Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2005 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..............................................................................................................................30-52 Required Supplementary Information (Other than MD&A): Budgetary Comparison Schedule – General Fund (State Highway Fund) .........................................................53-54 Notes to Required Supplementary Information.............................................................................................................55 Information About Infrastructure Assets Reported Using the Modified Approach..........................................56-60 Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2005 TABLE OF CONTENTS (Continued) Page Supplementary Information: Non-Major Governmental Funds: Combining Balance Sheet (Exhibit 9).............................................................................................................61-62 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Exhibit 10) ........63-64 Fiduciary Fund: Combining Statement of Net Assets – Agency Funds (Exhibit 11) .....................................................................65 Statement of Changes in Assets and Liabilities – Agency Funds (Exhibit 12) ..................................................66 Capital Assets Used in the Operation of Governmental Funds: Schedule by Source (Exhibit 13) ................................................................................................................................67 Schedule by Function and Activity (Exhibit 14)......................................................................................................68 Schedule of Changes by Function and Activity (Exhibit 15) ................................................................................69 STATISTICAL SECTION Government-wide Information: Government-wide Expenses by Function (Table 1) .....................................................................................................70 Government-wide Revenues (Table 2) ...........................................................................................................................71 Fund Information: General Governmental Expenditures by Functions/Programs (Table 3) ..................................................................72 General Governmental Revenues by Source (Table 4)................................................................................................73 Expenditures of Federal Awards (Table 5) ....................................................................................................................74 Fuel Tax Rates (Table 6) ...................................................................................................................................................75 Highway User Revenue Fund Collections (Table 7)....................................................................................................76 Highway User Revenue Fund Distributions (Table 8).................................................................................................77 Highway User Revenue Fund Series Bond Coverage (Table 9).................................................................................78 Legal Debt Margin – Highway User Revenue Fund Table 10)..................................................................................79 Regional Area Road Fund Series Bond Coverage (Table 11) ....................................................................................80 Total Public Road Mileage by Highway Class and Governmental Ownership (Table 12) ...................................81 Acknowledgements ........................................................................................................................................................................82 INTRODUCTORY SECTION Arizona Department of Transportation List of Principal Officials Victor M. Mendez Director David P. Jankofsky Deputy Director John A. Bogert Chief of Staff Sam M. Elters State Engineer Intermodal Transportation Division Stacey K. Stanton Assistant Director Motor Vehicle Division Dale J. Buskirk Assistant Director Transportation Planning Division James D. Dickey Assistant Director Public Transportation Division Barclay L. Dick Assistant Director Aeronautics Division John E. McGee Chief Financial Officer Arizona State Transportation Board Member Dallas Gant, Chairman Richard Hileman, Vice Chairman James W. Martin Joe Lane S. L. Schorr Delbert Householder Robert M. Montoya 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) District 5 (Navajo, Apache and Coconino Counties) Term Expires 2006 2006 2007 2008 2009 2010 2011 FINANCIAL SECTION Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 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, 2005. 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 basic 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 $11.6 billion, compared to $10.9 billion for fiscal year 2004, an increase of 6.5 percent. Of this amount, $234.3 million represents unrestricted net assets and may be used to meet the Department’s ongoing obligations to citizens and creditors as compared to $208.9 million in 2004. • The Department’s investment in capital assets, net of related debt, is $10.8 billion, compared to $10.2 billion for fiscal year 2004, an increase 5.9 percent. The Department’s capital assets are $12.7 billion, compared to $12.0 billion for fiscal year 2004, an increase 5.1 percent. This increase is primarily attributable to the reduction of outstanding debt. • The Department’s non-current liabilities are $2.0 billion, compared to $2.0 billion in 2004. The Department retired $9 million more in bonds than were issued. No new transportation excise tax revenue bonds were issued due to the scheduled expiration of the tax. Fund Level: • As of the close of the fiscal year, the governmental funds of the Department reported combined ending fund balances of $537 million, as compared to $434 million in 2004, a 23.7 percent increase over the prior fiscal year. The total reserved fund balance is $447 million; of this, $419 million (93.8 percent) is reserved for capital projects. Approximately $90.5 million (16.8 percent) is available for spending at the government’s discretion (unreserved fund balance) as compared to $69 million (15.9 percent) in 2004. At the end of the fiscal year, the unreserved fund balance for the General Fund (State Highway Fund) was $57 million. • The proprietary funds reported net assets at year-end of $65.6 million, as compared to $65.6 million in 2004. There was a decrease of $36 thousand due to a net loss in the Arizona Highways Magazine Fund caused by a decline in readership and several changes in cost recognition and reserve policies. Overview of the Financial Stateme nts 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. 2005 Comprehensive Annual Financial Report 3 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 • 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 bridges (infrastructure) and economic trends affecting the Department’s future tax revenues. The statement of activities focuses on both the gross and net cost of various activities (governmental and 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 utilizing 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. • Bond issuance costs are capitalized and amortized to expense as governmental activities, but reported as expenditures in the governmental fund statements. • Unless due and payable, long-term liabilities, such as capital lease obligations, compensated absences, notes payable and others, only appear as liabilities on the government-wide statements. • Capital outlay spending results in capital assets on the government-wide statements, but is 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. 2005 Comprehensive Annual Financial Report 4 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 Fund Financial Statements (Reporting the Department’s Major Funds) The fund financial statements begin on page 17 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 fifteen 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 nine governmental funds are comb ined 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 (State Highway Fund). The Schedule of Revenues and Expenditures – Budget and Actual has been provided for the General Fund (State Highway 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, 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 outside customers, other agencies or to other divisions of the Department. 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 page 28. 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 29-52 of this report. 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 2005 Comprehensive Annual Financial Report 5 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 Expenditures – Budget and Actual for the General Fund (State Highway Fund) and the modified approach to reporting infrastructure assets. Required Supplementary Information can be found on pages 53-60 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 61-69 of this report. Governme nt-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, 2005 and 2004. The Department’s combined net assets increased by $711 million over the course of this fiscal year’s operations, an increase of 6.5 percent. The net assets of the governmental activities increased by $711 million or 6.6 percent and businesstype activities decreased by $33 thousand or .1 percent. The following table reflects the condensed Statement of Net Assets as of June 30: Governmental Activities 2005 2004 Business-type Activities 2005 2004 Total 2005 2004 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 $ 964,696,614 12,650,004,961 13,614,701,575 $ 826,944,375 12,032,459,953 12,859,404,328 $215,449,199 499,474 215,948,673 $211,482,635 810,011 212,292,646 $ 1,180,145,813 12,650,504,435 13,830,650,248 $ 1,038,427,010 12,033,269,964 13,071,696,974 238,154,132 1,869,530,670 2,107,684,802 210,502,363 1,852,874,536 2,063,376,899 3,791,948 146,587,988 150,379,936 4,124,920 142,565,681 146,690,601 241,946,080 2,016,118,658 2,258,064,738 214,627,283 1,995,440,217 2,210,067,500 10,780,474,291 491,994,682 234,547,800 $ 11,507,016,773 10,179,585,417 408,410,333 208,031,679 $ 10,796,027,429 499,474 810,011 65,273,296 63,899,875 <204,033> 892,159 $ 65,568,737 $ 65,602,045 10,780,973,765 557,267,978 234,343,767 $11,572,585,510 10,180,395,428 472,310,208 208,923,838 $10,861,629,474 The total assets of the Department were $13.8 billion, while total liabilities were $2.2 billion, resulting in a net assets balance of $11.6 billion. By far, the largest portion of the Department’s net assets, $10.8 billion (93.2 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, 2005, the Department is able to report positive balances in all three categories of net assets for the governmental activities. The same situation held true for the prior fiscal year. The business-type activities reported a deficit in unrestricted net assets for the current year, although the balance was positive in the prior fiscal year. There was a decrease of $33 thousand in net assets for the Department’s business-type activities. This decrease was due to a net loss in the Arizona Highways Magazine Fund combined with a gain in the Highway Expansion and Extension Loan Program fund. 2005 Comprehensive Annual Financial Report 6 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 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 2005 2004 Business-type Activities 2005 2004 Total 2005 2004 Revenues: Program revenues: Charges for services Operating grants and contributions 118,225,054 44,007,905 $ 11,452,006 - $ 12,799,883 - 484,275,728 418,174,005 - - 484,275,728 418,174,005 316,805,562 288,599,800 - - 316,805,562 288,599,800 966,884,699 901,023,518 - - 966,884,699 901,023,518 759,632,832 13,180,039 19,245,241 27,120,478 2,772,359,506 712,039,873 6,320,722 8,352,046 24,774,776 2,521,517,699 2,764,337 380,488 14,596,831 1,587,588 504,612 14,892,083 759,632,832 13,180,039 22,009,578 27,500,966 2,786,956,337 712,039,873 6,320,722 9,939,634 25,279,388 2,536,409,782 42,297,877 9,803,605 57,702,625 7,512,258 - - 42,297,877 9,803,605 57,702,625 7,512,258 Highway Highway Maintenance Motor Vehicle 72,665,070 105,036,826 91,676,147 48,797,165 95,641,623 86,845,369 - - 72,665,070 105,036,826 91,676,147 48,797,165 95,641,623 86,845,369 Other Non-capital, including asset preservation Distributions to Arizona counties 6,871,015 209,901,662 9,814,863 378,788,704 - - 6,871,015 209,901,662 9,814,863 378,788,704 1,086,955,131 306,852,517 42,440,134 1,022,767,761 161,029,210 39,205,377 - - 1,086,955,131 306,852,517 42,440,134 1,022,767,761 161,029,210 39,205,377 86,870,178 - 89,430,886 - 10,270,407 10,006,670 86,870,178 10,270,407 89,430,886 10,006,670 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 and cities Distributions to other state agencies Intergovernmental Interest on long-term debt Arizona Highways Magazine Highway Expansion and Extension Loan Program $ 126,267,181 58,947,746 $ $ 137,719,187 58,947,746 $ 131,024,937 44,007,905 - - 4,359,732 4,413,701 