003 budget: Administration: Personal services Employee related expenditures Other operating expenditures Attorney General Legal Service Total Administration $ 1,349,897 1,033,491 2,383,388 Highway: (continued) 2003 Comprehensive Annual Financial Report 51 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Schedule of Revenues and Expenditures Budget and Actual - General Fund (State Highway Fund) For the fiscal year ended June 30, 2003 Variance with Budgeted Amounts Original Final Actual Amounts Final Budget Positive Motor Vehicle (continued): Public Information Service $ 150,000 $ 150,000 $ 150,000 $ - Plate and Fee to Owner MVD One-time Trailer Fees Administration 75,071 44,285 75,071 44,285 74,988 562 83 43,723 MVD Electronic Certificate of Title System MVD Attorney General Legal Services Abandoned Vehicle Administration 320,209 137,000 501,300 320,209 137,000 501,300 301,772 137,000 449,504 18,437 51,796 48,100 72,700 5,000 87,492,967 48,100 72,700 5,000 82,082,467 30,894 42,372 4,997 77,014,613 17,206 30,328 3 5,067,854 38,600 12,300 200 51,100 38,600 12,300 200 51,100 38,600 12,300 200 51,100 - Capital outlay - land, buildings and improvements Arizona Department of Public Safety transfers 9,666,415 28,266,600 9,666,415 28,266,600 4,167,101 28,266,600 5,499,314 - Expenditures appropriated by state legislature by carryover of previous year's unexpended budget Total expenditures Excess of revenues over expenditures 1,840,763 315,301,096 $ 217,890,704 1,840,763 313,910,196 $ 219,281,604 1,693,142 300,410,341 $ 235,164,847 147,621 13,499,855 $ 15,883,243 Vechicle Registration Enforcement Trailers Permit Registration MVD Fuel Dispenser Labels Total Motor Vehicle Division Air Quality Programs: Administration air quality project: Personal services Employee related expenditures Other operating expenditures Total Air Quality Programs The notes to required supplementary information are an integral part of this statement. 2003 Comprehensive Annual Financial Report 52 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Notes to Required Supplementary Information – Budgetary Reporting Budgets and budgetary accounting Annual budgets for the operating expenditures and capital outlay including land, building and improvements for the General Fund (State Highway Fund) are submitted to the Governor in accordance with state law. The budgets are legally enacted as appropriations after approval by the state legislature and signature by the Governor. The legal level of control for operating expenditures is at the program level and expenditure budgets are appropriated using a lump sum format with special line items. Expenditure details for personal services, employee related expenditures and all other operating expenditures are specifically budgeted within all divisions. In certain divisions, other specific programs are budgeted in addition to these categories. Revenue budgets are developed internally by the Department and are not a part of the appropriation process. Amendments to the approved appropriations require legislative approval. However, since the Department’s appropriation is a lump sum appropriation by program, the allocation of funds between personal services, employeerelated expenses, and other operating expenses is an internal decision for the program manager. Accordingly, transfers between line items such as personal services and other operating expenses within a particular program may be made by the program manager. Transfers of funds between programs require the approval of the Director of the Department of Administration. Expenditures may not exceed appropriations. All transfers of funds are reported to the Department’s Office of Strategic Planning and Budgeting for monitoring purposes. Budgets are prepared on the cash basis except that liabilities incurred before the end of the fiscal year and paid within the first month of the subsequent fiscal year are charged against the prior fiscal year’s budget. The Department’s appropriations lapse at year-end unless exempted by the legislature. For financial reporting purposes, the accompanying financial statements present the legally adopted budget for the operations of the General Fund that is subject to legislative appropriation. The capital outlay appropriation includes state highway construction and land, buildings and improvements for the General Fund. A legal limitation is adopted for land, buildings and improvements; however, legislation allows the Department to spend in excess of its appropriation for state highway construction up to the current fund balance. The Department monitors expenditures through an internal budgetary process and the Five-Year Transportation Facilities Construction Program approved by the Transportation Board. The Department has elected to report the budgetary comparison as required supplementary information (RSI). The Department is required to report as notes to RSI: any budgetary expenditures in excess of appropriations, budgetary basis of accounting used for the adopted budgets and reconciliation between the budgetary basis of accounting and accounting principles generally accepted in the United States (GAAP). 