Financial Audit Report 2006

Washington State Auditor’s Office Financial Statements Audit Report

LOTT Alliance Thurston County

Audit Period January 1, 2006 through December 31, 2006

Report No. 72758

Issue Date June 8, 2007

Insurance Building, P.O. Box 40021 y Olympia, Washington 98504-0021 y (360) 902-0370 y (866) 902-3900 y TDD Relay (800) 833-6388 FAX (360) 753-0646 y http://www.sao.wa.gov

Washington State AuditorBrian Sonntag

June 8, 2007

Board of Directors LOTT Alliance Olympia, Washington

Report on Financial Statements Please find attached our report on LOTT Alliance’s financial statements.

We are issuing this report in order to provide information on the Alliance’s financial condition.

In addition to this work, we look at other areas of our audit client’s operations for compliance with state laws and regulations. The results of that audit will be included in a separately issued accountability report.

Sincerely,

BRIAN SONNTAG, CGFM STATE AUDITOR

Insurance Building, P.O. Box 40021 y Olympia, Washington 98504-0021 y (360) 902-0370 y (866) 902-3900 y TDD Relay (800) 833-6388 FAX (360) 753-0646 y http://www.sao.wa.gov

http://www.sao.wa.gov

Table of Contents


January 1, 2006 through December 31, 2006

Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards ........................................ 1

Independent Auditor’s Report on Financial Statements ............................................................................... 3

Financial Section........................................................................................................................................... 5

Independent Auditor’s Report on Internal Control over Financial Reporting and on

Compliance and Other Matters in Accordance with Government Auditing Standards




We have audited the basic financial statements of LOTT Alliance, Thurston County, Washington, as of and for the year ended December 31, 2006, and have issued our report thereon dated April 11, 2007.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In planning and performing our audit, we considered the Alliance’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Alliance’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Alliance’s internal control over financial reporting.

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Alliance's ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Alliance's financial statements that is more than inconsequential will not be prevented or detected by the Alliance's internal control.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.

Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above.

____________________________________________________________________________________________________________ Washington State Auditor's Office

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COMPLIANCE AND OTHER MATTERS

As part of obtaining reasonable assurance about whether the Alliance’s financial statements are free of material misstatement, we performed tests of the Alliance’s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.

The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

This report is intended for the information and use of management the Board of Directors. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations.


April 11, 2007


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Independent Auditor’s Report on Financial Statements




We have audited the accompanying basic financial statements of LOTT Alliance, Thurston County, Washington, as of and for the year ended December 31, 2006, as listed on page 5. These financial statements are the responsibility of the Alliance’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LOTT Alliance, as of December 31, 2006, and the changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report on our consideration of the Alliance’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

The management’s discussion and analysis on pages 6 through 8 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of


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management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.


April 11, 2007


4

Financial Section



REQUIRED SUPPLEMENTAL INFORMATION

Management’s Discussion and Analysis – 2006

BASIC FINANCIAL STATEMENTS

Statement of Net Assets – 2006 Statement of Revenues, Expenses and Changes in Net Assets – 2006 Statement of Cash Flows – 2006 Notes to the Financial Statements – 2006


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Management’s Discussion and Analysis

The following discussion and analysis of the financial performance of the LOTT Alliance (the Alliance) provides an overall review of the Alliance’s financial activities for the year ended December 31, 2006. This discussion is designed to be read in conjunction with the financial statements and notes, which follow this section.

FINANCIAL HIGHLIGHTS

The LOTT Alliance was incorporated on April 17, 2000 and operates under the laws of the State of Washington and applicable to 501(c)(3) corporations. All financial reporting is based on twelve months of operations. Key financial highlight for fiscal year 2006 are:

� The Alliance’s Wastewater Service Charge of $25.50 per month has not been increased since 1999 and service has remained uninterrupted. The Capacity Development Charge was increased by the annual incremental rate adjustment of $64.10 to $3,384.60 as planned.

� On January 1, 2006, all administrative and treasury services were transitioned from the City of Olympia to the Alliance. Thurston County now provides banking and treasury services to the Alliance pursuant to RCW 43.09.285.

In 2006, the Alliance had a positive cash flow and met all debt obligations. As of December 31, 2006, the Alliance had an unrestricted net asset balance of $45,071,049, much of which is slated for future capital improvements.

OVERVIEW OF THE FINANCIAL STATEMENTS

This section of the annual report explains the purpose of the Alliance’s basic financial statements and the notes to the financial statements.