4,359,732 4,413,701 2,061,370,162 1,997,535,841 14,630,139 14,420,371 2,076,000,301 2,011,956,212 Change in net assets Net assets - July 1 710,989,344 10,796,027,429 523,981,858 10,272,045,571 <33,308> 65,602,045 471,712 65,130,333 710,956,036 10,861,629,474 524,453,570 10,337,175,904 Net assets - June 30 $ 11,507,016,773 $ 10,796,027,429 $ 65,602,045 $ 11,572,585,510 $ 10,861,629,474 Total expenses $ 65,568,737 2005 Comprehensive Annual Financial Report 7 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 Governmental Activities: The following chart depicts revenues of the governmental activities for the fiscal year ended June 30, 2005: Revenues - Governmental Activities $2,772,359,506 Fuel and motor carrier taxes and fees 27.4% Interest on investments 0.7% Other revenues including flight property taxes 1.5% Transportation excise taxes 11.4% Charges for services 4.5% Capital grants and contributions 17.5% Vehicle, registration, title, license and related taxes 34.9% Operating grants and contributions 2.1% $2.5 billion (or 91.2 percent) of the Department’s revenues are from the following four revenue sources: • Vehicle, registration, title, license and related taxes comprise the Department’s largest revenue source of $966.9 million (34.9 percent). • Fuel and motor carrier taxes and fees represent the Department’s second largest revenue source of $759.6 million (27.4 percent). • Capital grants and contributions total $484.3 million (17.5 percent). • Transportation excise taxes are the Department’s fourth largest revenue source of $316.8 million (11.4 percent). The Highway User Revenue Fund (HURF) and the Maricopa County Transportation Excise Tax both posted strong gains in fiscal year 2005. The HURF revenue year-over-year growth was slightly below the fiscal year 2004 growth level while the Maricopa County Transportation Excise Tax collections posted the strongest year-over-year growth rate since fiscal year 1996. The growth in collections was broad based, posting gains over fiscal year 2004 for vehicle registration, gas tax, use fuel tax and motor carrier taxes because of the increase in the population, which tends to follow job growth. 2005 Comprehensive Annual Financial Report 8 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 The following chart depicts expenses of the governmental activities for the fiscal year ended June 30, 2005: Expenses - Governmental Activities $2,061,370,162 Distributions to other state agencies 14.9% Distributions to Arizona counties and cities 52.7% Intergovernmental 2.1% Non-capital, including asset preservation 10.2% Interest on long-term debt 4.2% Administration 2.1% Highway 3.5% Highway Maintenance 5.1% Motor Vehicle 4.4% Other * 0.8% *Other includes expenses for Aeronautics and Other $1.6 billion (or 77.8 percent) of the Department’s expenses were for the following: • Distributions to Arizona counties and cities $1,087.0 million (52.7 percent). • Distributions to other state agencies $307.0 million (14.9 percent). • Non-capital, including asset preservation $209.9 million (10.2 percent) The increase in distributions to other state agencies was due to 2004 Senate Bill 1314 which required an additional $118.0 million be transferred from fuel tax revenues to the State of Arizona General Fund. There was also a 6.3 percent increase in the distributions to Arizona counties and cities due to an increase in motor fuel tax and vehicle license tax collections. 2005 Comprehensive Annual Financial Report 9 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 Business-type Activities: Net assets for business-type activities decreased by $33 thousand in fiscal year 2005. Total revenues were $14.6 million, with charges for services representing 78.5 percent and interest on investments 18.9 percent. The total expenses for business-type activities were $14.6 million. Factors contributing to these results included: • The Arizona Highways Magazine (AHM) had an operating deficit of $1.4 million in fiscal year 2005. Two key factors contributed to this result. First, normal operations as reported utilizing the magazine’s historical accounting practices resulted in a deficit of about $550 thousand. The publishing industry continues an overall decline and the Magazine experienced a readership decline that approximated industry wide trends. Secondly, AHM introduced several new accounting policies, which lead to recognizing an additional $850 thousand in expenses in 2005 that were incurred and deferred in fiscal year 2004 and prior years. AHM incurs project expenditures in advance of sales revenue for the associated project. Typical project costs include prepaid book royalties to authors, payments for writing and photography works from freelance contributors and payment for production costs for related product sales such as calendars, holiday cards and catalog items. These project costs are generally deferred until the future period in which the sales revenue is earned and recognized. The enterprise established new cost recognition and reserve policies to recognize in the current period deferred project expenditures when the likelihood of associated future revenues has been substantially delayed or impaired. For fiscal year 2005, the enterprise was able to achieve positive cash flow for the third time in eleven years and, despite the highly competitive business environment, expects positive cash flow again in fiscal year 2006. • The Highway Expansion and Extension Loan Program had an increase in revenues of $644 thousand. The interest on loans receivables decreased by 15 percent in fiscal year 2005 compared to a decrease of 9 percent in fiscal year 2004. Higher average interest rates on invested cash due to prevailing market conditions during fiscal year 2005 resulted in increased interest on investments of $1.2 million for fiscal year 2005. 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 17-24) 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 non-major governmental funds are combined into a single column. Combining statements for the non-major governmental funds may be found on pages 61-64. As of the end of the fiscal year, the fund balances of the governmental funds totaled $537.0 million, an increase of $103.1 million over the previous fiscal year. Of this balance, $90.0 million or 16.8 percent constitutes the unreserved fund balance, which was available for spending for the general purposes of the Department. The remaining fund balance of $447.0 million, or 83.2 percent, was reserved for the following: 1) $5.2 million for inventories, 2) $20.0 million to liquidate an advance to the HELP Fund, 3) $2.3 million to pay debt service, and 4) $419 million to pay for capital projects. The General Fund (State Highway 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 (State Highway Fund) was $57.1 million and the reserved fund balance was $166.4 million. As a measure of the General Fund’s (State Highway Fund) 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 7.0 percent of total General Fund (State Highway Fund) expenditures, while total fund balance represents 27.5 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 2005 were $346.3 million; transportation excise revenue of $316.8 million (or 91.5 2005 Comprehensive Annual Financial Report 10 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 percent) was the bulk of the revenue. Of this revenue, $204.9 million (or 64.7 percent) was used to pay the debt service for the Transportation Excise Tax Revenue Bonds. The Debt Service Fund 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 $374.2 million were transferred in from the General Fund (State Highway Fund) ($104.5 million), the Capital Projects Fund (1.0), the MRF fund ($204.9 million) and Grant Anticipation Notes Fund ($63.8 million), and were used to pay the debt service payment of $393.8 (principal $301.9 million, and interest $91.8 million) during the fiscal year. The remaining fund balance of $2.2 million is restricted for future debt service payments. The Capital Projects Fund 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’s expenditures were $268.9 million. Capital outlay expenditure of $236.4 million (87.9 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 increased by $44.9 million (51.1) during this fiscal year. Budget Variances There were no significant differences between the Department’s budgeted amounts and the actual expenditures for fiscal year 2005. 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, 2005, amounts to $12.7 billion (net of accumulated depreciation), a $.6 billion increase over the previous fiscal year. Governmental Activities 2005 2004 Land $ Buildings and improvements Improvements other than buildings Mobile fleet and aircraft Machinery and equipment Infrastructure Construction in progress Total Business-type Activities 2005 2004 $ $ 1,858,113,828 7,900 $ 1,875,778,386 $ 1,858,121,728 91,904,625 32,529,900 45,923,112 93,975,769 32,151,069 38,477,108 244,151 - 277,968 - 92,148,776 32,529,900 45,923,112 94,253,737 32,151,069 38,477,108 16,624,936 8,863,627,692 1,723,624,210 16,437,987 8,591,370,633 1,401,933,559 247,423 - 524,143 - 16,872,359 8,863,627,692 1,723,624,210 16,962,130 8,591,370,633 1,401,933,559 $ 12,650,004,961 $ 12,032,459,953 810,011 $12,650,504,435 $12,033,269,964 499,474 $ 2004 1,875,770,486 $ 7,900 Total 2005 $ As provided by accounting principles generally accepted in the United States (GAAP), the Department has elected to record its infrastructure assets using the modified approach, as defined in GASB Statement 34. Assets accounted for under the modified approach include 6,816 center lane miles (18,424 travel lane miles) and 4,608 bridges 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” 2005 Comprehensive Annual Financial Report 11 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 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 2005. 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 2005, a CRI of 93.9 percent was obtained. In addition to many smaller projects, each of the following major highway construction projects in excess of $20 million were started during fiscal year 2005: Description Construction of State Route Loop 202 from Frye Road to Power Road in Maricopa County. Construction of State Route Loop 202 from Gilbert Road to Frye Road in Maricopa County. Construction on Interstate 60 at 59th Avenue and Glendale Avenue in Maricopa County. Construction at the interchange of State Route Loop 202 and Interstate 60 in Maricopa County. Contract Start Date Contract Amount Total Contract Expenditures 09/20/2004 $ 58,869,154 11/10/2004 50,458,080 11/22/2004 25,995,948 04/18/2005 $ 71,374,832 $ 21,746,738 17,460,627 5,004,665 $ 3,847,537 In addition to many smaller projects, the following major highway construction projects had expenditures in excess of $15 million in fiscal year 2005. These expenditures include payments made to construction contractors as well as utility, design, right-of-way and landscaping costs. Project Expenditures Description Construction of State Route Loop 202 from Power road to Elliot Road in Maricopa County. Construction on State Route Loop 202 from Arizona Avenue to Gilbert Road in Maricopa County. Construction of State Route Loop 202 from Frye Road to Power Road in Maricopa County. Construction on State Route Loop 202 from Elliot Road to Baseline Road in Maricopa County. Construction of State Route Loop 202 from Gilbert Road to Frye Road in Maricopa County. Construction on State Route 85 to add a parallel road between Gila Bend and Interstate 10 to improve capacity and safety in Maricopa County. Construction on State Route Loop 202 from Dobson Road to Arizona Avenue in Maricopa County. Construction on State Route Loop 202 west of Higley Road to Power Road in Maricopa County. Construction at the interchange of State Route Loop 202 and Interstate 60 in Maricopa County. Construction on the Burro Creek Section of US 93 in Mohave County. Construction on State Route 51 from Interstate 10 to Shea Boulevard in Maricopa County. 