COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2008_part2 docx

INDEPENDENT AUDITORS' REPORT To the Board of Commissioners Gaston County, North Carolina We have audited the accompanying financial statements of the governmental activities, the busines

INDEPENDENT AUDITORS' REPORT

To the Board of Commissioners

Gaston County, North Carolina

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Gaston County, North Carolina as of and for the year ended June 30, 2008, which collectively comprise the County’s basic financial statements as listed in the table of contents These financial statements are the responsibility of Gaston County’s management Our responsibility is to express an opinion on these basic 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 basic financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation We believe that our audit provides a reasonable basis for our opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Gaston County, North Carolina, as of June 30, 2008, and the respective changes in financial position and cash flows, where applicable, thereof and the respective budgetary comparison for the General Fund and Public Assistance Fund 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 a report dated November 12,

2008, on our consideration of Gaston County’s internal control over financial reporting and 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

Management’s Discussion and Analysis, Schedule of Employer Contributions and the Notes to the Required Schedules of Funding Progress, Employer Contributions, Notes to the Required Schedules for the Law Enforcement Officers’ Special Separation Allowance and Other Post Employment Benfits are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board We have applied certain limited procedures, which

Our audit was performed for the purpose of forming an opinion on the financial statements that collectively comprise the basic financial statements of Gaston County, North Carolina The introductory section, combining and individual fund financial statements, budget and actual schedules, other supplemental schedules and statistical tables are presented for purposes of additional analysis and are not

a required part of the basic financial statements The combining and individual major fund financial statements and schedules, budget and actual schedules and other supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole The introductory section and the statistical section have not been subject to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion

on them

Martin Starnes & Associates, CPAs, P.A

November 12, 2008

Management’s Discussion and Analysis

The management of Gaston County provides the readers of the County’s financial statements the following narrative summary and analysis of the financial activities of Gaston County for the fiscal year ended June 30, 2008 This narrative should be read in conjunction with other information that we have furnished in the County’s financial statements, which follows this narrative

Financial Highlights

• The assets of Gaston County exceeded its liabilities at the end of the fiscal year by $101,881,478 (net assets) compared to $97,952,373 at June 30, 2007

• The County’s net assets of governmental activities increased by $2,616,620

• As of June 30, 2008, fund balance in the General Fund was $68,321,949, an increase of

$5,009,170 in comparison with the prior year Approximately 64% of this total amount,

$43,732,759 is available for spending at the government’s discretion while the difference is either reserved for a specific purpose or restricted by State statute

• Gaston County’s total debt, excluding compensated absences, net pension obligations and other post-employment benefits, increased by $9,981,952 during the current fiscal year The primary factor in this increase was the issuance of $24,900,000 in community college bonds

• The County holds the following bond ratings:

Moody’s Aa3

Standard & Poor’s A+

Overview of the Financial Statements

This discussion and analysis are an introduction to Gaston County’s basic financial statements The County’s basic financial statements consist of three components: (1) government-wide financial statements, (2) fund financial statements and (3) notes to the financial statements (see Figure 1) The basic financial statements present two different views of the County through the use of government-wide statements and fund financial statements In addition to the basic financial statements, this report contains other supplemental information that will enhance the reader’s understanding of the financial condition of Gaston County

Required Components of the Annual Financial Report

Figure 1

Summary Detail

Basic Financial Statements

The first two statements (pages 13 and 14) in the basic financial statements are the Government-Wide

Financial Statements They provide both short and long-term information about the County’s financial

condition

The next statements (pages 16 through 26) are Fund Financial Statements These statements focus on

the activities of the individual parts of Gaston County government These statements provide more detail than the government-wide statements There are four parts to the fund financial statements: (1) the governmental funds statements; (2) the budgetary comparison statements; (3) the proprietary fund statements; and (4) the fiduciary fund statements

The next section of the basic financial statements is the notes The notes to the financial statements explain in detail some of the data contained in those statements After the notes, there is required

supplemental information concerning Gaston County’s progress in funding its obligation to provide

certain pension benefits to law enforcement officers This information is found on pages 62 and 63 In

addition, supplemental information is provided to show details about the County’s non-major

governmental funds, all of which are added together in one column on the basic financial statements Budgetary information required by the North Carolina General Statutes also can be found in this section

of the statements The supplemental information is included on pages 64 through 108

