Edmonds SAO Financials

Washington State Auditor’s Office

Financial Statements Audit Report

Edmonds Public Facilities District (Edmonds Center for the Arts)

Snohomish County

Audit Period January 1, 2011 through December 31, 2011

Report No. 1008553 Issue Date October 29, 2012

October 29, 2012 Board of Directors Edmonds Center for the Arts Edmonds, Washington Report on Financial Statements Please find attached our report on the Edmonds Center for the Arts financial statements. We are issuing this report in order to provide information on the District’s financial condition. Sincerely,

BRIAN SONNTAG, CGFM STATE AUDITOR

Washington State Auditor Brian Sonntag

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

Table of Contents

Edmonds Center for the Arts Snohomish County

January 1, 2011 through December 31, 2011

Schedule of Audit Findings and Responses ............................................................................... 1

Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards ................. 4

Independent Auditor’s Report on Financial Statements .............................................................. 6

Financial Section ........................................................................................................................ 8

Schedule of Audit Findings and Responses


January 1, 2011 through December 31, 2011 1. The District’s financial position continues to place it at risk of not meeting

its financial obligations

Description of Condition

The City of Edmonds created the Edmonds Public Facility District in 2001 to acquire and operate a performing arts center. The District started generating revenue in 2006. In 2009, we reported concerns with the District’s financial condition, including its inability to make debt payments. During the current audit, we found the District is working to increase revenue and decrease expenditures. However, it has not generated sufficient funds to meet its financial obligations.

The following table shows the District’s financial condition from 2008 through 2011.

Balance 2008 2009 2010 2011 Operating Revenues $ 773,113 $ 981,711 $1,103,381 $1,420,587 Operating Expenses Excluding Depreciation $1,270,096 $1,241,780 $1,146,549 $1,419,136

Operating Income/(Loss) $ (496,983) $ (260,069) $ (43,168) $ 1,451

Cash and Cash Equivalents $ 237,308 $ 83,377 $ 171,844 $ 101,478 Average Monthly Operating Expenditures $ 105,841 $ 103,482 $ 95,546 $ 118,261

Restricted Net Assets for Debt Service $ 517,119 $ 915,198 $ 851,708 $ 90,788

Unrestricted Net Assets $ (122,323) $ (699,354) $ (763,442) $ (559,188)

Outstanding Debt $9,635,000 $9,480,000 $9,403,684 $8,975,000 The District’s net income was just over $1,000 in 2011, excluding depreciation. This was the first year in which the District was able to cover its cash operating expenses. Between 2008 and 2010 the District used a total of $441,596 in restricted funds to help pay for operating expenses. This outstanding interfund loan balance is an internal loan from the District’s restricted captal fund to its operating fund. Further, the District owes the City of Edmonds $310,176 for bond payments the City helped to make on its behalf in fiscal years 2010 and 2011. The City of Edmonds is contractually obligated to assist the District to meet its annual bond payments through a contingent loan agreement. The District’s 2011 debt payments totalled $682,863.

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Cause of Condition The District has not identified new revenue streams, or reduced expenses enough to compensate for declining sales tax revenues dedicated to cover its annual debt obligations. Net income from operations is not yet sufficient to cover this annual capital shortfall. Effect of Condition The District may not be able to pay the debt noted above, or continue operations at current service levels.

Recommendation We recommend the District establish a formal, comprehensive plan that includes detailed financial benchmarks and guidelines to specifically target revenues and expenses. The plan should address its financial condition and future operating income. We further recommend the District closely monitor and evaluate its financial activities to ensure the plan is being followed and the desired results achieved. The District should revise the plan as needed to resolve its cash-flow issues. District’s Response

The Board of Directors and Executive Director of the District appreciate the willingness of the State Auditor’s Office (SAO) to discuss this matter in depth with District representatives and for sharing the list of ratios and other metrics it used to arrive at and to support its Finding and Recommendation. Upon careful review and consideration, the District respectfully disagrees with the State Auditor's conclusion that the District is “at risk of not meeting its financial obligations,” and cites the following key facts:

1) The State Auditor’s Office issued a similar Finding to the District in FY 2009. However, in FY 2010, the SAO noted that there had been significant improvements and, although it stated that there was more work to be done, the reporting level for that issue was reduced from a Finding to a Management Letter item. Certain of the SAO’s ratios can be interpreted to suggest that the District’s financial condition has declined. However, there are other measures and metrics suggesting that the District’s financial condition, particularly with regard to operations, has continuously improved. (Please see section titled “Financial Condition, Results and Outlook” in Management’s Discussion and Analysis).

2) The District’s operating performance, in particular, has improved continuously and significantly over the past four years. In FY 2008, the District had an operating deficit of approximately $500,000. By the end of FY 2011, during a period of severe economic malaise, the District had managed to balance its revenue and expenses (excluding depreciation) and achieve break even status. The District expects that trend to continue its upward trajectory and, in future years, to produce operating surpluses that will be used, at least in part, to service its capital debt.


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3) The Contingent Loan Agreement between the City of Edmonds and Edmonds Center for the Arts ensures that the District’s annual bond payments will be made. Any portion of annual debt payments that cannot be made by the District each year is converted to debt owed to the City of Edmonds. Because the City has agreed to loan the District funds for this purpose, the District’s financial condition will remain stable and its bills will be paid as they come due.