Basic Financial Statements

The financial statements of the Alliance are designed to provide readers with a broad overview of the Alliance’s finances similar to a private-sector business. They have been prepared using the accrual basis of accounting in accordance with generally accepted accounting principles. Under this basis of accounting, revenues are recognized in the period in which they are earned and expenses are recognized in the period in which they are incurred, regardless of the timing of related cash flows. These statements offer short and long-term financial information about the Alliance’s activities.

The Statement of Net Assets presents the Alliance’s assets and liabilities, with the difference between the two reported as Net Assets (Equity). The Statement of Net Assets provides information about the nature and amount of investments in resources (assets), and the obligations to creditors (liabilities). Equity increases when revenues exceed expenses. The Statement of Revenues, Expenses, and Changes in Net Assets reports the revenues and expenses during the periods indicated. The Statement of Cash Flows provides information about the Alliance’s cash receipts and payments for operations, as well as funds provided and used in investing and financing activities.

Notes to the Financial Statements

The notes to the financial statements provide additional information that is essential to gain a full understanding of the figures provided in the financial statements.


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FINANCIAL ANALYSIS

Condensed Financial Information December 31, 2006 and 2005

December 31, 2006 December 31, 2005 Current and Other Assets $ 46,316,409 $ 44,705,201 Net Utility Plant 129,974,514 119,389,780

Total Assets $ 176,290,923 $ 164,094,981

Current Liabilities $ 2,784,503 $ 2,742,776 Long-Term Debt 60,387,967 59,146,088 Other Long-Term Liabilities 606,636 471,445

Total Liabilities $ 63,779,106 $ 62,360,309

Invested in Utility Plant, Net of Related Debt $ 64,606,477 $ 63,070,607 Restricted for Debt Service 2,834,291 2,834,291 Unrestricted 45,071,049 35,829,774

Total Net Assets $ 112,511,817 $ 101,734,672

2006 2005 Operating Revenues $ 15,088,954 $ 20,052,327 Nonoperating Revenue 10,423,589 1,094,409 Total Revenue $ 25,512,543 $ 21,146,736

Operating Expenses 12,393,447 $ 12,484,016 Nonoperating Expenses 2,378,342 1,803,536 Total Expenses $ 14,771,789 $ 14,287,552

Excess(Deficiency) $ 10,740,754 6,859,184 Capital Contributions 38,503

Net Assets - beginning of year $ 101,732,559 $ 94,873,375 Net Assets – end of year $ 112,511,817 $ 101,732,559

For the twelve months ending December 31, 2006 the total assets of the Alliance increased by $11.5 million or approximately 7% and saw the Alliance’s overall financial position improve, mainly due to continued growth in LOTT’s service area. Plant assets have increased due to continued efforts to increase capacity of the system.

There are no restrictions, commitments or other limitations which may affect the availability of resources for future use.


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Capital Assets

The Alliance had a total net Capital Asset Value of $129,974,514 as of December 31, 2006. This was an increase of more than $10 million in assets placed into service for the year. Capital Assets consisted of $57,322,303 in assets not being depreciated including land, improvements and construction in process; $142,509,421 in depreciable assets with a total accumulated depreciation of $69,857,210 or a net value of depreciable assets of $72,652,211. Please refer to the Notes to the Financial Statements for more information.

Long-term Debt

The Alliance currently has the following types of long term debt:

A Washington State Revolving Fund Loan that was defeased from the City of Olympia to the Alliance in July 2001. The Alliance makes yearly payments of $2,834,291 on the loan which will be paid in full in the year 2015. The loan requires that one year’s payment be kept in a restricted fund which will be used for the last payment.

A Washington Economic Development Bond Issue made in 2002. The Alliance’s annual installment for 2006 on the Bonds was $1,207,581. The final payment on the Bond Issue is in 2022.

In October of 2004 the Alliance signed a loan agreement with the Washington State Department of Ecology for a Washington State Water Pollution Control Revolving Fund Loan. The loan was in the amount of $29,224,000 for the construction of the Hawks Prairie Reclaimed Water Plant project. This is a 20 year loan with a 1.5% interest rate. The first payment of $1,747,876 on the loan is due June 30, 2008 and will continue through June 30, 2027.

