Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2004 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 Organization Chart .................................................................................................................................................................viii FINANCIAL SECTION Independent Auditors’ Report ..............................................................................................................................................1-2 Management’s Discussion and Analysis ..........................................................................................................................3-14 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets (Exhibit 1) ...........................................................................................................................15 Statement of Activities (Exhibit 2) .............................................................................................................................16 Governmental Fund Financial Statements: Balance Sheet - Governmental Funds (Exhibit 3) .............................................................................................17-18 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets (Exhibit 3.1) ........................................................................................................19 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (Exhibit 4) ..................................................................................................20-23 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities (Exhibit 4.1)...............................24 Proprietary Fund Financial Statements: Statement of Net Assets (Exhibit 5) ...........................................................................................................................25 Statement of Revenues, Expenses, and Changes in Fund Net Assets (Exhibit 6)..............................................26 Statement of Cash Flows (Exhibit 7) .........................................................................................................................27 Fiduciary Fund Financial Statement Statement of Net Assets – Agency Funds (Exhibit 8).............................................................................................28 Index of Notes to the Financial Statements....................................................................................................................29 Notes to the Financial Statements..............................................................................................................................30-51 Required Supplementary Information (Other than MD&A): Budgetary Comparison Schedule – General Fund (State Highway Fund) .........................................................52-53 Notes to Required Supplementary Information.............................................................................................................54 Information About Infrastructure Assets Reported Using the Modified Approach..........................................55-59 2004 Comprehensive Annual Financial Report Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2004 TABLE OF CONTENTS (continued) Page Supplementary Information: Non-Major Governmental Funds: Combining Balance Sheet (Exhibit 9).............................................................................................................60-61 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Exhibit 10) ........62-63 Fiduciary Fund Statement of Changes in Assets and Liabilities – Agency Funds (Exhibit 11) ..................................................64 Capital Assets Used in the Operation of Governmental Funds: Schedule by Source (Exhibit 12) ................................................................................................................................65 Schedule by Function and Activity (Exhibit 13)......................................................................................................66 Schedule of Changes by Function and Activity (Exhibit 14) ................................................................................67 STATISTICAL SECTION Government-wide Information: Government-wide Expenses by Function (Table 1) .....................................................................................................68 Government-wide Revenues (Table 2) ...........................................................................................................................69 Fund Information: General Governmental Expenditures by Functions/Programs (Table 3) ..................................................................70 General Governmental Revenues by Source (Table 4)................................................................................................71 Expenditures of Federal Awards (Table 5) ....................................................................................................................72 Fuel Tax Rates (Table 6) ...................................................................................................................................................73 Highway User Revenue Fund Collections (Table 7)....................................................................................................74 Highway User Revenue Fund Distributions (Table 8).................................................................................................75 Highway User Revenue Fund Series Bond Coverage (Table 9).................................................................................76 Regional Area Road Fund Series Bond Coverage (Table 10) ....................................................................................77 Total Public Road Mileage by Highway Class and Governmental Ownership (Table 11) ...................................78 Acknowledgements ........................................................................................................................................................................79 2004 Comprehensive Annual Financial Report October 29, 2004 The Honorable Janet Napolitano, Governor of the State of Arizona, Members of the Legislature, and Citizens of the State of Arizona The Arizona Department of Transportation (Department) is pleased to submit the comprehensive annual financial report (CAFR) of the Department for the fiscal year ended June 30, 2004. The 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 organization 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 CAFR, for the fiscal year ended June 30, 2004, 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 Department's financial statements for the fiscal year ended June 30, 2004, 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 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 and account groups 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 control 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 and account groups. 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 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 four operating divisions supported by a Planning Division and a Transportation Services Group (TSG). The four operating divisions include: Intermodal Transportation Division, Motor Vehicle Division, Aeronautics Division and Public Transportation 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 22 ports-of-entry. 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 Public Transportation Division (PTD) is responsible for designing and managing certain rural transit programs to meet non-urbanized public, elderly and disabled transportation needs statewide. With the design and construction of the light rail program in Phoenix, the PTD is also responsible for ensuring safety and security throughout the implementation and construction. 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 that provides support to the Department's operating and other divisions. Overall, the Department employs approximately 4,500 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. ii 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. 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 The Arizona economy experienced a dramatic turnaround in fiscal year 2004 with an improved job market, higher than average population growth, increased tourism and continued low interest rates. The low interest rates generated record level new home sales along with strong demand for new motor vehicles. Higher fuel prices did not impact gas revenues due to the demand for gas being relatively inelastic. In addition, the stock market uncertainty and geopolitical issues, which plagued much of fiscal year 2003, subsided somewhat during fiscal year 2004. The Department’s two main non-federal funding sources, the Highway User Revenue Fund (HURF) and the Maricopa County Transportation Excise Tax rebounded during fiscal year 2004 posting strong growth over fiscal year 2003. HURF collections totaled $1.2 billion, an increase of 6.1 percent over fiscal year 2003 and 2.6 percent above the forecast. Maricopa County Transportation Excise Tax revenues amounted to $288.6 million, an increase of 7.4 percent over fiscal year 2003 and 4.2 percent above the forecast. The HURF and Maricopa County Transportation Excise Tax revenues recorded their highest year-over-year growth rates since fiscal years 1999 and 2000, respectively. Historically, the Arizona economy lags the rest of the nation during recessionary periods but outperforms most of the nation during economic growth periods. The results from fiscal year 2004 were very promising, however, Arizona has yet to regain some jobs lost in the manufacturing industry during the economic downturn. In order for Arizona to return to being one of the top states for employment, personal income and population growth, the manufacturing industry must experience growth not seen since before fiscal year 2001. The Department’s fiscal year 2005 HURF estimate totals $1.2 billion, an increase of 4.2 percent over the fiscal year 2004 estimate. The HURF average compound growth rate for fiscal years 1995 through 2004 was 4.4 percent. The distribution of HURF revenues in fiscal year 2005 is estimated to be as follows: State Highway Fund $475.5 million; Arizona cities and towns $358.5 million; Arizona counties $223.3 million; Department of Public Safety $52.2 million; Economic Strength Project Fund $1.0 million; and the Motor Vehicle Division for the registration compliance $.4 million. An additional $118.0 million will be diverted from the State Highway Fund share of HURF vehicle license tax revenues to the State General Fund. Proposition 400 in the November 2004 general election will extend Maricopa County’s half-cent transportation excise tax for another 20 years to help finance new freeways, improve other freeways, expand major arterial streets, add buses and bus routes, and expand the light-rail system that is being built by Phoenix, Mesa and Tempe. If Proposition 400 is approved by the voters, the Maricopa County Transportation Excise Tax collections in fiscal year 2005 are projected to reach $306.9 million, an increase of 6.3 percent over fiscal year 2004. Growth during the year is expected to be somewhat lower than in fiscal year 2004 due mainly to slower consumer spending brought on by higher interest rates. The Maricopa County Transportation Excise Tax average compound growth rate for fiscal years 1995 through 2004 was 6.8 percent. Planned Construction Activity In June 2004, the Transportation Board approved a $3.8 billion highway construction program as part of the Five-Year Transportation Facilities Construction Program for fiscal years 2005 through 2009. 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: $664.0 million for freeway and expressway construction in Maricopa County funded in large part from the Maricopa County Regional Area Road Fund; $2.0 billion for system improvements, which includes $242.0 million to advance freeway and iii expressway construction in Maricopa County; $764.0 million for system preservation; and $345.0 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," 138 miles of new freeways are planned to be opened by the end of 2007. Currently 103 miles have been opened to traffic and 17 more miles are under construction. As part of the Five-Year Transportation Facilities Construction Program, the Transportation Board also adopted a $685.4 million Five-Year Airport Development Program that includes 779 projects at general aviation and air carrier airports located throughout the State. Retirement Plan The Arizona State Retirement System Board administers the Arizona State Retirement Plan (Plan), a cost sharing multi-employer public employee retirement system, 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 2004, the Department earned over $9.9 million in interest from its investment program. On average, 99.8 percent of the Department's average cash balance was invested during the year earning an average yield of 1.1 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, 2004. 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, 2003. This was the fourteenth 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 comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. iv A Certificate of Achievement is valid for a period of one year only. We believe our current comprehensive annual financial report 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. 