2003 Comprehensive Annual Financial Report 53 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Explanation of differences between budgetary inflows and outflows and GAAP revenues and expenditures: Sources/inflows of resources: Actual amounts from the Schedule of Revenues and Expenditures - Budget and Actual $ 535,575,188 Net (increase) decrease in receivable related to fuel and motor carrier taxes and vehicle registration, title, license, and related fees not recognized as revenue on budgetary basis 5,470,018 Revenues which are on the modified accrual basis and not recognized on budgetary basis: Federal aid reimbursements of construction expenditures from the Federal Highway Administration Federal grants and reimbursements related to elderly and disabled assistance, planning assistance and 380,890,972 community assistance from the Federal Transit Administration State and local reimbursements related to grants from Arizona counties, cities and other state agencies 6,895,652 15,943,303 Distribution from other state agencies Investment interest and loan interest income from Treasurer and loan agreements 1,284,044 10,227,820 Other income Sale of capital assets 3,237,952 1,713,913 Rental income Insurance recovery 1,184,752 1,081,803 Total revenues as reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (General Fund - Exhibit 4) Uses/outflows of resources: Actual amounts from the Schedule of Revenues and Expenditures - Budget and Actual $ 963,505,417 $ 300,410,341 Net increase (decrease) in accounts payable, accrued payroll and other accruals not recognized as expenditures for budgetary basis 1,757,078 Expenditures which are on the modified accrual basis and not recognized on budgetary basis: Transportation expenditures from sources not appropriated by state legislature 9,594,090 Capital outlay are outflows of highway construction expenditures from state appropriation and federal aid reimbursements Highway maintenance - asset preservation 503,097,493 125,327,622 Distributions to other state agencies Interest expense on loans borrowed from the Highway Expansion and Extension Loan Program 12,035,783 2,779,516 Total revenues as reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (General Fund - Exhibit 4) $ 955,001,923 2003 Comprehensive Annual Financial Report 54 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Information About Infrastructure Assets Reported Using the Modified Approach As allowed by Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments (GASB 34), the Arizona Department of Transportation (Department) reports it roads and bridges using the modified approach. Assets accounted for under the modified approach include approximately 6,801 centerline miles (18,129 travel lane miles) of roads and 4,463 bridges that the Department is responsible to maintain. In order to utilize the modified approach, the Department 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 Department. • 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 contains estimated expenditures for highway system improvements and the preservation of existing roadway and bridges. Both of these factors impact the condition assessment of the roads and bridges as described in the following sections. The Five-Year Transportation Facilities Construction Program in effect for fiscal year 2003 and beyond was adopted by the Transportation Board on June 25, 2002. The following information pertains to the condition assessment and maintenance of infrastructure assets. Roads The mission of the 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 ADOT 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 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 travelling public (as documented in 1961 after AASHTO Road Test, 1956-1961). Serviceability is based on detailed measurements of objective features of the pavement. Many surveys since the original road test have shown that these measurements closely track the subjective opinion of the travelling public. Most commonly, this number is called Present Serviceability Rating and abbreviated as 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 PSR Excellent Good Fair Poor Very Poor Impassable Perfect Very Good Good Fair Poor Very Poor 2003 Comprehensive Annual Financial Report 55 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Information About Infrastructure Assets Reported Using the Modified Approach - continued The goal of the Arizona Department of Transportation is to maintain a condition level (PSR) rating of 3.23 or better for all roads in the state 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 