2005 Comprehensive Annual Financial Report 12 $ 34,236,011 32,570,797 28,601,165 24,317,032 23,689,258 23,319,197 20,601,415 19,689,959 17,817,728 16,897,744 $ 15,452,590 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 Non-Current Liabilities (See Note 5 G to the financial statements for additional information): The Department’s non-current liabilities for its governmental and business-type activities as of June 30, 2005, amounts to $2.0 billion, an increase of $20.7 million over the previous fiscal year. Governmental Activities 2005 2004 Highway revenue bonds Transportation excise tax revenue bonds Grant anticipation notes Premium on bonds Compensated absences Capital leases Notes payable Total Governmental Activities $ 1,161,355,000 80,375,000 363,970,000 76,721,480 11,726,637 5,909,829 169,472,724 1,869,530,670 $ 1,017,360,000 289,000,000 308,585,000 60,480,591 11,023,013 1,120,965 165,304,967 1,852,874,536 Business-type Activities Compensated absences Notes payable Total Business-type Activities 133,522 146,454,466 146,587,988 151,215 142,414,466 142,565,681 $ 2,016,118,658 $ 1,995,440,217 Total Non-Current Liabilities The revenue bonds have been sold in 36 separate issues between 1980 and 2005. All bonds outstanding as of June 30, 2005, are scheduled to mature on various dates, but not later than July 1, 2024. The bonds are obligations of the State Transportation Board and are not obligations of the State of Arizona. Of the $5.4 billion total in bonds issued between 1980 and 2005, $1.3 billion, or approximately 24 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 Highway User Revenue Fund (HURF) bonds have been rated AAA/Aa1 by Standard & Poor’s Ratings Services and Moody’s Investors Service, respectively. The Department’s subordinate lien HURF bonds are rated AA/Aa2. The senior lien Regional Area Road Fund (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. Arizona Revised Statutes, ARS 28-7678, authorized the Transportation Board to issue non-negotiable Board Funding Obligations (BFOs) for purchase by the Arizona State Treasurer. Laws 2005, Chapter 150 (HB 2123), authorized the Transportation Board to issue BFOs in the principal amount of $200 million in any fiscal year from fiscal years 2006 through 2020 and that mature no later than four calendar years after the date of issuance. The distribution of this authority is $60 million to the General Fund (State Highway Fund) and $140 million to the Highway Expansion and Extension Loan Program (HELP) Fund. 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. In fiscal year 2005, the Department issued Highway Revenue Bonds totaling $188,260,000 to (i) finance portions of the Transportation Board’s Five-Year Transportation Facilities Construction Program, (ii) pay costs of issuing the bonds, and (iii) pay interest on any bonds issued for highway purposes. The Department also issued Grant Anticipation Notes totaling $104,385,000 to (i) pay costs of the projects (as specified) and (ii) pay the costs of issuing the notes. 2005 Comprehensive Annual Financial Report 13 Arizona Department of Transportation Management’s Discussion and Analysis June 30, 2005 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/Inside_ADOT/fms . 2005 Comprehensive Annual Financial Report 14 BASIC FINANCIAL STATEMENTS Government -wide Financial Statements – include the Statement of Net Assets and Statement of Activities and uses the accrual basis of accounting for financial reporting. Governmental Fund Financial Statements – include the Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances for the major governmental funds and uses the modified accrual basis of accounting for financial reporting. Also includes the reconciliations to the government-wide financial statements. Proprietary Fund Financial Statements – include the Statement of Net Assets, Statement of Revenues, Expenses and Changes in Fund Net Assets and Statement of Cash Flows for the business-type activities and uses the accrual basis of accounting for financial reporting. Statement of Fiduciary Net Assets – includes the Statement of Net Assets for assets being held for parties outside of the Department. Notes to the Financial Statements Exhibit 1 Arizona Department of Transportation Statement of Net Assets June 30, 2005 Governmental Activities ASSETS Unrestricted cash on deposit with the State Treasurer $ 197,125,509 Business-type Activities $ 1,774,165 Total $ 198,899,674 Receivables: Notes and loans Subscriptions, net of allowance for doubtful accounts Accrued interest Taxes and fees Other, net of allowance for doubtful accounts 5,586,168 1,704,420 60,057,262 14,118,717 131,430,313 396,137 277,628 59,907 137,016,481 396,137 1,982,048 60,057,262 14,178,624 Due from U.S. Government for reimbursable construction costs Due from other state agencies Internal balances Inventories Prepaid items Deferred charges 40,074,217 40,552 15,425,291 8,028,257 14,510,632 203,158 <15,425,291> 1,137,120 290,978 - 40,074,217 243,710 9,165,377 290,978 14,510,632 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 608,025,589 12,463,022,388 95,305,084 7,900 703,330,673 12,463,030,288 186,982,573 13,614,701,575 491,574 215,948,673 187,474,147 13,830,650,248 7,952,520 112,644 8,065,164 7,634,589 86,860,821 127,738,437 110,825 - 7,745,414 86,860,821 127,738,437 7,967,765 - 3,568,479 7,967,765 3,568,479 198,145,790 1,671,384,880 2,107,684,802 133,522 146,454,466 150,379,936 198,279,312 1,817,839,346 2,258,064,738 10,780,474,291 499,474 10,780,973,765 LIABILITIES Accounts payable and other current liabilities Accrued payroll and other accrued expenses Contracts and retainage payable 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: Loans and other financial assistance Debt service Capital projects Unrestricted Total Net Assets 3,051,797 488,942,885 234,547,800 $ 11,507,016,773 65,273,296 <204,033> $ The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 15 65,568,737 65,273,296 3,051,797 488,942,885 234,343,767 $ 11,572,585,510 Exhibit 2 Arizona Department of Transportation Statement of Activities For the fiscal year ended June 30, 2005 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 $ 42,297,877 9,803,605 72,665,070 105,036,826 91,676,147 6,871,015 209,901,662 $ Charges for Services Operating Grants and Contributions Capital Grants and Contributions 919,327 1,518,029 113,506,009 5,563,506 - $ $ 4,203,044 12,421,228 - 484,275,728 - Net Revenues $ <42,297,877> <4,681,234> 424,031,886 <103,518,797> 21,829,862 <1,307,509> <209,901,662> 1,086,955,131 306,852,517 42,440,134 86,870,178 2,061,370,162 4,760,310 126,267,181 42,323,474 58,947,746 484,275,728 <1,086,955,131> <306,852,517> 4,643,650 <86,870,178> <1,391,879,507> 10,270,407 8,443,339 - - <1,827,068> 4,359,732 14,630,139 $ 2,076,000,301 3,008,667 11,452,006 $ 137,719,187 58,947,746 $ 484,275,728 <1,351,065> <3,178,133> $ <1,395,057,640> 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 Sale of capital assets Other Total general revenues $ <1,391,879,507> $ <3,178,133> $ <1,395,057,640> Change in net assets Net assets - July 1 Net assets - June 30 710,989,344 10,796,027,429 $ 11,507,016,773 316,805,562 966,884,699 759,632,832 13,180,039 19,245,241 18,391,623 8,728,855 2,102,868,851 The notes to the financial statements are an integral part of this statement. 16 2,764,337 380,488 3,144,825 316,805,562 966,884,699 759,632,832 13,180,039 22,009,578 18,391,623 9,109,343 2,106,013,676 <33,308> 710,956,036 65,602,045 10,861,629,474 $ 65,568,737 $ 11,572,585,510 GOVERNMENTAL FUNDS FINANCIAL STATEMENTS MAJOR FUNDS General Fund (State Highway Fund) This fund is used to account for all financial transactions applicable to the general operations of the Department. The fund receives money from the Highway User Revenue Fund for vehicle registration, title, license and related fees and fuel and motor carrier taxes. Reimbursements for certain construction expenditures are received from the federal government, Arizona cities and counties, and other state agencies. The fund also receives interest and other revenues. The fund disburses money primarily for the engineering, construction, improvement and maintenance of state highways, parts of highways forming state routes and highways under cooperative agreements with the United States. Maricopa Regional Area Road Construction Fund This fund receives Maricopa County transportation excise tax monies collected by the Department of Revenue. These monies are used for the construction of certain state highways within Maricopa County. Motor Vehic le Division Clearing Fund This fund accounts for the collection and disbursement of Motor Vehicle Division revenues. Highway User Revenue Fund This fund collects motor vehicle and liquid use fuel taxes and receives certain Motor Vehicle Division revenues from the Motor Vehicle Division Clearing Fund. These monies are distributed to the State Highway Fund, the Department of Public Safety, the Arizona State Parks, the Economic Strength Project Fund, and incorporated cities and counties. Debt Service Fund This fund is used to administer all payments of principal and interest on bonds and notes issued by the Arizona Department of Transportation Board for Highway Revenue Bonds, Arizona Transportation Excise Tax Revenue Bonds, and Grant Anticipation Notes. Capital Projects Fund This fund is used to administer bond proceeds for Arizona Transportation Board Highway Revenue Bonds, Arizona Transportation Excise Tax Revenue Bonds, Grant Anticipation Notes and Board Funding Obligations. These monies are expended for the construction of federal, state and local highways within the state. NON-MAJOR FUNDS Other Governmental Funds are the non-major funds and are all special revenue funds. These funds can be found on Exhibit 9 and Exhibit 10. 2005 Comprehensive Annual Financial Report Arizona Department of Transportation Balance Sheet Governmental Funds June 30, 2005 General Fund (State Highway Fund) ASSETS Unrestricted cash on deposit with the State Treasurer Receivables: Accrued interest Interfund (Note 5E) Taxes and fees Notes and loans Other Amounts due from: U.S. Government Arizona counties and cities Inventories Advance to other funds Defered charges 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 (Note 5E) 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 Advance to other funds Debt service Capital projects Unreserved reported in: General fund Non-major special revenue funds Total fund balances Total liabilities and fund balances $ 161,158,006 Special Revenue Funds Motor Vehicle Division Clearing Fund Maricopa Regional Area Road Construction Fund $ - $ - Highway User Revenue Fund $ - 792,688 97,335,975 317,372 5,493,250 70,913 20,430 1,298,810 6,833,171 742,860 6,838,718 - 129,640 18,219,355 53,218,544 - $ 32,227,677 5,231,165 20,000,000 141,188,341 463,744,474 1,991 153,184,337 $ 161,409,652 $ 8,134,859 41,544,284 57,260,721 $ 120,954,057 192,521,596 $ 958,405 $ $ 5,774,510 $ 1,063 $ 26,555 9,279,654 53,584,625 5,500,624 4,965 26,178,929 85,000 21,354,518 683 97,222,524 373,636 715,303 317,372 169,472,724 240,202,343 1,298,810 27,594,259 28,416,589 1,387,752 327,352 57,260,721 95,297,326 192,521,596 5,231,165 20,000,000 141,188,341 133,815,393 - - 57,122,625 223,542,131 463,744,474 133,815,393 $ 161,409,652 57,260,721 192,521,596 The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 17 $ $ Exhibit 3 Debt Service Fund $ Total Non-Major Governmental Funds (See Exhibit 9) Capital Projects Fund - - $32,406,172 180,304 - 464,025 - 55,803 3,272,786 3,969,986 1,792,296 1,693,373 119,591,406 60,057,262 5,586,168 14,118,717 2,107,905 $ 2,288,209 132,157,139 $ 132,621,164 7,844,549 40,552 16,889,526 $66,271,670 $ 40,074,217 40,552 5,231,165 20,000,000 8,134,859 608,025,589 1,076,117,486 $ $ $ $ 6,760,533 - $ Total Governmental Funds - - $ 193,564,178 - - 177,946 7,097,267 - 9,463,248 86,860,821 124,162,666 - - 4,024,522 6,206,377 3,969,986 21,476,098 127,738,437 7,967,765 1,042,655 5,586,168 169,472,724 539,055,017 2,288,209 - 132,621,164 85 11,447,694 5,231,165 20,000,000 2,288,294 419,072,592 2,288,209 $ 2,288,209 132,621,164 $ 132,621,164 33,347,793 44,795,572 $66,271,670 57,122,625 33,347,793 537,062,469 1,076,117,486 $ 2005 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, 2005 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) 537,062,469 12,603,336,546 45,992,420 5,586,168 <1,684,960,830> $ 11,507,016,773 The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 19 Arizona Department of Transportation Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the fiscal year ended June 30, 2005 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 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 Division Clearing Fund - $ 316,805,562 149,734,911 333,348,462 - 656,402,577 6,765,394 261,768,302 386,226,374 392,940,136 9,077,434 15,351,798 2,349,307 588,892 7,286,612 5,349,227 1,120,194 3,578,022 920,724,995 369,327 12,074,050 131,880 3,447,724 13,042,396 475,952 346,346,891 663,167,971 983,892 2,070,677 651,049,245 40,599,096 63,743,830 105,887,007 86,368,195 169,811 - - - 296,767,939 - - - The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 20 $ - $ Highway User Revenue Fund - Exhibit 4 Debt Service Fund $ Total Non-Major Governmental Funds (See Exhibit 10) Capital Projects Fund - $ - $ Total Governmental Funds - $ 316,805,562 - - 12,484,918 33,292,602 1,080,390,708 759,632,832 3,362,360 3,362,360 3,700,933 3,700,933 110,336,935 4,760,310 224,712 380,109 13,180,039 919,327 567,168 176,146,120 503,646,398 9,077,434 32,186,158 2,349,307 945,484 19,161,630 13,180,039 919,327 18,391,623 1,596,146 6,215,867 2,764,498,515 115,783 - 9,516,884 42,440,134 3,839,933 1,515,929 40,599,096 9,516,884 106,183,964 105,887,007 90,208,128 1,801,523 115,783 - 57,312,880 354,196,602 (continued) 2005 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, 2005 Maricopa Regional Area Road Construction Fund 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 : Transfers in Transfers out for debt service Transfers out other Insurance recovery Debt issuance Capital leases Premium from debt issuance Total other financing sources Net change in fund balances Fund balances - July 1 Fund balances - June 30 $ 34,693,490 2,514,145 Highway User Revenue Fund 7,713,366 - $ 484,762,866 178,405,105 - $ 589,075,086 61,974,159 - 311,866 8,496 178,512,763 299,901,187 812,709,886 682,017 87,521,382 95,916,765 663,167,971 651,049,245 108,015,109 250,430,126 - - 13,840,817 <104,473,980> <43,812> 1,518,029 311,866 <88,847,080> 17,787 <204,938,070> <7,730,044> <212,650,327> - - - - 19,168,029 204,374,102 223,542,131 $ Special Revenue Funds Motor Vehicle Division Clearing Fund 37,779,799 96,035,594 $ 133,815,393 The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 22 $ $ Exhibit 4 Debt Service Fund $ Total Non-Major Governmental Funds (See Exhibit 10) Capital Projects Fund - $ - $ Total Governmental Funds 5,403,813 31,779,763 - $ 1,086,955,131 306,852,517 2,514,145 301,890,000 91,821,897 393,827,680 1,996,384 30,530,861 236,406,122 268,933,367 176,021 94,672,477 302,201,866 91,830,393 1,996,384 209,901,662 623,828,691 2,980,277,391 <390,465,320> <265,232,434> 81,473,643 <215,778,876> 374,161,732 374,161,732 <939,265> <6,016,817> 292,645,000 24,414,008 310,102,926 26,025 <63,810,417> <93,956> <63,878,348> 388,046,361 <374,161,732> <13,884,629> 1,518,029 292,645,000 311,866 24,414,008 318,888,903 <16,303,588> 44,870,492 18,591,797 87,750,672 $ 2,288,209 $ 132,621,164 $ 17,595,295 27,200,277 44,795,572 103,110,027 433,952,442 $ 537,062,469 2005 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, 2005 Net change in fund balance - total governmental funds (Exhibit 4) $ 103,110,027 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. 