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MANAGEMENT'S DISCUSSION AND ANALYSIS
This section of the City of Muskegon's annual financial report presents our discussion
and analysis of the City's financial performance during the fiscal year ended December
31, 2002. Please read it in conjunction with the City's financial statements, which follow
this section.
FINANCIAL HIGHLIGHTS
The City's total combined net assets were $75,629,937 at December 31, 2002. Of
this amount $20,326,050 was unrestricted and may be used to meet the City's
ongoing obligations to citizens and creditors.
During the year, the City's total expenses for both governmental and business-
type activities were $38,269,005. Of this amount:
$12,766,656 (33%) was paid by direct charges (such as water fees) to the
benefiting parties;
$11,379,759 (30%) was paid by grants from the state and federal
governments; and
The remaining portion was paid through state shared revenues, local income
and property taxes, and other locally generated revenues.
The City's general fund reported a fund balance of $2,807,996, a decrease of
$354,372 from the prior year. The City also maintained a budget stabilization (or
"rainy day") fund that reported a fund balance of Figure A-1, Required Components of the
$2.0 million at December 31, 2002. City's Annual Financial Report
The City received an $11 million grant from the
State of Michigan to complete the Shoreline Drive
extension project and re-route traffic along the
City's waterfront.
The City issued $2.245 million in refunding bonds
during fiscal year 2002, resulting in present value
debt service savings of over $73,000.
OVERVIEW OF THE FINANCIAL STATEMENTS
This annual report consists of three parts-
management's discussion and analysis (this section),
the basic financial statements, and required
supplementary information. The basic financial
statements include two kinds of statements that
present different views of the City:
The first two statements are government-wide financial statements that provide
both long-term and short-term information about the City's overall financial status.
The remaining statements are fund financial statements that focus on individual
parts of the government, reporting individual City operations in more detail than
the government-wide statements.
The governmental funds statements tell how general government services
were financed in the short term as well as what remains available for future
spending.
Proprietary fund statements offer short- and long-term financial information
about activities the City operates like private businesses.
Fiduciary fund statements provide information about the financial relationships
in which the City acts solely as a trustee or agent for the benefit of others, to
whom the resources in question belong.
The financial statements also include detailed notes that explain some of the
information in the
financial statements Figure A-2. Major Features of the City's Government-Wide and Fund Financial Statements
and provide additional Fund Statements
data. The statements Type of Statements Government-Wide Governmental Funds Proprietary Funds Fiduciary Funds
Entire City government The activities of the City Activities the City Instances in which the
are followed by a (except fiduciary funds) that are not proprietary or operates similar to private City is the trustee or
and the City's component fiduciary Businesses. agent for someone else's
section of required Scope units resources
supplementary
information that further Statement of net assets Balance sheet Statement of net assets Statement of fiduciary
net assets
explains and supports
Required financial Statement of activities Statement of revenues, Statement of revenues, Statement of changes
statements expenditures & changes expenses and changes in in fiduciary net assets
the information in the in fund balances fund net assets
financial statements. Statement of cash flows
Accounting basis Accrual accounting and Modified accrual Accrual accounting and Accrual accounting and
Figure A-1 shows how and measurement economic resources focus accounting and current economic resources focus economic resources focus
focus financial resources focus
the required parts of All assets and liabilities, Only assets expected to All assets and liabilities, All assets and liabilities,
both financial and capital, be used up and liabilities both financial and capital, both short-term and long-
this annual report are Type of
asset/liability short-term and long-term that come due during the and short-term and long- term; the City's funds do
arranged and related to information year or soon thereafter; term not currently contain
no capital assets included capital assets, although
one another. they can
All revenues and Revenues for which cash All revenues and expenses All revenues and
expenses during year, is received during or soon during year, regardless of expenses during year,
regardless of when cash after the end of the year; when cash is received or regardless of when cash
Figure A-2 summarizes Type of is received or paid expenditures when goods paid is received or paid
the major features of inflow/outflow or services have been
information received and payment is
the City's financial due during the year or
soon thereafter
statements, including
the portion of the City government they cover and the types of information they contain.