2003, an overall rating of 3.6 was achieved, as shown in the following graph: Condition Level - Roads 5.00 PSR 4.00 3.00 Actual Level 2.00 Desired Level 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 the Department. The estimated and actual expenditures for fiscal years 2002 and 2003 were as follows: Fiscal Year 2002 2003 Estimated Expenditures (in millions) $227.4 $243.5 Actual Expenditures (in millions) $234.8 $220.8 Bridges ADOT’s bridge assets constitute a significant portion of all infrastructure assets in Arizona. As of June 30, 2003, ADOT owns and maintains 4,463 bridges with an approximate total deck area of 40,841,425 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 assisting 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 2003 Comprehensive Annual Financial Report 56 Arizona Department of Transportation Required Supplementary Information June 30, 2003 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 Information About Infrastructure Assets Reported Using the Modified Approach - continued 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 ADOT to maintain state highway bridges so that the CRI exceeds 92.5%. In fiscal year 2003, the CRI was computed at 93.9%. Condition Levels - Bridges 95% CRI 94% 93% Actual Level 92% Desired Level 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 Department in its mission of products and services for a safe, efficient, and cost effective transportation system. Figure 3 indicates that approximately 65% of the bridges in the state were constructed prior to the 1970s while only 22% have been constructed in the last two decades. 2003 Comprehensive Annual Financial Report 57 Arizona Department of Transportation Required Supplementary Information June 30, 2003 Information About Infrastructure Assets Reported Using the Modified Approach - continued 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 70s 80s 90s 2000s Figure 3 Preservation of the bridges is accomplished through programs managed by the Bridge Group. The estimated and actual expenditures for fiscal years 2002 and 2003 were as follows: Fiscal Year 2002 2003 Estimated Expenditures (in millions) $14.4 $13.6 Actual Expenditures (in millions) $18.2 $15.8 2002 Comprehensive Annual Financial Report 58 Non-Major Governmental Funds Financial Statements SPECIAL REVENUE FUNDS Special revenue funds are used to account for specific revenues that are legally restricted to expenditures for particular purposes. The State Aviation Fund is appropriated by the legislature and receives monies from aviation gasoline taxes, sale of abandoned or seized aircraft, flight property taxes and the operation of certain airports. The State Aviation Fund monies are used to build and maintain airport facilities. The Safety Enforcement and Transportation Infrastructure Fund is appropriated by the legislature and receives monies from the registration of vehicles of nonresidents for enforcement of vehicle safety requirements, maintenance of transportation facilities and upgrades of transportation facilities, including roads, streets, and highways, approved by the Transportation Board within twenty-five miles of the border betweenArizona and Mexico. The Motor Vehicle Liability Insurance Enforcement Fund receives fees and interest to administer the State's Mandatory Liability Insurance Program. The Vehicle Inspection and Title Enforcement Fund receives monies from continuing appropriation to be used to defray the cost of investigations involving certificates of title, licensing fraud, registration enforcement and other enforcement related issues. The Motor Carrier Safety Revolving Fund receives fees to administer and enforce the rules governing the safety operations of motor carriers, shippers and vehicles transporting hazardous materials, substances or waste. The Motorcycle Safety Education Fund provides support for the motorcycle licensing and education programs that promote motorcycle safety. The Underground Storage Tank Fund receives certain Motor Vehicle Division revenues for distribution to the Department of Environmental Quality. The Economic Strength Project Fund collects monies from the Highway User Revenue Fund for use on approved economic strength projects recommended by the Commerce and Economic Development Commission. The Grant Anticipation Notes Fund receives revenues from the Federal Highway Administration under a grant agreement and certain other federal-aid revenues to accelerate highway construction projects. The Local Agency Deposits Fund receives monies from the U.S. Government and local agencies for the payment of local agency sponsored county secondary road construction projects. Arizona Department of Transportation Combining Balance Sheet Non-Major Governmental Funds June 30, 2003 State Aviation Fund ASSETS Unrestricted cash on deposit with the State Treasurer Receivables: Accrued