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 2004 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 R. Brisk Deputy Director John A. Bogert Chief of Staff Michael J. Ortega State Engineer Intermodal Transportation Division Stacey K. Stanton Assistant Director Motor Vehicle Division Dale J. Buskirk Assistant Director Transportation Planning Division Samuel Chavez, Jr. Acting Assistant Director Public Transportation Division Barclay L. Dick Assistant Director Aeronautics Division John E. McGee Chief Financial Officer Arizona State Transportation Board Counties Bill Jeffers, Chairman Dallas Gant, Vice Chairman Richard Hileman James W. Martin Joe Lane S. L. Schorr Delbert Householder District 5 (Navajo, Apache and Coconino Counties) District 1 (Maricopa County) District 6 (Yavapai, Yuma, Mohave, and LaPaz Counties) District 3 (Cochise, Greenlee and Santa Cruz Counties) District 1 (Maricopa County) District 2 (Pima County) District 4 (Gila, Graham and Pinal Counties) 2004 Comprehensive Annual Financial Report vii Term Expires 2005 2006 2006 2007 2008 2009 2010 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 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, 2004. 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 15 with the accompanying notes and required supplementary information (RSI). Financial Highlights Government-wide: • The net assets of the Department at the close of the fiscal year are $10.9 billion, compared to $10.3 billion for fiscal year 2003, an increase of 5.1 percent. Of this amount, $208.9 million represents unrestricted net assets and may be used to meet the Department’s ongoing obligations to citizens and creditors as compared to $212.6 million in 2003. • The Department’s investment in capital assets, net of related debt, is $10.2 billion, compared to $9.6 billion for fiscal year 2003, an increase 5.8 percent. The Department’s capital assets are $12.0 billion, compared to $11.4 billion for fiscal year 2003, an increase 5.2 percent. This increase is primarily attributable to the building of additional highways. • The Department’s non-current liabilities are $2.0 billion, which remained the same as the prior year due to the fact that debt acquisitions and retirements were virtually the same, $.7 billion. Fund Level: • As of the close of the fiscal year, the governmental funds of the Department reported combined ending fund balances of $434.0 million, as compared to $452.9 million in 2003, a 4.2 percent decrease over the prior fiscal year. The total reserved fund balance is $365.0 million; of this, $321.4 million (88.1 percent) is reserved for capital projects. Approximately $69.0 million (15.9 percent) is available for spending at the government’s discretion (unreserved fund balance) as compared to $65.1 million (14.4 percent) in 2003. At the end of the fiscal year, the unreserved fund balance for the General Fund was $48.6 million. • The proprietary funds reported net assets at year-end of $65.6 million, as compared to $65.1 million, an increase of $0.5 million over the prior year. This increase was due to not having any distributions to other state agencies during fiscal year 2004. Overview of the Financial Statements This discussion and analysis is 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. 2004 Comprehensive Annual Financial Report 3 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 • 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. • Other indicators of the Department’s financial health include the condition of its roads and highways (infrastructure), and economic trends affecting the Depart ment’s future tax revenues. The statement of activities focuses on both the gross and net cost of various activities (governmental and business-type); 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 15-16 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 Governmental Accounting Standards Board Statement 34 (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, comp ensated 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. 2004 Comprehensive Annual Financial Report 4 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Fund Financial Statements (Reporting the Department’s Major Funds) The fund financial statements begin on page 16 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 government-wide 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 17-24 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 25-27 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 pages 28 and 64. 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 29-51 of this report. 2004 Comprehensive Annual Financial Report 5 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Required Supplementary Information. In addition to the basic financial statements including accompanying notes, this section 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 52-59 of this report. 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 60-67 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 years ended June 30, 2004 and 2003. The Department’s combined net assets increased by $524.5 million over the course of this fiscal year’s operations, an increase of 5.1 percent. The net assets of the governmental activities increased by $524.0 million or 5.1 percent and business-type activities increased by $0.5 million or .7 percent. The following table reflects the condensed Statement of Net Assets as of June 30: Governmental Activities 2004 2003 Business-type Activities 2004 2003 Total 2004 2003 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 $ 826,944,375 12,032,459,953 12,859,404,328 $ 851,633,105 11,438,563,961 12,290,197,066 $211,482,635 810,011 212,292,646 $220,185,188 1,125,754 221,310,942 $ 1,038,427,010 12,033,269,964 13,071,696,974 $ 1,071,818,293 11,439,689,715 12,511,508,008 210,502,363 1,852,874,536 2,063,376,899 200,791,918 1,817,359,577 2,018,151,495 4,124,920 142,565,681 146,690,601 4,484,163 151,696,446 156,180,609 214,627,283 1,995,440,217 2,210,067,500 205,276,081 1,969,056,023 2,174,332,104 10,179,585,417 408,410,333 208,031,679 $10,796,027,429 9,621,204,384 439,045,246 211,795,941 $10,272,045,571 810,011 63,899,875 892,159 $ 65,602,045 1,125,754 63,224,779 779,800 $ 65,130,333 10,180,395,428 472,310,208 208,923,838 $10,861,629,474 9,622,330,138 502,270,025 212,575,741 $10,337,175,904 The total assets of the Department were $13.1 billion, while total liabilities were $2.2 billion, resulting in a net assets balance of $10.9 billion. By far, the largest portion of the Department’s net assets, $10.2 billion (93.7 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, 2004, 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. 2004 Comprehensive Annual Financial Report 6 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 There was an increase of $.5 million in net assets for the Department’s business-type activities. The bulk of this increase was due to a reduction in interest on notes payable, which was partially offset by a decrease in interest on investment of the Highway Expansion and Extension Loan Program Fund. 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, compared to the prior year: Governmental Activities 2004 2003 Business-type Activities 2004 2003 Total 2004 2003 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 Non-capital, including asset preservation 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 Change in net assets before accounting change Cumulative effect of accounting change Change in net assets Net assets - July 1 Net assets - June 30 $ 118,225,054 44,007,905 418,174,005 $ 117,412,098 34,160,325 453,757,521 $12,799,883 - $ 13,477,401 - 288,599,800 268,720,901 - - 288,599,800 268,720,901 914,657,233 698,406,158 6,320,722 8,352,046 24,774,776 2,521,517,699 832,492,117 691,003,491 6,026,213 19,802,902 21,303,653 2,444,679,221 1,587,588 504,612 14,892,083 2,440,375 425,219 16,342,995 914,657,233 698,406,158 6,320,722 9,939,634 25,279,388 2,536,409,782 832,492,117 691,003,491 6,026,213 22,243,277 21,728,872 2,461,022,216 57,702,625 7,512,258 48,797,165 95,641,623 86,845,369 9,814,863 378,788,704 52,533,318 3,848,091 45,643,844 96,352,820 83,090,207 8,460,021 277,974,738 - - 57,702,625 7,512,258 48,797,165 95,641,623 86,845,369 9,814,863 378,788,704 52,533,318 3,848,091 45,643,844 96,352,820 83,090,207 8,460,021 277,974,738 1,022,767,761 161,029,210 39,205,377 89,430,886 - 957,056,532 192,536,424 30,235,385 84,083,940 - 10,006,670 11,118,003 1,022,767,761 161,029,210 39,205,377 89,430,886 10,006,670 957,056,532 192,536,424 30,235,385 84,083,940 11,118,003 1,997,535,841 1,831,815,320 4,413,701 14,420,371 26,348,539 37,466,542 4,413,701 2,011,956,212 26,348,539 1,869,281,862 523,981,858 - 612,863,901 40,398,858 471,712 - 524,453,570 - 591,740,354 40,398,858 523,981,858 10,272,045,571 $10,796,027,429 653,262,759 9,618,782,812 $10,272,045,571 471,712 65,130,333 $65,602,045 <21,123,547> 524,453,570 86,253,880 10,337,175,904 $ 65,130,333 $10,861,629,474 632,139,212 9,705,036,692 $10,337,175,904 <21,123,547> - 2004 Comprehensive Annual Financial Report 7 $ 131,024,937 44,007,905 418,174,005 $ 130,889,499 34,160,325 453,757,521 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Governmental Activities: The following chart depicts revenues of the governmental activities for the fiscal year ended June 30, 2004: Revenues - Governmental Activities Interest on investments 0.3% Fuel and motor carrier taxes and fees 27.7% Other revenues including Transportation excise taxes 11.5% flight property taxes 1.2% Charges for services 4.7% Capital grants and contributions 16.6% Vehicle, registration, title, license and related taxes 36.3% Operating grants and contributions 1.7% $2.3 billion (or 92.0 percent) of the Department’s revenues are from the following four revenue sources: • Vehicle, registration, title, license and related taxes (VLT) represent the Department’s largest revenue source of $914.6 million (36.3 percent). • Fuel and motor carrier taxes and fees (HURF) represent the Department’s second largest revenue source of $698.4 million (27.7 percent). • Capital grants and contributions represent the Department’s third largest revenue source of $418.2 million (16.6 percent). • Transportation excise taxes (RARF) represent the Department’s fourth largest revenue source of $288.6 million (11.5 percent). The fiscal year 2004 collections for both VLT and HURF recorded the highest year-over-year growth since fiscal year 1999 due mainly to the improved state and national economies and population growth. The VLT growth was primarily attributable to a significant increase in registered vehicles (236,000) over fiscal year 2003. The HURF growth in collections was broad based, posting gains over fiscal year 2003 for gas tax, use fuel tax and motor carrier taxes because of the increase in the population, which tends to follow job growth. The fiscal year 2004 RARF revenues included a one-time $.6 million from the tax amnesty program for previous years’ activity and an improved Maricopa County job market and tourism activity, population growth and low interest rates. Capital grants and contributions decreased by $35.6 million from the previous fiscal year because of a reduction of projects with federal funding. 2004 Comprehensive Annual Financial Report 8 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 The following chart depicts expenses of the governmental activities for the fiscal year ended June 30, 2004: Expenses - Governmental Activities Distributions to Arizona counties and cities 51.1% Distributions to other state agencies 8.1% Intergovernmental 2.0% Interest on long-term debt 4.5% Administration 2.9% Highway 2.4% Non-capital, including asset preservation 19.0% Highway Maintenance 4.8% Other * 0.8% Motor Vehicle 4.4% *Other includes expenditures for Aeronautics and Other $1.6 billion (or 78.2 percent) of the Department’s expenditures were for the following: • Distributions to Arizona counties and cities $1,022.8 million (51.1 percent). • Non-capital, including asset preservation $378.8 million (19.0 percent). • Distributions to other state agencies $161.0 million (8.1 percent). 2004 Comprehensive Annual Financial Report 9 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Business-type Activities: Net assets for business-type activities increased by $.5 million in fiscal year 2004. Total revenues were $14.9 million, charges for services represented 86.0 percent and interest on investments 10.7 percent. The total expenses for business-type activities were $14.4 million. Factors contributing to these results included: • The Arizona Highways Magazine had a deficit of $.2 million. This deficit is due to a continued decline in magazine sales as a result of the downturn in the economy. • The Highway Expansion and Extension Loan Program had an increase in revenues of $.7 million. The bulk of this increase was due to a reduction in interest on notes payable, which was partially offset by a decrease in interest on investment of the Highway Expansion and Extension Loan Program Fund. 