4) The District and the City of Edmonds have identified opportunities to develop new private and/or public revenue streams to help meet the District’s long-term debt obligations to bond holders and to the City itself. District representatives, in partnership with City staff and Council, are diligently pursuing these opportunities. The District believes that at least one of these new revenue sources will be secured within the next three years and will likely eliminate the need for the City to continue to provide loans to the District for debt service.

5) The City of Edmonds will refinance the District’s 2002 bond issue in October, 2012. The net savings to the District will be more than $70,000 per year in annual capital debt costs beginning in 2013.

6) Future improvements in economic conditions affecting Snohomish County will lead to increased sales taxes that, in turn, will positively impact the District’s financial position. As revenue from the District’s sales tax rebate climbs, it’s reliance on City loan support will decline.

The District has analyzed and interpreted the financial metrics used by the auditors to determine the reporting level of this item. The District firmly believes that it is not "at risk of not meeting its financial obligations." The District's financial position is viable and the results of its operations continue to improve.

The District is not in danger of ceasing operations nor defaulting on short- or long-term debts. To the contrary, Edmonds Center for the Arts continues to build audience and generate significant financial support from individuals, businesses and foundations – balancing its operating budget. The District is meeting its mission to generate tourism and economic activity for Snohomish County, and to provide high quality performing arts programs and outreach activities for its community. Auditor’s Remarks

The District continues to be dependent on financial assistance from the City of Edmonds to cover its financial obligations. Although revenues have steadily increased, expenses have not been significantly reduced, and even increased in 2011. As noted above in the finding and in the District’s response, the positive income figure for 2011 excludes depreciation expense. With depreciation included the District is operating at a significant loss. We will review the District’s financial condition during the next audit. We reaffirm our finding.


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

Compliance and Other Matters in Accordance with Government Auditing Standards

Edmonds Center for the Arts

Snohomish County January 1, 2011 through December 31, 2011

Board of Directors Edmonds Center for the Arts Edmonds, Washington We have audited the basic financial statements of the Edmonds Center for the Arts, Snohomish County, Washington, as of and for the year ended December 31, 2011, and have issued our report thereon dated June 27, 2012. 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. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the District’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 District’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control over financial reporting. A deficiency in internal control 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 and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. 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 deficiencies, 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. However, we noted certain matters that we have reported to the management of the District in a separate letter dated October 25, 2012.


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COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District’s financial statements are free of material misstatement, we performed tests of the District’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. The District’s response to the finding identified in our audit is described in the accompanying Schedule of Audit Findings and Responses. We did not audit the District’s response and, accordingly, we express no opinion on it. This report is intended for the information and use of management and 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.

BRIAN SONNTAG, CGFM STATE AUDITOR June 27, 2012


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Independent Auditor’s Report on Financial Statements

Edmonds Center for the Arts

Snohomish County January 1, 2011 through December 31, 2011

Board of Directors Edmonds Center for the Arts Edmonds, Washington We have audited the accompanying basic financial statements of the Edmonds Center for the Arts, Snohomish County, Washington, as of and for the year ended December 31, 2011, as listed on page 8. These financial statements are the responsibility of the District’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 the Edmonds Center for the Arts, as of December 31, 2011, and the changes in financial position and 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 District’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. Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 9 through 14 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards


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generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

BRIAN SONNTAG, CGFM STATE AUDITOR June 27, 2012


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Financial Section


January 1, 2011 through December 31, 2011 REQUIRED SUPPLEMENTARY INFORMATION

Management’s Discussion and Analysis – 2011

BASIC FINANCIAL STATEMENTS

Statement of Net Assets – 2011 Statement of Revenues, Expenses and Changes in Fund Net Assets – 2011 Statement of Cash Flows – 2011 Notes to Financial Statements – 2011


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EDMONDS PUBLIC FACILITIES DISTRICT

MANAGEMENT’S DISCUSSION AND ANALYSIS Edmonds Public Facilities District (EPFD) presents this Management Discussion and Analysis of financial activities for the fiscal year ended December 31, 2011. This information focuses on significant financial issues, provides an overview of the District’s financial activity, and highlights significant changes in the District’s financial position. FINANCIAL HIGHLIGHTS

• The assets of the District exceeded liabilities by $5.27 million. • The District’s total assets decreased by $546,867 in 2011.

• The District’s long-term debt at the end of the year totaled $8.975 million (of which,

$305,000 is payable in FY 2012), which consists of a long-term obligation payable to the City of Edmonds of $5.24 million and a $3.735 million payable to The Depository Trust Company (DTC), New York, New York. The principal and interest are payable directly to DTC by the State’s fiscal agent (currently The Bank of New York), as registrar, authenticating agent and paying agent (the “Bond Registrar”).

OVERVIEW OF THE FINANCIAL STATEMENTS

The District’s basic financial statements consist of two components: (1) financial statements, and (2) notes to the financial statements. This section introduces and explains the basic financial statements. Financial Statements

The District is a business-type activity, the purpose of which is to construct, maintain and operate a performing arts center within the boundaries of the District, which correspond to the boundaries of the City of Edmonds. Business-type activities are to be self-supporting through user fees and charges. The District is also supported in part by a legally separate entity, a 501(c)(3) not-for-profit corporation called Edmonds Center for the Arts (ECA), the purpose of which is to assist the District with community outreach, audience development and raising contributions from private sources and to help support the operation of the Center. ECA is included in the financial statements of the District as a blended component unit.