2005 Comprehensive Annual Financial Report 24 616,226,841 <317,059,008> 311,360,744 3,857,104 <6,506,364> $ 710,989,344 PROPRIETARY FUND FINANCIAL STATEMENTS MAJOR FUNDS Arizona Highways Magazine Fund The Department uses this fund in the publishing and marketing of the Arizona Highways Magazine and various other products that promote the State of Arizona. Highway Expansion And Extension Loan Program Fund This fund is an innovative financing mechanism to administer funds designated to provide loan and credit enhancement assistance to the Department and to sponsors of local transportation projects. NON-MAJOR FUND Internal Service Fund The Department’s own internal service fund, known as the Equipment Fund, purchases and maintains equipment and materials to be used by other funds and state agencies. 2005 Comprehensive Annual Financial Report Exhibit 5 Arizona Department of Transportation Statement of Net Assets Proprietary Funds June 30, 2005 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 Interfund receivables (Note 5E) Due from Arizona counties and cities Inventories Prepaid items Total current assets 95,305,084 Arizona Highways Magazine Fund $ 1,774,165 - Total $ 1,774,165 95,305,084 Governmental Activities Internal Service Fund $ 3,561,331 - 272,427 16,533,685 4,531,210 203,158 116,845,564 396,137 5,201 59,907 43,815 1,137,120 218,478 3,634,823 396,137 277,628 16,533,685 59,907 4,575,025 203,158 1,137,120 218,478 120,480,387 11,047 2,797,091 6,369,469 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 114,896,628 - 72,500 7,900 72,500 114,896,628 7,900 - 114,896,628 231,742,192 491,574 571,974 4,206,797 491,574 115,468,602 235,948,989 46,668,415 46,668,415 53,037,884 LIABILITIES Current liabilities: Accounts payable Accrued payroll and other accrued expenses Interfund payables (Note 5 E) Compensated absences Deferred revenue Notes payable Total current liabilities 4,310 10,120 14,430 112,644 106,515 3,765 123,402 3,568,479 3,914,805 112,644 110,825 3,765 133,522 3,568,479 3,929,235 149,332 417,110 569,193 1,233,944 2,369,579 20,000,000 146,454,466 166,454,466 166,468,896 3,914,805 20,000,000 146,454,466 166,454,466 170,383,701 4,675,885 4,675,885 7,045,464 Noncurrent liabilities: Advance from other funds 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 $ 65,273,296 65,273,296 $ 499,474 <207,482> 291,992 499,474 65,273,296 <207,482> 65,565,288 $ Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds Net assets of business-type activities $ The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 25 3,449 65,568,737 40,758,586 5,233,834 45,992,420 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, 2005 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Operating revenues: Sales and charges for services (net of write off $114,314) Interest on loans receivables Other Total operating revenues $ 3,008,667 3,008,667 Arizona Highways Magazine Fund $ 8,443,339 380,488 8,823,827 Total $ Governmental Activities Internal Service Fund 8,443,339 3,008,667 380,488 11,832,494 $ 34,291,452 2,885,503 37,176,955 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 201,557 877 110,301 1,297 4,040,000 5,700 4,359,732 4,717,154 97,816 2,688,529 1,404,533 96,885 43,690 680,529 9,657 313,693 220,266 10,272,752 4,717,154 97,816 2,890,086 1,404,533 97,762 43,690 790,830 10,954 4,040,000 313,693 225,966 14,632,484 6,324,112 6,046,460 11,788,437 335,586 76,952 318,384 605,300 83,547 46,767 6,813,082 961,880 33,400,507 Operating gain <1,351,065> <1,448,925> <2,799,990> 3,776,448 2,724,486 2,724,486 39,851 <610> 39,241 2,764,337 <610> 2,763,727 83,611 83,611 1,373,421 63,899,875 $ 65,273,296 <1,409,684> 1,701,676 $ 291,992 <36,263> 3,860,059 42,132,361 $ 45,992,420 Non-operating revenues : Interest on investments 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 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds Change in net assets of business-type activities $ The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 26 2,955 <33,308> Exhibit 7 Arizona Department of Transportation Statement of Cash Flows Proprietary Funds For the fiscal year ended June 30, 2005 Business-type Activities - Enterprise Funds Highway Expansion and Extension Loan Program Fund Arizona Highways Magazine Fund Total Governmental Activities Internal Service Fund Cash flows from operating activities: Receipts from customers Receipts from other funds Receipts from other agencies Payments to suppliers Payments to employees Payments to other funds Payments to other agencies Other receipts Net cash provided by operating activities $ 1,546,603 $ 8,194,651 $ 9,741,254 $ 44,258,248 44,258,248 28,727,946 10,233,117 10,233,117 5,563,506 <29,649> <5,755,551> <5,785,200> <15,061,372> <214,780> <2,676,792> <2,891,572> <11,815,465> <47,427,545> <40,050> <47,467,595> <7,681,528> <7,681,528> <5,700> 379,533 373,833 2,875,566 678,766 101,791 780,557 10,290,181 Cash flows from capital and related financing activities: Proceeds from sale of capital assets Acquisition of capital assets Net cash capital and related financing activities - Cash flows from investing activities: Interest on investments Net cash provided by investing activities Net increase in cash Cash - July 1 Cash - June 30 Reconciliation of operating gain 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 <3,765> <3,765> <3,765> <3,765> 591,004 <9,386,753> <8,795,749> 2,587,637 2,587,637 39,851 39,851 2,627,488 2,627,488 83,611 83,611 3,266,403 137,877 3,404,280 1,578,043 92,038,681 $ 95,305,084 1,636,288 $ 1,774,165 93,674,969 $ 97,079,249 1,983,288 $ 3,561,331 $ <1,351,065> $ <1,448,925> $ <2,799,990> $ 3,776,448 <536,179> <1,645,053> 182,989 Inventories Prepaid items Accounts payable Accrued payroll and other accrued expenses Compensated absences Notes payable Deferred revenue Net cash provided by operating activities 313,693 84,787 <40,050> - 1,136,815 394,210 <16,046> <2,401> 19,905 <9,525> <8,168> 4,040,000 <334,430> $ 678,766 $ 101,791 $ The notes to the financial statements are an integral part of this statement. 2005 Comprehensive Annual Financial Report 27 313,693 <451,392> <1,685,103> 182,989 6,813,082 <9,937> - 1,136,815 <294,663> 394,210 <16,046> <51,268> 17,504 60,624 <17,693> <4,105> 4,040,000 <334,430> 780,557 $ 10,290,181 FIDUCIARY FUND FINANCIAL STATEMENT AGENCY FUNDS Highway Properties - Privilege Tax Fund This fund collects monies from renters of properties previously acquired by the Department for use in future highway development. Monies collected are distributed to the Department of Revenue. Highway Properties - 24% Lieu Tax Fund This fund collects 24 percent of the Department's rental income from properties for use in future highway development. Monies collected are distributed to the local counties. Exhibit 8 Arizona Department of Transportation Statement of Net Assets Agency Funds June 30, 2005 ASSETS Restricted cash on deposit with the State Treasurer Total assets LIABILITIES Due to Department of Revenue Due to Arizona counties Total liabilities $ $ 248,415 248,415 $ 220 248,195 248,415 $ The notes to the financial statements are an integral part of this statement. 2005 Comprehsive Annual Financial Report 28 Notes to the Financial Statements Arizona Department of Transportation Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2005 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 ...............................................40 Note 5 – Detailed Notes on all Funds..........................................................................................................................................42 A – Capital Assets ................................................................................................................................................................42 B – Construction Commitments.........................................................................................................................................43 C – Deferred Revenues........................................................................................................................................................43 D – Securities Held in Lieu of Retention..........................................................................................................................44 E – Interfund Receivables, Payables, Advances and Transfers....................................................................................44 F – Leases...............................................................................................................................................................................45 G – Non-Current Liabilities ................................................................................................................................................46 H – Short-term Debt.............................................................................................................................................................50 I – Fund Balances .................................................................................................................................................................50 Note 6 – Other Information...........................................................................................................................................................51 A – Subsequent Events ........................................................................................................................................................51 B – Contingent Liabilities ...................................................................................................................................................51 C – Retirement Plan .............................................................................................................................................................51 2005 Comprehensive Annual Financial Report 29 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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 2005 Comprehensive Annual Financial Report 30 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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 enterprise 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 enterprise 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 judgments, 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. 2005 Comprehensive Annual Financial Report 31 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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 (neither are 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, and then unrestricted resources, as they are needed to maintain appropriate cash balances and finance the construction program. 2005 Comprehensive Annual Financial Report 32 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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. As of June 30, 2005, the state’s investment pools were not rated. 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 fund. Receivables, Payables and Advances 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”. Advances between funds, as reported in the fund financial statements, are offset by a fund balance reserve account in applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources. 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 2005 Comprehensive Annual Financial Report 33 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 indicating it does not constitute available expendable resources. government-wide statements for inventories. No reservation of net assets is shown in the The business-type activities’ inventories are stated at the lower of cost or market. Costs of enterprise fund inventories consisting of resale products and supplies are generally determined by moving average cost and specific identification methods, respectively. Costs of the internal service fund’s inventories (consisting of vehicle parts and supplies, fuels and lubricants, and other supplies) are determined by moving average cost methods. 