interest Interfund Notes and loans Other Amounts due from: U.S. Government Other state agencies Restricted cash on deposit with the State Treasurer Total assets LIABILITIES Accounts payable Accrued payroll and other accrued expenditures Contracts and retainage payable Amounts due to: Arizona counties and cities Other state agencies Deferred revenue Total liabilities FUND BALANCES Reserved: Debt service Capital projects Unreserved special revenue funds Total fund balances Total liabilities and fund balances $ 6,933,426 Safety Enforcement and Transportation Infrastructure Fund $ 2,125,116 Motor Vehicle Liability Insurance Enforcement Fund $ 5,324,913 Vehicle Inspection and Title Enforcement Fund $ 1,431,603 Motor Carrier Safety Revolving Fund $ 9,125 Motorcycle Safety Education Fund $ 13,938 111,393 57,291 4,993,698 360,378 7,500 5,932 - 21,250 - 8,060 - - 1,187 - 241,996 - 12,669 - - - - $ 12,698,182 $ 2,151,217 $ 5,346,163 $ 1,439,663 $ 9,125 $ 15,125 $ 128,530 $ 37,817 $ - $ - $ - $ - $ 38,621 - 15,559 - 23,819 - 20,649 - - - 4,993,698 5,160,849 53,376 23,819 20,649 - 15,125 15,125 7,537,333 7,537,333 12,698,182 2,097,841 2,097,841 2,151,217 5,322,344 5,322,344 5,346,163 1,419,014 1,419,014 1,439,663 9,125 9,125 9,125 15,125 $ $ 2003 Comprehensive Annual Financial Report 59 $ $ $ Exhibit 9 Underground Storage Tank Fund $ - Economic Strength Project Fund $ Grant Anticipation Notes Fund - $ - Local Agency Deposits Fund $ Total Non-major Governmental Funds - $ 15,838,121 785 2,346,839 4,391 66,140 6,289 - 777,768 130,358 93,720 4,993,698 3,551,125 - - - 1,892,857 40,552 2,134,853 53,221 3,228,768 $ 5,576,392 2,807,468 $ 2,877,999 $ 2,234,384 2,240,673 5,620,248 $ 8,331,425 13,890,868 $ 40,685,964 $ $ $ - $ $ - - - 166,347 - 66,140 - 2,708,241 98,648 2,774,381 5,576,392 5,576,392 2,811,859 2,877,999 - 2,708,241 2,811,859 5,591,517 4,993,698 16,436,450 $ 5,576,392 $ 2,877,999 2,240,673 2,240,673 2,240,673 5,623,184 5,623,184 $ 8,331,425 2,240,673 5,623,184 16,385,657 24,249,514 $ 40,685,964 $ 2003 Comprehensive Annual Financial Report 60 Arizona Department of Transportation Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Non-Major Governmental Funds For the fiscal year ended June 30, 2003 Revenues: Vehicle registration, title, license and related taxes and fees Fuel and motor carrier taxes and fees Reimbursement of construction expenditures - federal aid Reimbursements from other state agencies Interest on loans receivable Interest on investments Flight property taxes Grand Canyon National Park Airport Other Total revenues Expenditures: Current: Transportation - appropriated by state legislature: Highway Motor Vehicle Aeronautics Other Total Transportation - appropriated by State legislature State Aviation Fund Safety Enforcement and Transportation Infrastructure Fund Motor Vehicle Liability Insurance Enforcement Fund Vehicle Inspection and Title Enforcement Fund $ 3,916,792 1,127,101 $ 3,071,599 - $ 2,811,575 - $ 1,428,550 - 241,996 250,137 304,889 6,026,213 717,168 135,210 12,719,506 79,499 12,669 3,163,767 2,811,575 1,428,550 1,000 3,579,192 - 2,052,555 - 1,023,995 - 953,152 - - Motor Carrier Safety Revolving Fund $ 1,000 - 3,579,192 2,052,555 1,023,995 953,152 - Distributions to Arizona counties and cities Distributions to other state agencies Highway maintenance - asset preservation Capital outlay Total expenditures 11,256,956 4,500,335 19,336,483 1,128,700 1,080,000 2,392 1,367,724 5,631,371 1,023,995 107,700 1,060,852 334 334 Excess of revenues over expenditures <6,616,977> <2,467,604> 1,787,580 367,698 666 <3,164> <3,164> - - - <6,616,977> <2,470,768> 1,787,580 14,154,310 4,568,609 3,534,764 $ 7,537,333 $ 2,097,841 $ 5,322,344 367,698 1,051,316 $ 1,419,014 666 8,459 9,125 Other financing sources : Interfund transfers out for debt service Interfund transfers out other Total other financing sources Net change in fund balances Fund balances - July 1 Fund balances - June 30 - 2003 Comprehensive Annual Financial Report 61 $ Exhibit 10 Motorcycle Safety Education Fund $ Underground Storage Tank Fund 34,945,749 61,303 21,952 583,255 21,833,402 47,477 21,880,879 25,439,086 5,080,264 41,265 30,560,615 47,514,484 5,080,264 250,137 493,168 6,026,213 717,168 211,096 108,177,905 - - - 3,283 30,235,385 - 30,235,385 4,029,702 3,579,192 3,283 - - - 3,283 30,235,385 37,847,562 160,071 160,071 34,945,749 34,945,749 583,255 583,255 3,283 30,235,385 12,968,911 40,794,189 2,392 1,367,724 92,980,778 - - 21,877,596 325,230 15,197,127 - - <21,833,402> <21,833,402> <91,112> <91,112> <21,833,402> <94,276> <21,927,678> - - $ $ - 44,194 2,196,479 $ 2,240,673 $ Total Non-major Governmental Funds 83,009 <77,062> 77,062 - $ 500,000 Local Agency Deposits Fund $ 34,945,749 - - $ Grant Anticipation Notes Fund 69,463 13,546 <77,062> $ Economic Strength Project Fund - 234,118 5,389,066 $ 5,623,184 $ $ 46,244,728 1,640,647 <6,730,551> 