Management’s Discussion and Analysis

Basic Financial Statements

Government-Wide Financial

Statements

Notes to the Financial Statements

Fund Financial Statements

Government-Wide Financial Statements

The government-wide financial statements are designed to provide the reader with a broad overview of the County’s finances, similar in format to a financial statement of a private-sector business The government-wide statements provide short and long-term information about the County’s financial condition as a whole

The two government-wide statements are divided into two categories: (1) governmental activities and (2) business-type activities The governmental activities include most of the County’s basic services such as public safety, health and social services, parks and recreation, and general administration Property taxes and State and federal grants finance most of these activities The business-type activities are those that the County charges customers to provide In Gaston County, only landfill services are reported as a business-type activity

Fund Financial Statements

The fund financial statements provide a more detailed look at the County’s most significant activities A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives Gaston County, like all other governmental entities in North Carolina, uses fund accounting to ensure and reflect compliance (or noncompliance) with finance-related legal requirements, such as the General Statutes or the County’s budget ordinance All of the funds of Gaston County can be divided into two categories: governmental funds and proprietary funds

Governmental Funds - Governmental funds are used to account for those functions reported as

governmental activities in the government-wide financial statements Most of the County’s basic services are accounted for in governmental funds These funds focus on how assets can readily be converted into cash flow, both in and out, and what monies are left at year-end that will be available for spending in the next year Governmental funds are reported using an accounting method called modified accrual accounting which provides a current financial resources focus As a result, the governmental fund financial statements give the reader a detailed short-term view that helps him or her determine if there are more or less financial resources available to finance the County’s programs The relationship between government activities (reported in the Statement of Net Assets and the Statement of Activities) and

governmental funds is described in a reconciliation that is a part of the fund financial statements

Gaston County adopts an annual budget for its General Fund, as required by the General Statutes The budget is a legally adopted document that incorporates input from the citizens and management of the County and the decisions of the Board of Commissioners about which services to provide and how to pay for them It also authorizes the County to obtain funds from identified sources to finance these current period activities The budgetary statement provided for the General Fund demonstrates how well the County complied with the budget ordinance and whether or not the County succeeded in providing the services as planned when the budget was adopted The budgetary comparison statement uses the budgetary basis of accounting and is presented using the same format, language, and classifications as the legal budget document The statement shows four columns: (1) the original budget as adopted by the Board; (2) the final budget as amended by the Board; (3) the actual resources, charges to appropriations, and ending balances in the General Fund and other governmental funds, and (4) the difference or variance between the final budget and the actual resources and charges To account for the difference between the budgetary basis of accounting and the modified accrual basis, a reconciliation showing the differences in the reported activities is shown at the end of the budgetary statement

Proprietary Funds - Gaston County has one kind of proprietary fund Enterprise Funds are used to

report the same functions presented as business-type activities in the government-wide financial statements Gaston County uses an enterprise fund to account for its solid waste services This fund is the same as the function shown in the business-type activities in the Statement of Net Assets and the Statement of Activities

Agency (Fiduciary) Funds - Agency funds are used to account for assets the County holds on behalf of

others Gaston County has five agency funds

Notes to the Financial Statements - The notes provide additional information that is essential to a full

understanding of the data provided in the government-wide and fund financial statements

Other Information - In addition to the basic financial statements and accompanying notes, this report

includes certain required supplementary information concerning Gaston County’s progress in funding its obligation to provide pension benefits to its employees Required supplementary information can be found beginning on page 62 of this report

Government-Wide Financial Analysis

As noted earlier, net assets may serve over time as one useful indicator of a government’s financial condition The assets of Gaston County exceeded liabilities by $101,881,478 as of June 30, 2008 The County’s net assets increased by $3,929,105 for the fiscal year ended June 30, 2008