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 (State Highway Fund) from the Highway User Revenue Fund for the design, purchase of right-of-way or construction of controlledaccess 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 rightof-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 fund. 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 2005 Comprehensive Annual Financial Report 34 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Infrastructure was capitalized for the first time in fiscal year 2002. The infrastructure assets are reported in the governmental-type activities column of the Statement of Net Assets. The Department’s infrastructure assets consist of roads and bridges and are presented using the modified approach and, therefore, are not depreciated. In order to utilize the modified approach, the Department is required to: 1) maintain an asset management system that includes an up to date inventory of eligible infrastructure assets, 2) perform condition assessments of eligible assets and summarize the results using a measurement scale, 3) estimate each year the annual amount to maintain and preserve the assets at the condition level established and disclosed by the Department, and 4) document that the assets are being preserved approximately at or above the established condition level. 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 subscription 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 revenue represents 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 as well as compensatory time. There is no liability for unpaid accumulated sick leave for the Department. All vacation pay and compensatory time 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) and up to 240 hours of compensatory time which is paid when vacation or compensatory time is taken or upon termination of employment at the individual’s then current rate of pay. The liabilities for vacation and compensatory time 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, which approximates the effective interest 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. 2005 Comprehensive Annual Financial Report 35 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Net Assets/Fund Balance The difference between assets and liabilities is “Net Assets” on the government-wide and proprietary statements and “Fund Balance” on the governmental fund statements. Reservations Fund balances for governmental funds are classified as either reserved or unreserved in the fund financial statements. Reserved fund balances reflect either: 1) funds legally segregated for a specific purpose, or 2) assets, which by their nature, are not available for expenditure. Unreserved fund balances reflect the balances available for appropriation for the general purposes of the fund. 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 revenue includes 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 are 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, capital leases, insurance recovery 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 or loss from the Equipment Fund). 2005 Comprehensive Annual Financial Report 36 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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. 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 Grant Anticipation Notes Fund Local Agency Deposits Fund Motorcycle Safety Education Fund Underground Storage Tank Fund Economic Strength Project 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 Highways Magazine Fund Highway Expansion and Extension Loan Program Fund FIDUCIARY FUNDS Agency Funds: Highway Properties - Privilege Tax Fund Highway Properties - 24% Lieu Tax 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 expenditures is an internal decision for the program manager. Accordingly, transfers between line items such as personal services and other operating expenditures 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. 2005 Comprehensive Annual Financial Report 37 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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. The capital outlay appropriation includes state highway construction and land, buildings and improvements for the General Fund (State Highway 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. Since all of the Department’s investments are placed in the State Treasurer’s investment pools, and the pools are not rated, no other provisions of this Statement are applicable to the Department. 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. 2005 Comprehensive Annual Financial Report 38 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Statement No. 46, Net Assets Restricted by Enabling Legislation In December 2004, GASB issued Statement No. 46. This Statement requires that limitations on the use of net assets imposed by legislation be reported as restricted net assets. The Statement clarifies that a legally enforceable enabling legislation restriction is one that a party external to a government – such as citizens, public interest groups, or the judiciary – can compel a government to honor. This Statement also specifies the accounting and financial reporting requirements if new enabling legislation replaces existing enabling legislation or if legal enforceability is reevaluated. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2005. The Department has not yet implemented this Statement. Statement No. 47, Accounting for Termination Benefits This Statement was issued in June 2005. The Statement requires employers to disclose a description of the termination benefit arrangement, the cost of the termination benefits (required in the period in which the employer becomes obligated if that information is not otherwise identifiable from information displayed on the face of the financial statements), and significant methods and assumptions used to determine termination benefit liabilities. The requirements of the Statement are effective for financial statements for periods beginning after June 15, 2005. Earlier application is encouraged. The Department has not yet implemented this Statement. B. Explanations of Reconciling Items of the Balance Sheet of Governmental Funds to the Statement of Net Assets The governmental funds 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 $ less Internal Service Fund (Equipment Fund) assets $ 2. 12,463,022,388 186,982,573 12,650,004,961 <46,668,415> 12,603,336,546 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 $ 317,372 1,298,810 3,969,986 $ 5,586,168 2005 Comprehensive Annual Financial Report 39 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 3. Long-term liabilities, including bonds payable, are not due and payable in the current period and are not reported in the current period on the fund statements. The detail for the $<1,684,960,831> difference is as follows: Bonds payable $<1,682,421,480> Deferred charges - bond issuance costs Capital leases Compensated absences Business activity share of Equipment Fund gain 6,069,876 311,866 <8,918,138> <2,955> $<1,684,960,831> 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 funds statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes in fund balances – total governmental funds and changes in net assets of governmental activities as reported on the government-wide Statement of Activities. The following explanations are necessary to explain these differences between the governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balances and the government-wide Statement of Activities: 1. Governmental funds report capital outlay as expenditures. However, in the Statement of Activities, these costs are removed; some costs are capitalized as assets while other costs are expensed as follows: Capital outlay Less depreciation expense 2. $ 623,828,691 <7,601,850> $ 616,226,841 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 $<5,698,264> difference are as follows: Debt issued or incurred: Issuance of Highway Revenue Bonds Issuance of Grant Anticipation Notes Premium on bonds $ <188,260,000> <104,385,000> <24,414,008> <317,059,008> Principal repayments: Highway Revenue Bonds Transportation Excise Tax Revenue Bonds Grant Anticipation Notes 44,265,000 208,625,000 49,000,000 Amortization of premium and discount Amortization of bond issuance costs 7,474,360 1,996,384 311,360,744 $ 2005 Comprehensive Annual Financial Report 40 <5,698,264> Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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 loss $ $ 4. 3,860,059 <2,955> 3,857,104 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: Highway administration Sales/disposals of capital assets Capital lease payments Notes & loans Compensated absences $ <8,057,809> 2,045,021 1,120,965 <1,272,807> <341,734> $ <6,506,364> 2005 Comprehensive Annual Financial Report 41 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 5. DETAILED NOTES ON ALL FUNDS A. Capital Assets Capital assets activity for the year ended June 30, 2005, was as follows: July 1, 2004 Beginning Balance Governmental Activities Capital Assets, not being depreciated: Land Infrastructure Construction in progress Total Capital Assets, not being depreciated $ Capital Assets, being depreciated: Buildings and improvements Improvements other than buildings Machinery and equipment Mobile Fleet and aircraft Total Capital Assets, being depreciated Less accumulated depreciation for: Buildings and improvements Improvements other than buildings Machinery and equipment Mobile Fleet and aircraft Total accumulated depreciation Total Capital Assets, being depreciated, net Governmental activities capital assets, net $ $ 1,875,770,486 8,863,627,692 1,723,624,210 12,463,022,388 <51,792,948> <1,881,295> <30,005,541> <77,337,849> <161,017,633> <3,009,909> <321,061> <4,411,913> <6,672,049> <14,414,932> 2,103,066 5,466,893 7,569,959 <54,802,857> <2,202,356> <32,314,388> <78,543,005> <167,862,606> 181,041,933 6,504,773 <564,133> 186,982,573 895,267,786 $ <277,722,777> $ 12,650,004,961 Decreases June 30, 2005 Ending Balance $ 7,900 Increases $ 981,157 2,368,035 3,349,192 810,011 - $ - $ 7,900 <6,097> <6,097> 981,157 2,365,703 3,346,860 <33,816> <279,877> <313,693> 5,488 5,488 <737,006> <2,118,280> <2,855,286> <309,928> <609> <309,928> $ <609> 2005 Comprehensive Annual Financial Report 42 $ 3,765 3,765 802,111 $ <20,957,253> <14,561> <256,186,830> <277,158,644> 146,707,482 34,732,256 48,939,324 124,466,117 354,845,179 <703,190> <1,843,891> <2,547,081> Business type activities capital assets, net $ <2,016,568> <6,117,524> <8,134,092> $ Total Capital Assets, being depreciated, net 38,613,911 272,271,621 577,877,481 888,763,013 938,765 699,892 4,512,364 14,768,684 20,919,705 July 1, 2004 Beginning Balance Less accumulated depreciation for: Buildings and improvements Machinery and equipment Total accumulated depreciation Decreases 145,768,717 34,032,364 46,443,528 115,814,957 342,059,566 $ 12,032,459,953 Business-Type Activities Capital Assets, not being depreciated: Land Capital Assets, being depreciated: Buildings and improvements Machinery and equipment Total Capital Assets, being depreciated 1,858,113,828 8,591,370,632 1,401,933,559 11,851,418,020 Increases June 30, 2005 Ending Balance 491,574 $ 499,474 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Depreciation expense was charged to functions/programs as follows: Governmental Activities: Administration Aeronautics Highway Highway Maintenance Motor Vehicle Capital assets held by the Department's internal service fund are charged to the various functions based on their usage of the assets Total depreciation expense - governmental activities Business-type Activities Arizona Highways Magazine Fund $ 1,786,273 284,669 2,471,153 1,477,608 1,582,147 6,813,082 $ 14,414,932 $ 313,693 B. Construction Commitments The Department’s outstanding commitments for contracts at June 30, 2005, were $627,447,779. Expenditures To Date Construction contracts: Rural roadways Small urban roadways Urban roadways Large urban roadways $ Sub-total Design contracts Other commitments Total $ Remaining Commitment 253,636,947 $ 26,017,594 46,027,739 543,350,071 130,114,621 16,311,160 39,714,037 234,256,868 869,032,351 420,396,686 897,145,149 146,242,902 1,912,420,402 $ 103,793,199 103,257,894 627,447,779 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, 2005: 2005 Comprehensive Annual Financial Report 43 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Governmental Funds: General Fund (State Highway Fund) Maricopa Regional Area Road Construction Fund State Aviation Fund Proprietary Fund: Arizona Highways Magazine Fund $ 317,372 1,298,810 3,969,986 $ 5,586,168 $ 3,568,479 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. At June 30, 2005, the bank held assignment on securities aggregating approximately $24 million in lieu of contractor retentions for construction. These additional securities are not reflected in the accompanying financial statements. E. Interfund Receivables, Payables, Advances and Transfers The balances of current interfund receivables and payables as of June 30, 2005, were: Receivables Governmental activities: General Fund (State Highway Fund) Maricopa Regional Area Road Fund Motor Vehicle Division Clearing Fund Highway User Revenue Fund Non-major governmental funds Business-type activities: Arizona Highways Magazine Fund Highway Expansion and Extension Loan Program Fund Payables Amount Highway User Revenue Fund Arizona Highways Magazine Fund Maricopa Regional Area Road Fund Motor Vehicle Division Clearing Fund Motor Vehicle Division Clearing Fund General Fund (State Highway Fund) Motor Vehicle Division Clearing Fund General Fund (State Highway Fund) Motor Vehicle Division Clearing Fund $ 97,222,524 3,765 85,000 24,686 20,430 742,860 18,036,616 182,739 3,272,786 119,591,406 General Fund (State Highway Fund) General Fund (State Highway Fund) 43,815 4,531,210 4,575,025 $ 124,166,431 The General Fund receivable of $97,222,524 is an accrual for fuel tax revenues imposed in fiscal year 2005 from the Highway User Revenue Fund that will be collected in fiscal year 2006. The Highway User Revenue Fund receivable of $18,036,616 is an accrual for vehicle license taxes due in fiscal year 2005 from the Motor Vehicle Division Clearing Fund that will be collected in fiscal year 2006. In a prior fiscal year, the General Fund advanced $20 million to the Highway Expansion and Extension Loan Program Fund to increase its loan capacity. The advance is due no later than December 31, 2008. 