The statement of net assets presents information on all of the District’s assets and liabilities, with the difference between the two reported as net assets. This statement is similar to the balance sheet of a private sector business. Over time, increases or decreases in net assets may serve as useful indicators of improvement or deterioration in the District’s overall financial position.

The statement of revenues, expenses and changes in fund net assets presents increases (revenue and gains) and decreases (expenses and losses) designed to show how the District’s net assets changed during the current year.

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The statement of cash flows, as its name implies, is concerned solely with flows of cash. Consequently, only transactions that affect the District’s and the not-for-profit corporation’s cash accounts are reported.

Notes to the Financial Statements The notes to the financial statements are an integral part of the financial statements. They provide additional disclosures that are essential to a full understanding of the financial statements. The notes to the financial statements immediately follow the basic financial statements in this report. FINANCIAL ANALYSIS The District has presented its financial statements under the new reporting model as required by the Governmental Accounting Standards Board Statement No. 34 (GASB 34), Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments. Statement of Net Assets The Statement of Net Assets can serve as a useful indicator to the District’s financial position. The District’s net assets at December 31, 2011 total $5.27 Million. Following is a condensed version of the statement of the net assets.

Figure 1: Condensed Statement of Net Assets

2011 2010 ASSETS Current and other assets $ 421,474 $ 416,509 Capital assets (net of depreciation) 14,636,589 15,188,421 TOTAL ASSETS $ 15,058,063 $ 15,604,930 LIABILITIES AND FUND EQUITY Current and other liabilities $ 1,104,854 742,147 Long-term obligations 8,684,765 8,989,779 TOTAL LIABILITIES $ 9,789,619 $ 9,731,926 NET ASSETS Restricted $ 5,827,631 $ 6,636,445 Unrestricted (559,188) (763,442) TOTAL NET ASSETS $ 5,268,443 $ 5,873,004


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Change in Net Assets The change in net assets table illustrates the increases or decreases in net assets of the District resulting from its current year operating activities. Following is a condensed version of the District’s statement of revenues, expenses and changes in fund net assets.

Figure 2: Condensed Statement of Revenue, Expenses and Changes in Fund Net Assets.

2011 2010 OPERATING REVENUE Ticket Sales, Rentals, Contributions and Other $ 1,420,587 $ 1,103,381 NON-OPERATING REVENUE Taxes 409,569 394,020 Intergovernmental revenue - 72,160 Interest revenue 456 157 TOTAL REVENUE $1,830,612 $1,569,718 OPERATING EXPENSE Operating Expense $2,022,010 $1,789,947 NON-OPERATING EXPENSE Interest expense $ 413,166 $ 422,201 Capital expenditures - 6,340 TOTAL EXPENSE $2,435,176 $2,218,488 Increase in Net Assets before Capital ($ 604,562) ($ 648,770) Contributions, Transfers & Special Item Capital Contributions - 91,155 Special Item - 15,800

Increase (Decrease) in Net Assets ($ 604,562) ($ 541,815) NET ASSETS BEGINNING OF THE YEAR $5,873,005 $6,430,761 Prior period adjustment - (15,945) NET ASSETS END OF THE YEAR $5,268,443 $5,873,005


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CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The District’s investment in capital assets as of December 31, 2011 amounts to $14.7 million (net of accumulated depreciation). In 2011, depreciation expenses were recorded in the amount of $602,874. For additional information on the District’s capital assets refer to Note 1, Section C-4 in the accompanying Notes to the Financial Statements. Long-Term Debt

• At the end of the fiscal year, the District had total debt outstanding of $8.975 million. The City of Edmonds is owed $5.24 million of this amount and will be repaid with funds received from sales tax rebate revenue according to the terms of an interlocal agreement. (2002 Limited General Obligation Bonds)

• The remaining $3.735 million is payable to The Depository Trust Company (DTC), New

York, New York. The principal and interest are payable directly to DTC by the State’s fiscal agent (currently The Bank of New York Mellon), as registrar, authenticating agent and paying agent (the “Bond Registrar”). (2008 Sales Tax Obligation and Refunding Bonds)

For additional information on the District’s long term debt refer to notes 6 and 7 in the Notes to the Financial Statements.

ANALYSIS OF FINANCIAL POSITION AND RESULT OF OPERATIONS The District’s operating performance continued to strengthen in FY 2011. Contributions for operations increased by $123,640 (22%), revenue from rentals increased by $24,758 (7%), and ticket sales increased by $153,037 (33%). Total Operating Revenues increased $317,206 (22%) in FY 2011. The District has achieved a substantially breakeven position in FY 2011. Operating revenues totaled $1,420,587; expenses before Depreciation and Amortization amounted to $1,419,136, resulting in a small surplus. By comparison, the District recorded operating losses of ($275,819) in FY 2009 and ($43,167) in FY 2010. The Districts balanced budget in FY 2011 is a tremendous achievement, particularly considering the challenging economic climate of the past three years. The District expects to maintain a balanced operating budget from this point forward. As the District’s operating results have improved, its capital position has declined due to a severe drop in receipts from the District’s state sales tax rebate. The economic crisis has led to a difference of $200,000 annually between anticipated revenue and actual receipts from this source. This revenue stream is restricted to payments on long-term debt. The City of Edmonds is currently assisting the District to meet its bi-annual bond payment obligations. The District and the City are working together to identify new sources of revenue, both public and private, to help address this annual shortfall (please see next section, “Capital Asset and Long-Term Debt Activity,” for more information).