The Alliance also signed a Washington State Public Works Trust Fund Loan agreement in March of 2005, for the upgrade of the Budd Inlet Treatment Plant Secondary Clarifier project. The authorized loan amount shall not exceed $4,278,404. This is a 20 year loan with a 0.5% interest rate. The next loan payment under this agreement is due on July 1, 2007 in the amount of $327,091.

Please refer to the Notes to the Financial Statements for more information.

REQUESTS FOR INFORMATION

The Alliance’s financial statements, notes and management discussion and analysis are designed to provide a general overview of the Alliance’s finances. Questions concerning any of the information presented in this report should be directed to the Alliance at:

The LOTT Alliance 111 Market St. NE, Ste. 250 Olympia, WA 98501 (360) 664-2333


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Statement of Net Assets

ASSETS Current Assets

Cash and Cash Equivalents Receivables (Net) Due from other Governmental Units Prepayments Other Current/Accrued Assets Total Current Assets

December 31, 2006

$

2006

40,670,306 11,261

1,888,744 911,806

-43,482,118

Noncurrent Assets Restricted cash and cash equivalents Captial Assets

Land Plant Collection System Machinery and Equipment Construction in Progress Accumulated Depreciation Total Capital Assets (Net)

Total Noncurrent Assets

2,834,291

7,663,024 103,970,572 37,950,823

588,026 49,659,279

(69,857,210) 129,974,514 132,808,804

TOTAL ASSETS $ 176,290,922

LIABILITIES Current Liabilities

Accounts Payable Current Portion of Long-Term Debt Other Current and Accrued Liabilities Total Current Liabiities

$ 215,655 2,568,847

-2,784,503

Noncurrent Liabilities: Long-Term Debt (Net of Current Portion) Compensated Absences Total Noncurrent Liabilities

60,387,967 606,636

60,994,603

TOTAL LIABILITIES 63,779,106

NET ASSETS Invested in Capital Assets, Net of Related Debt Restricted for Debt Service Unrestricted

64,606,477 2,834,291

45,071,049

TOTAL NET ASSETS 112,511,816

TOTAL LIABILITIES AND NET ASSETS $ 176,290,922

The accompanying notes are an integral part of these financial statements. ____________________________________________________________________________________________________________

Washington State Auditor's Office 9

Statement of Revenues, Expenses and Changes in Net Assets For the Year Ended December 31, 2006

2006 OPERATING REVENUES

Charges for Services Intergovernmental Revenue Other Operating Revenue Total Operating Revenue

$ 14,778,227 -

310,727 15,088,954

OPERATING EXPENSES General Operations Professional Services Repairs and Maintenance Depreciation Other Operating Expenses Total Operating Expenses

7,394,289 634,561 291,277

4,073,320 -

12,393,447

OPERATING INCOME (LOSS) 2,695,506

NONOPERATING REVENUE (EXPENSES) Capacity Development Charge Interest Income Interest Expense Gain (Loss) on Capital Asset Disposition Other Nonoperating Revenues Other Nonoperating Expenses Total Nonoperating Revenues (Expenses)

8,901,756 1,521,833

(1,700,675) --

(677,667) 8,045,247

Income Before Contributions and Transfers 10,740,753

Capital Contributions Extraordinary Items

38,503 -

CHANGE IN NET ASSETS 10,779,257

TOTAL NET ASSETS, January 1 $ 101,732,559

TOTAL NET ASSETS, December 31 $ 112,511,816



Cash Flows from Operating Activities Cash Received from Customers Cash Received from Other Operating Activities Cash Payments to Suppliers for Goods & Services Cash Payments to Employees Cash Payments for Other Operating Activities Net Cash Provided (Used) by Operating Activities

Statement of Cash Flows For the Year Ended December 31, 2006

Page 1 of 2

$

2006

19,825,273 161,226

(4,478,479) (3,061,800)

(868,821) 11,577,400

Cash Flows from Non-Capital Financing Activities Bond Principal Payments Repayments on Revolving Fund Loan Interest paid on Revenue Bonds Interest paid on Revolving Fund Loan Miscellaneous Other Net Cash Provided (Used) in Non-Capital Financing Activities

(545,000) (1,801,549)

(662,581) (1,032,740)

(677,665) (4,719,536)