2005 Comprehensive Annual Financial Report 44 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Interfund transfers for the year ended June 30, 2005, consisted of the following: Interfund Transfer In: Interfund Transfer Out: General Fund (State Highway Fund) Capital Projects Fund Maricopa Regional Area Road Construction Fund Non-Major Governmental Funds Total $ General Fund (State Highway Fund) Maricopa Regional Area Road Construction Fund 6,016,817 $ 7,730,044 93,956 $ 13,840,817 $ Debt Service Fund 17,787 - $ 104,473,980 939,265 17,787 204,938,070 63,810,417 $ 374,161,732 Non-Major Governmental Funds $ $ Total 26,025 - $104,517,792 6,956,082 26,025 212,668,114 63,904,373 $388,046,361 The General Fund (State Highway Fund) ($104,473,980), the Maricopa Regional Area Road Construction Fund ($204,938,070) and Other Governmental Funds - Grant Anticipation Notes Fund ($63,810,417) made transfers to the Debt Service Fund to pay bond debt service. F. Leases Operating Leases The Department leases data processing equipment, other equipment, and certain facilities from various lessors. The majority of these leases are for a one-year term, renewable annually. Total rental expenditures (excluding interfund transactions) for the fiscal year ended June 30, 2005, approximated $2,737,116. 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 2006 2007 Future operating lease commitments Amount $ 777,243 818,150 $ 1,595,393 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 2006 2007 2008 2009 2010 2011 -2013 Future operating lease commitments Amount $ 101,820 101,820 105,489 117,324 120,660 349,488 $ 896,601 2005 Comprehensive Annual Financial Report 45 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Capital Leases The Department has entered into lease agreements as lessee for financing the acquisition of various vehicles and equipment. 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 $ $ 6,122,138 <178,671> 5,943,467 The future minimum lease obligations and the net present value of these minimums lease payments as of June 30, 2005, were as follows: Year Ending June 30 2006 2007 2008 2009 2010 & Beyond Governmental Activities $ Total minimum lease payments Less amount representing interest Present value of minimum lease payments 1,233,944 1,334,501 1,334,501 1,334,501 1,193,854 6,431,300 <521,471> $ 5,909,829 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 $1,017,360,000. During the year, Highway Revenue Bonds totaling $188,260,000 were issued to (i) finance portions of the Transportation Board’s Five-Year Transportation Facilities Construction Program, (ii) pay interest on any bonds issued for highway purposes, and (iii) pay costs of issuing the bonds. 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 (State Highway 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: 2005 Comprehensive Annual Financial Report 46 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Purpose Govermental activities Govermental activities - refunding Interest Rates Amount 2.8% - 8.0% 2.75% - 6.0% $ 837,160,000 324,195,000 $ 1,161,355,000 Annual debt service requirements to maturity for Highway Revenue Bonds are as follows: Fiscal year ending Highway Revenue Bonds June 30 Principal Interest 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2024 $ 54,830,000 57,825,000 60,645,000 64,190,000 68,140,000 321,265,000 360,675,000 173,785,000 $59,749,812 56,805,968 54,040,194 50,696,052 47,493,152 185,314,598 99,887,930 18,090,814 $1,161,355,000 $572,078,520 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 $289,000,000. 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, 2005) 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. 2005 Comprehensive Annual Financial Report 47 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 All Transportation Excise Tax Revenue Bonds mature no later than December 15, 2005. Transportation Excise Tax Revenue Bonds currently outstanding are as follow: Purpose Interest Rates Govermental activities 3.0% - 5.0% Amount $ 80,375,000 Annual debt service requirements to maturity for Transportation Excise Tax Revenue Bonds are as follows: Fiscal year ending June 30 2006 Transportation Excise Tax Revenue Bonds Principal Interest $ 80,375,000 $ 1,566,542 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 $308,585,000. During the year, Grant Anticipation Notes totaling $104,385,000 were issued to (i) pay costs of the projects (as specified), (ii) pay interest on the notes, and (iii) pay costs of issuing the notes. Grant Anticipation Notes currently outstanding are as follows: Purpose Govermental activities Interest Rates Amount 3.0% - 5.25% $ 363,970,000 Annual debt service requirements to maturity for Grant Anticipation Notes are as follows: Fiscal year ending June 30 2006 2007 2008 2009 2010 2011-2015 2016 Grant Anticipation Notes Principal Interest $ 38,540,000 42,570,000 36,565,000 29,990,000 31,350,000 172,865,000 12,090,000 $ 16,479,893 14,578,218 13,299,868 11,831,556 10,467,556 28,504,964 604,500 $363,970,000 $ 95,766,555 2005 Comprehensive Annual Financial Report 48 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Notes Payable The Department’s outstanding notes payable as of June 30, 2005, was $315,927,190. The governmental activities notes payable was $169,472,724 and business-type activities was $146,454,466. The notes payable represent the General Fund (State Highway Fund) loan payable to HELP for $106,515,135 and the Board Funding Obligations (BFO) for loans from the State Treasurer for $209,412,055 (principal of $200,000,000 and accrued interest of $9,412,055). Annual debt service requirements to maturity for notes payable are as follows: Fiscal year ending June 30 2006 2007 2008 2009 Governmental Activities Business-type Activities Principal 6,515,135 30,000,000 90,000,000 40,000,000 Interest $ 6,853,270 2,335,975 7,599,000 412,875 $166,515,135 $ 17,201,120 $ Principal $ 140,000,000 - $140,000,000 Interest $ 16,160,000 - $ 16,160,000 The notes payable amount for governmental activities of $169,472,724 includes the accrued interest on the BFO of $2,957,589. The notes payable for business-type activities of $146,454,466 includes the accrued interest on the BFO of $6,454,466. Refunded Bonds Deposited with Escrow Agents In prior fiscal years, the Transportation Board had 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. Refunded bonds of the Department deposited with escrow agents at June 30, 2005, are as follows: Original Issue Type Escrow Maturity Date Balance 1999 Senior 1998 Series A Senior Highway Refunding Bonds Transportation Excise Tax Revenue Bonds July 1, 2009 July 1, 2005 $ 64,130,000 1,425,000 1988 Series A Transportation Excise Tax Revenue Bonds Capital Appreciation Bonds Total refunded bonds deposited with July 1, 2005 8,996,156 escrow agents 2005 Comprehensive Annual Financial Report 49 $ 74,551,156 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 Changes in non-current liabilities The activity for the fiscal year ended June 30, 2005, was as follows: Beginning Ending Balance July 1, 2004 Balance June 30, 2005 Additions Reductions Due Within One Year Governmental Activities: Bonds and Notes: Highway Revenue Bonds $ 1,017,360,000 $ 188,260,000 $ <44,265,000> $ 1,161,355,000 $ 54,830,000 Transportation Excise Tax Tax Revenue Bonds 289,000,000 - <208,625,000> 80,375,000 80,375,000 Grant Anticipation Notes Premium on Bonds 308,585,000 60,480,591 104,385,000 24,414,008 <49,000,000> <8,173,119> 363,970,000 76,721,480 38,540,000 7,024,870 1,675,425,591 317,059,008 <310,063,119> 1,682,421,480 180,769,870 Capital leases Compensated absences Notes payable Total bonds and notes 1,120,965 11,023,013 165,304,967 6,434,004 11,589,056 48,987,545 <1,645,140> <10,885,432> <44,819,788> 5,909,829 11,726,637 169,472,724 1,233,944 9,626,841 6,515,135 Total governmental activities 1,852,874,536 384,069,613 <367,413,479> 1,869,530,670 198,145,790 Business-type Activities: Compensated absences Notes payable 151,215 142,414,466 145,537 4,040,000 <163,230> - 133,522 146,454,466 133,522 - Total business-type activities 142,565,681 4,185,537 <163,230> 146,587,988 133,522 $ <367,576,709> $ 2,016,118,658 $ 198,279,312 Total non-current liabilities $ 1,995,440,217 $ 388,255,150 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, $569,193 of internal service funds compensated absences and $5,909,829 of capital leases 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, 2005. I. Fund Balances Reservations 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, 2005, approximately $134.5 million was reserved in the General Fund (State Highway Fund) or this purpose. The remaining $6.7 million was restricted for highway construction from Federal highway fatality monies and right of way. The advance from the General Fund (State Highway Fund) for $20.0 million is reserved for the receivable from the Highway Expansion and Extension Loan Program Fund. 2005 Comprehensive Annual Financial Report 50 Arizona Department of Transportation Notes to the Financial Statements June 30, 2005 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 July 19, 2005, the Transportation Board issued $147,400,000 in Highway Revenue Refunding Bonds, Series 2005A to (i) refund portions of the Board’s outstanding senior bonds and (ii) pay costs of issuing the Series 2005A Refunding Bonds. The 2005A Bonds are due July 1, 2011, through July 1, 2022. Net proceeds totaled $161,783,280 (after receipt of $14,956,636 reoffering premium and payment of $573,356 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. 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. Furthermore, 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. 2005 Comprehensive Annual Financial Report 51 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, 2005, was computed to be 5.2 percent of covered payroll by an actuarial valuation performed at June 30, 2003. The contribution rate for fiscal year 2004 was 2.71 percent. Contributions for the years ended June 30, 2005, 2004 and 2003 were $8,990,672, $8,687,059 and $4,093,262, respectively, for both the employees and the Department, which were equal to the required contributions for each year. The Department's total payroll for fiscal year 2005 was $161.8 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 2005 was $9.0 million by both the employees and the Department. Required Supplementary Information (Other than MD&A) Budgetary Comparison Schedule – General Fund (State Highway Fund) Notes to Required Supplementary Schedule Information About Infrastructure Assets Reported Using the Modified Approach 2005 Comprehensive Annual Financial Report Arizona Department of Transportation Required Supplementary Information June 30, 2005 Budgetary Comparsion Schedule General Fund (State Highway Fund) For the fiscal year ended June 30, 2005 Variance with Final Budget Budgeted Amounts Original Final Actual Amounts Positive Expenditures appropriated by State legislature in 2005 budget: Administration: Personal services Employee related expenditures $ 18,119,700 6,433,700 $ 17,513,100 5,287,200 $ 17,513,088 5,286,688 $ 12 512 Other operating expenditures Attorney General legal service 12,131,500 2,197,000 13,804,500 2,197,000 13,798,874 2,197,000 5,626 - Total Administration 38,881,900 38,801,800 38,795,650 6,150 31,985,500 10,319,100 21,607,500 63,912,100 30,572,332 9,083,700 24,256,068 63,912,100 30,572,330 9,082,845 24,248,750 63,903,925 2 855 7,318 8,175 Personal services 27,299,100 20,823,900 20,823,810 90 Employee related expenditures Other operating expenditures 9,340,800 16,472,700 7,891,700 24,397,000 7,891,194 24,392,558 506 4,442 53,112,600 53,112,600 53,107,562 5,038 Personal services Employee related expenditures 31,440,000 13,560,000 29,000,000 11,900,000 28,761,080 11,669,171 238,920 230,829 Other operating expenditures Maintenance carryover 61,112,000 2,670,844 65,212,000 2,670,844 