30,980,065 24,249,514 2003 Comprehensive Annual Financial Report 62 Exhibit 11 Arizona Department of Transportation Statement of Changes in Assets and Liabilities Agency Funds For the fiscal year ended June 30, 2003 Balance July 1, 2002 Additions Deletions Balance June 30, 2003 Highway Properties - Privilege Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 237 237 $ $ 2,924 2,924 $ <2,908> $ $ <2,908> $ 253 253 LIABILITIES Due to Department of Revenue Total liabilities $ $ 237 237 $ $ 2,924 2,924 $ <2,908> $ $ <2,908> $ 253 253 Highway Properties - 24 % Lieu Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 365,471 365,471 $ $ 600,478 600,478 $<377,828> $ $<377,828> $ 588,121 588,121 LIABILITIES Due to Arizona counties Total liabilities $ $ 365,471 365,471 $ $ 600,478 600,478 $<377,828> $ $<377,828> $ 588,121 588,121 2003 Comprehsive Annual Financial Report 63 Capital Assets Exhibit 12 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule by Source1 June 30, 2003 and 2002 2002 2003 Governmental funds capital assets: Land Buildings and improvements Improvements other than buildings Machinery and equipment Infrastructure Construction in progress Total governmental funds capital assets $ Investment in governmental funds capital assets by source: Government funds Total governmental funds capital assets 1 This schedule presents only the capital assets balances related to governmental funds. Accordingly, the capital assets reported in the internal service fund are excluded from the above amounts. Generally, the capital assets of the internal service fund are included as governmental activities in the statement of net assets. 64 $ $ 1,839,172,464 145,247,665 33,168,583 40,208,658 7,564,772,978 1,852,537,010 11,475,107,358 $ 1,715,941,418 142,715,993 32,948,803 41,992,797 7,444,327,275 1,385,665,135 10,763,591,421 $ $ 11,475,107,358 11,475,107,358 $ $ 10,763,591,421 10,763,591,421 Exhibit 13 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule By Function and Activity1 June 30, 2003 Function and Activity Land Administration Aeronautics Highway: Administrative and other services Highway construction Highway development Materials engineering Traffic engineering Transportation planning and research Highway Maintenance Motor Vehicle $ Total governmental funds capital assets $ Improvements other than Buildings Buildings and Improvements 879,017 - $ 935,955 1,822,628,102 4,907,328 9,822,062 14,828,184 21,604 $ 33,833,319 4,648,473 4,844,126 320,207 40,514,116 46,237,636 749,984 19,593,875 Machinery and Equipment $ 1,528,027 276,396 21,667 122,946 7,785,973 3,089,715 8,675,598 980,728 Construction in Progress Infrastructure $ 3,663,112 5,031,777 3,063,953 3,540,296 895,264 687,787 5,379,506 8,290,637 - $ 7,564,772,978 - Total - $ 1,852,537,010 - 25,132,783 20,596,207 39,960,413 11,249,894,736 3,063,953 8,384,422 1,237,138 810,733 58,586,923 67,440,050 65 1,839,172,464 $ 1 This schedule presents only the capital assets balances related to governmental funds. Accordingly, the capital assets reported in the internal service fund are excluded from the above amounts. Generally, the capital assets of the internal service fund are included as governmental activities in the statement of net assets. 145,247,665 $ 33,168,583 $ 40,208,658 $ 7,564,772,978 $ 1,852,537,010 $ 11,475,107,358 Exhibit 14 Arizona Department of Transportation Capital Assets used in the Operation of Governmental Funds Schedule of Changes by Function and Activity1 For the fiscal year ended June 30, 2003 Governmental Funds Capital Assets July 1, 2002 Function and Activity Administration Aeronautics Highway: $ Additions 28,369,077 20,604,435 $ 1,413,384 9,529 Deductions $ <4,649,678> $ <17,757> Governmental Funds Capital Assets June 30, 2003 25,132,783 20,596,207 Administrative and other services Highway construction Highway development Materials engineering Traffic engineering Transportation planning and research Highway Maintenance Motor Vehicle 39,697,437 9,152,744,107 3,069,269 8,152,100 1,303,836 832,416 57,729,605 65,424,004 417,138 248,912,509 46,063 401,606 15,585 40,297 1,030,667 2,809,603 <154,162> <4,298,890> <51,379> <169,284> <82,283> <61,980> <173,349> <793,557> 39,960,413 9,397,357,726 3,063,953 8,384,422 1,237,138 810,733 58,586,923 67,440,050 Functional sub-total 9,377,926,286 255,096,381 <10,452,319> 9,622,570,348 Construction in progress 1,385,665,135 587,621,490 <120,749,615> 1,852,537,010 842,717,871 $ <131,201,934> $ 11,475,107,358 Total governmental funds capital assets $ 10,763,591,421 $ 1 This schedule presents only the capital assets balances related to governmental funds. Accordingly, the capital assets reported in the internal service fund are excluded from the above amounts. Generally, the capital assets of the internal service fund are included as governmental activities in the statement of net assets. 