Cash Flows from Capital and Related Financing Activities Proceeds from Capacity Development Charge Proceeds from Revolving Fund Loan - Hawks Prairie Project Proceeds from PWTF Loan - Secondary Clarifier Project Acquisition, Construction and Improvements of Capital Assets Transfer of Principal on Long-term Borrowing Repayments on Revolving Fund Loan - Hawks Prairie Project Repayments on PWTF Loan - Secondary Clarifier Project Interest paid on Revolving Fund Loan - Hawks Prairie Project Interest paid on PWTF Loan - Secondary Clarifier Project Miscellaneous Other Net Cash Provided (Used) in Capital and Related Financing Activities

8,901,756 2,741,126 1,069,601

(14,619,550) ----

(5,354) -

(1,912,421)

Cash Flows from Investing Activities Interest Received on Investments Net Cash Provided by Investing Activities

1,599,910 1,599,910

Net Increase (Decrease) in Cash and Cash Equivalents 6,545,353

Cash and Cash Equivalents at Beginning of Year 36,959,244

Cash and Cash Equivalents at End of Year $ 43,504,598



Statement of Cash FlowsFor the Year Ended December 31, 2006

Page 2 of 2

Reconciliation of Operating Income (Loss) to Net Cash Provided by Operating Activities:

2006

Operating Income $ 2,695,506

Depreciation 4,073,320

Changes in Operating Assets and Liabilities Accounts Receivable, net Prepayments A/P and Construction Payables Accrued Annual Leave Liability Miscellaneous Deferred, Accrued and Other Liabilities

4,908,807 -

(224,163) 135,191 (11,261)

Total Changes 4,808,574

Total Adjustments 8,881,894

Net Cash Provided by Operating Activities $ 11,577,400

Noncash Investing, Capital or Financing transactions: During 2006, the City of Olympia transferred vehciles with a net value of $38,503 to the Alliance that affected recognized assets but did not result in cash flows.



Notes to the Financial Statements For the Year Ended December 31, 2006

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the LOTT Alliance (the Alliance) conform to generally accepted accounting principles (GAAP) as applicable to proprietary funds of governments. The Alliance has elected to apply Financial Accounting Standards Board (FASB) guidance issued after November 30, 1989 to the extent that it does not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In June 1999, GASB approved Statement 34, Basic Financial Statements – and Management Discussion and Analysis – for State and Local Governments. This and consecutive statements are reflected in the accompanying financial statements including notes to financial statements. The following is a summary of the most significant policies:

a. Reporting Entity The LOTT Alliance was incorporated on April 17, 2000 and operates under the laws of the State of Washington and applicable to 501(c)(3) corporations. The Alliance is recognized as a governmental organization pursuant to the Inter-local Cooperation Act (RCW 39.34).

b. Basis of Accounting and Presentation The accounting records of the Alliance are maintained in accordance with methods prescribed by the State Auditor under the authority of RCW 43.09.

The Alliance uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when a liability is incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds.

Unbilled utility service receivables are recorded at year-end. Gains and losses from the disposal of utility plant are excluded from operating income.

c. Cash and Cash Equivalents For purposes of the statement of cash flows, the Alliance considers all highly liquid investments including restricted assets with a maturity of three months or less when purchased to be cash equivalents.

d. Utility Plant and Depreciation See Note 3.

e. Restricted Funds In accordance with bond resolutions and other agreements, separate funds have been established for restricted- or limited-use funds. The assets held in these funds are limited as to their use, including debt service and other special reserve requirements.

f. Receivables Customer accounts receivable consist of amounts owed from private individuals or organizations for goods and services including amounts owed for which billings have not been prepared. Receivables have been reported net of estimated uncollectible accounts.

g. Investments See Note 2.


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h. Compensated Absences Vacation leave may be accumulated up to 320 hours for non exempt employees. Exempt employees may accumulate additional hours but that total will be rolled back to 480 hours each January 1. In both cases, vacation is payable upon separation up to a maximum of 240 hours for non exempt employees, and 480 hours for exempt employees. The liability for unpaid vacation leave as of December 31, 2006 was $240,567.

As of December 31, 2006, comp time earned in place of overtime can accrue up to 80 hours for eligible independent employees, and 60 hours for represented employees. Beginning on January 1, 2007, the limit for all employees increased to 120 hours. These banks are payable upon separation or at any time the employee requests it. The liability for unpaid comp time as of December 31, 2006 is $6,141.