62,468,057 2,670,315 2,743,943 529 108,782,844 108,782,844 105,568,623 3,214,221 Highways: Personal services Employee related expenditures Other operating expenditures Total Highways Highway Construction Administration: Total Highway Construction Highway Maintenance: Total Highway Maintenance (continued) 2005 Comprehensive Annual Financial Report 53 Arizona Department of Transportation Required Supplementary Information June 30, 2005 Budgetary Comparsion Schedule General Fund (State Highway Fund) For the fiscal year ended June 30, 2005 Variance with Final Budget Budgeted Amounts Original Final Actual Amounts Positive Motor Vehicle: Personal services Employee related expenditures $ 47,500,000 17,200,000 $ 44,312,387 16,397,400 $ 44,312,356 16,397,177 Other operating expenditures Fee accounting and revenue 17,415,500 21,405,713 21,372,837 32,876 management system Integrated inventory system Security enhancement 156,083 99,244 2,343,421 156,083 99,244 2,343,421 153,181 99,194 802,686 2,902 50 1,540,735 License plates and tabs Public information service 2,295,300 150,000 2,295,300 150,000 2,291,554 150,000 3,746 - Special plates MVD electronic certificate of title system MVD one-time trailer fees administration 1,535,569 18,341 43,724 1,535,569 18,341 43,724 183,712 - 1,351,857 18,341 43,724 140,200 748,400 140,200 748,400 140,200 676,888 71,512 383,300 342,500 148,000 90,519,582 383,300 342,500 148,000 90,519,582 378,128 245,181 157,392 87,360,486 38,500 16,200 3,900 58,600 42,169 16,200 231 58,600 42,169 16,200 231 58,600 - 6,849,155 32,288,300 6,849,155 32,680,100 3,872,392 32,680,100 2,976,763 - MVD Attorney General legal services Abandoned vehicle administration Vechicle registration enforcement License plate credit Motor carrier towing Total Motor Vehicle $ 31 223 5,172 97,319 <9,392> 3,159,096 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 39,512 39,512 39,512 $ 394,444,593 $394,756,293 $ 385,386,850 The notes to required supplementary information are an integral part of this statement. 2005 Comprehensive Annual Financial Report 54 $ 9,369,443 Arizona Department of Transportation Required Supplementary Information June 30, 2005 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 expenditures is an internal decision for the program manager. Accordingly, transfers between line items such as personal services and other operating expenditures within a particular program may be made by the program manager. Transfers of funds between programs require the approval of the Director of the Department of Administration. Expenditures may not exceed appropriations. All transfers of funds are reported to the Department’s Office of Strategic Planning and Budgeting for monitoring purposes. Budgets are prepared on the cash basis except that liabilities incurred before the end of the fiscal year and paid within the first month of the subsequent fiscal year are charged against the prior fiscal year’s budget. The Department’s appropriations lapse at year-end unless exempted by the legislature. For financial reporting purposes, the accompanying financial statements present the legally adopted budget for the operations of the General Fund that is subject to legislative appropriation. The capital outlay appropriation includes state highway construction and land, buildings and improvements for the General Fund (State Highway 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 Budgetary Comparison Schedule 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 2005 Comprehensive Annual Financial Report 55 $ 385,386,850 990,641 243,292,097 178,512,763 2,013,390 2,514,145 $ 812,709,886 Arizona Department of Transportation Required Supplementary Information June 30, 2005 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 6,816 center lane miles (18,424 travel lane miles) of roads and 4,608 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 2006 and beyond was adopted by the Transportation Board on June 17, 2005. 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 is 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 traveling 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 traveling 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: 2005 Comprehensive Annual Financial Report 56 Arizona Department of Transportation Required Supplementary Information June 30, 2005 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 2005, 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 2005 were as follows: Fiscal Year 2002 2003 2004 2005 Estimated Expenditures (in millions) $227.4 243.5 198.5 235.7 Actual Expenditures (in millions) $234.8 220.8 215.5 196.0 2005 Comprehensive Annual Financial Report 57 Arizona Department of Transportation Required Supplementary Information June 30, 2005 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, 2005, the Department owns and maintains 4,608 bridges with an approximate total deck area of 41,988,500 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 sub-structure 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 2005, the CRI was computed at 93.9%. 2005 Comprehensive Annual Financial Report 58 Arizona Department of Transportation Required Supplementary Information June 30, 2005 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 64% of the bridges in the state were constructed prior to the 1970s while only 15% 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 80s 2005 Comprehensive Annual Financial Report 59 90s 2000s Arizona Department of Transportation Required Supplementary Information June 30, 2005 Figure 3 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 2005 were as follows: Fiscal Year 2002 2003 2004 2005 Estimated Expenditures (in millions) $14.4 13.6 12.1 9.4 Actual Expenditures (in millions) $18.2 15.8 12.2 10.0 2005 Comprehensive Annual Financial Report 60 NON-MAJOR GOVERNMENTAL FUNDS FINANCIAL STATEMENTS SPECIAL REVENUE FUNDS Specia l revenue funds are used to account for specific revenues that are legally restricted to expenditures for particular purposes. The State Aviation Fund is appropriated by the legislature and receives monies from aviation gasoline taxes, sale of abandoned or seized aircraft, flight property taxes and the operation of certain airports. The State Aviation Fund monies are used to build and maintain airport facilities. The Safety Enforcement and Transportation Infrastructure Fund is appropriated by the legisla ture and receives monies from the registration of vehicles of nonresidents for enforcement of vehicle safety requirements, maintenance of transportation facilities and upgrades of transportation facilities, including roads, streets, and highways, approved by the Transportation Board within twenty-five miles of the border between Arizona and Mexico. The Motor Vehicle Liability Insurance Enforcement Fund receives fees and interest to administer the State's Mandatory Liability Insurance Program. The Vehicle Inspection and Title Enforcement Fund receives monies from continuing appropriation to be used to defray the cost of investigations involving certificates of title, licensing fraud, registration enforcement and other enforcement related issues. The Motor Carrier Safety Revolving Fund receives fees to administer and enforce the rules governing the safety operations of motor carriers, shippers and vehicles transporting hazardous materials, substances or waste. The Underground Storage Tank Fund receives certain Motor Vehicle Division revenues for distribution to the Department of Environmental Quality. The Economic Strength Project Fund collects monies from the Highway User Revenue Fund for use on approved economic strength projects recommended by the Commerce and Economic Development Commission. The Grant Anticipation Notes Fund receives revenues from the Federal Highway Administration under a grant agreement and certain other federal-aid revenues to accelerate highway construction projects. The Local Agency Deposits Fund receives monies from the U.S. Government and local agencies for the payment of local agency sponsored county secondary road construction projects. 2005 Comprehensive Annual Financial Report Arizona Department of Transportation Combining Balance Sheet Non-Major Governmental Funds June 30, 2005 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 $ 20,409,766 Safety Enforcement Motor Vehicle and Liability Transportation Insurance Infrastructure Enforcement Fund Fund Vehicle Inspection and Title Enforcement Fund $ Motor Carrier Safety Revolving Fund 994,903 $ 8,426,403 $ 2,551,808 37,287 77,677 3,969,986 297,094 2,273 12,347 - 26,430 - 13,465 - - 2,215,839 - - - - - $ 27,007,649 $ 1,009,523 $ 8,452,833 $ 2,565,273 $ 23,292 $ $ $ $ $ - - - - - $ 23,292 60,470 1,562,845 - 47,577 - 36,624 - 33,275 - - 3,969,986 5,593,301 47,577 36,624 33,275 - 21,414,348 21,414,348 $ 27,007,649 961,946 961,946 $ 1,009,523 8,416,209 8,416,209 $ 8,452,833 2,531,998 2,531,998 $ 2,565,273 23,292 23,292 23,292 2005 Comprehensive Annual Financial Report 61 $ Exhibit 9 Underground Storage Tank Fund $ - Economic Strength Project Fund $ Grant Anticipation Notes Fund - $ - Local Agency Deposits Fund $ Total Non-Major Governmental Funds - $ 32,406,172 5,444 3,142,867 - 10,799 - - 1,495,202 55,803 3,272,786 3,969,986 1,792,296 - - - 5,628,710 40,552 7,844,549 40,552 3,058,066 $ 6,206,377 4,013,723 $ 4,024,522 $ 85 85 9,817,652 $ 16,982,116 16,889,526 $ 66,271,670 $ $ $ - $ $ - - - - - 6,206,377 6,206,377 $ 6,206,377 - - - 5,534,422 - 177,946 7,097,267 - 4,024,522 4,024,522 - 5,534,422 4,024,522 6,206,377 3,969,986 21,476,098 $ 4,024,522 85 85 85 11,447,694 11,447,694 $ 16,982,116 85 11,447,694 33,347,793 44,795,572 $ 66,271,670 $ 2005 Comprehensive Annual Financial Report 62 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, 2005 Safety Enforcement and Transportation Infrastructure Fund Motor Vehicle Liability Insurance Enforcement Fund Vehicle Inspection and Title Enforcement Fund $ 2,620,195 - $ 1,642,485 - 224,712 184,560 13,180,039 919,327 546,775 25,069,930 22,813 4,166 2,917,041 2,620,195 1,642,485 9,516,884 - 1,887,259 - 950,077 - 1,002,597 - 9,516,884 1,887,259 950,077 1,002,597 Distributions to Arizona counties and cities Distributions to other state agencies Non-capital, including asset preservation Total expenditures 4,358,632 13,875,516 1,226,800 176,021 3,290,080 30,000 980,077 107,700 1,110,297 Excess of revenues over expenditures 11,194,414 <373,039> 1,640,118 532,188 - <1,896> <1,896> - - 1,640,118 6,776,091 8,416,209 532,188 1,999,810 $ 2,531,998 State Aviation Fund 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 $ 5,322,509 488,964 4,203,044 Expenditures: Current: Transportation - appropriated by State legislature: Aeronautics Highway Motor Vehicle Other Total Transportation - appropriated by State legislature Other financing sources : Interfund transfers in 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 $ $ 11,194,414 10,219,934 21,414,348 $ 2,890,062 - <374,935> 1,336,881 961,946 $ 2005 Comprehensive Annual Financial Report 63 Exhibit 10 Motor Carrier Safety Revolving Fund $ $ Underground Storage Tank Fund 9,667 - $ 31,803,637 Economic Strength Project Fund $ Grant Anticipation Notes Fund 1,000,001 $ - Local Agency Deposits Fund $ Total Non-Major Governmental Funds - $ 12,484,918 33,292,602 9,667 71,255 31,874,892 101,480 1,101,481 63,810,417 1 63,810,418 42,323,474 4,760,310 16,227 47,100,011 110,336,935 4,760,310 224,712 380,109 13,180,039 919,327 567,168 176,146,120 - 1,515,929 - - 42,440,134 - 9,516,884 42,440,134 3,839,933 1,515,929 - 1,515,929 - - 42,440,134 57,312,880 - 30,358,963 31,874,892 1,045,181 56,300 1,101,481 - 42,440,134 5,403,813 31,779,763 176,021 94,672,477 9,667 - - 63,810,418 4,659,877 81,473,643 - - - <63,810,417> <63,810,417> 9,667 13,625 23,292 - - $ $ $ 1 84 85 26,025 <92,060> <66,035> 4,593,842 6,853,852 $ 11,447,694 26,025 <63,810,417> <93,956> <63,878,348> $ 17,595,295 27,200,277 44,795,572 2005 Comprehensive Annual Financial Report 64 FIDUCIARY FUND FINANCIAL STATEMENTS AGENCY FUNDS Combining Statement of Net Assets Statement of Changes in Assets and Liabilities AGENCY FUNDS Highway Properties - Privilege Tax Fund collects monies from renters of properties previously acquired by the Department for use in future highway development. Monies collected are distributed to the Department of Revenue. Highway Properties - 24% Lieu Tax Fund collects 24 percent of the Department's rental income from properties for use in future highway development. Monies collected are distributed to the local counties. 