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 $434.0 million, a decrease of $18.9 million over the previous fiscal year. This decrease in primarily attributed to an increase in capital project expenditures for highway construction. Of this balance, $69.0 million or 15.9 percent constitutes the unreserved fund balance, which was available for spending for the general purposes of the Department. The remaining fund balance of $365.0 million, or 84.1 percent, was reserved for the following: 1) $5.0 million for inventories, 2) $20.0 million to liquidate an interfund receivable to the HELP, 3) $18.6 million to pay debt service, and 4) $321.4 million to pay for capital projects. The General Fund is the primary operating fund of the Department. At the end of the current fiscal year, the unreserved fund balance of the General Fund was $48.6 million and the reserved fund balance was $155.8 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 5.5 percent of total General Fund expenditures, while total fund balance represents 23.2 percent of the same amount. The Maricopa Regional Area Road Construction Fund (MRF) is a major special revenue fund that receives Maricopa County Transportation Excise Tax monies that are used for construction of certain state highways within Maricopa County. Total revenues collected in fiscal year 2004 were $315.6 million; transportation excise revenue of $288.6 million (or 91.4 percent) was the bulk of the revenue. Of this revenue, $222.1 million (or 77 percent) was used to pay the debt service for Transportation Excise Tax Revenue Bonds. The Debt Service Fund is a major special revenue fund that is used for the accumulation of resources for, and the payment of, general long-term debt principal and interest of the governmental funds. The other financing sources of $374.8 million were transferred in fro m the General Fund ($102.7 million), the MRF fund ($222.1 million) and Grant Anticipation Notes Fund ($50.0 million), and were used to pay the debt service payment of $374.6 (principal $284.8 million, interest $89.5 million and bond issuance cost of $.3 million) during the fiscal year. The remaining fund balance of $18.6 million is restricted for future debt service payments. The Capital Projects Fund is a major special revenue fund that is used to account for financial resources used for the acquisition or construction of major capital facilities of the governmental funds. During the fiscal year, the Department expenditures were $358.1 million. Capital outlay expenditure of $318.4 million (88.9 percent) accounted for the majority of the expenditures. This expenditure for the acquisition and construction of new highways was converted to capital assets on the government wide statements. The fund balance decreased by $71.9 million (or 45 percent) during this fiscal year. 2004 Comprehensive Annual Financial Report 10 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Capital Assets and Debt Administration Capital Assets (See Note 5A to the financial statements for additional information): The Department’s investment in capital assets for its governmental and business-type activities as of June 30, 2004, amounts to $12.0 billion (net of accumulated depreciation), a $.6 billion increase over the previous fiscal year. Governmental Activities 2004 2003 Land Buildings and improvements Improvements other than buildings Mobile fleet and aircraft Machinery and equipment Infrastructure Construction in progress Total $ 1,858,113,828 93,975,769 32,151,069 38,477,108 16,437,987 8,591,370,633 1,401,933,559 $12,032,459,953 $ 1,839,172,464 96,966,010 31,619,008 37,739,350 15,757,141 7,564,772,978 1,852,537,010 $11,438,563,961 Business-type Activities 2004 2003 $ 7,900 277,968 524,143 $ 810,011 $ 7,900 311,784 806,070 $ 1,125,754 Total 2004 2003 $ 1,858,121,728 94,253,737 32,151,069 38,477,108 16,962,130 8,591,370,633 1,401,933,559 $12,033,269,964 $ 1,839,180,364 97,277,794 31,619,008 37,739,350 16,563,211 7,564,772,978 1,852,537,010 $11,439,689,715 As provided by GAAP, the Department has elected to record its infrastructure assets using the modified approach. Assets accounted for under the modified approach include 6,912 center lane miles (18,391 travel lane miles) and 4,488 bridges (deck area of 41.2 million square feet) that the Department is responsible for maintaining. The Five Year Transportation Facilities Construction Program (Program) is a dynamic instrument and adjustments are made to the annual plans based on the needs of the Department to maintain the condition level of the roads and bridges at a level equal to, or greater than, the goals established by the Department. In addition, not only are adjustments made during the life of the Program, circumstances may require that refinements to the individual components of the Program be made during the fiscal year. In comparing Estimated to Actual Expenditures, significant variances can occur. These variances are primarily due to the methodology used in the preparation of the Program. In this Program, the Estimated Expenditures for the current year are based on “programmed” projects which may or may not be spent in the current year of the Program. “Programmed” expenditures consist of those items that are planned for the future and contracts have not yet been awarded. Furthermore, the Actual Expenditures will include projects that were “programmed” for a prior year’s Estimated Expenditures but which did not occur, or were not completed, in the prior year. The 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 from the Transportation Material Technicians indicated that an overall rating of 3.8 was achieved for fiscal year 2004. 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 2004, a CRI of 93.8 percent was obtained. 2004 Comprehensive Annual Financial Report 11 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 In addition to many smaller projects, each of the following major highway construction projects in excess of $20 million were started during fiscal year 2004: Project Description Construction of new roadway on State Route Loop 202, from Elliot Road to Power Road in Maricopa County. Widening US 60 and constructing part of the State Route Loop 202 urban interchange, starting at Sossaman Road and ending west of Ellsworth Road in Maricopa County. Construction of new roadway on State Route Loop 202, from Elliot Road to Baseline Road in Maricopa County. Reconstruction of roadway to a 4 lane divided highway on the Burro Creek Section of US 93 in Mohave County. Construction of new roadway on State Route 188, from Resort Road to Devore Wash in Gila County. Construction of new roadway on State Route Loop 202, west of Higlely Road to Power Road in Maricopa County. Contract Start Contract Amount Current Year Expenditures 03/23/2004 $ 54,113,671 $ 7,445,428 10/20/2003 $ 40,951,761 $ 31,461,606 11/24/2003 $ 39,462,936 $ 18,703,438 12/23/2003 $ 25,934,220 $ 5,055,416 09/05/2003 01/20/2004 $ 25,643,043 $ 22,855,184 $ 11,218,535 $ 4,735,645 In addition to many smaller projects, the following major highway construction projects had expenditures in excess of $15 million in fiscal year 2004: Project Description Construction of HOV lanes, roadway and drainage improvements on State Route 51, from Interstate 10 to Shea Boulevard in Maricopa County. Construction of a bridge to by-pass the Hoover Dam on Interstate 93 in Mohave County. Construction of new roadway at the interchange of State Route Loop 202 and Interstate 60 in Maricopa County. Construction of new roadway on State Route Loop 202, from Gilbert Road to Higley Road in Maricopa County. Construction of the roadway at the interchange of Interstate 10 and Interstate 19 in Pima County. Construction of new roadway on State Route Loop 202, at Price Road in Maricopa County. Construction of new roadway on State Route Loop 202, from Elliot Road to Baseline Road in Maricopa County. Construction on Interstate 95 from McCulloch Boulevard to London Bridge Road in Mohave County. Construction of new roadway on State Route Loop 202, from Dobson Road to Arizona Avenue in Maricopa County. Construction of two overpasses on Grand Avenue (US 60): One at 43rd Ave and Camelback Road and another at 51st Avenue and Bethany Home Road in Maricopa County. Construction on State Route 260 in the vicinity of Camp Verde in Yavapai County. Construction of new roadway on State Route Loop 202, from Price Road to Arizona Avenue in Maricopa County. 2004 Comprehensive Annual Financial Report 12 Project Expenditures $ 74,689,901 $ 50,041,051 $ 36,479,174 $ 30,619,314 $ 23,425,008 $ 22,086,322 $ 20,469,699 $ 19,193,542 $ 17,416,484 $ 16,075,605 $ 15,166,445 $ 15,137,603 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 Non-Current Liabilities (See Note 5 G to the financial statements for additional information): Governmental Activities Highway revenue bonds $1,017,360,000 Transportation excise tax revenue bonds Grant anticipation notes Premium on bonds Compensated absences 289,000,000 308,585,000 60,480,591 11,023,013 Capital leases Notes payable Total governmental activities 1,120,965 165,304,967 1,852,874,536 Business-type Activities Compensated absences Notes payable Total Business-type Activities 151,215 142,414,466 142,565,681 Total Non-Current Liabilities $1,995,440,217 The bonds have been sold in 34 separate issues between 1980 and 2004. All bonds outstanding as of June 30, 2004, are scheduled to mature on various dates , but not later than July 1, 2023. The bonds are obligations of the State Transportation Board and are not obligations of the State of Arizona. Of the $5.1 billion total in bonds issued between 1980 and 2004, $1.3 billion, or approximately 25 percent, have been refunding issues to lower debt service costs. These efforts have resulted in cumulative debt service savings of $74.6 million in current dollars and $54.7 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 non-negotiable Board Funding Obligations (BFOs) for purchase by the Arizona State Treasurer. The law restricts the Transportation Board to issuing $100 million in each year of 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. In fiscal year 2004, the Department issued Highway Revenue Bonds totaling $250,560,000 to (i) finance portions of the Transportation Board’s Five-Year Transportation Facilities Construction Program, (ii) pay costs of issuing the Bonds, (iii) pay interest on any bonds issued for highway purposes, and (iv) refund portions of the Board’s outstanding Senior Series 2004 Comprehensive Annual Financial Report 13 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2004 and 2003 1993A/B Bonds in the aggregate principal amount of $114,745,000. The Department also issued Grant Anticipation Notes totaling $199,955,000 to (i) pay costs of the projects (as specified), (ii) pay costs of issuing the Notes, (iii) pay interest on the Notes, and (iv) refund the 2000A Series Notes in the aggregate principal amount of $26,255,000. 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.azdot.gov/ABOUT/fms/cafr/cindex.htm. 2004 Comprehensive Annual Financial Report 14 Exhibit 1 Arizona Department of Transportation Statement of Net Assets June 30, 2004 Governmental Activities ASSETS Unrestricted cash on deposit with the State Treasurer $ 165,144,097 Business-type Activities $ Total 1,636,288 $ 166,780,385 Receivables: Notes and loans Subscriptions, net of allowance for doubtful accounts Accrued interest Taxes and fees 6,858,974 1,495,363 60,208,509 130,894,134 477,725 139,831 - 137,753,108 477,725 1,635,194 60,208,509 Other, net of allowance for doubtful accounts Due from U.S. Government for reimbursable construction costs 19,850,055 47,342,880 64,054 - 19,914,109 47,342,880 Due from other state agencies Internal balances Inventories Prepaid items Deferred charges 40,552 17,113,349 7,496,927 5,078,148 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 386,147 <17,113,349> 2,273,935 685,189 - 426,699 9,770,862 685,189 5,078,148 496,315,521 11,851,418,020 92,038,681 7,900 588,354,202 11,851,425,920 181,041,933 12,859,404,328 802,111 212,292,646 181,844,044 13,071,696,974 LIABILITIES Accounts payable and other current liabilities Accrued payroll and other accrued expenses 10,415,733 6,927,814 128,690 93,321 10,544,423 7,021,135 Contracts and retainage payable 82,857,579 - 82,857,579 103,371,150 6,930,087 - 3,902,909 103,371,150 6,930,087 3,902,909 358,358,597 1,494,515,939 2,063,376,899 151,215 142,414,466 146,690,601 358,509,812 1,636,930,405 2,210,067,500 10,179,585,417 810,011 10,180,395,428 19,696,816 63,899,875 - 63,899,875 19,696,816 388,713,517 208,031,679 10,796,027,429 892,159 65,602,045 388,713,517 208,923,838 10,861,629,474 Due to Arizona counties and cities Due to other state agencies Deferred revenues (Note 5C) Non-current liabilities (Note 5G): 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. 