Sick leave may accumulate up to 960 hours for all employees. Upon separation, the value of an employee’s unused sick leave is deposited into a shared leave account per the Administrative Guideline. The liability for unpaid sick leave as of December 31, 2006 is $359,928 and the balance in the shared leave account is $15,317.

i. Revenues and Expenses The Alliance defines operating revenues as those received for the Wastewater Service Change. This charge assessed monthly and is used for the operation of the system. Non-operating revenues are primarily comprised of the Capacity Development Charge. This charge is assessed for new customers hooking up to the system and is used to increase capacity of the system.

Operating Expenses are those expenses incurred in conjunction with the day to day operation of the utility. Non-operating expenses are primary comprised of interest on long term debt.

NOTE 2 - DEPOSITS AND INVESTMENTS

The LOTT Alliance’s deposits and certificates of deposits are entirely covered by federal depository insurance (FDIC) or by the collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). As of December 31, 2006 the Alliance had $43,504,597 on deposit with the Thurston County Treasurer.

NOTE 3 – UTILITY PLANT AND DEPRECIATION

All fixed assets are valued at historical cost or estimated cost, where historical cost is not known. The Alliance has acquired certain assets by contribution from the City of Olympia. These assets were recorded by the Alliance at depreciated cost at the time of contribution.

Depreciation on all assets is provided on the straight-line basis over the following useful lives:

Treatment Facility 25 – 50 years Collection 50 – 60 years Other Assets 10 – 20 years


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Utility plant activity for the year ended December 31, 2006 was as follows:

Asset Beginning Balance Increase Decrease Ending Balance

Utility plant not being depreciated: Land and Land Improvements 5,839,462 $ 1,823,562 $ - $ 7,663,024 Construction in Progress 41,387,023 14,557,483 $ $ (6,285,227) $ 49,659,279

Total utility plant not being depreciated 47,226,485 16,381,045 $ $ (6,285,227) $ 57,322,303

Utility plant being depreciated Buildings and Improvements 101,029,783 $ 2,940,789 $ - $ 103,970,572 Machinery and Equipment 487,455 $ 100,571 $ - $ 588,026 Treatment Collection System 36,429,946 $ 1,520,876 $ - $ 37,950,823

Total utility plant being depreciated 137,947,184 $ 4,562,236 $ - $ 142,509,420

Less Accumulated Depreciation for: Buildings and Improvements (59,942,598) $ (3,110,005) $ - $ (63,052,603) Machinery and Equipment (306,665) $ (50,869) $ - $ (357,534) Treatment Collection System (5,534,627) $ (912,446) $ - $ (6,447,073)

Total Accumulated Depreciation (65,783,890) $ (4,073,320) $ - $ (69,857,210)

Total Utility Plant being depreciated, net 72,163,294 $ 488,916 $ $ - $ 72,652,211

Total Utility Plant, Net 119,389,779 16,869,962 $ $ (6,285,227) $ 129,974,514

NOTE 4 – CONSTRUCTION IN PROGRESS

The following table details construction in progress activity as of December 31, 2006:

Expended Project through

Project Name Number 12/31/2006 Waukasha Engine Generator BI04 53,838 $ Bi Control System Upgrade BI16 271,789 Secondary Clarifiers Ras Pumps (Pwtf) BI34 4,094,300 Southern Connection Pipeline - Downtown Segment CT27 5,187,947 Budd Inlet Plant Reclaimed Water Facility CT29 6,218,078 Budd Inlet Plant Process Improvements 0602 56,770 Budd Inlet Habitat Improvements 0603 12,186 Hawks Prarie Recharge Basin Construction HP01 7,238,730 Satellite 1 Construction HP02 21,070,612 Hawks Prarie Conveyance HP06 4,440,702 Lott Administration Lab Building 0601 211,186 Olympia/Woodland Tr Sewer Improvements MI06 19,169 Martin Way Interceptor BI36 327,749 Kaiser Road Forcemain KR07 160,196 Kaiser Road Pump Station Improvements KR05 193,143 Tumwater Land Acquisition CT40 87,975 Port Land Acquisition PO01 5,983 Analytical Field Samplers 8,927

Total Wastewater Treatment Projects 49,659,279 $


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NOTE 5 – LEASE COMMITMENTS

The Alliance leases office space under a non-cancelable operating lease which is set to expire on March 31, 2008. Lease expenses for the year ended December 31, 2006 amounted to $108,167. Future minimum lease payments for the lease are as follows:

Years Ending December 31st Amount

2007 $ 147,769 2008 $ 35,454

NOTE 6 – LONG-TERM DEBT

Long-term debt as of December 31, 2006 consisted of the following:

Amount Annual Final Effective Balance Issue Name Authorized Installments Maturity Rates 12/31/06

State of Washington Revolving Fund Loans: Treatment Facility $ 29,740,204 $ 2,834,289 2015 4.50% - 6.00% $ 20,375,497 Hawks Prairie Reclaimed Water Facility 29,224,000 2027 1.50% 27,486,036

Public Works Trust Fund Loan: Secondary Clarifiers 4,278,404 327,091 2025 0.50% 1,925,282

Revenue Bonds: Economic Development Bond 15,245,000 1,206,744 2022 3.00% - 5.50% 13,170,000

Total Debt $ 78,487,608 $ 4,368,124.00 $ 62,956,815

During the year ended December 31, 2006, the following changes occurred in long-term debt:

Beginning Ending Balance Principal Balance Due Within

Issue 1/1/2006 Incurred Payments 12/31/2006 One Year State Revolving Fund Loans: Treatment Facility $ 22,133,455 $ - $ 1,757,958 $ 20,375,497 $ 1,846,222 Hawks Prairie Reclaimed Water 24,744,910 2,741,126 - 27,486,036 -Public Works Trust Fund Loan Secondary Clarifiers 855,681 1,069,601 - 1,925,282 157,625 Bonds

Economic Development Bond 13,715,000 - 545,000 13,170,000 565,000 Total Debt $ 61,449,046 $ 3,810,727 $ 2,302,958 $ 62,956,815 $ 2,568,847


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The annual requirements to amortize all debts outstanding as of December 31, 2006, including principal and interest, are as follows:

Years Ending December 31st Principal Interest Total

2007 $ 2,568,847 $ 1,799,276 $ 4,368,123 2008 3,814,907 2,343,208 6,158,115 2009 3,950,580 1,982,020 5,932,600 2010 4,096,415 1,833,604 5,930,019 2011 4,252,664 1,677,816 5,930,480

2012-2016 20,980,370 5,741,446 26,721,816 2017-2021 12,576,532 2,808,345 15,384,877 2022-2026 9,139,216 1,082,136 10,221,352

2027 1,577,284 6,526 1,583,810 $ 62,956,815 $ 19,274,376 $ 82,231,191

NOTE 7 – PENSION PLAN

Substantially all Alliance full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit and defined contribution retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380. The following disclosures are made pursuant to GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers.

Public Employees’ Retirement System (PERS) Plans 1, 2, and 3

Plan Description

PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a combination defined benefit/defined contribution plan. Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges currently in a judicial retirement system); employees of legislative committees; community and technical colleges, college and university employees (not in national higher education retirement programs); judges of district and municipal courts; and employees of local governments. PERS participants who joined the system by September 30, 1977, are Plan 1 members. Those who joined on or after October 1, 1977 and by either, February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS participants joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. PERS defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. PERS retirement benefit provisions are established in state statute and may be amended only by the State Legislature.

Plan 1 retirement benefits are vested after an employee completes five years of eligible service. Plan 1 members are eligible for retirement at any age after 30 years of service, or at the age of 60 with five years of service, or at the age of 55 with 25 years of service. The annual benefit is 2 percent of the average final compensation per year of service, capped at 60 percent. The average final compensation is based


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on the greatest compensation during any 24 eligible consecutive compensation months. If qualified, after reaching the age of 66 a cost-of-living allowance is granted based on years of service credit and is capped at 3 percent annually.

Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at the age of 65 with five years of service, or at the age of 55 with 20 years of service, with an allowance of 2 percent of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-month period. Plan 2 retirements prior to the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and a cost-of-living allowance is granted (indexed to the Seattle Consumer Price Index), capped at 3 percent annually.

Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member contributions finance a defined contribution component. The defined benefit portion provides a benefit calculated at 1 percent of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-month period. Plan 3 members become eligible for retirement if they have: at least ten years of service; or five years including twelve months that were earned after age 54; or five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 retirements prior to the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and Plan 3 provides the same cost-of-living allowance as Plan 2. The defined contribution portion can be distributed in accordance with an option selected by the member, either as a lump sum or pursuant to other options authorized by the Employee Retirement Benefits Board.