2005 Comprehensive Annual Financial Report Exhibit 11 Arizona Department of Transportation Combining Statement of Net Assets Agency Funds June 30, 2005 Highway Highway Properties Properties - 24 % -Privilege Tax Fund Lieu Tax Fund ASSETS Restricted cash on deposit with the State Treasurer Total assets LIABILITIES Due to Department of Revenue Due to Arizona counties Total liabilities $ $ 220 220 $ $ 248,195 248,195 $ 248,415 $ 248,415 $ 220 220 $ 248,195 248,195 $ $ 2005 Comprehsive Annual Financial Report 65 Total $ 220 248,195 $ 248,415 Exhibit 12 Arizona Department of Transportation Statement of Changes in Assets and Liabilities Agency Funds For the fiscal year ended June 30, 2005 Balance July 1, 2004 Additions Deductions Balance June 30, 2005 Highway Properties - Privilege Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 195 195 $ $ 3,409 3,409 $ <3,384> $ $ <3,384> $ 220 220 LIABILITIES Due to Department of Revenue Total liabilities $ $ 195 195 $ $ 3,409 3,409 $ <3,384> $ $ <3,384> $ 220 220 Highway Properties - 24 % Lieu Tax ASSETS Restricted cash on deposit with the State Treasurer Total assets $ $ 223,385 223,385 $ $ 249,886 249,886 $<225,076> $ $<225,076> $ 248,195 248,195 LIABILITIES Due to Arizona counties Total liabilities $ $ 223,385 223,385 $ $ 249,886 249,886 $<225,076> $ $<225,076> $ 248,195 248,195 2005 Comprehensive Annual Financial Report 66 CAPITAL ASSETS CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS Schedule by Source Schedule by Function and Activity Schedule of Changes by Function and Activity 2005 Comprehensive Annual Financial Report Exhibit 13 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule by Source1 June 30, 2005 and 2004 2004 2005 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. 2005 Comprehensive Annual Financial Report 67 $ $ 1,875,770,486 146,707,482 34,732,256 46,235,293 8,863,627,692 1,723,624,210 12,690,697,419 $ 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 $ $ 12,690,697,419 12,690,697,419 $ $ 12,074,926,537 12,074,926,537 Exhibit 14 Arizona Department of Transportation Capital Assets Used in the Operation of Governmental Funds Schedule By Function and Activity1 June 30, 2005 Function and Activity Land 68 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 $ 1 879,017 - $ 935,955 1,859,226,124 14,828,184 297,868 $ 33,875,622 4,648,473 4,844,126 320,207 41,490,801 46,402,201 4,907,328 9,822,062 1,875,770,486 Improvements other than Buildings Buildings and Improvements $ 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. 146,707,482 753,950 19,907,982 Machinery and Equipment $ 1,646,171 284,610 7,077 21,667 122,946 8,436,237 3,551,616 $ 34,732,256 9,352,868 1,106,360 Infrastructure $ 4,678,802 6,327,542 3,281,586 3,753,381 1,350,811 654,196 7,015,689 8,714,058 $ 46,235,293 Construction in Progress - $ 8,863,627,692 $ 8,863,627,692 Total - $ 1,723,624,210 $ 1,723,624,210 25,814,019 21,312,210 41,136,550 12,457,738,651 3,281,586 8,604,584 1,692,685 777,142 61,850,055 68,489,937 $ 12,690,697,419 STATISTICAL SECTION 2005 Comprehensive Annual Financial Report Table 1 Arizona Department of Transportation Government-wide Expenses by Function For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year Administration 2005 $ 42,298 2004 57,703 2003 52,533 2002 57,864 Aeronautics $ 9,804 7,512 3,848 3,751 Highway $ 72,665 48,797 45,644 46,543 Highway Maintenance/1 $ 314,938 474,430 374,328 188,198 Motor Vehicle $ 91,676 86,845 83,090 82,904 Distributions to Arizona counties, cities and other State Interagencies governmental $ 1,393,808 1,183,797 1,149,593 1,064,560 $ 42,440 39,205 30,235 24,791 Interest on long-term debt $ 86,870 89,431 84,084 89,605 Other Arizona Highways Magazine Highway Expansion and Extension Loan Program $ 6,871 9,815 8,460 6,844 $ 10,270 10,007 11,118 10,711 $ 4,360 4,414 26,349 5,265 70 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 Total $ 2,076,000 2,011,956 1,869,282 1,581,036 Table 2 Arizona Department of Transportation Government-wide Revenues For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year 2005 2004 2003 2002 General Revenues Program Revenues Operating Capital Grants Charges for Grants and and Services Contributions Contributions $ 126,267 131,025 130,889 124,565 $ 58,948 44,008 34,160 56,481 $ 484,276 418,174 453,758 470,772 Taxes $ 2,056,503 1,907,984 1,798,243 1,720,030 Other Revenues Interest on Investments $ $ 27,120 25,279 21,729 27,148 19,245 9,940 22,243 35,488 Total $ 2,772,359 2,536,410 2,461,022 2,434,484 NOTE: Implemented GASB 34 in fiscal year 2002. Therefore, government-wide financial information for years prior to fiscal year 2002 is not available. 71 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 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Administration/1 $ 40,599 56,484 51,485 56,230 48,150 47,847 44,648 43,914 43,981 36,406 Aeronautics $ 9,517 7,228 3,579 3,491 18,280 21,640 26,787 30,734 18,975 11,107 Highway Maintenance Highway/2 $ 106,184 85,258 74,244 68,369 43,117 42,302 42,035 41,381 40,230 111,884 $ 105,887 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 $ $ 90,208 84,921 81,518 81,012 77,337 74,492 67,144 63,056 30,147 33,486 1,393,808 1,182,797 1,146,840 1,038,314 - $ 394,032 374,352 330,203 292,979 292,930 253,823 226,928 199,948 210,446 200,364 $ 833,730 978,607 989,494 1,105,917 1,008,590 941,913 853,695 602,955 540,203 555,087 72 NOTES: FY 2002-2005 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 1996. /3 FY 2002 includes expenditures that are distributed to General Fund (State Highway 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 1996. Other/5 $ 6,312 8,319 7,507 33,526 34,310 43,927 62,600 65,625 84,433 87,960 Total $ 2,980,277 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 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 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Transportation Excise Taxes/1 $ 316,806 288,600 268,721 267,563 - Motor Fuel Taxes and Fees/1 $ 759,633 712,040 695,503 658,535 300,750 276,189 298,394 273,806 288,878 291,000 Vehicle Reg., Title, License and Related Fees/1 $ 1,080,391 1,009,370 935,389 892,093 219,746 255,088 250,121 210,370 198,002 171,823 Expenditures of Federal Reimburse- Interest on Awards /2 ments Investments $ 512,724 427,366 466,354 522,036 428,290 414,015 401,464 283,982 305,438 268,605 $ 34,535 38,945 26,102 12,664 17,150 18,788 15,748 8,505 15,083 32,711 $ 19,162 8,333 19,702 29,697 44,648 41,534 34,377 34,382 33,238 29,603 Other/3 Total $41,248 33,328 25,191 34,405 292,416 267,004 257,479 223,486 231,792 228,698 $ 2,764,499 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 NOTES: /1 FY 2002-2005 includes revenues that were considered Agency Funds in prior years. /2 For years prior to 1999, includes Expendable Trust Fund. /3 Includes interest on loans receivable, flight property taxes, Grand Canyon National Airport, and other. 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 1996 1997 1998 1999 2000 2001 Fiscal Year 73 2002 2003 2004 2005 Table 5 Arizona Department of Transportation Expenditures of Federal Awards /1 For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year FAA 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 $ 4,203 480 242 6 6,278 2,379 91 506 FRA $ 3 14 2 69 14 130 499 FTA $ 8,466 5,549 6,618 5,264 4,746 3,717 5,107 3,392 2,508 3,552 NHTSA $ 96 84 87 83 65 65 275 49 - FHWA FMCSA BLM $ 456,924 384,416 433,472 496,509 390,204 393,958 371,013 278,148 302,633 261,820 $ 282 434 466 282 - $ 152 79 30 47 - $ BIA Sub-total FHWA /2 Total 278 1,048 974 76 2,228 $ 470,401 391,042 440,915 502,188 395,029 398,796 383,716 283,982 305,438 268,605 ####### 36,324 25,439 19,848 33,261 15,219 17,748 - ######## 427,366 466,354 522,036 428,290 414,015 401,464 283,982 305,438 268,605 SOURCE: Single Audit Reports - fiscal years 1996 through 2005. 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 74 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 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 2005 - 18 26 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 SOURCE: Arizona Revised Statutes §28-5606 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. 75 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' Fiscal Year 2005 Motor Veh. 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 $ 701,965 $ 163,463 $ 18,573 $ 50,789 $ 318,689 $ 1,253,479 2004 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 SOURCES: Basic Financial Statements - Fiscal Years 2002 through 2005, General Purpose Financial Statements - Fiscal Years 1996 through 2001, Arizona Highway User Revenue Fund Revenue Collections by Category - Fiscal Years 1996 through 1998. Highway User Revenue Fund Collections $1,350,000 $1,200,000 Thousands of Dollars $1,050,000 $900,000 $750,000 $600,000 $450,000 $300,000 $150,000 $0 1996 1997 1998 1999 2000 2001 Fiscal Year 76 2002 2003 2004 2005 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 Cities and Towns Counties of Public Safety Strength Project Fund Other /1 Total 2005 $ 483,047 $ 362,965 $ 226,110 $ $ 1,000 $128,141 $ 1,253,479 2004 570,801 344,699 214,731 48,698 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 52,216 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 2005, General Purpose Financial Staements - Fiscal Years 1996 through 2001, Monthly Reports MV675580-01 fiscal years 1996 through 2005 (adjusted for accrual basis). NOTES: /1 In fiscal years 1996 through 2005, an appropriation for Arizona State Parks is included. Fiscal years 2002 and 2005 include distributions to State General Fund. 77 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 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 $ 44,265 51,155 44,490 45,365 52,055 46,270 43,805 43,405 40,970 38,430 $ 60,459 53,149 41,932 38,534 36,581 33,994 31,090 33,266 36,148 38,770 $ 104,724 104,304 86,422 83,899 88,636 80,264 74,895 76,671 77,118 77,200 $ 461,763 557,854 540,540 523,326 513,890 528,721 509,935 468,240 468,542 429,825 4.4 5.3 6.3 6.2 5.8 6.6 6.8 6.1 6.1 5.6 SOURCES: Highway User Revenue Fund Schedule 1 Summary For Revenue Collected Monthly Reports MV675577-1 fiscal years 1996 through 2005; Debt Service Funds - fiscal years 1996 through 2005. /1 For fiscal year 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. Fiscal year 2005 is net of a $118 million distribution to the State General 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 1996 1997 1998 1999 2000 2001 2002 Fiscal Year REVENUE 78 DEBT SERVICE 2003 2004 2005 Table 10 Arizona Department of Transportation Legal Debt Margin Highway User Revenue Fund For the fiscal year ended June 30 (Thousands of Dollars) Fiscal Year 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 NOTE: /1 Debt Limit/1 $1,300,000 1,300,000 1,300,000 1,000,000 800,000 800,000 800,000 800,000 800,000 800,000 Total Principal Applicable to Limit $1,161,355 1,017,360 932,700 734,155 700,280 608,500 524,345 568,150 611,555 652,525 Legal Debt Margin $138,645 282,640 367,300 265,845 99,720 191,500 275,655 231,850 188,445 147,475 Total Principal Applicable to the Limit as a Percentage of Debt Limit 89.34% 78.26% 71.75% 73.42% 87.54% 76.06% 65.54% 71.02% 76.44% 81.57% The statutory limitation on the issuance of bonds, as outlined in ARS §28-7510, applies only to the Highway User Revenue Fund (HURF). The only limitation on Maricopa County Regional Area Road Fund (RARF) and Grant Anticipation Notes (GANS) is the ability to secure the debts with available excise tax monies and available grant revenues, respectively. 79 Table 11 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 2005 $ 208,625 $ 14,318 316,806 1.4 2004 199,400 23,553 222,953 288,600 1.3 2003 190,415 31,533 221,948 268,721 1.2 2002 163,455 35,445 198,900 267,563 1.3 2001 156,865 40,035 196,900 264,722 1.3 2000 128,805 42,609 171,414 248,596 1.5 1999 106,765 43,251 150,016 229,470 1.5 1998 82,765 40,512 123,277 209,263 1.7 1997 78,015 45,248 123,263 192,257 1.6 1996 76,955 46,209 123,164 178,413 1.4 Total $ Revenues 222,943 $ Coverage 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 $350,000 $300,000 Thousands of Dollars $250,000 $200,000 $150,000 $100,000 $50,000 $0 1996 1997 1998 1999 2000 2001 2002 Fiscal Year REVENUE DEBT SERVICE 80 2003 2004 2005 Table 12 Arizona Department of Transportation Total Public Road Mileage By Highway Class and Governmental Ownership For the calendar year ended December 31, 2004 (With comparative totals for the calendar year ended December 31, 2003) (In Center Lane Miles) TOTAL FUNCTIONAL CLASSIFICATION STATE COUNTY MUNICIPAL FEDERAL 2004 2003 RURAL: Interstate Freeway 980 - - - 980 980 Principal Arterial 1147 20 18 2 1,187 1,141 Minor Arterial 1169 142 29 3 1,343 1,276 Major Collector 1758 1,548 265 730 4,301 4,233 Minor Collector Local 413 411 1,073 13,948 131 1,632 593 10,025 2,210 26,016 2,117 26,004 16,731 2,075 11,353 36,037 35,751 TOTAL RURAL 5,878 URBAN: Interstate Freeway 188 - - - 188 187 Urban Expressway 142 1 7 - 150 145 Principal Arterial 302 113 741 - 1,156 1,087 Minor Arterial 93 229 953 4 1,279 1,189 Urban Collector Local 37 176 677 1,747 1,394 14,830 53 389 2,161 17,142 2,200 16,969 938 2,767 17,925 446 22,076 21,777 TOTAL URBAN STATEWIDE COMPOSITE: Freeways and Expressways 1,310 1 7 - 1,318 1,312 Arterials 2,711 504 1,741 9 4,965 4,693 Collectors Locals 2,208 587 3,298 15,695 1,790 16,462 1,376 10,414 8,672 43,158 8,550 42,973 6,816 19,498 20,000 11,799 58,113 57,528 TOTAL STATEWIDE SOURCE: Arizona's Highway Performance Monitoring System (HPMS) 2004 & 2003 Data 81 ACKNOWLEDGMENTS The Comprehensive Annual Financial Report was prepared by Financial Management Services, Fiscal Operations: Craig Rudolphy, CPA, CPFO, CGFM Lawrence H. Ehrke, Jr. Richard Neshwat Christopher Kipiani Sheryl Bodmer, CPA Patricia Markiw, CPA Winifred Gettings Diane Wascher 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 David McDarby of Communications and Community Partnerships for his graphic design. 2005 Comprehensive Annual Financial Report 82