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CAPITAL ASSET AND LONG-TERM DEBT ACTIVITY The District issued bonds in 2002 and in 2008 to cover costs associated with the renovation of its 1939 auditorium, the centerpiece of Edmonds Center for the Arts. The major revenue sources guaranteeing this debt include sales tax rebates from the State of Washington based on actual sales taxes paid to the State within the District’s boundaries, a portion of a similar sales tax rebate paid by the State to the Snohomish County Public Facilities District, and private donations. The District currently does not have a reserve fund for debt service. Increasing debt expenses and declining sales tax revenues present a challenge for the District as well as for the City of Edmonds, as the City has guaranteed the debt for both bond issues. In FY 2011, the District invoked the terms of a Contingent Loan Agreement between the District and the City of Edmonds. This agreement requires the City of Edmonds to loan funds to the District as necessary in order to meet bond payment obligations. As of December 31, 2011, the City had loaned the District a total of $310,176 for this purpose. On January 6, 2012, the District repaid the City $88,000 of this outstanding balance. As of May, 2012, the District has an outstanding loan from the City of $222,176. The terms of this outstanding loan, including payment schedule and interest rate, have not been finalized. The District and the City formed a Task Force in August, 2010. The purpose of this Task Force is to seek long-term funding solutions and to ensure that the District can meet future debt obligations without assistance from the City. Opportunities to secure new revenue exist, which the District is vigorously pursuing. If and when economic conditions improve and sales tax revenue increases, the gap between what The District earns and what it owes for Capital Debt is expected to close, limiting the City’s liability over time. The City of Edmonds has included $200,000 in its Amended Budget for FY 2011 to assist The District and to ensure that its debt obligations are met. The City will continue to budget funds annually for this purpose until new funding can be secured. Inter-Fund Loans – Capital to Operations To help address operating shortfalls in FY 2008 and FY 2009 and to help maintain operating cash flows, the District made Inter-Fund Loans from its restricted capital and bond debt funds to its operating fund. These funds are donor-restricted or restricted by inter-local agreements. Therefore, these funds must be repaid from the operating fund to the capital and debt service funds within three years of loan origination. In addition, the District must charge reasonable interest to the operating fund on the outstanding loan amount. The outstanding inter-fund loan amount as of December 31, 2011 was $441,596. BUDGET VARIANCES IN THE GENERAL OPERATING FUND The District’s Operations Budget for FY 2011 projected a net surplus in the amount of $2,230. The District’s actual surplus for FY 2011 was $1,451. Actual Revenues and Expenses were each higher than the original budget forecast by approximately $170,000. The primary reason for these differences was due to The District’s decision to increase its investment in presented artists in the first half of the 2011-2012 Season. The increased artist fees and production expenses were offset by increased ticket sales and concessions revenue, as well as increased contributions. The District also expanded its education and outreach programs, which added labor costs and other program-related expenses. These investments helped the district attract new private foundation grants, which offset the increased costs.


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Requests for Information The financial statements are designed to provide users with a general overview of the District’s finances as well as to demonstrate accountability to its citizens, investors, creditors, and other customers. If you have a question about the report, please contact the Edmonds Public Facilities District Executive Director, 410 Fourth Avenue North, Edmonds, Washington, WA 98020, (425) 275-4485.


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EDMONDS PUBLIC FACILITIES DISTRICTSTATEMENT OF NET ASSETSDECEMBER 31, 2011

ASSETS 2011 Current Assets

Cash and cash equivalents 10,690 Customer accounts 108,163 Inventory 2,261 Advance to operation fund Restricted cash and cash equivalents 90,788 Due from other governmentsPledges receivable 75,941 Prepayments and other 58,376 Total Current Assets 346,219

Long-term AssetsUnamortized debt issue costs 75,255 Land 3,444,885 Capital assets, net of depreciation 11,191,703 Total Noncurrent Assets 14,711,843

TOTAL ASSETS 15,058,063

LIABILITIES

Current LiabilitiesAccounts payable 226,562 Wages and benefits payable 60,559 Due to Internal funds 0 Due to City of Edmonds 310,176 Current portion of long-term obligations 305,000 Accrued Interest on Bond ObligationsDeferred revenue 162,714 Customer Deposits payable 39,843 Total Current Liabilities 1,104,854

Long-term Liabilities

Long term leases and equipment purchases 6,227 Noncurrent portion of long-term obligations 8,670,000 Unamortized premium -Sales Tax Obligations Bonds 2008 8,538

TOTAL LIABILITIES 9,789,619

NET ASSETS

Invested in Capital Assets, net of related debt 5,736,843

Restricted for debt service 90,788 Unrestricted (559,188)

TOTAL NET ASSETS 5,268,443

The accompanying notes are an integral part of this financial statement.