66 Table 1 Arizona Department of Transportation Government-wide Expense by Function For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year Administration 2003 2002 $ 52,533 57,864 Aeronautics $ 3,848 3,751 Highway $ 45,644 46,543 Highway Maintenance/1 $ 364,737 180,716 Motor Vehicle $ 83,090 82,904 Distributions to Arizona counties, cities and other State Interagencies governmental $ 1,149,593 1,064,560 $ 30,235 24,791 Interest on long-term debt $ 84,084 89,605 Other/2 Arizona Highways Magazine Highway Expansion and Extension Loan Program Total $ 18,051 14,326 $ 11,118 10,711 $ 26,349 5,265 $ 1,869,282 1,581,036 67 Note: Implemented GASB 34 in fiscal year 2002. Therefore, government-wide financial information for years prior to fiscal year 2002 is not available. 1 Includes Highway Maintenance - asset preservation 2 Includes Transportation - not appropriated by the State legislature Table 2 Arizona Department of Transportation Government-wide Revenues For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year 2003 2002 Program Revenues Operating Capital Grants Charges for Grants and and Services Contributions Contributions $ 130,889 124,565 $ 34,160 56,481 $ 453,758 470,772 General Revenues Taxes $ 1,798,243 1,798,243 Other Revenues Interest on Investments $ $ 21,729 27,148 22,243 35,488 Total $ 2,461,022 2,512,697 Note: Implemented GASB 34 in fiscal year 2002. Therefore, government-wide financial information for years prior to fiscal year 2002 is not available. 68 Statistical Table 3 Arizona Department of Transportation General Governmental Expenditures by Functions/Programs Last Ten Fiscal Years For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 Administration/1 $ 51,485 56,230 48,150 47,847 44,648 43,914 43,981 36,406 36,933 45,363 Aeronautics $ 3,579 3,491 18,280 21,640 26,787 30,734 18,975 11,107 9,239 13,579 Highway Maintenance Highway/2 $ 74,244 68,369 43,117 42,302 42,035 41,381 40,230 111,884 111,876 107,756 $ 94,978 89,314 89,400 83,398 79,304 76,597 70,336 - Distributions to Transportation - Arizona counties, not appropriated by cities and other Capital Outlay and Motor Vehicle the State legislature State agencies/3 Debt Service Maintenance /4 $ 81,518 81,012 77,337 74,492 67,144 63,056 30,147 33,486 35,221 27,992 $ 9,594 7,480 - $ 1,146,840 1,038,314 - $ 330,203 292,979 292,930 253,823 226,928 199,948 210,446 200,364 182,554 181,519 69 Notes: FY 2002 includes expenditures that were considered Agency Funds in prior years. /1 Includes the Director's Office, Financial Management (formerly Administrative) Services, Transportation Services Group and the Department's Risk Management Premium. /2 Includes Transportation Planning for FY 1997-2000. Includes Highway Maintenance for FY 1994-1996. /3 FY 2002 includes expenditures that are distributed to General Fund, Cities, Counties and other State Agencies. /4 Named Highway Construction in years prior to FY 2002. For years prior to 1999, includes Expendable Trust Fund. /5 FY 2002 includes interest on loans payable, State appropriations and DPS distributions - appropriated by State legislature. FY 2001 includes other and Arizona Department of Public Safety (DPS) distributions - appropriated by State legislature. Includes Transportation not appropriated, Land, Buildings & Improvements, Leases Payable and Transfers for FY 1997-2000. Includes Reimbursements, Transfers, Director's Office, Highway Safety Office and Land, Buildings and Improvements for FY 1994-1996. $ 979,900 1,098,437 1,008,590 941,913 853,695 602,955 540,203 555,087 418,601 481,538 Other/5 $ 7,507 7,507 34,310 43,927 62,600 65,625 84,433 87,960 57,757 78,254 Total $ 2,779,848 2,743,133 1,612,114 1,509,342 1,403,141 1,124,210 1,038,751 1,036,294 852,181 936,001 Table 4 Arizona Department of Transportation General Governmental Revenues by Source Last Ten Fiscal Years For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Transportation Year Excise Taxes/1 Motor Fuel Taxes and Fees/1 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $ 690,869 547,129 300,750 276,189 298,394 273,806 288,878 291,000 293,870 280,394 $ 268,721 267,563 - Vehicle Reg., Title, License and Related Fees/1 $ 940,023 1,003,499 219,746 255,088 250,121 210,370 198,002 171,823 133,689 117,412 Expenditures of Federal Reimburse- Interest on Awards /2 ments Investments $ 466,354 522,036 428,290 414,015 401,464 283,982 305,438 268,605 225,607 261,000 $ 26,102 12,664 17,150 18,788 15,748 8,505 15,083 32,711 17,808 13,130 $ 19,702 29,697 44,648 41,534 34,377 34,382 33,238 29,603 22,340 14,229 Other/3 Total /4 $25,191 34,405 292,416 267,004 257,479 223,486 231,792 228,698 190,498 177,561 2,436,962 2,416,993 1,303,000 1,272,618 1,257,583 1,034,531 1,072,431 1,022,440 883,812 863,726 Notes: FY 2002 includes revenues that were considered Agency Funds in prior years. /1 FY 2002 include revenues that are being collected for distribution to General