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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, 2003. 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 $86,200,845 at December 31, 2003, an
increase of $10,570,908 (14.0%) over the prior year. Most of this increase is
attributable to major street construction activities undertaken during the year. Of
the total net assets, $19,774,573 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 $38,489,639, a slight increase of $220,634 (0.5%) over 2002.
Of the total expenses for 2003:
$13,380,231 (35%) was paid through direct charges (such as water fees) to
benefiting parties;
$16,364,857 (43%) was paid by grants and contributions, primarily from the
state and federal governments; and
The remaining portion was paid from state shared revenues, local income and
property taxes, and other locally generated revenues.
The City's general fund reported a fund balance of $2,431,418, a decrease of
$376,578 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
$1.5 million at December 31, 2003, a decrease City's Annual Financial Report
of $500,000 from 2002.
The City issued $1.575 million in capital
improvement bonds during fiscal year 2003 to
finance citywide sidewalk improvements.
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 greater 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 Figure A-2. Major Features of the City's Government-Wide and Fund Financial Statements
financial statements Fund Statements
and provide additional 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
data. The statements (except fiduciary funds) that are not proprietary or operates similar to private City is the trustee or
are followed by a Scope and the City's component fiduciary businesses. agent for someone else's
units resources
section of required
supplementary Statement of net assets Balance sheet Statement of net assets Statement of fiduciary
net assets
information that further
Required financial Statement of activities Statement of revenues, Statement of revenues, Statement of changes
explains and supports statements expenditures & changes expenses and changes in in fiduciary net assets
in fund balances fund net assets
the information in the Statement of cash flows
Accounting basis Accrual accounting and Modified accrual Accrual accounting and Accrual accounting and
financial statements. and measurement economic resources focus accounting and current economic resources focus economic resources focus
Figure A-1 shows how focus financial resources focus
All assets and liabilities, Only assets expected to All assets and liabilities, All assets and liabilities,
the required parts of Type of both financial and capital, be used up and liabilities both financial and capital, both short-term and long-
short-term and long-term that come due during the and short-term and long- term; the City's funds do
this annual report are asset/liability
information year or soon thereafter; term not currently contain
no capital assets included capital assets, although
arranged and related to they can
one another. 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
Type of is received or paid expenditures when goods paid is received or paid
Figure A-2 summarizes inflow/outflow or services have been
information received and payment is
the major features of due during the year or
the City's financial 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 or other legal requirements.
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 the user 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
2003 2002 2003 2002 2003 2002 2003-2002
Current and other assets $32,654 $29,530 $13,539 $15,059 $46,193 $44,589 3.6%
Capital assets 39,203 30,604 41,352 40,942 80,555 71,546 12.6%
Total Assets 71,857 60,134 54,891 56,001 126,748 116,135 9.1%
Long-term liabilities 8,615 8,231 15,328 16,881 23,943 25,112 -4.7%
Other liabilities 16,161 14,970 444 423 16,605 15,393 7.9%
Total Liabilities 24,776 23,201 15,772 17,304 40,548 40,505 0.1%
Net Assets
Invested in capital assets,
net of related debt 32,120 23,793 27,809 26,226 59,929 50,019 19.8%
Restricted 5,674 4,462 822 823 6,496 5,285 22.9%
Unrestricted 9,287 8,678 10,488 11,648 19,775 20,326 -2.7%
Total Net Assets $47,081 $36,933 $39,119 $38,697 $86,200 $75,630 14.0%
The total net assets of the City were $86,200,845 as of December 31, 2003. This
represents an increase of $10,570,908 over the prior year. This change is explained
more fully below.
Changes in net assets. The City's total revenues were $49,060,547. A significant portion
(27%) of the City's revenue stream
Figure A-3
came from charges to users of specific City of Muskegon
services such as water or sewer (See Sources of Revenue for Fiscal Year 2003
Figure A-3). Another thirty-four percent
came from various grants from the state Operating &
Capital Grants
and federal governments and twenty- 34%
eight percent was from local property
Property Taxes
and income taxes. The remainder was 14%
comprised of state-shared revenues
(10%) and various other sources such Charges for Income Taxes
Services 14%
as interest income. 27% Other State Shared
1% Revenue
10%
The total cost of all City programs and
services during 2003 was $38,489,639.