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EDMONDS PUBLIC FACILITIES DISTRICTSTATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETSFOR THE YEAR ENDED DECEMBER 31, 2011

2011OPERATING REVENUES: Contributions-Operating 570,379 Rental Revenue 330,621 Charges for Services 62,398 Ticket Sales 457,189

Total Operating Revenues 1,420,587

OPERATING EXPENSES:

Artists' Presentations & Theatre 377,204 Advertising & Marketing 129,069 Development 60,994 Salaries & Benefits 547,528 Facility Maintenance & Utilities 127,779 Supplies & Operating 174,239 Depreciation and Amortization 602,874 Other Operating Expenses 2,323

Total Operating Expenses 2,022,010

Operating Income (Loss) (601,423)

NON - OPERATING REVENUE (EXPENSE):

Taxes 409,569 Debt Service Interest Expense (413,166) Interest Revenue 456

Total Non-Operating Revenue (Expense) (3,139)

Income Before Contributions, Transfers, and Special Items (604,562)

Net Income (Loss) (604,562)

NET ASSETS BEGINNING OF THE YEAR 5,873,005 NET ASSETS END OF THE YEAR 5,268,443

In-kind Contributions 14,300



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EDMONDS PUBLIC FACILITIES DISTRICTSTATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2011

CASH FLOWS FROM OPERATING ACTIVITIES: 2011 Cash received from customers 827,777 Cash contributions received 543,219 Cash payments to suppliers (810,235) Cash payments to employees for services (537,778) Net cash provided (used) by operating activities 22,983

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Transfer from Primary Government 310,176 Net Interfund Transfers 0 Net cash provided (used) by noncapital financing activities 310,176

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Proceeds from Long Term debt - Cash received from sales tax rebate 488,922 Acquisition and construction of capital assets (51,056) Principal paid on debt (400,000) Interest paid on debt (441,850) Net cash provided (used) by capital and related financing activities (403,984)

CASH FLOWS FROM INVESTING ACTIVITIES: Interest on investments 456 Net cash provided (used) by investing activities 456

Net increase (decrease) in cash and cash equivalents (70,368) Cash and cash equivalents, January 1 171,844 Cash and cash equivalents, December 31, 2011 101,476

101,477.68 (1.95)

RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASHPROVIDED (USED) BY OPERATING ACTIVITIES: Operating income (Loss) (601,423) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 602,874 Change in assets and liabilities (Increase) decrease in accounts receivable (83,268) (Increase) decrease in inventory 1,185 (Increase) decrease in pledges receivable (27,159) (Increase) decrease in prepayments (45,442) Increase (decrease) in vouchers payable 105,630 Increase (decrease) in wages payable/contracts payable 9,750 Increase (decrease) in deferred revenue 45,144 Increase (decrease) in customer deposits 15,692 Total Adjustments 624,406 Net cash provided (used) by operating activities 22,983

In-kind Contributions 14,300



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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Edmonds Public Facilities District (EPFD) have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to government units. The more significant of the District's accounting policies are described below. A. Reporting Entity Edmonds Public Facilities District (EPFD) was created by City of Edmonds Ordinance No.

3358 pursuant to Chapter 35.57 of the Revised Code of Washington to finance, design, construct, operate, and maintain an undesignated public facility. The Ordinance, adopted on April 24, 2001, established Edmonds Public Facilities District as a municipal corporation of the State of Washington.

On June 19, 2001, the Edmonds City Council adopted Resolution #1002, appointing five

Board Members to govern the District. The members of the EPFD Board of Directors are each appointed to serve four-year terms.

On November 4, 2002, the Edmonds City Council approved an Interlocal Agreement between the City of Edmonds, EPFD, Snohomish County, and Snohomish County Public Facilities District concerning participation in and financial commitments to the creation of a performing arts center. Land and existing structures, including a 1939 auditorium, were acquired late in 2002. The renovation of the auditorium was completed in 2005, and was funded by a combination of proceeds from bonds issued by the City of Edmonds, City of Edmonds contributions, grants, private donations and a construction loan. Although EPFD is a legally separate municipal corporation, it is included in the financial statements of the City of Edmonds. Blended Component Unit Edmonds Center for the Arts (ECA) is a 501(c) (3) non-profit corporation as described in the Internal Revenue Code of 1986. A twenty-member Board of Directors, appointed by the Board of EPFD, governs the non-profit corporation. Although ECA is a legally separate organization, its financial activity is reported as if it were part of the government entity because its primary purpose is to raise contributed revenue from private sources to support the operations of the performing arts center. Financial information can be obtained through the EPFD/ECA administrative office, c/o Joseph McIalwain, Executive Director, 410 4th Avenue North, Edmonds, WA 98020 or www.ec4arts.org.