The remainder of this overview section of management's discussion and analysis
explains the structure and contents of each of the statements.
Government-Wide Statements
The government-wide statements report information about the City as a whole using
accounting methods similar to those used by private-sector companies. The statement
of net assets includes all of the government's assets and liabilities. All of the current
year's revenues and expenses are accounted for in the statement of activities
regardless of when cash is received or paid.
The two government-wide statements report the City's net assets and how they have
changed. Net assets-the difference between the City's assets and liabilities-is one
way to measure the City's overall financial health or position. Over time, increases or
decreases in the City's net assets are an indicator of whether its financial health is
improving or deteriorating, respectively. However, to assess the overall health of the
City, one needs to consider additional nonfinancial factors such as changes in the City's
tax base.
The government-wide financial statements include not only the City of Muskegon itself
(known as the primary government), but also legally separate component units for which
the City is financially accountable. Financial information for these component units is
reported separately from the financial information presented for the primary government
itself.
The government-wide financial statements of the City include the Governmental
activities. Most of the City's basic services are included here, such as general
government, public safety, highways and streets, sanitation, economic development,
parks and recreation, and interest on long-term debt. Income taxes, property taxes and
revenues from the State of Michigan finance most of these activities. The government-
wide financial statements can be found beginning on page 32 of this report.
Fund Financial Statements
The fund financial statements beginning on page 34 provide more detailed information
about the City's major funds-not the City as a whole. Funds are accounting devices
that the City uses to keep track of specific sources of funding and spending for
particular purposes.
Some funds are required by State law and by bond covenants.
The City Commission establishes other funds to control and manage money for
particular purposes or to show that it is properly using certain taxes and grants.
The City has the following kinds of funds:
Governmental funds-Most of the City's basic services are included in
governmental funds, which focus on (1) how cash and other financial assets that
can readily be converted to cash flow in and out and (2) the balances left at year-
end that are available for spending. Consequently, the governmental fund
statements provide a detailed short-term view that helps you determine whether
there are more or fewer financial resources that can be spent in the near future to
finance the City's programs. Because this information does not encompass the
additional long-term focus of the government-wide statements, we provide
additional information on the subsequent page of the governmental funds
statements that explain the relationship (or differences) between them.
Proprietary funds-Services for which the City charges customers a fee are
generally reported in proprietary funds. Proprietary funds, like the government-
wide statements, provide both long-term and short-term financial information.
We use internal service funds to report activities that provide supplies and services
for the City's other programs and activities.
Fiduciary funds-The City is the trustee, or fiduciary, for certain funds. It is also
responsible for other assets that-because of a trust arrangement-can be used
only for the trust beneficiaries. The City is responsible for ensuring that the assets
reported in these funds are used for their intended purposes. All of the City's
fiduciary activities are reported in a separate statement of fiduciary net assets and
a statement of changes in fiduciary net assets. We exclude these activities from
the City's government-wide financial statements because the City cannot use
these assets to finance its operations.
Component units Finally, the City of Muskegon's Comprehensive Annual
Financial report includes two component units: Downtown Development Authority
(DDA) and Local Development Finance Authority (LDFA), which contains three
sub-districts. Component units are separate legal entities for which the City of
Muskegon has some level of financial accountability. The component units of the
City exist primarily for the issuance and repayment of debt to finance projects in
specific areas of the City. Accordingly, they are discussed below under the Capital
Assets and Debt Administration heading.