The largest portion of net assets in the amount of $86,530,626 reflects the County’s investment in capital assets (e.g., land, buildings, machinery, and equipment); less any related debt still outstanding that was issued to acquire those items Gaston County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending Although Gaston County’s investment in its capital assets is reported net of the outstanding related debt, the resources needed to repay that debt must be provided by other sources, since the capital assets cannot be used to liquidate these liabilities The remaining balances are divided between restricted and unrestricted Restricted amounts are balances that are either restricted by third parties or legal restraints Unrestricted amounts are the amounts available to fund future operations

The deficit in unrestricted net assets results from a situation somewhat unique to North Carolina in that the counties record the debt for school bonds issued, but title to the land and buildings resides with the school system The County’s outstanding school debt at June 30, 2008 was $142,400,668

Gaston County’s Net Assets

Figure 2

Current and other assets $ 201,532,305 $ 182,137,468 $ 5,540,933 $ 3,977,232 $ 207,073,238 $ 186,114,700 Capital assets 112,933,521 114,124,788 8,794,819 7,537,270 121,728,340 121,662,058 Total assets 314,465,826 296,262,256 14,335,752 11,514,502 328,801,578 307,776,758 Long-term liabilities

outstanding, net of

current portion 185,024,147 170,949,719 4,400,403 3,864,125 189,424,550 174,813,844 Other liabilities 35,768,422 34,255,901 1,727,128 754,641 37,495,550 35,010,542 Total liabilities 220,792,569 205,205,620 6,127,531 4,618,766 226,920,100 209,824,386 Net assets:

Invested in capital assets,

net of related debt 77,988,668 77,807,277 8,541,958 7,123,331 86,530,626 84,930,608 Restricted 2,533,268 60,736,328 - - 2,533,268 60,736,328 Unrestricted 13,151,321 (47,486,969) (333,737) (227,595) 12,817,584 (47,714,564) Total net assets $ 93,673,257 $ 91,056,636 $ 8,208,221 $ 6,895,736 $ 101,881,478 $ 97,952,372

Governmental Activities Business-Type Activities Total

Certain aspects of the County’s financial operations positively influenced the total unrestricted

governmental net assets:

• Sales tax revenues increased as the local economy continues to improve

• The County continues to improve its property tax collection percentage

• The County continues to monitor and control expenditures

Gaston County Changes in Net Assets

Figure 3

Revenues:

Program revenues:

Charges for services $ 29,270,903 $ 27,855,961 $ 6,084,901 $ 4,560,038 $ 35,355,804 $ 32,415,999 Operating grants and contributions 24,311,731 23,793,835 - 3,440,348 24,311,731 27,234,183 Capital grants and contributions 10,865,076 8,031,406 - - 10,865,076 8,031,406 General revenues:

Property taxes 122,206,198 114,386,061 - - 122,206,198 114,386,061 Other taxes 39,420,512 37,929,311 - - 39,420,512 37,929,311 Other 8,404,282 8,258,772 129,070 127,415 8,533,352 8,386,187 Total revenues 234,478,702 220,255,346 6,213,971 8,127,801 240,692,673 228,383,147 Expenses:

General government 22,471,943 21,498,972 - - 22,471,943 21,498,972 Public safety 49,395,878 44,380,699 - - 49,395,878 44,380,699 Environmental protection 57,169 50,228 - - 57,169 50,228 Economic and physical development 12,844,466 8,845,674 - - 12,844,466 8,845,674 Human services 68,086,490 66,275,575 - - 68,086,490 66,275,575 Cultural and recreational 5,316,324 4,766,556 - - 5,316,324 4,766,556 Education 66,152,636 49,937,579 - - 66,152,636 49,937,579 Interest and fees on long-term debt 7,537,176 7,537,663 - - 7,537,176 7,537,663 Solid Waste - 4,901,486 - 3,903,228 4,901,486 3,903,228 Total expenses 203,292,946 231,862,082 4,901,486 3,903,228 236,763,568 207,196,174

Increase (decrease) in net assets 2,616,620 16,962,400 1,312,485 4,224,573 3,929,105 21,186,973 Net assets, July 1 91,056,637 74,094,237 6,895,736 2,671,163 97,952,373 76,765,400 Net assets, June 30 $ 93,673,257 $ 91,056,637 $ 8,208,221 $ 6,895,736 $ 101,881,478 $ 97,952,373