Seventy-eight percent of these costs
were for governmental activities such as police and fire protection, streets, parks, and
general administration. The remaining twenty-two 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 ($10,570,908)
represents the increase in total net assets for 2003. The increase is primarily
attributable to the receipt of large capital grants for street and other infrastructure
improvements. The following table (Changes in City's Net Assets) further breaks down
the change in total net assets into year-to-year changes in individual revenue and
expense categories:
Changes in City's Net Assets
(In thousands of dollars)
Total
Governmental Business-Type Percentage
Activities Activities Total Change
2003 2002 2003 2002 2003 2002 2003-2002
Program revenues
Charges for services $4,917 $4,506 $8,463 $8,261 $13,380 $12,767 4.8%
Operating grants and contributions 5,614 5,497 - 500 5,614 5,997 -6.4%
Capital grants and contributions 10,495 5,383 256 - 10,751 5,383 99.7%
General revenues
Property taxes 7,029 7,176 - - 7,029 7,176 -2.0%
Income taxes 6,645 6,877 - - 6,645 6,877 -3.4%
State shared revenues 4,939 5,354 - - 4,939 5,354 -7.8%
All other 719 1,069 (17) 105 702 1,174 -40.2%
Total revenues 40,358 35,862 8,702 8,866 49,060 44,728 9.7%
Governmental activities expenses
Public representation 888 986 - - 888 986 -9.9%
Administrative services 1,228 1,287 - - 1,228 1,287 -4.6%
Financial services 1,843 1,855 - - 1,843 1,855 -0.6%
Public safety 11,583 11,576 - - 11,583 11,576 0.1%
Public works 2,947 2,830 - - 2,947 2,830 4.1%
Leisure services 3,042 3,009 - - 3,042 3,009 1.1%
Planning and economic development 3,371 4,015 - - 3,371 4,015 -16.0%
Highways, streets and bridges 3,483 2,881 - - 3,483 2,881 20.9%
General administration 1,601 1,750 - - 1,601 1,750 -8.5%
Interest on long-term debt 224 308 - - 224 308 -27.3%
Business-type activities expenses
Water - - 4,538 4,038 4,538 4,038 12.4%
Sewer - - 3,416 3,441 3,416 3,441 -0.7%
Marina - - 326 293 326 293 11.3%
Total expenses 30,210 30,497 8,280 7,772 38,490 38,269 0.6%
Change in net assets 10,148 5,365 422 1,094 10,570 6,459 63.6%
Net assets at beginning of year 36,933 31,568 38,697 37,603 75,630 69,171 9.3%
Net assets at end of year $47,081 $36,933 $39,119 $38,697 $86,200 $75,630 14.0%
Governmental Activities
The following table (Net Cost of Selected City Functions) 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 related intergovernmental aid). The net cost reflects
what was funded by local tax dollars and other general resources.
The operational cost of all governmental activities during 2003 was $30,209,680.
This is a slight decrease from 2002 as the City continued to reduce costs in
response to economic conditions and falling state-shared revenues.
The net cost that City taxpayers paid for these activities through local taxes was
$13,674,101, or about 45% of the total.
The remaining cost was paid by user charges to those who directly benefit from
the programs or by state and federal grants and contributions.
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 2004 CAFR.
Net Cost of Selected City Functions
(in thousands of dollars)
Total Cost of Net Cost of
Services % Change Services % Change
2003 2002 2003 2002
Governmental activities
Public safety $11,583 $11,576 0.1% $10,210 $10,061 1.5%
Planning and economic development 3,371 4,015 -16.0% (351) 363 -196.7%
Leisure services 3,042 3,009 1.1% 1,717 1,843 -6.8%
Highways and streets 3,483 2,881 20.9% (9,220) (4,773) 93.2%
Public works 2,947 2,830 4.1% 2,290 2,575 -11.1%
All other 5,784 6,186 -6.5% 4,538 5,042 -10.0%
Total governmental activities $30,210 $30,497 -0.9% $9,184 $15,111 -39.2%
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 2003 this goal was achieved with
the City's total business-type activities realizing an overall increase in net assets of
$422,641. These funds were 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 2003 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 conditions and policy priorities. The quarterly
budget reforecasts were particularly relevant in 2003 due to the turbulent state and
national economies. A $500,000 transfer from the City's rainy day fund was needed at
year-end to offset revenue losses, particularly state shared revenues. The following
table shows the general fund year-end fund balance for the last four years:
Fund Balance as a % of
Year-End Fund Year-to-Year % Prior Year's Prior Year Expenditures
Year Balance Change Expenditures (Policy Target = 10%)
2003 $2,431,418 -13.4% $ 23,971,536 10.14%
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 2003 general fund expenditures were $269,150 below original budget amount.
Most of this variance occurred in the areas of salaries, benefits and other operating
costs as the City continued to manage its way through a difficult economy.
General fund revenues in 2003 were $305,302 less than originally budgeted:
Most significantly, state shared revenues were $611,441 under original budget due
to faltering state sales tax collections and cutbacks by the state.
As noted, a $500,000 transfer from the budget stabilization fund was needed to
help offset this revenue shortfall.