FINANCIAL ANALYSIS OF THE CITY AS A WHOLE
Net assets. The Statement of Net Assets provides an overview of the City's assets,
liabilities and net assets. Over time this can provide a good indicator of the City's fiscal
health. A summary of the City's net assets follows:
City's Net Assets
(In thousands of dollars)
Total
Governmental Business-Type Percentage
Activities Activities Total Change
2002 2001 2002 2001 2002 2001 2002-2001
Current and other assets $29,530 (1) $15,059 (1) $44,589 (1) (1)
Capital assets 30,604 (1) 40,942 (1) 71,546 (1) (1)
Total Assets 60,134 (1) 56,001 (1) 116,135 (1) (1)
Long-term liabilities 8,231 (1) 16,881 (1) 25,112 (1) (1)
Other liabilities 14,970 (1) 423 (1) 15,393 (1) (1)
Total Liabilities 23,201 (1) 17,304 (1) 40,505 (1) (1)
Net Assets
Invested in capital assets,
net of related debt 23,793 (1) 26,226 (1) 50,019 (1) (1)
Restricted 4,462 (1) 823 (1) 5,285 (1) (1)
Unrestricted 8,678 (1) 11,648 (1) 20,326 (1) (1)
Total Net Assets $36,933 (1) $38,697 (1) $75,630 (1) (1)
(1) Since GASB 34 was adopted during 2002, only one year of data is presented in the tables shown here. A comparative analysis
of data will be presented in future years when the information is available.
The total net assets of the City were $75,629,937 as of December 31, 2002. This
represents an increase of $6,458,668 over the prior year. This change is explained
more fully below.
Changes in net assets. The City's total revenues were $44,727,673. A significant portion
(29%) of the City's revenue stream came
from direct charges to users of specific Figure A-3
City of Muskegon
services such as water or sewer (See Sources of Revenue for Fiscal Year 2002
Figure A-3). Another thirty-one percent
came from local property and income taxes Operating &
and twenty-five percent was from various Capital Grants
25% Property Taxes
grants from the state and federal 16%
governments. The remainder was
comprised of state-shared revenues (12%) Charges for Income Taxes
and various other sources such as interest Services 15%
income. 29% Other State Shared
3% Revenue
12%
The total cost of all City programs and
services during 2002 was $38,269,005.
Eighty percent of these costs were for governmental activities such as police and fire
protection, streets, parks, and administration. The remaining twenty-percent represents
business-type activities operated by the City, specifically, water, sewer and marina
operations.
The difference between the City's total revenues and expenses ($6,458,668)
represented the increase in total net assets for 2002.
Changes in City's Net Assets
(In thousands of dollars)
Total
Governmental Business-Type Percentage
Activities Activities Total Change
2002 2001 2002 2001 2002 2001 2002-2001
Program revenues
Charges for services $4,506 (1) $8,261 (1) $12,767 (1) (1)
Operating grants and contributions 5,497 (1) 500 (1) 5,997 (1) (1)
Capital grants and contributions 5,383 (1) - (1) 5,383 (1) (1)
General revenues
Property taxes 7,176 (1) - (1) 7,176 (1) (1)
Income taxes 6,877 (1) - (1) 6,877 (1) (1)
State shared revenues 5,354 (1) - (1) 5,354 (1) (1)
All other 1,069 (1) 105 (1) 1,174 (1) (1)
Total revenues 35,862 (1) 8,866 (1) 44,728 (1) (1)
Governmental activities expenses
Public representation 986 (1) - (1) 986 (1) (1)
Administrative services 1,287 (1) - (1) 1,287 (1) (1)
Financial services 1,855 (1) - (1) 1,855 (1) (1)
Public safety 11,576 (1) - (1) 11,576 (1) (1)
Public works 2,830 (1) - (1) 2,830 (1) (1)
Leisure services 3,009 (1) - (1) 3,009 (1) (1)
Planning and economic development 4,015 (1) - (1) 4,015 (1) (1)
Highways, streets and bridges 2,881 (1) - (1) 2,881 (1) (1)
General administration 1,750 (1) - (1) 1,750 (1) (1)
Interest on long-term debt 308 (1) - (1) 308 (1) (1)
Business-type activities expenses
Water - (1) 4,038 (1) 4,038 (1) (1)
Sewer - (1) 3,441 (1) 3,441 (1) (1)
Marina - (1) 293 (1) 293 (1) (1)
Total expenses 30,497 (1) 7,772 (1) 38,269 (1) (1)
Change in net assets 5,365 (1) 1,094 (1) 6,459 (1) (1)
Net assets at beginning of year 31,568 (1) 37,603 (1) 69,171 (1) (1)
Net assets at end of year $36,933 (1) $38,697 (1) $75,630 (1) (1)
(1) Since GASB 34 was adopted during 2002, only one year of data is presented in the tables shown here. A comparative analysis
of data will be presented in future years when the information is available.