Governmental Activities Business-Type Activities Total

Governmental activities - Governmental activities increased the County’s net assets by $2,616,620

thereby accounting for 66.60% of the total change in the net assets of Gaston County

Business-type activities - Business-type activities increased Gaston County’s net assets by $1,312,485,

which was 33.40% of the total increase of the County’s net assets The key factor in this increase was:

• Revenues grew approximately 33.44% while operating expenses only increased by 25.22% This resulted in an operating gain $1,183,415 for the landfill

Financial Analysis of the County’s Funds

As noted earlier, Gaston County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements

Governmental Funds - The focus of Gaston County’s governmental funds is to provide information on

near-term inflows, outflows and balances of usable resources Such information is useful in assessing Gaston County’s financing requirements Specifically, unreserved fund balance can be a useful measure

of a government’s net resources available for spending at the end of the fiscal year

The General Fund is the chief operating fund of the County At the end of the current fiscal year, unreserved fund balance of the General Fund was $43,732,759, while total fund balance increased to

$68,321,949 As a measure of the General Fund’s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures and transfers-out Unreserved fund balance represents 23.28% of total General Fund expenditures and transfers-out, while total fund balance represents 36.37% of that same amount Those levels compare to 22.21% and 36.09%, respectively, in the prior year

At June 30, 2008, the governmental funds of Gaston County reported a combined fund balance of

$177,433,970, an 11.74% increase over last year The primary reason for the increase is the growth in the Capital Improvement Fund balance The Capital Improvement Fund balance increase approximately

$11,768,693 This is mostly due to the issuance of $24,900,000 general obligation bonds for the school system

General Fund Budgetary Highlights - During the fiscal year, the County revised the budget on several

occasions Generally, budget amendments fall into one of three categories: (1) amendments made to adjust the estimates that are used to prepare the original budget ordinance once exact information is available; (2) amendments made to recognize new funding amounts from external sources, such as federal and State grants; and (3) increases in appropriations that become necessary to maintain services Various budget amendments accounted for a $2,413,635 increase in the revenue estimates for the General Fund, the result of additional State and federal funding and increase in sales and services revenues Other amendments appropriated a total of $13,368,133 from the fund balance of the General Fund

Proprietary Funds - Gaston County’s proprietary fund provides the same type of information found in

the government-wide statements but in more detail Unrestricted net assets of the Solid Waste Fund at the end of the fiscal year amounted to $(333,737) The total increase in net assets for that fund was

$1,312,485 Other factors concerning the finances of this fund have already been addressed in the discussion of Gaston County’s business-type activities

Capital Asset and Debt Administration Capital Assets - Gaston County’s investment in capital assets for its governmental and business-type

activities as of June 30, 2008, totals $121,728,340 (net of accumulated depreciation) These assets include land, buildings, machinery and equipment, park facilities, and vehicles

Major capital asset transactions during the year include:

• Beginning the construction of a new cell at the landfill

• Acquired new vehicles for the County’s public safety agencies and other departments to replace aging models

Gaston County’s Capital Assets

Figure 4

Land $ 19,713,831 $ 19,713,831 $ 1,135,881 $ 1,135,881 $ 20,849,712 $ 20,849,712 Buildings and

improvements 85,883,370 87,649,853 5,547,696 6,007,271 91,431,066 93,657,124 Equipment 3,276,747 4,303,432 182,883 187,919 3,459,630 4,491,351 Vehicles and

motorized

equipment 3,519,479 2,312,697 605,525 206,199 4,125,004 2,518,896 Construction

in progress 144,975 540,094 1,322,834 1,862,928 - 144,975 Total $ 114,124,788 112,933,521 $ 8,794,819 $ 7,537,270 $ 121,728,340 $ 121,662,058 $

Governmental Activities Business-Type Activities Total

Additional information on the County’s capital assets can be found in note 2E of the Basic Financial Statements

Long-Term Debt - As of June 30, 2008, Gaston County had total bonded debt outstanding of

$161,875,000, all of which is debt backed by the full faith and credit of the County