Fund, Cities, Counties and other State Agencies. /2 For years prior to 1999, includes Expendable Trust Fund. /3 Includes interest on loans receivable, flight property taxes, Grand Canyon National Airport and other. /4 Method of accounting for taxpayer assessed revenues has been changed due to the adoption of GASB Statement No. 22 during fiscal year 1995. Total Revenues $2,500,000 Thousands of Dollars $2,000,000 $1,500,000 $1,000,000 $500,000 2002 Comprehensive Annual Financial Report $0 1994 1995 1996 1997 1998 1999 Fiscal Year 70 2000 2001 2002 2003 Table 5 Arizona Department of Transportation Expenditures of Federal Awards /1 For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year FAA FRA 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $ 242 6 6,278 2,379 91 506 849 129 $ SOURCE: 3 14 2 69 14 130 499 475 437 FTA NHTSA $ 6,618 5,264 4,746 3,717 5,107 3,392 2,508 3,552 1,687 3,448 $ 87 83 65 65 275 49 - FHWA FMCSA BLM $ 433,472 496,509 390,204 393,958 371,013 278,148 302,633 261,820 221,818 256,986 $ 466 282 - $ 30 47 28 - $ BIA Sub-total FHWA /2 Total 1,048 974 76 2,228 750 - $ 440,915 502,188 395,029 398,796 383,716 283,982 305,438 268,605 225,607 261,000 $ 25,439 19,848 33,261 15,219 17,748 - $ 466,354 522,036 428,290 414,015 401,464 283,982 305,438 268,605 225,607 261,000 Single Audit Reports - fiscal years 1994 through 2003. NOTES: /1 Federal Aviation Administration (FAA); Federal Railroad Administration (FRA); Federal Transit Administration (FTA) - previously Urban Mass Transit Administration (UMTA); National Highway Transportation Safety Administration (NHTSA); Federal Highway Administration (FHWA); Federal Motor Carrier Safety Administration (FMCSA); Bureau of Land Management (BLM); Bureau of Indian Affairs (BIA); and Department of Agriculture (DOA). /2 Prior to 1999, the Local Agency Deposits Fund was an Expendable Trust Fund. It is now a Special Revenue Fund. Total Expenditures of Federal Awards $550,000 Thousand of Dollars $450,000 $350,000 $250,000 $150,000 $50,000 1994 1995 1996 1997 1998 1999 ($50,000) Fiscal Year 71 2000 2001 2002 2003 Table 6 Arizona Department of Transportation Fuel Tax Rates For the fiscal year ended June 30 (Cents per Gallon) Fiscal Year Effective Date Gasoline Tax Use Fuel Tax /1 2003 - 18 26 2002 - 18 26 2001 07/01/2000 18 26 2000 - 18 27 1999 - 18 27 1998 12/31/1997 18 27 1997 - 18 18 1996 - 18 18 1995 - 18 18 1994 - 18 18 SOURCE: Arizona Revised Statutes §28-5606, §28-5708 NOTE: Gasohol is currently taxed at the same rate as gasoline and use fuel. Use fuel is primarily diesel fuel. /1 Lightweight motor vehicles under 26,000 pounds pay $.18 per gallon. 72 Table 7 Arizona Department of Transportation Highway User Revenue Fund Collections For the fiscal year ended June 30 (Thousands of Dollars) Motor Veh. Total Operators' Deposited Motor Veh. Motor Veh. Motor License License To Arizona Fuel Tax Revenue Reg. Fee Revenues Carrier Tax Revenues Fees and Other Fees (In Lieu) Tax Revenues Hwy. User Rev. Fund Fiscal Year 2003 Motor Veh. $ 633,826 $ 158,726 $ 23,302 $ 39,906 $ 276,279 $ 1,132,039 2002 629,360 151,437 11,896 40,122 259,308 1,092,123 2001 566,115 148,336 15,094 43,248 251,496 1,024,289 2000 545,901 158,424 15,040 43,508 235,287 998,160 1999 636,117 145,340 14,409 15,939 217,905 1,029,710 1998 508,544 109,445 56,123 36,426 176,950 887,488 1997 488,701 101,528 90,186 41,294 175,253 896,962 1996 473,741 97,601 85,433 42,654 160,145 859,574 1995 451,089 86,159 92,103 39,238 131,562 800,151 1994 422,556 83,826 118,530 37,161 113,990 776,063 SOURCES: General Purpose Financial Statement - Fiscal Years 1999 through 2003. Arizona Highway User Revenue Fund Revenue Collections by Category Fiscal Years 1994 through 1998. Highway User Revenue Fund Collections $1,200,000 $1,050,000 Thousands of Dollars $900,000 $750,000 $600,000 $450,000 $300,000 $150,000 $0 1994 1995 1996 1997 1998 1999 Fiscal Year 73 2000 2001 2002 2003 Table 8 Arizona Department of Transportation Highway User Revenue Fund Distributions For the fiscal year ended June 30 (Thousands of Dollars) State Department Economic Fiscal Year Highway Fund /1 Cities and Towns Counties of Public Safety Strength Project Fund Other /2 Total 2003 $ 537,668 $ 324,431 $ 202,105 $ $ 1,000 $ 12,419 $ 1,132,039 2002 519,837 312,252 195,530 37,066 1,000 26,438 1,092,123 2001 503,611 305,009 188,982 10,937 1,000 14,750 1,024,289 2000 493,697 323,798 157,594 13,622 1,000 8,449 998,160 1999 512,149 295,879 199,591 12,630 1,000 8,461 1,029,710 1998 435,882 263,220 163,973 14,688 1,000 8,519 887,282 1997 444,927 268,696 167,350 17,188 1,000 9,289 908,450 1996 429,171 256,901 152,571 19,688 1,000 9,304 868,635 1995 412,206 244,512 145,349 20,000 1,000 9,084 832,151 1994 406,376 205,479 134,511 24,925 1,000 532 772,823 54,416 The Highway User Revenue Fund receives certain Motor Vehicle Division revenues from the Motor Vehicle Division