Governmental Activities
The following table presents the cost of each of the City's largest functions as well as
each function's net cost (total cost less fees generated by the activities and
intergovernmental aid). The net cost reflects what was funded by local tax dollars and
other general resources.
The cost of all governmental activities during 2002 was $30,496,747.
The net cost that City taxpayers paid for these activities through local property and
income taxes and other general City resources was $15,110,859, or less than one-
half of the total.
The remaining cost was paid by those who directly benefited from the programs
($4,505,612), or
By state and federal grants and contributions ($10,880,276).
Revenues for highways and streets function exceeded program costs because the
City's historic infrastructure or related depreciation costs are not yet recorded.
GASB 34 requires that this information be reported by the year ending December
31, 2007. The City plans to include this information in the 2003 CAFR.
Net Cost of Selected City Functions
(in thousands of dollars)
Total Cost of Net Cost of
Services % Change Services % Change
2002 2001 2002 2001
Governmental activities
Public safety $11,576 (1) (1) $10,061 (1) (1)
Planning and economic development 4,015 (1) (1) 363 (1) (1)
Leisure services 3,009 (1) (1) 1,843 (1) (1)
Highways and streets 2,881 (1) (1) (4,773) (1) (1)
Public works 2,830 (1) (1) 2,575 (1) (1)
All other 6,186 (1) (1) 5,042 (1) (1)
Total governmental activities $30,497 $15,111
(1) Since GASB 34 was adopted during 2002, only one year of data is presented in the tables shown here. A comparative analysis
of data will be presented in future years when the information is available.
Business-Type Activities
The financial goal of the City's business-type activities (i.e. water, sewer and marina
operations) is to operate on a more or less "break-even" basis without making
significant profit or needing general tax subsidies. For 2002 this goal was achieved with
the City's total business-type activities having realized an overall increase in net assets
of $1,093,754. These funds are used to pay debt principal or invest in capital assets.
FINANCIAL ANALYSIS OF THE CITY'S FUNDS
The analysis of the City's major funds begins on page 34 of the CAFR report, following
the government-wide statements. The fund financial statements provide detailed
information about the major City funds, not the City as a whole. The City's major funds
for 2002 were the general fund and the major and local street funds.
General Fund Budgetary Highlights
The general fund receives the most public attention since it is where local tax revenues
are accounted for and where the most popular municipal services such as police, fire
and parks are funded. The City reforecasts its general fund budget on a quarterly basis
to take into account changing economic or political conditions. The quarterly budget
reforecasts were particularly relevant in 2002 due to the turbulent state and national
economies. As recently as the third quarter reforecast (September 2002) it was thought
that a $500,000 transfer from the City's budget stabilization fund would be needed to
offset large threatened reductions in state shared revenues. Fortunately, it was not
necessary to use budget stabilization funds and the general fund ended 2002 in a
strong position, maintaining a fund balance above the City's targeted amount of ten
percent of the prior year's expenditures:
Fund Balance as a % of
Year-End Fund Year-to-Year % Prior Year's Prior Year Expenditures
Year Balance Change Expenditures (Policy Target = 10%)
2002 $2,807,996 -11.2% $ 23,235,978 12.08%
2001 3,162,368 +7.1% 22,232,657 14.22%
2000 2,951,735 - 22,011,881 13.41%
Actual 2002 general fund expenditures were $676,007 below original budget amount.