CAPITAL ASSETS AND DEBT ADMINISTRATION
Capital Assets
At the end of 2003, the City and its component units had invested $84,738,825 in a wide
range of capital assets, including land, equipment, buildings, water and sewer lines, and
vehicles. In addition the City reports infrastructure assets, including roads, bridges,
sidewalks, and storm sewers acquired or improved since the start of 2002. In future
years, the City will also include historical infrastructure asset investments made
between 1980 and 2002. 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 2004 capital budget anticipates Bond Ratings
spending $24,340,556 for capital projects principally street The City's limited full faith
and water system improvements. These improvements will and credit bonds (i.e. bonds
be funded through grants, bond proceeds, and operating guaranteed by the City's
revenues. Accordingly, revenue bonds in the amount of general taxing powers)
presently carry a Standard &
$13.9 million were issued in March 2004 to finance Poors rating of "A".
improvements to the City's water filtration plant.
Long-Term Debt
At year-end the City had $22,297,288 in bonds and notes outstanding as shown below.
During 2003, new capital improvement bonds in the amount of $1,575,000 were issued
for the purpose of financing citywide sidewalk improvements. Additional information
concerning the City's long-term debt is presented in Note D to the basic financial
statements.
City's Long Term Debt
(In thousands of dollars)
Total
Governmental Business-Type Percentage
Activities Activities Total Change
2003 2002 2003 2002 2003 2002 2003-2002
Bonds and loans payable $7,159 $6,857 $15,138 $16,695 $22,297 $23,552 -5.3%
Long-term absences payable 1,456 1,374 190 186 1,646 1,560 5.5%
Total bonds & notes payable $8,615 $8,231 $15,328 $16,881 $23,943 $25,112 -4.7%
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 $9,386,403 at year-end as shown in the table below. During 2003, $725,000 of
series 1994 LDFA bonds with relatively high interest rates were called using available
cash on hand. Debt issued by the component units is typically secured by the limited
full faith and credit of the City and so is an important consideration in assessing the
City's overall fiscal health. Additional information concerning component units' long-term
debt is presented in Note D to the basic financial statements and is summarized as
follows:
Component Unit Long Term Debt
(In thousands of dollars)
Total
Downtown Local Development Percentage
Finance Authority Finance Authority Total Change
2003 2002 2003 2002 2003 2002 2003-2002
Bonds and loans payable $4,670 $4,840 $4,716 $5,541 $9,386 $10,381 -9.6%
ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES
The City depends on five major sources of income to fund operations: local income
taxes, local property taxes, state-shared revenues, state street funds, and water and
sewer utility fees. Together, these five income sources accounted for $26,801,831, or
82% of the City's 2003 non-grant revenues. Clearly, discussion of the City's financial
outlook must center 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 tax sources are such institutions. Income tax revenues declined
from $6,692,609 in 2002 to $6,542,355 for 2003 (-2.2%) due to general economic
conditions. For 2004, the City is conservatively estimating income tax revenues at
$6,450,000. The following table shows the resident and non-resident composition of the
income tax base:
Number of 2003 Percent of Average
Category Payers Amount Paid Total Amount Paid
City Resident 8,439 $ 2,442,102 37% $ 289
Non-Resident 14,904 3,598,295 55% 241
Corporate 1,700 501,958 8% 295
Total 25,043 $6,542,355 100% $ 261
Local Property Tax
The City's 2003 property tax millage consisted of 10 mills: 7 mills for general operations
and 3 mills levied for sanitation. City charter authorizes a general operating millage up
to 10 mills and state law permits a maximum sanitation millage of 3 mills. For 2004, the
City's operating millage was adjusted to 7.5 mills while the sanitation millage was
reduced to 2.5 mills. This change was made to reflect cost efficiencies in the sanitation
program and also to forestall the possibility of future automatic millage rollbacks due
assessment growth. 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 marginally over the last few years.
Percent
Year Real Personal Total Change
2003 $661,692,712 $177,348,400 $839,041,112 +1.6%
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 21% 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 several years, state shared
revenues have fallen sharply due to the faltering economy and to executive order
budget cuts in the statutory share. The most recent data available from the state
indicates that the state shared revenues will fall short of the City's original 2004 budget
estimate. The City is in the process of making budget adjustments to address this
shortfall. State shared revenue received by the City in recent years is summarized
below:
State Shared Percent
Year Revenues Change
2004 * $4,700,000 -4.8%
2004 ** 5,000,000 +1.2%
2003 4,938,861 -7.8%
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,
Muskegon is somewhat less dependent on this revenue source than most Michigan
cities.
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:
Street Revenues Percent
Year from State Change
2004* $3,314,260 +4.7%
2003 3,166,406 -1.7%
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 $8,188,869 in 2003. Charges to customers
are based on the amount of metered services used times rates periodically set by the
City Commission. For 2004, it is anticipated that sewer rates will remain unchanged.
Water rates were increased January 1, 2004 to help 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).