2004 Comprehensive Annual Financial Report 15 $ Exhibit 2 Arizona Department of Transportation Statement of Activities For the fiscal year ended June 30, 2004 Program Revenues Expenses Functions/Programs Governmental Activities: Administration Aeronautics Highway Highway Maintenance Motor Vehicle Other Non-capital, including asset preservation 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 $ 57,702,625 7,512,258 48,797,165 95,641,623 86,845,369 9,814,863 378,788,704 $ Charges for Services Operating Grants and Contributions Capital Grants and Contributions 901,569 108,346,413 4,847,996 - $ $ 479,940 7,204,451 - 418,174,005 - Net Revenues $ <57,702,625> <6,130,749> 376,581,291 <95,641,623> 21,501,044 <4,966,867> <378,788,704> 1,022,767,761 161,029,210 39,205,377 89,430,886 1,997,535,841 4,129,076 118,225,054 36,323,514 44,007,905 418,174,005 <1,022,767,761> <161,029,210> 1,247,213 <89,430,886> <1,417,128,877> 10,006,670 9,270,532 - - <736,138> 4,413,701 14,420,371 $ 2,011,956,212 3,529,351 12,799,883 $ 131,024,937 44,007,905 $ 418,174,005 <884,350> <1,620,488> $ <1,418,749,365> Business-type Activities Total $ Governmental Activities Net General revenues: Transportation excise taxes Vehicle, registration, title, license and related taxes Fuel and motor carrier taxes Flight property taxes Interest on investments Other Total general revenues $ <1,417,128,877> $ <1,620,488> $ <1,418,749,365> 288,599,800 914,657,233 698,406,158 6,320,722 8,352,046 24,774,776 1,941,110,735 1,587,588 504,612 2,092,200 288,599,800 914,657,233 698,406,158 6,320,722 9,939,634 25,279,388 1,943,202,935 Change in net assets Net assets - July 1 Net assets - June 30 523,981,858 10,272,045,571 $ 10,796,027,429 471,712 65,130,333 $ 65,602,045 524,453,570 10,337,175,904 $ 10,861,629,474 The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 16 Arizona Department of Transportation Balance Sheet Governmental Funds June 30, 2004 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 Arizona counties and cities 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 $ 143,454,834 Special Revenue Funds Motor Vehicle Division Clearing Fund Maricopa Regional Area Road Construction Fund $ - $ - Highway User Revenue Fund $ Debt Service Fund - $ - 572,383 107,390,547 558,374 10,838,285 1,791,012 3,566,620 18,998,016 - 120,856 16,535,881 41,210,493 - 258,737 - $ 39,189,835 4,994,499 130,760,690 437,759,447 $ 883 113,829,987 119,188,502 $ 21,848,830 40,846,846 $ 114,427,319 172,294,549 $ 18,483,041 18,741,778 $ 933,036 $ 30 $ 7,508,624 $ - $ 149,981 $ 8,213,808 55,179,276 2,886,157 94,957 21,266,909 - 16,737,217 87,008,747 - 369,039 502,228 558,374 164,743,427 233,385,345 1,791,012 23,152,908 14,431,134 1,306,887 862,984 40,846,846 85,285,802 172,294,549 149,981 4,994,499 20,000,000 130,760,690 96,035,594 - - 18,591,797 - 48,618,913 204,374,102 437,759,447 96,035,594 119,188,502 40,846,846 172,294,549 18,591,797 18,741,778 $ The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 17 $ $ $ Exhibit 3 Total Non-Major Governmental Funds (See Exhibit 9) Capital Projects Fund $ - $ 19,705,975 Total Governmental Funds $ 163,160,809 431,148 - 111,129 109,624 4,509,588 5,445,150 1,494,253 124,036,052 60,208,509 6,858,974 19,850,055 $ 87,551,168 87,982,316 $ 8,152,162 40,552 9,414,486 47,488,666 $ 47,342,880 40,552 4,994,499 496,315,521 924,302,104 $ 231,644 $ 26,606 $ 8,849,921 $ - 142,337 6,411,394 290,088 8,451,102 82,857,579 106,922,209 231,644 3,654,214 5,254,161 4,509,588 20,288,388 103,371,150 6,930,087 1,365,212 6,858,974 164,743,427 490,349,661 87,750,672 84 6,853,852 4,994,499 20,000,000 18,591,881 321,400,808 87,750,672 87,982,316 20,346,342 27,200,278 47,488,666 48,618,913 20,346,342 433,952,443 924,302,104 $ $ 2004 Comprehensive Annual Financial Report 18 Exhibit 3.1 Arizona Department of Transportation Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets June 30, 2004 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 4 B). 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 4 B). Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds (Note 4 B). Net assets of governmental activities (Exhibit 1) The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 19 $ 433,952,443 11,993,122,494 42,132,361 6,858,974 <1,680,038,843> $ 10,796,027,429 Arizona Department of Transportation Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the fiscal year ended June 30, 2004 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 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 Aeronautics Highway Highway maintenance Motor Vehicle 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 - $288,599,800 253,537,275 319,174,189 - 212,524,327 275,932,476 513,432,539 101,703,892 336,255,844 6,146,255 21,000,577 933,196 1,209,937 3,531,339 3,699,178 1,260,090 1,406,637 2,363,925 950,518,442 344,638 12,882,046 411,032 597,207 12,324,217 375,103 82,654 315,616,697 488,456,803 411,343 1,978,520 617,526,294 56,483,530 46,052,848 95,144,111 81,431,794 2,752,708 51,565 - - 281,864,991 51,565 - - The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 20 $ - $ - Exhibit 4 Debt Service Fund $ Total Non-Major Governmental Funds (See Exhibit 10) Capital Projects Fund - $ - $ Total Governmental Funds - $ 288,599,800 - - 43,509,505 1,595,601 1,023,003,646 698,406,158 1,914,702 1,914,702 1,771,231 1,771,231 84,619,354 4,129,076 259,142 107,172 6,320,722 901,569 735,634 142,177,775 421,219,836 6,146,255 38,011,699 933,196 1,880,111 8,332,994 6,320,722 901,569 16,023,395 1,635,193 1,406,637 5,160,733 2,517,981,944 134,990 - 7,228,392 39,205,377 3,489,048 143 56,483,530 7,228,392 85,258,225 95,144,111 84,920,842 2,939,406 134,990 - 49,922,960 331,974,506 (continued) 2004 Comprehensive Annual Financial Report 21 Arizona Department of Transportation Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the fiscal year ended June 30, 2004 General Fund (State Highway Fund) Distributions to Arizona counties and cities Distributions to other state agencies Interest on notes payable Debt service: Principal Interest Bond issuance costs Non-capital, including asset preservation Capital outlay Total expenditures $ 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 Fund balances - July 1 Fund balances - June 30 30,883,181 2,833,830 Maricopa Regional Area Road Construction Fund $ Special Revenue Funds Motor Vehicle Highway Division User Clearing Revenue Fund Fund 7,587,791 - $ 447,869,141 40,587,662 - $ 559,430,374 58,095,920 - 340,589,140 223,933,759 880,104,901 57,481,979 65,121,335 488,456,803 617,526,294 70,413,541 250,495,362 - - - - - - 57,069,617 17,179,009 <102,692,089> <222,099,630> <4,051,130> <16,308,166> <49,673,602> <221,228,787> $ 20,739,939 183,634,163 204,374,102 29,266,575 66,769,019 $ 96,035,594 The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 22 $ $ Exhibit 4 Debt Service Fund $ Total Non-Major Governmental Funds (See Exhibit 10) Capital Projects Fund - $ - $ Total Governmental Funds 7,880,455 30,462,447 - $ 1,022,767,761 160,029,210 2,833,830 284,815,000 89,537,490 301,911 374,789,391 2,244,013 37,492,167 318,403,441 358,139,621 706,222 88,972,084 284,815,000 89,537,490 2,545,924 378,787,529 599,819,179 2,873,110,429 <372,874,689> <356,368,390> 53,205,691 <355,128,485> 374,851,569 272,577 130,573,262 13,189,356 <145,965,284> 372,921,480 <53,694,253> 319,669,161 18,457,362 284,432,270 <50,059,850> <195,077> <50,254,927> 449,100,195 <374,851,569> <74,248,626> 319,941,738 130,573,262 31,646,718 <145,965,284> 336,196,434 <71,936,120> 159,686,792 $ 87,750,672 $ 2,950,764 24,249,514 27,200,278 46,791 18,545,006 $ 18,591,797 <18,932,051> 452,884,494 $ 433,952,443 2004 Comprehensive Annual Financial Report 23 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, 2004 Net change in fund balance - total governmental funds (Exhibit 4) $ <18,932,051> 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 4 C). 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 4 C). 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 4 C). 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 4 C). 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 4 C). Change in net assets of governmental activities (Exhibit 2) The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 24 591,587,118 <482,161,718> 433,425,862 1,397,352 <1,334,705> $ 523,981,858 Exhibit 5 Arizona Department of Transportation Statement of Net Assets Proprietary Funds June 30, 2004 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 92,038,681 Arizona Highways Magazine Fund $ 1,636,288 - Total $ 1,636,288 92,038,681 Governmental Activities Internal Service Fund $ 1,983,288 - 135,578 47,349,662 - 477,725 4,253 64,054 477,725 139,831 47,349,662 64,054 1,110 - 2,886,157 386,147 142,796,225 2,273,935 506,189 4,962,444 2,886,157 386,147 2,273,935 506,189 147,758,669 2,502,428 4,486,826 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 83,544,472 - 179,000 7,900 179,000 83,544,472 7,900 - 83,544,472 226,340,697 802,111 989,011 5,951,455 802,111 84,533,483 232,292,152 39,337,459 39,337,459 43,824,285 LIABILITIES Current liabilities: Accounts payable Accrued payroll and other accrued expenses Compensated absences Deferred revenue Notes payable Total current liabilities 6,711 19,645 26,356 128,690 86,610 131,570 3,902,909 4,249,779 128,690 93,321 151,215 3,902,909 4,276,135 200,600 356,486 573,298 561,540 1,691,924 20,000,000 142,414,466 162,414,466 162,440,822 4,249,779 20,000,000 142,414,466 162,414,466 166,690,601 1,691,924 63,899,875 63,899,875 810,011 891,665 1,701,676 810,011 63,899,875 891,665 65,601,551 38,775,919 3,356,442 42,132,361 Noncurrent liabilities: Interfund payables Notes payable Total noncurrent liabilities Total liabilities 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. 2004 Comprehensive Annual Financial Report 25 $ $ 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, 2004 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Operating revenues: Sales and charges for services (net of write off $51,721) 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 3,529,351 3,529,351 $ 214,707 1,464 98,560 711 4,097,236 1,023 4,413,701 Operating gain 9,270,532 504,612 9,775,144 $ 32,298,123 990,176 33,288,299 4,219,431 102,101 3,037,831 1,533,919 103,962 51,904 461,436 12,834 4,097,236 320,161 479,526 14,420,341 5,708,819 5,850,829 10,948,300 358,483 2,970 447,059 605,300 87,217 63,505 5,967,349 868,508 30,908,339 <231,496> <1,115,846> 2,379,960 28,142 <1,690> 26,452 1,587,588 <1,690> 1,585,898 19,052 <1,000,000> <980,948> 1,559,446 1,559,446 675,096 63,224,779 $ 63,899,875 $ $ <205,044> 470,052 1,906,720 65,131,499 1,701,676 $ 65,601,551 The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 26 Total Governmental Activities Internal Service Fund 9,270,532 3,529,351 504,612 13,304,495 4,219,431 102,101 2,823,124 1,533,919 102,498 51,904 362,876 12,123 320,161 478,503 10,006,640 <884,350> Non-operating revenues : Interest on investments Distributions to other state agencies 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 1,399,012 40,733,349 $ 42,132,361 Exhibit 7 Arizona Department of Transportation Statement of Cash Flows Proprietary Funds For the fiscal year ended June 30, 2004 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Arizona Highways Magazine Fund Governmental Activities Internal Service Fund Total 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 $ 1,907,458 $ 8,872,611 $ 10,780,069 $ 65,868,960 65,868,960 27,450,127 6,064,334 6,064,334 4,847,996 <34,350> <6,473,562> <6,507,912> <13,985,963> <212,616> <2,851,015> <3,063,631> <10,933,069> <60,944,511> <60,944,511> <18,293,509> <18,293,509> <1,023> 507,204 506,181 1,000,077 <5,645,257> 55,238 <5,590,019> 8,379,168 Cash flows from noncapital financing activities: Distribution to other state agencies Net cash noncapital financing activities - Cash flows from capital and related financing activities: Proceeds from sale of capital assets Acquisition of capital assets Net cash used in capital and related financing activities - Cash flows from investing activities: Interest on investments Net cash provided by investing activities 1,673,770 1,673,770 Net increase in cash Cash - July 1 Cash - June 30 - <6,108> <6,108> 28,142 28,142 <3,971,487> 77,272 96,010,168 1,559,016 $ 92,038,681 $ 1,636,288 Reconciliation of operating income to net cash provided by operating activities: Operating gain Adjustment to reconcile operating gain 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 Arizona counties and cities $ <6,108> <6,108> 1,701,912 1,701,912 <1,000,000> <1,000,000> 1,003,458 <9,323,675> <8,320,217> 19,052 19,052 <3,894,215> <921,997> 97,569,184 2,905,285 $ 93,674,969 $ 1,983,288 <884,350> $ <231,496> $ <1,115,846> $ 2,379,960 5,988,782 <1,616,242> <5,651> Inventories Prepaid items Accounts payable Accrued payroll and other accrued expenses Compensated absence Notes payable Deferred revenue Net cash provided by operating activities - 320,161 <55,107> - 320,161 5,933,675 <1,616,242> <5,651> 5,967,349 9,901 - 385,112 385,112 <130,445> <1,220> <1,220> 5,901 5,901 49,955 1,844 <26,766> <24,922> 106,762 960 <1,125> <165> <4,314> <9,130,600> <9,130,600> <340,222> <340,222> $ <5,645,257> $ 55,238 $ <5,590,019> $ 8,379,168 The notes to the financial statements are an integral part of this statement. 2004 Comprehensive Annual Financial Report 27 Exhibit 8 Arizona Department of Transportation Statement of Net Assets Agency Funds June 30, 2004 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 $ $ 195 195 $ 223,385 $ 223,385 $ 195 195 $ $ The notes to the financial statements are an integral part of this statement. 