Most of this variance occurred in the areas of major capital improvements and transfers
to other funds as the City managed through a difficult economy.
General fund revenues were $213,007 less than originally budgeted:
On the negative side, state shared revenues were nearly $400,000 less than
originally budgeted due to cutbacks by the state and actual interest earnings were
nearly $220,000 less than originally budgeted due to continued historically low
interest rates.
Helping offset these negatives were better than expected revenues from building
permit fees and income tax penalties.
CAPITAL ASSETS AND DEBT ADMINISTRATION
Capital Assets
At the end of 2002, the City and its component units had invested $72,264,744 in a wide
range of capital assets, including land, equipment, buildings, water and sewer lines, and
vehicles. In addition, for the first time the City is reporting infrastructure assets, which
include roads, bridges, sidewalks, and storm drains acquired or improved during 2002.
In future years, the City will also include historical infrastructure asset investments made
since 1980. Note C of the notes to the basic financial statements provides detailed
information on the City's capital asset investment.
The City's fiscal year 2003 capital budget projects spending Bond Ratings
$31,598,331 for capital projects principally for street and The City's limited full faith
water system improvements. These improvements will be and credit bonds (i.e. bonds
funded primarily through grants and operating revenues. guaranteed by the City's
Bonds will be issued to finance improvements to the City's general taxing powers)
presently carry a Standard &
water filtration plant. Poors rating of "A".
Long-Term Debt
At year-end the City had $23,551,659 in bonds and notes outstanding as shown below.
Although the City did not issue new debt during the year, several existing debt issues
were refunded to take advantage of the historically low interest rate that prevailed
during 2002.
City's Long Term Debt
(In thousands of dollars)
Total
Governmental Business-Type Percentage
Activities Activities Total Change
2002 2001 2002 2001 2002 2001 2002-2001
Bonds and loans payable $6,857 $8,097 $16,695 $18,109 $23,552 $26,206 -10.1%
Long-term absences payable 1,374 1,546 186 196 1,560 1,742 -10.4%
Total bonds & notes payable $8,231 $9,643 $16,881 $18,305 $25,112 $27,948 -10.1%
In addition to the City's debt, component units such as the Downtown Development
Authority (DDA) and Local Development Finance Authority (LDFA) had outstanding debt
totaling $10,380,824 at year-end as shown in the table below. During 2002, $4,725,000
of new debt was issued by the LDFA to fund construction of the Michigan Center for
Energy Excellence on the downtown waterfront. Debt issued by the component units is
secured by the limited full faith and credit of the City and so it is an important
consideration in assessing the City's overall fiscal health.
Component Unit Long Term Debt
(In thousands of dollars)
Total
Downtown Local Development Percentage
Finance Authority Finance Authority Total Change
2002 2001 2002 2001 2002 2001 2002-2001
Bonds and loans payable $4,840 $5,005 $5,541 $925 $10,381 $5,930 75.1%
ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES
The City depends on five major income sources to fund its operations: local income
taxes, local property taxes, state-shared revenues, state street funds, and water and
sewer utility fees. A discussion of the City's financial outlook must focus on these major
income sources.
Local Income Tax
The City income tax was approved by voters in 1993 and now is the primary source of
funding for police, fire, parks and other general operations. The tax rate is 1% on city
residents and ½ of 1% on non-residents who work in the city. The income tax provides
key advantages for an urban core city such as Muskegon. First, it allows the City to
"regionalize" its tax structure by taxing non-residents who work here and use City
services and by allowing the City to benefit from development occurring outside the City
limits. A second major advantage is that it generates revenue from employees working
at hospitals, government agencies, colleges and other institutions traditionally exempted
from paying property taxes. This is particularly important for Muskegon since six of the
ten largest income sources are such institutions. Income tax revenues declined from
$6,820,171 in 2001 to $6,692,609 for 2002 (-1.9%) due to general economic conditions.