B. Measurement focus, basis of accounting, and financial statement preparation

As a proprietary fund, the financial statements of Edmonds Public Facilities District are reported using the flow of economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating


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http://www.ec4arts.org/

EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011

revenues and expenses generally result from providing services in connection with the proprietary fund’s principal ongoing operations. The principal operating revenues of EPFD consist of tickets sales for presented arts events and arts education and outreach programs, concessions sales, and facility rentals. Operating expenses include the costs of providing these programs and services, and general administrative expenses. All revenues and expenses not meeting this definition are reported as non-operating revenue and expenses. Pursuant to Statement No. 20 of the Governmental Accounting Standards Board (GASB), the District reports in accordance with all applicable GASB pronouncements and all FASB Statements and Interpretations, Accounting Principles Board (APB), and Opinions and Accounting Research Bulletins (ARB) issued on or before November 30, 1989 (unless they conflict with or contradict GASB pronouncements). In 2005, the District implemented GASB Statement No. 40 Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements.

C. Assets, Liabilities, and Equity 1. Cash and Cash Equivalents

The Administrative Services Director of the City of Edmonds is the legal ex-officio Treasurer for EPFD. EPFD maintains accounts with the Washington State Local Government Investment Pool, 1st Security Bank and Union Bank (formerly Frontier Bank). ECA maintains accounts at The Bank of Washington, Whidbey Island Bank and Charles Schwab. Funds deposited into these accounts are managed with the intent to optimize return on all temporary cash surpluses consistent with a high degree of security, while meeting daily cash flow demands and conforming to all state statutes and local ordinances governing the investment of public funds. EPFD considers all highly liquid investments with a three-month maturity or less at the time of purchase to be cash equivalents.

2. Investments

Investments are presented in the financial statements at fair value based on quoted market prices. The District’s position in the Local Government Investment Pool is the same as the value of the pool shares. Pool investments are reported as Restricted Cash and Cash Equivalents. For reporting, interest earnings for all funds are recognized in the accounting period in which they become available and measurable. Additional deposit and investment information is presented in Note 3.

3. Receivables

EPFD outstanding customer accounts receivable totaled $108,162, consisting of: $49,340 rentals for use of the auditorium and gymnasium, $34,511 in Sales Tax receivable and $24,311.of other receivables.


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011

Pledges receivable included: Capital pledges $45,155 Sponsorships 22,400 Board pledges 4,750 Individuals 3,636 Total $75,941

4. Capital Assets (see Note 4) Capital assets before depreciation include land, buildings, and equipment. As of December

31, 2011 EPFD owned $17,798,600 in capital assets.

Land 3,444,885 Renovated Buildings 14,023,812 Equipment 266,732 Technology and Software 63,171

Total Capital Assets $17,798,600 The District capitalizes items purchased having a useful life of more than one year. Such

assets are recorded at historical cost or estimated historical cost when purchased or constructed.

Land is not depreciated. The District’s major asset is the renovated auditorium. The

auditorium is depreciated using the straight line method over 25 years. 5. Long-Term Debt See Note 7 NOTE 2 LEGAL ISSUES On July 14, 2008, Edmonds Public Facilities District (The District) entered into a Contingent Loan Agreement (CLA) with the City of Edmonds, providing credit support for the District’s $4,000,000 Sales Tax Obligation and Refunding Bonds of 2008. The CLA states that the City of Edmonds pledges its “full faith, credit and resources” in an “absolute and unconditional” obligation to lend money to the District for the purpose of paying debt service on the bonds. Due to a shortfall in sales tax revenues which are dedicated to servicing bond debt, the District did not receive sufficient funds therefrom to meet its 2011 debt service obligations. The District had liabilities under the CLA to the City of Edmonds at December 31, 2011 in the amount of $310,176. The District repaid $88,000 of this liability to the City of Edmonds in January 2012. (See Note 16) The District has no other legal issues to report.


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 NOTE 3 DEPOSITS AND INVESTMENTS As of December 31, 2011 the District held the following investments:

Cash in State Investment Pool $33.330

Cash in CD Charles Schwab & Co. - Operations $333

$33,663

Credit risk. The District complies with state law which requires all investments of the District’s funds be obligations of the U.S. Government, U.S. agency issues, Obligations of the State of Washington, repurchase agreements, prime banker's acceptances, the Washington State Local Government Investment Pool, and time certificates of deposit with authorized Washington State banks. The Washington State Local Government Investment Pool, operated in a manner consistent with the SEC’s Rule 2a-7 of the Investment Act of 1940, is unrated. Custodial Credit Risk - Deposits. In the case of deposits, this is the risk that in the event of a bank failure, the District’s deposits may not be returned to it. All City District deposits are insured by Federal Depository Insurance (FDIC) up to $100,000.except for the Washington State Local Government Investment Pool, which is covered by the Washington Public Deposit Protection Commission (WPDPC) of the State of Washington. The WPDPC is a statutory authority established under RCW chapter 39.58. It constitutes a multiple financial institution collateral arrangement that provides for additional assessments against members of the pool on a pro rata basis up to a maximum of 10 percent of each institution’s public deposits. Provisions of RCW chapter 39.58, section 60 authorize the WPDPC to make pro-rata assessments in proportion to the maximum liability of each such depository as it existed on the date of loss. Custodial credit risk – Investments. For investments, this is the risk that in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. All District securities are held in the District’s name.