2004 Comprehsive Annual Financial Report 28 223,385 $ 223,385 Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2004 Index Notes to the Financial Statements Page Note 1 – Summary of Significant Accounting Policies ...........................................................................................................30 A – Reporting Entity ............................................................................................................................................................30 B – Government-wide and Fund Financial Statements..................................................................................................30 C – Measurement Focus, Basis of Accounting, and Financial Statement Presentation ...........................................31 D – Assets, Liabilities, and Net Assets/Fund Balance ...................................................................................................33 E – Revenues and Expenditures/Expenses.......................................................................................................................36 F – Interfund Activity and Balances..................................................................................................................................36 Note 2 – Funds by Classification .................................................................................................................................................37 Note 3 – Budgeting, Budgetary Control, and Legal Compliance...........................................................................................37 Note 4 – Accounting Pronouncements and Reconciliation of Government-wide and Fund Financial Statements.......38 A – New Accounting Pronouncements.............................................................................................................................38 B – Explanations of Reconciling Items of the Balance Sheet of Governmental Fund to the Statement of Net Assets...........................................................................................................................................39 C – Explanations of Reconciling Items of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Fund to Statement of Activities ...............................................39 Note 5 – Detailed Notes on all Funds..........................................................................................................................................41 A – Capital Assets ................................................................................................................................................................41 B – Construction Commitments.........................................................................................................................................42 C – Deferred Revenues........................................................................................................................................................42 D – Securities Held in Lieu of Retention..........................................................................................................................43 E – Interfund Receivables, Payables, and Transfers.......................................................................................................43 F – Leases...............................................................................................................................................................................44 G – Non-Current Liabilities ................................................................................................................................................45 H – Short-term Debt.............................................................................................................................................................49 I – Fund Balances .................................................................................................................................................................50 Note 6 – Other Information...........................................................................................................................................................50 A – Subsequent Events ........................................................................................................................................................50 B – Contingent Liabilities ...................................................................................................................................................50 C – Retirement Plan .............................................................................................................................................................51 2004 Comprehensive Annual Financial Report 29 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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 2004 Comprehensive Annual Financial Report 30 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. 2004 Comprehensive Annual Financial Report 31 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. 2004 Comprehensive Annual Financial Report 32 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. The Department has restricted cash for payment of capital projects for Maricopa and Pima counties, for future debt service payments, and for loan repayment to the HELP. 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 recoverable insurance claims net of allowance for doubtful accounts. The subscriptions receivable allowance for doubtful accounts is equal to outstanding subscription payments past due more than 90 days. 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 2004 Comprehensive Annual Financial Report 33 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. 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 Expansion and Extension 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. The Department has restricted cash for payment of capital projects for Maricopa and Pima counties, for future debt service payments, and for loan repayment to the HELP. 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 as sets 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. 2004 Comprehensive Annual Financial Report 34 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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 subscriptions’ revenue for the Arizona Highways Magazine. Unearned subscription revenue is recorded when subscription orders are received and is amortized as revenue 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 uncovered 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. 2004 Comprehensive Annual Financial Report 35 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. 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 gain 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. 2004 Comprehensive Annual Financial Report 36 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. 2004 Comprehensive Annual Financial Report 37 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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 PRONOUNCEMENTS AND RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. New Accounting Pronouncements Statement No. 40, Deposit and Investment Risk Disclosures – an amendment to GASB Statement No. 3 In March 2003, GASB issued 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. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries In November 2003, GASB issued Statement No. 42. This Statement establishes accounting and financial reporting standards for impairment of capital assets. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. This Statement also clarified and establishes accounting requirements for insurance recoveries. The provisions of this Statement are effective for fiscal periods beginning after December 15, 2004. Earlier application is encouraged. The Department has adopted this statement. Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other than Pension Plans, issued April 2004. Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefit Plans Other than Pensions, issued June 2004. Statement Nos. 43 and 45 relate to postemployment benefits. The Department does not offer such benefits, consequently, these Statements are not applicable to the Department. Statement No. 44, Economic Condition Reporting: The Statistical Section, an amendment of NCGA Statement 1, issued May 2004. This Statement amends the portions of NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, that guide the preparation of the statistical section. The statistical section presents detailed information, typically in ten-year trends, that assists users in utilizing the basic financial statements, notes to basic financial statements, and required supplementary information to assess the economic condition of a government. This Statement applies to any statistical section that accompanies a government’s basic financial statements. The provisions of this Statement are effective for statistical sections for periods beginning after June 15, 2005. The Department has not yet implemented this Statement. 2004 Comprehensive Annual Financial Report 38 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 B. 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 $ 11,851,418,020 181,041,933 12,032,459,953 <39,337,459> Less Internal Service Fund (Equipment Fund) assets $ 11,993,122,494 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 1,791,012 4,509,588 $ 3. 558,374 6,858,974 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 $<1,680,038,843> difference is as follows: Bonds payable Deferred charges - issuance costs Capital leases Compensated absences Business activity share of Equipment Fund gain $ <1,675,425,591> 5,078,148 <1,120,965> <8,568,775> <1,660> $ <1,680,038,843> C. Explanations of Reconciling Items of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the 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: 2004 Comprehensive Annual Financial Report 39 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 1. Governmental funds report capital outlay as expenditures. However, in the Statement of Activities, these costs are removed; some costs are capitalized as assets while other costs are expensed as follows: Capital outlay $ 599,819,179 Depreciation expense <8,232,061> $ 591,587,118 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 bond 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 $<48,735,856> difference are as follows: Debt issued or incurred: Issuance of Highway Revenue Bonds $ <250,560,000> Issuance of Grant Anticipation Notes Premium on bonds <199,955,000> <31,646,718> <482,161,718> Principal repayments: Highway Revenue Bonds 51,155,000 Transportation Excise Tax Revenue Bonds Grant Anticipation Notes Amortization of premium and discount Bond issuance costs Principal payment to refunded bond escrow agent 199,400,000 34,260,000 5,071,888 2,538,974 141,000,000 433,425,862 $ <48,735,856> 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 gain in the Internal Service Fund represents over-billing and must be eliminated from the government-wide Statement of Activities for the Business activity. Internal Service Fund (Equipment Fund): Changes in net assets Business activity share of Equipment Fund gain $ 1,399,012 <1,660> $ 1,397,352 4. 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: Disposal of capital assets $ 1,664,146 Capital lease <204,781> Notes and loans Compensated absences <2,995,439> 201,369 $<1,334,705> 2004 Comprehensive Annual Financial Report 40 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 5. DETAILED NOTES ON ALL FUNDS A. Capital Assets Capital assets activity for the year ended June 30, 2004, was as follows: July 1, 2003 Beginning Balance Governmental Activities Capital assets, not being depreciated: Land Infrastructure Construction in progress Total capital assets, not being depreciated $ 1,839,172,464 7,564,772,978 1,852,537,010 11,256,482,452 Increases $ June 30, 2004 Ending Balance Decreases 43,798,889 1,181,700,124 731,096,673 1,956,595,686 $ <24,857,525> $ 1,858,113,828 <155,102,469> 8,591,370,633 <1,181,700,124> 1,401,933,559 <1,361,660,118> 11,851,418,020 Capital assets, being depreciated: Buildings and improvements Improvements other than buildings Machinery and equipment Mobile Fleet and aircraft Total capital assets, being depreciated 145,247,665 33,168,583 42,897,596 113,001,086 334,314,930 521,052 863,781 5,687,011 7,511,678 14,583,522 <2,141,079> <4,697,807> <6,838,886> 145,768,717 34,032,364 46,443,528 115,814,957 342,059,566 Less accumulated depreciation for: Buildings and improvements Improvements other than buildings Machinery and equipment <48,281,655> <1,549,575> <27,140,455> <3,511,293> <331,720> <4,573,594> 1,708,508 <51,792,948> <1,881,295> <30,005,541> Mobile fleet and aircraft Total accumulated depreciation <75,261,736> <152,233,421> <5,782,803> <14,199,410> 3,706,690 5,415,198 <77,337,849> <161,017,633> Total capital assets, being depreciated, net 182,081,509 384,112 <1,423,688> 181,041,933 Governmental activities capital assets, net $ 11,438,563,961 $ 1,956,979,798 July 1, 2003 Beginning Balance Business-type Activities Capital assets, not being depreciated: Land Capital assets, being depreciated: Buildings and improvements Machinery and equipment $ 7,900 Total capital assets, being depreciated Less accumulated depreciation for: Buildings and improvements Machinery and equipment Total accumulated depreciation Increases $ June 30, 2004 Ending Balance Decreases - $ - $ 7,900 981,157 2,378,827 6,108 <16,901> 981,157 2,368,034 3,359,984 6,108 <16,901> 3,349,191 <669,373> <1,572,757> <33,816> <286,345> 15,211 <703,189> <1,843,891> <2,242,130> <320,161> 15,211 <2,547,080> 1,117,854 <314,053> <1,690> 802,111 <1,690> $ 810,011 Total capital assets, being depreciated, net Business-type activities capital assets, net $ <1,363,083,806> $ 12,032,459,953 $ 1,125,754 $ <314,053> 2004 Comprehensive Annual Financial Report 41 $ Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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 $ 1,299,288 289,431 2,921,821 1,700,750 2,020,771 5,967,349 $ 14,199,410 Business-type Activities Arizona Highways Magazine Fund $ 320,161 B. Construction Commitments The Department’s outstanding commitments for contracts at June 30, 2004, was $624,463,977. Construction Contracts: Rural Roadways Small Urban Roadways Urban Roadways Large Urban Roadways Sub-total Design Contracts Other Commitments Total Expenditures To Date Remaining Commitment $ 190,509,938 75,106,598 34,488,722 580,919,698 881,024,956 848,094,273 135,073,180 $1,864,192,409 $ 116,753,485 9,135,318 36,029,104 230,710,169 392,628,076 94,854,441 136,981,460 $ 624,463,977 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, 2004: Governmental Funds: General Fund (State Highway Fund) Maricopa Regional Area Road Construction Fund State Aviation Fund Proprietary Fund: Arizona Highways Magazine Fund $ 558,374 1,791,012 4,509,588 $ 6,858,974 $ 3,902,909 2004 Comprehensive Annual Financial Report 42 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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, 2004, 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, 2004, were: Receivables General Fund (State Highway Fund) Highway Expansion and Extension Loan Program Fund Highway User Revenue Fund Non-major governmental funds Payables Highway User Revenue Fund Motor Vehicle Division Clearing Fund Avaition Fund Highway Expansion and Extension Loan Program Fund General Fund Motor Vehicle Division Clearing Fund Motor Vehicle Division Clearing Fund Amount $ 87,008,747 91,712 290,088 20,000,000 2,886,157 16,535,881 109,624 $ 126,922,209 The General Fund receivable of $87,008,747 is an accrual for fuel tax revenues imposed in fiscal year 2004 from the Highway User Revenue Fund that will be collected in fiscal year 2005. The Highway User Revenue Fund receivable of $16,535,881 is an accrual for vehicle license taxes due in fiscal year 2004 from the Motor Vehicle Division Clearing Fund that will be collected in fiscal year 2005. 