For 2003, the City is conservatively estimating income tax revenues at $6,650,000. The
following table shows the resident and non-resident composition of the income tax base:
Number of 2002 Percent of Average
Category Payers Amount Paid Total Amount Paid
City Resident 8,287 $ 2,403,762 36% $ 290
Non-Resident 15,048 3,605,633 54% 240
Corporate 1,800 683,214 10% 380
Total 25,135 $6,692,609 100% $ 266
Local Property Tax
The City's operating millage consists of 7 mills for general operations and 3 mills levied
for sanitation. City charter authorizes a general operating millage up to 10 mills, but the
City's leadership has chosen to maintain the levy at 7 mills since the local income tax
was adopted. There is no anticipation of changing this policy in the near-term. Millage
rates are applied to the taxable value of property in the City to arrive at the City's
property tax levy. As shown below, taxable values have grown over the last few years
providing a measure of stability to overall City finances.
Percent
Year Real Personal Total Change
2002 $638,624,250 $187,393,600 $826,017,850 +1.6%
2001 601,420,300 211,503,600 812,923,900 +12.3%
2000 543,897,900 180,164,900 724,062,800 -
State Shared Revenues
State shared sales tax revenues represent 23% of total general fund revenue and other
financing sources. The City's state shared revenue allocation is made up of two
approximately equal parts. The constitutional component is a fixed percentage of total
state sales tax collections that cannot be reduced by the legislature. The statutory
component is determined by a complex formula and is subject to adjustment through
the State's budget process. Both constitutional and statutory components depend, of
course, on overall state sales tax collections. Over the last two years, state shared
revenues have fallen due to the faltering economy and to executive order budget cuts in
the statutory share. As of this writing, the Michigan's governor has indicated that she
will seek another 3% reduction in the budget for the State's 2004 fiscal year which will
amount to a loss of approximately $160,000 to the City.
State Shared Percent
Year Revenues Change
2003 * $5,300,000 -4.5%
2003 ** 5,550,302 +3.7%
2002 5,353,987 -6.9%
2001 5,748,523 -
* Current revised budget amount
** Original budget amount
Continued erosion of the state shared revenue component constitutes the single biggest
threat to the stability of City finances at this time. Due to the local income tax, the City
is less dependent on this revenue source than most Michigan municipalities.
Street Funds
The State also returns to the City a share of gasoline tax revenues to help fund
maintenance and construction of major and local streets in the City. These revenues
have not suffered to the extent that general state sales tax revenues have and, in fact,
the City has seen moderate growth in this source over the last few years:
Street Revenues Percent
Year from State Change
2003 * $3,329,566 +3.4%
2002 3,220,625 +1.9%
2001 3,159,325 -
* Budgeted amount
Water and Sewer Fees
From a government-wide entity perspective, combined water and sewer fees represent
the City's largest income source totaling $7,587,576 in 2002. Charges to customers
are based on the amount of metered services used times rates periodically set by the
City Commission. For 2003, it is anticipated that sewer rates will remain unchanged but
that water rates will be increased to finance major improvements at the water filtration
plant. Muskegon's water and sewer rates consistently rank among the lowest in the
state.
CONTACTING THE CITY'S FINANCIAL MANAGEMENT
This financial report is designed to provide our citizens, taxpayers, customers, and
investors and creditors with a general overview of the City's finances and to
demonstrate the City's accountability for the money it receives. If you have questions
about this report, need additional financial information, or wish to obtain separate
financial statements for the City's component units, contact the City's Finance
Department at (231) 724-6713 or by e-mail (finance@shorelinecity.com).