Clearing Fund. These monies are distributed to the State Highway Fund and various counties and cities, based on statutory formulas. SOURCES: General Purpose Financial Statement - Fiscal Years 1994 through 2003. Monthly Reports MV675580-01 fiscal years 1994 through 2003 (adjusted for accrual basis). NOTES: /1 In fiscal year 1995, HB 2431 authorized the transfer of $1 million for border transportation projects. /2 Appropriation to the Motor Vehicle Division for funding of mandatory insurance enforcement administration for fiscal year 1994. In fiscal years 1995 through 2003, an appropriation for Arizona State Parks is included. Fiscal year 2002 includes distribution to State General Fund. 74 Table 9 Arizona Department of Transportation Bond Coverage Highway User Revenue Fund Series For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year Principal Interest Total Pledged Revenues /1 Coverage 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $ 44,490 45,365 52,055 46,270 43,805 43,405 40,970 38,430 36,330 33,425 $ 41,932 38,534 36,581 33,994 31,090 33,266 36,148 38,770 40,974 44,037 $ 86,422 83,899 88,636 80,264 74,895 76,671 77,118 77,200 77,304 77,462 $ 540,540 523,326 513,890 528,721 509,935 468,240 468,542 429,825 399,605 385,844 6.3 6.2 5.8 6.6 6.8 6.1 6.1 5.6 5.2 5.0 SOURCES: Highway User Revenue Fund Schedule 1 Summary For Revenue Collected Monthly Reports MV675577-1 fiscal years 1994 through 2003; Debt Service Funds - fiscal years 1994 through 2003. /1 For fiscal years 1994 through 1996, net of 7% distributed to cities with a population greater than 300,000 persons. For fiscal years 1997 and after, includes vehicle license tax revenues distributed directly to the State Highway Fund. Highway User Revenue Fund Series Bond Coverage $550,000 $500,000 $450,000 Thousands of Dollars $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1994 1995 1996 1997 1998 2000 2001 Fiscal Year REVENUE DEBT SERVICE 75 2002 2003 Table 10 Arizona Department of Transportation Bond Coverage Regional Area Road Fund Series For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year Principal Interest Total Revenues Coverage 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $ 190,415 163,455 156,865 128,805 106,765 82,765 78,015 76,955 57,930 54,710 $ 31,533 35,445 40,035 42,609 43,251 40,512 45,248 46,209 47,320 49,347 $ 221,948 198,900 196,900 171,414 150,016 123,277 123,263 123,164 105,250 104,057 $ 268,721 267,563 264,722 248,596 229,470 209,263 192,257 178,413 160,319 142,846 1.2 1.3 1.3 1.5 1.5 1.7 1.6 1.4 1.5 1.4 SOURCE: Maricopa County Regional Area Road Fund Report. NOTE: Bond coverage ratio is based upon total Maricopa County Transportation Excise Tax collections. Regional Area Road Fund Series Bond Coverage $300,000 $250,000 Thousands of Dollars $200,000 $150,000 $100,000 $50,000 $0 1994 1995 1996 1998 1999 2000 Fiscal Year REVENUE 76 DEBT SERVICE 2001 2002 2003 Table 11 Arizona Department of Transportation Total Public Road Mileage By Highway Class and Governmental Ownership For the calendar year ended December 31, 2002 (With comparative totals for the calendar year ended December 31, 2001) (In Centerline Miles) TOTAL FUNCTIONAL CLASSIFICATION STATE COUNTY MUNICIPAL FEDERAL 2002 2001 RURAL: Interstate Freeway 996 - - - 996 996 Principal Arterial 1,118 33 29 7 1,187 1,186 Minor Arterial 1,155 85 34 - 1,274 1,257 Major Collector 1,848 1,502 281 842 4,473 4,479 Minor Collector Local 367 501 1,162 14,299 93 2,417 667 10,233 2,289 27,450 2,303 27,019 5,985 17,081 2,854 11,749 37,669 37,240 172 TOTAL RURAL URBAN: Interstate Freeway 172 - - - 172 Urban Expressway 142 2 9 - 153 143 Principal Arterial 255 67 678 - 1,000 1,001 Minor Arterial 118 239 911 6 1,274 1,272 Urban Collector Local 6 123 424 1,713 1,278 12,866 24 486 1,732 15,188 1,734 13,682 816 2,445 15,742 516 19,519 18,004 TOTAL URBAN STATEWIDE COMPOSITE: Freeways and Expressways 1,310 2 9 - 1,321 1,311 Arterials 2,646 424 1,652 13 4,735 4,716 Collectors Locals 2,221 624 3,088 16,012 1,652 15,283 1,533 10,719 8,494 42,638 8,516 40,701 6,801 19,526 18,596 12,265 57,188 55,244 TOTAL STATEWIDE Source: Arizona's Highway Performance Monitoring System (HPMS) 2002 & 2001 Data 77 ACKNOWLEDGMENTS The Comprehensive Annual Financial Report was prepared by Financial Management Services, Fiscal Operations: Craig Rudolphy, MBA, CGFM, CPA, CPFO Theresa Simms, MBA, CGFM, CPA Lawrence H. Ehrke, Jr., MBA Julie Phelps, MS Stanley Brown, MS Mantian Xu, MA Richard Gromoll, MBA Christopher Kipiani Trang Huynh Sheryl Bodmer, CPA Marsha Bloom, CPA Patricia Markiw, CPA Special acknowledgment goes to: All Financial Management Services staff whose cooperation and hard work contributed to the compilation of financial information that appears in this report. A special thank you to Ronald Loar of Community Relations for his graphic design. 2003 Comprehensive Annual Financial Report 78