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, 2004, consisted of the following: Interfund Transfer In: Interfund Transfer Out: General Fund Capital Projects Fund Maricopa Regional Area Road Construction Fund Other Governmental Funds Total General Fund Maricopa Regional Area Road Construction Fund Debt Service Fund Total 40,566,374 $ 4,051,130 13,127,879 $102,692,089 - $ 106,743,219 53,694,253 16,308,166 195,077 - 222,099,630 50,059,850 238,407,796 50,254,927 $ 57,069,617 $ 17,179,009 $374,851,569 $ 449,100,195 $ The General Fund ($102,692,089), the Maricopa Regional Area Road Construction Fund ($222,099,630) and Other Governmental Funds - Grant Anticipation Notes Fund ($50,059,850) made transfers to the Debt Service Fund to pay bond debt service. 2004 Comprehensive Annual Financial Report 43 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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, 2004, approximated $2,556,604. 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 2005 2006 2007 Future operating lease commitments $ 736,335 777,243 818,150 $ 2,331,728 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 2005 2006 2007 2008 2009 2010-2013 $ 101,820 101,820 101,820 105,489 117,324 470,088 Future operating lease commitments $ 998,361 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 Total $ 1,682,505 <47,841> $ 1,634,664 2004 Comprehensive Annual Financial Report 44 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 The future minimum lease obligations and the net present value of these minimums lease payments as of June 30, 2004, were as follows: Governmental Activities Year Ending June 30 2005 2006 2007 2008 2009 $ Total minimum lease payments Less amount representing interest 167,292 307,723 307,723 246,077 189,832 1,218,647 <97,682> Present value of minimum lease payments $ 1,120,965 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 $932,700,000. During the year, Highway Revenue Bonds totaling $250,560,000 were issued to (i) finance portions of the Transportation Board’s Five-Year Transportation Facilities Construction Program, (ii) pay costs of issuing the Bonds, (iii) pay interest on any bonds issued for highway purposes, and (iv) refund portions of the Board’s outstanding Senior Series 1993A/B Bonds in the aggregate principal amount of $114,745,000. 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 that may be outstanding at any time, excluding refunded bonds, from exceeding $1.3 billion. Highway Revenue Bonds currently outstanding are as follows: Purpose Interest Rates Amount Govermental activities Govermental activities - refunding 2.0% - 8.0% 2.0% - 6.0% $ 681,430,000 335,930,000 $ 1,017,360,000 2004 Comprehensive Annual Financial Report 45 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 Annual debt service requirements to maturity for Highway Revenue Bonds are as follows: Fiscal year ending June 30 Highway Revenue Bonds Principal Interest 2005 2006 2007 2008 2009 2010-2014 2015-2019 2020-2023 $ 44,265,000 54,830,000 57,825,000 60,645,000 64,190,000 292,075,000 285,495,000 158,035,000 $52,797,980 50,336,812 47,392,968 44,627,194 41,283,052 156,896,624 85,759,204 17,027,916 $1,017,360,000 $496,121,750 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 original amount of Transportation Excise Tax Revenue Bonds issued in prior years and outstanding at the start of the fiscal year was $488,400,000. 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, 2004) 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 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 were 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, 2004, the carrying basis was $7,896,568. At June 30, 2004, the outstanding balance was $8,500,000. 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% 4.6% - 6.5% $192,650,000 8,500,000 87,850,000 $289,000,000 2004 Comprehensive Annual Financial Report 46 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 Annual debt service requirements to maturity for Transportation Excise Tax Revenue Bonds are as follows: Fiscal year ending June 30 2005 2006 Transportation Excise Tax Revenue Bonds Principal $ 208,625,000 80,375,000 Interest $14,318,152 1,566,542 $ 289,000,000 $15,884,694 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 in prior years and outstanding at the start of the fiscal year was $169,145,000. During the year, Grant Anticipation Notes totaling $199,955,000 were issued to (i) pay costs of the projects (as specified), (ii) pay costs of issuing the Notes, (iii) pay interest on the Notes, and (iv) refund the 2000A Series Notes in the aggregate principal amount of $26,255,000. Grant Anticipation Notes currently outstanding are as follows: Purpose Govermental activities Interest Rates 2.5% - 6.0% Amount $ 308,585,000 Annual debt service requirements to maturity for Grant Anticipation Notes are as follows: Fiscal year ending June 30 2005 2006 2007 2008 2009 2010-2015 Grant Anticipation Notes Principal $ 49,000,000 38,540,000 42,570,000 26,835,000 19,800,000 131,840,000 Interest $ 13,905,271 11,353,643 9,451,968 8,173,618 7,160,556 22,192,020 $308,585,000 $ 72,237,076 Notes Payable The Department’s outstanding notes payable as of June 30, 2004, was $307,719,433. The governmental activities notes payable was $165,304,967 and business-type activities was $142,414,466. The notes payable represent the General Fund loan payable to HELP for $103,345,838, the Equipment Fund loan payable to creditors for $561,540 and the Board Funding Obligations for loans from the State Treasurer for $203,812,055 (principal of $200,000,000 and accrued interest of $3,812,055). 2004 Comprehensive Annual Financial Report 47 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 Annual debt service requirements to maturity for Notes Payable are as follows: Fiscal year ending June 30 2005 2006 2007 2008 Governmental Activities Principal $ 38,692,243 5,215,135 10,000,000 110,000,000 Interest $ 453,361 196,462 6,004 14,492,821 $163,907,378 $ 15,148,648 Business-type Activities Principal Interest $ 140,000,000 $ 16,160,000 $140,000,000 $ 16,160,000 The notes payable amount for governmental activities of $165,304,967 includes the accrued interest on the BFO of $1,397,589. The notes payable for business-type activities of $142,414,466 includes the accrued interest on the BFO of $2,414,466. Refunded Bonds Deposited with Escrow Agents In fiscal year 2003 ($103,045,000) and fiscal year 2004 ($141,000,000), 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 a portion of the Highway Refunding Subordinated Series 1993A/B Bonds ($114,745,000) and all the 2000 Series A Grant Anticipation Notes ($26,255,000) to reduce its total debt service payments by $7,600,429 and to obtain an economic gain (difference between the present values of the debt service payments on the old and new debt) of $6,837,515. Refunded bonds of the Department deposited with escrow agents at June 30, 2004, are as follows: Original Issue Type Escrow Maturity Date Balance 1993A/B Subordinated 1999 Senior 1998 Series A Senior Highway Refunding Bonds Highway Refunding Bonds Transportation Excise Tax Revenue Bonds July 1, 2004 July 1, 2009 July 1, 2005 $ 114,745,000 64,130,000 4,550,000 1988 Series A Transportation Excise Tax Revenue Bonds Capital Appreciation Bonds Total refunded bonds deposited with July 1, 2005 8,996,156 escrow agents 2004 Comprehensive Annual Financial Report 48 $ 192,421,156 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 Changes in non-current liabilities The activity for the fiscal year ended June 30, 2004, was as follows: Beginning Balance July 1, 2003 Additions $ 932,700,000 $250,560,000 Reductions Ending Balance June 30, 2004 Due Within One Year 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 $ <165,900,000> $1,017,360,000 $ 44,265,000 488,400,000 - <199,400,000> 289,000,000 208,625,000 169,145,000 34,422,663 199,955,000 31,646,718 <60,515,000> <5,588,790> 308,585,000 60,480,591 49,000,000 6,843,794 1,624,667,663 482,161,718 <431,403,790> 1,675,425,591 308,733,794 916,184 11,337,254 180,438,476 1,817,359,577 1,401,035 11,144,797 114,493,921 609,201,471 <1,196,254> <11,459,038> <129,627,430> <573,686,512> 1,120,965 11,023,013 165,304,967 1,852,874,536 144,565 10,814,995 38,665,243 358,358,597 151,380 151,545,066 151,696,446 197,968 144,097,235 144,295,203 <198,133> <153,227,835> <153,425,968> 151,215 142,414,466 142,565,681 151,215 151,215 $ 1,969,056,023 $753,496,674 $ <727,112,480> $1,995,440,217 $ 358,509,812 Business-type Activities: Compensated absences Notes payable Total business-type activities Total non-current liabilities 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, $573,298 of internal service funds compensated absences and $561,540 of notes payable are included in the above amounts. Bonds and notes issued by the Department require compliance with a number of covenants. The Department believes that it is in compliance with all such covenants. In addition, certain of the Department’s obligations are subject to Internal Revenue Service regulations pertaining to issuance of tax-exempt debt by governmental entities. The Department has not accrued a liability under these regulations. H. Short-term Debt The Department had no short-term debt activity for the fiscal year ended June 30, 2004. 2004 Comprehensive Annual Financial Report 49 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 I. Fund Balances Reservations The line entitled “Reserved Fund Balances” on the Governmental Funds Balance Sheet at June 30, 2004, consisted of the following: General Fund (State Highway Fund) Reserved Fund Balances: Inventories Interfund receivables Debt Service Capital Projects Fund Total Reserved Fund Balances $ 4,994,499 20,000,000 130,760,690 $ 155,755,189 Maricopa Regional Area Road Construction Fund $ 96,035,594 $ 96,035,594 Debt Service Fund $ 18,591,797 $ 18,591,797 Capital Projects Fund $ 87,750,672 $87,750,672 Other Governmental Funds $ 84 6,853,852 $ 6,853,936 Total $ 4,994,499 20,000,000 18,591,881 321,400,808 $ 364,987,188 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, 2004, approximately $127.5 million was reserved in the General Fund for this purpose. The remaining $3.2 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 September 8, 2004, the Transportation Board issued $188,260,000 in Subordinated Highway Revenue Bonds, Series 2004B to (i) finance a portion of the Board’s Five-Year Transportation Facilities Construction Program, (ii) pay interest on any bonds issued for highway purposes, and (iii) pay costs of issuing the Series 2004B Subordinated Bonds. The 2004B Bonds are due July 1, 2012, through July 1, 2024. Net proceeds totaled $200,000,000 (after receipt of $12,862,714 reoffering premium and payment of $1,122,714 in underwriting fees and costs of issuance). 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 selfinsurance 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. 2004 Comprehensive Annual Financial Report 50 Arizona Department of Transportation Notes to the Financial Statements June 30, 2004 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. Light Rail Transit System ARS 28-9201 requires the Department to establish, implement and enforce minimum safety standards for light rail transit systems. If a violation of the safety standards is discovered, the Department shall report the violation in writing to the Federal Transit Administration. Furthermo re, the organization that operates a light rail transit system shall include a safety oversight function and pay the Department’s costs resulting from administration. 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, 2004, was computed to be 5.2 percent of covered payroll by an actuarial valuation performed at June 30, 2002. The contribution rate for fiscal year 2003 was 2.49 percent, with an increase of 2.71 percent for fiscal year 2004. Contributions for the years ended June 30, 2002, 2003 and 2004 were $3,959,972, $4,093,262 and $8,687,059 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 2004 was $154.5 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 2004 was $8.7 million by both the employees and the Department. 