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 NOTE 4 CAPITAL ASSETS

NOTE 5 SHORT-TERM DEBT The PFD has no short-term debt other than the current installments on the long-term bond obligations discussed in Note 6. NOTE 6 LONG-TERM DEBT In 2002, the City of Edmonds issued Limited General Obligation Bonds for the acquisition, renovation and initial operation of a Performing Arts Center by EPFD in the amount of $7,015,000. These proceeds, net of $94,774 bond issuance costs were transferred to The District. Of this amount, $1 million was considered a local match and will be repaid by City revenues. The District is obligated by an inter-local agreement to transfer sales tax rebate revenues to the City to offset the remainder of the debt service costs over the life of the bonds. In 2005, the District’s board authorized Resolution 14 approving a $7,000,000 General and Revenue Obligation Line of Credit pursuant to RCW 35.57.030 and 39.46.050 that was guaranteed by the City of Edmonds via a Contingent Loan Agreement. The note was payable from sales tax revenue and general revenue for the purpose of providing funds needed to complete the construction of the Regional Center, interim financing upon completion, and certain fees and costs for issuing and selling the note. In 2008 Edmonds Public Facilities District issued Sales Tax Obligation and Refunding Bonds in the amount of $4,000,000. The proceeds were used to refund the District’s outstanding balance

Balance Balance 01/01/11 Additions Deletions 12/31/11

Land $3,444,885 $0 $0 $3,444,885

Capital Assets, being depreciated Renovated Building 14,022,334 1,478 0 14,023,812 Furniture & Equipment 264,051 2,681 0 266,732 Technology & Software 16,289 46,883 0 63,171 Total capital assets, being depreciated $14,302,674 $51,042 $0 $14,353,715

Less accumulated depreciation for: Renovated Building (2,380,921) (560,072) 0 (2,940,993) Machinery & Equipment (176,614) (41,201) 0 (217,815) Technology & Upgrades (1,601) (1,601) (3,202) Total accumulated depreciation ($2,559,134) ($602,874) $0 ($3,162,010) Total capital assets, being depreciated, net

$11,743,535 ($551,832) $0 $11,191,705

Total capital assets, net $15,188,421 ($551,832) 0 $14,636,590


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 on its 2005 General and Revenue Obligation Line of Credit ($3,883,804). The remaining proceeds were used to pay bond issuance costs and a portion was placed in reserve for future debt payments. The Bonds were issued pursuant to chapters 35.57 and 39.46 of the Revised Code of Washington “RCW” and Resolution No. 27 adopted by the District’s Board of Directors. The table below summarizes The District’s long-term debt to maturity as of December 31, 2011 ORIGINAL DATE OF DATE OF AMOUNT ORIGINAL FINAL INT. AMOUNT OF BALANCE ISSUED ISSUE MATURITY RATES INSTALLMENTS 12/31/11

***$7,015,000 11/19/2002 12/1/2026 3.00 - 4.90% $70,000 - $575,000 5,240,000

4,000,000 07/14/2008 12/1/2025 4.25 - 4.50% - 3,735,000

$11,015,000

$8,975,000 ***Per interlocal agreement, bond proceeds of $1,000,000 represent the net present value of estimated future City Real Estate Excise Taxes. These items are presented in the Statement of Net Assets as Noncurrent portion of long-term obligations $8,670,000 and Current portion of long-term obligations $305,000. The following schedule depicts debt service requirements to maturity for the EPFD’s long-term debt.

Year Ending Principal Interest Total December 31 Requirement

2012 305,000 401,763 706,763 2013 345,000 389,651 734,651 2014 380,000 375,748 755,748 2015 420,000 359,593 779,593 2016 470,000 341,515 811,515

2017-2021 2022-2026

3,085,000 3,970,000

1,361,956 530,489

4,446,956 4,500,489

8,975,000 3,760,715 12,735,715


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 NOTE 7 CHANGES IN LONG-TERM LIABILITIES Due to Government (Bond Debt 2002 issue) Note Payable Balance as of 1/1/11 $ 5,548,684 2010 Principal in arrear $ (130,000) 2011 Principal installment $ (150,000) 2010 arrear interest paid $ (28,684) Balance as of 12/31/11 $ 5,240,000 Due to Government (Bond Debt 2008 issue) Note Payable Balance as of 01/01/11 $ 3,855,000 2010 Payments on principal $ (120,000) Balance as of 12/31/11 $ 3,735,000 NOTE 8 DEFERRED REVENUE AND PREPAYMENTS Deferred Revenue represents proceeds of ticket sales for 2011 events. The District does not recognize artist fees as an expense until the performance is complete. As of 12/31/2011 contractual obligations were in place with artists scheduled to perform in FY 2012. Advance fees paid to these artists amounted to $26,240 and are included in the Statement of Net Assets under Prepayments and Other. NOTE 9 PENSION PLAN

All PFD full-time employees participate in one of the statewide retirement systems administered by the Washington State Department of Retirement Systems. The Department of Retirement Systems (DRS) 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, PO Box 48380, Olympia, WA 98504-8380. The following disclosures are made pursuant to GASB Statement 27, Accounting for Pensions by State and Local Government Employers.

Public Employees’ Retirement System (PERS) Plan 2

Plan Description 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 a reduced benefit. As of 12/31/11 EPFD has 6 full time and 4 part-time employees covered under plan 2.