Funding Policy

Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2employer and employee contribution rates, and Plan 3 employer contribution rates. Employeecontribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and 7.5 percent for state government elected officers. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. PERS Plan 3 defined contribution is a non-contributing plan for employers. Employees who participate in the defined contribution portion ofPERS Plan 3 do not contribute to the defined benefit portion of PERS Plan 3. The Employee Retirement Benefits Board sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 to15 percent; two of the options are graduated rates dependent on the employee’s age. The methods used to determine the contribution requirements are established under state statute in accordance with chapters 41.40 and 41.45 RCW.

The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2005, were as follows:

PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 3.69% 3.69% 3.69%** Employee 6.00% 1.18% ***

* The employer rates include the employer administrative expense fee currently set at 0.18%. ** Plan 3 defined benefit portion only.

*** Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member.

Both the Alliance and the employees made the required contributions. The Alliance’s required contributions for the years ending December 31 were as follows:

PERS Plan 1 PERS Plan 2 PERS Plan 3 2006 $ 52,098.08 $ 86,682.88 $ 4,139.86 2005 $ 2,089.94 $ 29,205.04 $ 801.84 2004 $ 0.00 $ 6,670.14 $ 35.94


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NOTE 8 – RISK MANAGEMENT

Liability and Auto

The LOTT Alliance is a member of the Washington Cities Insurance Authority (WCIA).

Utilizing Chapter 48.62 RCW (self-insurance regulation) and Chapter 39.34 RCW (Interlocal Cooperation Act), nine cities originally formed WCIA on January 1, 1981. WCIA was created for the purpose of providing a pooling mechanism for jointly purchasing insurance, jointly self-insuring, and / or jointly contracting for risk management services. WCIA has a total of 121 Members.

New members initially contract for a three-year term, and thereafter automatically renew on an annual basis. A one-year withdrawal notice is required before membership can be terminated. Termination does not relieve a former member from its unresolved loss history incurred during membership.

Liability coverage is written on an occurrence basis, without deductibles. Coverage includes general, automobile, police, public officials’ errors or omissions, stop gap, and employee benefits liability. Limits are $3 million per occurrence self insured layer, and $12 million per occurrence in the re-insured excess layer with no annual aggregate except $10 million per member for public officials errors and omissions. The excess layer is insured by the purchase of reinsurance and insurance. Total limits are $15 million per occurrence subject to aggregate sublimits in the excess layers. The Board of Directors determines the limits and terms of coverage annually.

Insurance coverage for property, automobile physical damage, fidelity, inland marine, and boiler and machinery are purchased on a group basis. Various deductibles apply by type of coverage. Property insurance and auto physical damage are self-funded from the members’ deductible to $500,000, for all perils other than flood and earthquake, and insured above that amount by the purchase of reinsurance.

In-house services include risk management consultation, loss control field services, claims and litigation administration, and loss analyses. WCIA contracts for the claims investigation consultants for personnel issues and land use problems, insurance brokerage, and lobbyist services.

WCIA is fully funded by its members, who make annual assessments on a prospectively rated basis, as determined by an outside, independent actuary. The assessment covers loss, loss adjustment, and administrative expenses. As outlined in the interlocal, WCIA retains the right to additionally assess the membership for any funding shortfall.

An investment committee, using investment brokers, produces additional revenue by investment of WCIA's assets in financial instruments which comply with all State guidelines. These revenues directly offset portions of the membership's annual assessment.

A Board of Directors governs WCIA, which is comprised of one designated representative from each member. The Board elects an Executive Committee and appoints a Treasurer to provide general policy direction for the organization. The WCIA Executive Director reports to the Executive Committee and is responsible for conducting the day to day operations of WCIA.

Property

The LOTT Alliance purchases insurance for buildings, contents and other insurable assets through Factory Mutual Global Insurance. Year 2006 coverage extends to approximately $175 million of LOTT property with a $50,000. The coverage also includes $50,000,000 earth movement subject to a $100,000 minimum per location deductible and $100,000,000 flood coverage subject to a $50,000 per location deductible.

Settlements

In the past three years, there have been no settlements that exceeded insurance coverage.


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NOTE 9 – CONTINGENT LIABILITIES AND LITIGATION

The LOTT Alliance has recorded in its financial statements all material liabilities, including an estimate for situations which are not yet resolved but where, based on available information, management believes it is probable that the Alliance will have to make payment. In the opinion of management, the Alliance’s insurance policies and/or self-insurance reserves are adequate to pay all known or pending claims.


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Financial Audit Report 2006

Documents

Transcript of Financial Audit Report 2006