2004 Comprehensive Annual Financial Report 51 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Budgetary Comparsion Schedule General Fund (State Highway Fund) For the fiscal year ended June 30, 2004 Budgeted Amounts Original Final Actual Amounts Variance with Final Budget Positive Expenditures appropriated by State legislature in 2004 budget: Administration: Personal services Employee related expenditures Other operating expenditures Attorney General legal service Total Administration $ 17,666,300 5,521,300 30,933,600 2,131,800 56,253,000 $ 16,547,800 4,905,200 32,668,200 2,131,800 56,253,000 $ 16,547,646 4,905,121 32,658,537 2,131,800 56,243,104 Highways: Personal services Employee related expenditures Other operating expenditures Total Highways 31,039,100 9,049,000 6,014,200 46,102,300 29,653,300 8,517,900 7,945,700 46,116,900 29,625,826 8,494,730 7,888,972 46,009,528 27,474 23,170 56,728 107,372 Personal services Employee related expenditures Other operating expenditures Total Highway Construction 24,826,200 7,766,200 19,266,600 51,859,000 21,667,300 7,999,300 22,192,400 51,859,000 21,662,270 7,996,229 21,987,275 51,645,774 5,030 3,071 205,125 213,226 Highway Maintenance: Personal services Employee related expenditures Other operating expenditures Maintenance carryover Total Highway Maintenance 30,000,000 12,400,000 52,755,200 2,580,947 97,736,147 26,900,000 11,550,000 56,705,000 2,580,947 97,735,947 26,690,088 11,512,080 54,282,188 2,580,947 95,065,303 209,912 37,920 2,422,812 2,670,644 44,958,500 16,503,100 15,678,400 42,947,100 16,164,500 17,736,300 42,938,393 16,163,175 17,624,168 8,707 1,325 112,132 343,537 276,897 3,670,144 2,300,000 150,000 454,138 4,949 43,724 343,537 276,897 3,670,144 2,300,000 150,000 454,138 4,949 43,724 187,453 177,652 1,326,724 2,300,000 149,144 454,138 - 156,084 99,245 2,343,420 856 4,949 43,724 $ 154 79 9,663 9,896 Highway Construction: Motor Vehicle: Personal services Employee related expenditures Other operating expenditures Fee accounting and revenue management system Integrated inventory system Security enhancement License plates and tabs Public information service Special plates MVD electronic certificate of title system MVD one-time trailer fees administration (continued) 2004 Comprehensive Annual Financial Report 52 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Budgetary Comparsion Schedule General Fund (State Highway Fund) For the fiscal year ended June 30, 2004 Budgeted Amounts Original Final Actual Amounts Variance with Final Budget Positive Motor Vehicle (continued): MVD Attorney General legal services Abandoned vehicle administration Vechicle registration enforcement Trailers permit registration Total Motor Vehicle Air Quality Programs: Administration air quality project: Personal services Employee related expenditures Other operating expenditures Total Air Quality Programs Capital outlay - land, buildings and improvements Arizona Department of Public Safety transfers Expenditures appropriated by State legislature by carryover of previous year's unexpended budget Total expenditures $ 137,700 710,800 383,300 13,488 85,628,677 $ 137,700 710,800 383,300 13,488 85,336,577 $ 137,700 700,587 211,828 82,370,962 $ 10,213 171,472 13,488 2,965,615 37,000 14,800 3,900 55,700 37,000 14,800 3,900 55,700 37,000 14,800 3,900 55,700 - 6,047,232 28,565,600 6,047,232 30,151,400 2,413,077 30,151,400 3,634,155 - 2,633,622 $374,881,278 2,633,622 $376,189,378 2,633,622 $366,588,470 $ 9,600,908 The notes to required supplementary information are an integral part of this statement. 2004 Comprehensive Annual Financial Report 53 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Notes to Required Supplementary Information 1. 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, employee-related 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 imp rovements 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. 2. Explanation of difference between budgetary outflows and GAAP expenditures Actual amounts from the Schedule of Revenues, Expenditures and Changes in Fund Balances Net increase in accounts payable, accrued payroll and other accruals not recognized as expenditures for budgetary basis Expenditures which are on the modified accrual basis and not recognized on budgetary basis: Capital outlay Non-capital, including asset preservation Distribution to other state agencies Interest expense on loans borrowed from the Highway Expansion and Extension Loan Program Total expenditures as reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (General Fund - Exhibit 4) 2004 Comprehensive Annual Financial Report 54 $366,588,470 <470,805> 169,832,485 340,589,140 731,781 2,833,830 $880,104,901 Arizona Department of Transportation Required Supplementary Information June 30, 2004 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 6,912 center lane miles (18,391 travel lane miles) of roads and 4,488 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 Transportation Board on an annual basis, the Five-Year Transportation Facilities Construction Program (Program) contains estimated expenditures for highway system improvements and the preservation of existing roadway and bridges. Both of these factors impact the condition assessment of the roads and bridges as described in the following sections. The Program in effect for fiscal year 2005 and beyond was adopted by the Transportation Board on June 18, 2004. This Program is a dynamic instrument and adjustments are made to the annual plans based on the needs of the Department to maintain the condition level of the roads and bridges at a level equal to, or greater than, the goals established by the Department. In addition, not only are adjustments made during the life of the Program, circumstances may require that refinements to the individual components of the Program be made during the fiscal year. In comparing Estimated to Actual Expenditures, significant variances can occur. These variances are primarily due to the methodology used in the preparation of the Program. In this Program, the Estimated Expenditures for the current year are based on “programmed” projects which may or may not be spent in the current year of the Program. “Programmed” expenditures consist of those items that are planned for the future and contracts have not yet been awarded. Furthermore, the Actual Expenditures will include projects that were “programmed” for a prior year’s Estimated Expenditures but which did not occur, or were not completed, in the prior year. The following information pertains to the condition assessment and maintenance of infrastructure assets and reflects the Department’s success in achieving condition levels that exceed the established levels. Roads The mission of the Department’s 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 PMS both work toward the same basic goal, the efficient, effective management of the Department’s assets to produce long term benefits while minimizing expenditures. The PMS has developed performance goals for the condition level of the pavement in the State 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: 2004 Comprehensive Annual Financial Report 55 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Information About Infrastructure Assets Reported Using the Modified Approach - continued 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 The goal of the Department 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 2004, an overall rating of 3.8 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 (as specified in the Program as programmed amounts) and actual expenditures for fiscal years 2002 through 2004 were as follows: Fiscal Year 2002 2003 2004 Estimated Expenditures (in millions) $227.4 $243.5 $198.5 Actual Expenditures (in millions) $234.8 $220.8 $215.5 2004 Comprehensive Annual Financial Report 56 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Information About Infrastructure Assets Reported Using the Modified Approach - continued Bridges The Department’s bridge assets constitute a significant portion of all infrastructure assets in Arizona. As of June 30, 2004, the Department owns and maintains 4,488 bridges with an approximate total deck area of 41,189,551 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 ratings that are included in the CRI computation are: the bridge joints condition, the deck condition, the super- structure condition, and the substructure condition. The bridge joints condition rating is an Arizona specific rating item not included in the FHWA condition rating guidelines, whereas the three other condition ratings are federally mandated condition ratings. The CRI is computed by subtracting from one the ratio of the sum of the deck areas of all bridges with a condition rating of four or less (see table below), 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 the Department’s Bridge Group and regularly scheduled biennial inspections are made of all bridges. A civil or structural engineer, licensed to practice in Arizona, performs these inspections. It is the policy of the Department to maintain State highway bridges so that the CRI exceeds 92.5%. In fiscal year 2004, the CRI was computed at 93.8%. 2004 Comprehensive Annual Financial Report 57 Arizona Department of Transportation Required Supplementary Information June 30, 2004 Information About Infrastructure Assets Reported Using the Modified Approach - continued 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. Age of Department's Bridge Population 35 % of bridges built in corresponding decade 30 25 20 15 10 5 0 < 1930 30s 40s 50s 60s 70s Figure 3 2004 Comprehensive Annual Financial Report 58 80s 90s 2000s Arizona Department of Transportation Required Supplementary Information June 30, 2004 Information About Infrastructure Assets Reported Using the Modified Approach - continued Preservation of the bridges is accomplished through programs managed by the Bridge Group. The estimated (as specified in the Program as programmed amounts) and actual expenditures for fiscal years 2002 through 2004 were as follows: Fiscal Year 2002 2003 2004 Estimated Expenditures (in millions) $14.4 $13.6 $12.1 Actual Expenditures (in millions) $18.2 $15.8 $12.2 2004 Comprehensive Annual Financial Report 59 Arizona Department of Transportation Combining Balance Sheet Non-Major Governmental Funds June 30, 2004 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 Arizona counties and cities Restricted cash on deposit with the State Treasurer Total assets 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 Deferred revenue Total liabilities FUND BALANCES Reserved: Debt service Capital projects Unreserved special revenue funds Total fund balances Total liabilities and fund balances $ 9,507,070 Safety Enforcement and Transportation Infrastructure Fund $ 1,362,196 Motor Vehicle Liability Insurance Enforcement Fund $ 6,795,107 Vehicle Inspection and Title Enforcement Fund $ 2,027,977 Motor Carrier Safety Revolving Fund $ 13,625 Motorcycle Safety Education Fund $ - 103,987 87,849 4,509,588 596,168 2,843 4,915 - 9,450 - 7,410 - - - 286,776 - - - - - - $ 15,091,438 $ 1,369,954 $ 6,804,557 $ 2,035,387 $ 13,625 $ - $ 23,539 $ 2,519 $ 251 $ 297 $ - $ - $ 48,289 290,088 30,554 - 28,215 - 35,279 - - - 4,509,588 4,871,504 33,073 28,466 35,576 - - 10,219,934 10,219,934 15,091,438 1,336,881 1,336,881 1,369,954 6,776,091 6,776,091 6,804,557 1,999,811 1,999,811 2,035,387 13,625 13,625 13,625 - $ $ 2004 Comprehensive Annual Financial Report 60 $ $ $ Exhibit 9 Underground Storage Tank Fund $ - Economic Strength Project Fund $ Grant Anticipation Notes Fund - $ - Local Agency Deposits Fund $ Total Non-Major Governmental Funds - $ 19,705,975 2,637,255 4,248 - 51 - 2,211,727 111,129 109,624 4,509,588 5,445,150 - - - 7,865,386 40,552 8,152,162 40,552 2,616,906 $ 5,254,161 3,649,966 $ 3,654,214 $ 33 84 3,147,581 $ 13,265,246 9,414,486 $ 47,488,666 $ $ $ - $ $ - - - 26,606 - - - 6,411,394 - 142,337 6,411,394 290,088 5,254,161 5,254,161 3,654,214 3,654,214 - 6,411,394 3,654,214 5,254,161 4,509,588 20,288,388 $ 5,254,161 $ 3,654,214 84 84 84 6,853,852 6,853,852 $ 13,265,246 84 6,853,852 20,346,342 27,200,278 $ 47,488,666 $ 2004 Comprehensive Annual Financial Report 61 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, 2004 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 Arizona counties and cities 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: Aeronautics Highway Motor Vehicle Other Total Transportation - appropriated by State legislature Distributions to Arizona counties and cities Distributions to other state agencies Non-capital, including asset preservation Total expenditures Excess of revenues over expenditures 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 State Aviation Fund Safety Enforcement and Transportation Infrastructure Fund Motor Vehicle Liability Insurance Enforcement Fund Vehicle Inspection and Title Enforcement Fund $ 6,009,233 603,244 $ 2,608,749 - $ 2,510,516 - $ 1,508,745 - 479,940 259,142 82,916 6,320,722 901,569 607,172 15,263,938 20,752 9,488 2,638,989 2,510,516 1,508,745 4,500 7,228,392 - 1,612,031 - 1,056,769 - 820,248 - - 7,228,392 1,612,031 1,056,769 820,248 - 5,352,945 12,581,337 1,022,138 706,222 3,340,391 1,056,769 107,700 927,948 - 2,682,601 <701,402> 1,453,747 580,797 4,500 - <59,558> <59,558> - - - <760,960> 1,453,747 2,097,841 5,322,344 $ 1,336,881 $ 6,776,091 580,797 1,419,014 $ 1,999,811 4,500 9,125 13,625 2,682,601 7,537,333 $ 10,219,934 2004 Comprehensive Annual Financial Report 62 Motor Carrier Safety Revolving Fund $ $ 4,500 - Exhibit 10 Motorcycle Safety Education Fund $ $ Underground Storage Tank Fund Economic Strength Project Fund $ Grant Anticipation Notes Fund 992,357 $ - Local Agency Deposits Fund $ Total Non-Major Governmental Funds 13,939 - $ 30,853,823 - - $ 43,509,505 1,595,601 13,939 30,853,823 992,357 47,815,900 3,504 47,819,404 36,323,514 4,129,076 118,974 40,571,564 84,619,354 4,129,076 259,142 107,172 6,320,722 901,569 735,634 142,177,775 - - - 143 39,205,377 - 7,228,392 39,205,377 3,489,048 143 - - - 143 39,205,377 49,922,960 13,939 13,939 1,535,153 29,318,670 30,853,823 992,357 992,357 143 39,205,377 7,880,455 30,462,447 706,222 88,972,084 - - - 47,819,261 1,366,187 53,205,691 - - - <50,059,850> <50,059,850> - - - $ $ <135,519> <135,519> <2,240,589> 1,230,668 2,240,673 5,623,184 $ 84 $ 6,853,852 <50,059,850> <195,077> <50,254,927> $ 2,950,764 24,249,514 27,200,278 2004 Comprehensive Annual Financial Report 63 Exhibit 11 Arizona Department of Transportation Statement of Changes in Assets and Liabilities Agency Funds For the fiscal year ended June 30, 2004 Balance July 1, 2003 Additions Deletions Balance June 30, 2004 Highway Properties - Privilege Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 253 253 $ $ 2,333 2,333 $ <2,391> $ $ <2,391> $ 195 195 LIABILITIES Due to Department of Revenue Total liabilities $ $ 253 253 $ $ 2,333 2,333 $ <2,391> $ $ <2,391> $ 195 195 Highway Properties - 24 % Lieu Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 588,121 588,121 $ $ 402,288 402,288 $<767,024> $ $<767,024> $ 223,385 223,385 LIABILITIES Due to Arizona counties Total liabilities $ $ 588,121 588,121 $ $ 402,288 402,288 $<767,024> $ $<767,024> $ 223,385 223,385 2004 Comprehsive Annual Financial Report 64 Exhibit 12 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule by Source1 June 30, 2004 and 2003 2003 2004 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. 65 $ $ 1,858,113,828 145,768,717 34,032,364 43,707,436 8,591,370,633 1,401,933,559 12,074,926,537 $ 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 $ $ 12,074,926,537 12,074,926,537 $ $ 11,475,107,358 11,475,107,358 Exhibit 13 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule By Function and Activity1 June 30, 2004 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 1,841,569,466 4,907,328 9,822,062 14,828,184 21,604 $ 33,837,513 4,648,473 4,844,126 320,207 40,938,204 46,330,406 753,950 19,593,875 Machinery and Equipment $ 1,623,778 284,610 7,077 21,667 122,946 8,200,735 3,423,726 9,308,546 975,180 Construction in Progress Infrastructure $ 3,916,883 6,078,479 3,082,907 3,706,986 973,948 666,527 6,320,450 8,677,530 - $ 8,591,370,633 - Total - $ 1,401,933,559 - 25,769,697 20,590,659 40,314,129 11,845,885,220 3,082,907 8,558,189 1,315,822 789,473 60,366,717 68,253,724 66 1,858,113,828 $ 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. 145,768,717 $ 34,032,364 $ 43,707,436 $ 8,591,370,633 $ 1,401,933,559 $ 12,074,926,537 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, 2004 Governmental Funds Capital Assets July 1, 2003 Function and Activity Administration Aeronautics Highway: $ 25,132,783 20,596,207 Additions $ 2,127,259 - Deductions $ <1,490,345> $ <5,548> Governmental Funds Capital Assets June 30, 2004 25,769,697 20,590,659 Administrative and other services Highway construction Highway development Materials engineering Traffic engineering Transportation planning and research Highway Maintenance Motor Vehicle 39,960,413 9,397,357,726 3,063,953 8,384,422 1,237,138 810,733 58,586,923 67,440,050 379,536 1,226,590,006 108,005 181,929 99,401 1,793,773 1,187,091 <25,820> <179,996,071> <89,051> <8,162> <20,717> <21,260> <13,979> <373,417> 40,314,129 10,443,951,661 3,082,907 8,558,189 1,315,822 789,473 60,366,717 68,253,724 Functional sub-total 9,622,570,348 1,232,467,000 <182,044,370> 10,672,992,978 Construction in progress 1,852,537,010 731,096,673 <1,181,700,124> 1,401,933,559 $ <1,363,744,494> $ 12,074,926,537 Total governmental funds capital assets $ 11,475,107,358 1 $ 1,963,563,673 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. 67 Table 1 Arizona Department of Transportation Government-wide Expenses by Function For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year Administration 2004 2003 2002 $ 57,703 52,533 57,864 Aeronautics $ 7,512 3,848 3,751 Highway $ 48,797 45,644 46,543 Highway Maintenance/1 $ 474,430 374,328 188,198 Motor Vehicle $ 86,845 83,090 82,904 Distributions to Arizona counties, cities and other State Interagencies governmental $ 1,183,797 1,149,593 1,064,560 $ 39,205 30,235 24,791 Interest on long-term debt $ 89,431 84,084 89,605 Other Arizona Highways Magazine Highway Expansion and Extension Loan Program Total $ 9,815 8,460 6,844 $ 10,007 11,118 10,711 $ 4,414 26,349 5,265 $ 2,011,956 1,869,282 1,581,036 68 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 Non-capital, including asset preservation Table 2 Arizona Department of Transportation Government-wide Revenues For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year 2004 2003 2002 General Revenues Program Revenues Operating Capital Grants Charges for Grants and and Services Contributions Contributions $ 131,025 130,889 124,565 $ 44,008 34,160 56,481 $ 418,174 453,758 470,772 Taxes $ 1,907,984 1,798,243 1,798,243 Other Revenues Interest on Investments $ $ 25,279 21,729 27,148 9,940 22,243 35,488 Total $ 2,536,410 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. 69 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 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Administration/1 $ 56,484 51,485 56,230 48,150 47,847 44,648 43,914 43,981 36,406 36,933 Aeronautics $ 7,228 3,579 3,491 18,280 21,640 26,787 30,734 18,975 11,107 9,239 Highway Maintenance Highway/2 $ 85,258 74,244 68,369 43,117 42,302 42,035 41,381 40,230 111,884 111,876 $ 95,144 94,978 89,314 89,400 83,398 79,304 76,597 70,336 - Motor Vehicle Distributions to Capital Outlay and Arizona counties, Non-capital, cities and other including asset State agencies/3 Debt Service preservation/4 $ $ 84,921 81,518 81,012 77,337 74,492 67,144 63,056 30,147 33,486 35,221 1,182,797 1,146,840 1,038,314 - $ 374,352 330,203 292,979 292,930 253,823 226,928 199,948 210,446 200,364 182,554 $ 978,607 989,494 1,105,917 1,008,590 941,913 853,695 602,955 540,203 555,087 418,601 70 NOTES: FY 2002-2004 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 1995-1996. /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 1995-1996. Other/5 $ 8,319 7,507 33,526 34,310 43,927 62,600 65,625 84,433 87,960 57,757 Total $ 2,873,110 2,779,848 2,769,152 1,612,114 1,509,342 1,403,141 1,124,210 1,038,751 1,036,294 852,181 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 Year 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Transportation Excise Taxes/1 $ NOTES: /1 /2 /3 /4 288,600 268,721 267,563 - Motor Fuel Taxes and Fees/1 $ 698,406 690,869 547,129 300,750 276,189 298,394 273,806 288,878 291,000 293,870 Vehicle Reg., Title, License and Related Fees/1 $ 1,023,004 940,023 1,003,499 219,746 255,088 250,121 210,370 198,002 171,823 133,689 Expenditures of Federal Reimburse- Interest on Awards /2 ments Investments $ 427,366 466,354 522,036 428,290 414,015 401,464 283,982 305,438 268,605 225,607 $ 38,945 26,102 12,664 17,150 18,788 15,748 8,505 15,083 32,711 17,808 $ 8,333 19,702 29,697 44,648 41,534 34,377 34,382 33,238 29,603 22,340 Other/3 Total /4 $33,328 25,191 34,405 292,416 267,004 257,479 223,486 231,792 228,698 190,498 2,517,982 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 FY 2002-2004 includes revenues that were considered Agency Funds in prior years. For years prior to 1999, includes Expendable Trust Fund. Includes interest on loans receivable, flight property taxes, Grand Canyon National Airport and other Method of accounting for taxpayer assessed revenues has been changed due to the adoption of GASB Statement No. 22 during fiscal year 1995. Total Governmental Revenues $3,000,000 Thousands of Dollars $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 2002 Comprehensive Annual Financial Report $0 1995 1996 1997 1998 1999 2000 Fiscal Year 71 2001 2002 2003 2004 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 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 $ 480 242 6 6,278 2,379 91 506 849 $ 3 14 2 69 14 130 499 475 FTA $ 5,549 6,618 5,264 4,746 3,717 5,107 3,392 2,508 3,552 1,687 NHTSA $ 84 87 83 65 65 275 49 - FHWA FMCSA BLM $ 384,416 433,472 496,509 390,204 393,958 371,013 278,148 302,633 261,820 221,818 $ 434 466 282 - $ 79 30 47 28 $ BIA Sub-total FHWA /2 Total 1,048 974 76 2,228 750 $ 391,042 440,915 502,188 395,029 398,796 383,716 283,982 305,438 268,605 225,607 ####### 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 SOURCE: Single Audit Reports - fiscal years 1995 through 2004. 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 $500,000 Thousand of Dollars $400,000 $300,000 $200,000 $100,000 $0 1995 1996 1997 1998 1999 2000 Fiscal Year 72 2001 2002 2003 2004 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 2004 - 18 26 2003 - 18 26 2002 - 18 26 2001 7/1/2000 18 26 2000 - 18 27 1999 - 18 27 1998 12/31/1997 18 27 1997 - 18 18 1996 - 18 18 1995 - 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. 73 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 2004 Motor Veh. $ 656,881 $ 163,689 $ 16,623 $ 42,829 $ 309,688 $ 1,189,710 2003 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 SOURCES: Basic Financial Statements - Fiscal Years 2002 through 2004, General Purpose Financial Staements - Fiscal Years 1995 through 2001. Arizona Highway User Revenue Fund Revenue Collections by Category - Fiscal Years 1995 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 1995 1996 1997 1998 1999 2000 Fiscal Year 74 2001 2002 2003 2004 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 2004 $ 570,801 $ 344,699 $ 214,731 $ $ 1,000 $ 9,781 $ 1,189,710 2003 537,668 324,431 202,105 54,416 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 48,698 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: Basic Financial Statements - Fiscal Years 2002 through 2004, General Purpose Financial Staements - Fiscal Years 1995 through 2001. Monthly Reports MV675580-01 fiscal years 1995 through 2004 (adjusted for accrual basis). NOTES: /1 In fiscal year 1995, HB 2431 authorized the transfer of $1 million for border transportation projects. /2 In fiscal years 1995 through 2004, an appropriation for Arizona State Parks is included. Fiscal year 2002 includes distribution to State General Fund. 75 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 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 $ 51,155 44,490 45,365 52,055 46,270 43,805 43,405 40,970 38,430 36,330 $ 53,149 41,932 38,534 36,581 33,994 31,090 33,266 36,148 38,770 40,974 $ 104,304 86,422 83,899 88,636 80,264 74,895 76,671 77,118 77,200 77,304 $ 557,854 540,540 523,326 513,890 528,721 509,935 468,240 468,542 429,825 399,605 5.3 6.3 6.2 5.8 6.6 6.8 6.1 6.1 5.6 5.2 SOURCES: Highway User Revenue Fund Schedule 1 Summary For Revenue Collected Monthly Reports MV675577-1 fiscal years 1995 through 2004; Debt Service Funds - fiscal years 1995 through 2004. /1 For fiscal years 1995 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 $600,000 $550,000 $500,000 Thousands of Dollars $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1995 1996 1997 1998 2000 2001 2002 Fiscal Year REVENUE DEBT SERVICE 76 2003 2004 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 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 $ 199,400 190,415 163,455 156,865 128,805 106,765 82,765 78,015 76,955 57,930 $ 23,553 31,533 35,445 40,035 42,609 43,251 40,512 45,248 46,209 47,320 $ 222,953 221,948 198,900 196,900 171,414 150,016 123,277 123,263 123,164 105,250 $ 288,600 268,721 267,563 264,722 248,596 229,470 209,263 192,257 178,413 160,319 1.3 1.2 1.3 1.3 1.5 1.5 1.7 1.6 1.4 1.5 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 1995 1996 1997 1998 1999 2000 2001 Fiscal Year REVENUE 77 DEBT SERVICE 2002 2003 2004 Table 11 Arizona Department of Transportation Total Public Road Mileage By Highway Class and Governmental Ownership For the calendar year ended December 31, 2003 (With comparative totals for the calendar year ended December 31, 2002) (In Center Lane Miles) TOTAL FUNCTIONAL CLASSIFICATION STATE COUNTY MUNICIPAL FEDERAL 2003 2002 RURAL: Interstate Freeway 980 - - - 980 996 Principal Arterial 1110 18 11 2 1,141 1,187 Minor Arterial 1178 69 23 6 1,276 1,274 Major Collector 1838 1,492 181 722 4,233 4,473 Minor Collector Local 355 604 1,041 13,845 139 1,598 582 9,957 2,117 26,004 2,289 27,450 16,465 1,952 11,269 35,751 37,669 172 TOTAL RURAL 6,065 URBAN: Interstate Freeway 187 - - - 187 Urban Expressway 137 1 7 - 145 153 Principal Arterial 275 102 710 - 1,087 1,000 Minor Arterial 92 206 888 3 1,189 1,274 Urban Collector Local 34 122 689 2,092 1,421 14,375 56 380 2,200 16,969 1,732 15,188 847 3,090 17,401 439 21,777 19,519 TOTAL URBAN STATEWIDE COMPOSITE: Freeways and Expressways 1,304 1 7 - 1,312 1,321 Arterials 2,655 395 1,632 11 4,693 4,713 Collectors Locals 2,227 726 3,222 15,937 1,741 15,973 1,360 10,337 8,550 42,973 8,492 42,638 6,912 19,555 19,353 11,708 57,528 57,164 TOTAL STATEWIDE SOURCE: Arizona's Highway Performance Monitoring System (HPMS) 2003 & 2002 Data 78 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 Richard Gromoll, MBA Christopher Kipiani 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 Communications and Community Partnerships for his graphic design. 2004 Comprehensive Annual Financial Report 79