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 Funding Policy The required contribution rates expressed as a percentage of current-year covered payrolls as of December 31, 2011 were as follows:

PERS Plan 2

Employer 7.08% Employee 4.64%

Both The District and the employees made all required contributions. The District’s required contributions for the year ended December 31, 2010 and December 31, 2011 were as follows

PERS Plan

2 2010 36,962 2011 33,417 NOTE 10 RISK MANAGEMENT Edmonds Public Facilities District is a member of Enduris. Chapter 48.62 RCW authorizes the governing body of any one or more governmental entity to form together into or join a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, and/or joint hiring or contracting for risk management services to the same extent that they may individually purchase insurance, self-insure, or hire or contract for risk management services. An agreement to form a pooling arrangement was made pursuant to the provisions of Chapter 39.34 RCW, the Interlocal Cooperation Act. Enduris was formed July 10, 1987, when two (2) counties and two (2) cities in the State of Washington joined together by signing an Interlocal Governmental Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. As of August 31, 2010, there are 451 Enduris members representing a broad range of special purpose districts. Enduris allows members to jointly purchase excess insurance coverage, share in the self-insured retention, establish a plan for total self-insurance, and provide excellent risk management services and other related services. Enduris provides “occurrence” policies for all lines of liability coverage including Public Official’s Liability. The Property coverage is written on an “all risk” basis blanket form using current Statement of Values. The Property coverage includes mobile equipment, electronic data processing equipment, valuable papers, building ordinance coverage, property in transit, extra expense, consequential loss, accounts receivable, fine arts, inventory or appraisal cost, automobile physical damage to insured vehicles. Boiler and machinery coverage is included on a blanket limit of $100 million for all members. Enduris offers employee dishonesty coverage up to a liability limit of $1,000,000. Members make an annual contribution to fund Enduris. Enduris acquires insurance from unrelated insurance companies that is subject to a “per occurrence”: $750,000 deductible on liability loss (9/1/09-12/31/09) - the member is responsible for the first $1,000 of the deductible amount of each claim, while Enduris is responsible for the remaining $749,000 on liability loss;


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 $1,000,000 deductible on liability loss (1/1/10-8/31/10) - the member is responsible for the first $1,000 of the deductible amount of each claim, while Enduris covers the remainder; $250,000 deductible on property loss – likewise the member is responsible for the first $1,000 of the deductible amount of each claim, while Enduris is responsible for the remainder. Enduris is responsible for the $4,000 deductible on boiler and machinery loss. Insurance carriers cover all losses over the deductibles as shown to the policy maximum limits. Since Enduris is a cooperative program, there is a joint liability among the participating members. The contract requires members to continue membership for a period of not less than one (1) year and they must give notice 60 days before terminating participation. The Master Agreement (Intergovernmental Contract) is automatically renewed after the initial one (1) full fiscal year commitment. Even after termination, a member is still responsible for contribution to Enduris for any unresolved, unreported and in-process claims for the period they were a signatory to the Master Agreement. Enduris is fully funded by its member participants. Claims are filed by members with Enduris and are administered in house. A Board of Directors consisting of seven (7) board members governs Enduris. Its members elect the Board and the positions are filled on a rotating basis. The Board meets quarterly and is responsible for conducting the business affairs of Enduris

NOTE 11 OPERATING LEASES As of 12/31/2011 the EPFD was the Lessor in an operating lease for a portion of the property. The term of the lease is from January 1, 2004 thru December 31, 2013 with three successive extension options of five years each. The lease takes into consideration that the lessee’s use of the principal property will change over the lease term as a result of the District’s renovation of the property. Monthly lease payments receivable for the remainder of the initial lease period are: 2012 $5,835 2013 $6,010 The rental increases by 3% per annum, including any extension periods. NOTE 12 INTERFUND LOANS AND RESTRICTED NET ASSETS Inter-fund Loans Background As of 12/31/08, there were outstanding inter-fund transfers from The District’s Capital Fund to its Operations Fund in the amount of $310,521.


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EDMONDS PUBLIC FACILITIES DISTRICT JANUARY 1 THROUGH DECEMBER 31, 2011 In 2009, the following inter-fund transactions took place: Advance from Capital Fund to Operations Fund in the amount of $106,031. Advance from Debt Service Fund to Operations Fund in the amount of $89,544. The total inter-fund loan amount as of 12/31/09 was $506,096. Captial Fund: $310,521 & 106,031 = 416,552 Debt Service Fund =$89,544 2010 and 2011 Inter-Fund Loan Transactions During 2010, $24,500 was paid to the Debt Service Fund from the Operating Fund leaving a net balance of $65,044 as of 12/31/2010. The inter-fund loan balance for the Capital Fund remained at $416,552. The combined inter-fund loan total as of 12/31/2010 was $481,596. During 2011, an additional $40,000 was repaid to the Debt Service Fund, reducing the amount due from the Operating Fund to $25,044 and the combined inter-fund loan at 12/31/2011 to $441,596. Balances in Restricted Net Assets : Restricted for Debt Service Fund in the amount of $90,788 is reserved for debt payments, of both interest and principal. This is represented by funds in the Union Bank savings account ($57,422), and LGIP account ($33,030). The Capital Fund constitutes balances restricted for capital purposes as specified in grant awards or agreements, or specifically restricted donations by private donors. The negative balance in Unrestricted (-$559,188) reflects the cumulative balance in the operating fund as of 12/31/11. NOTE 13 SUBSEQUENT EVENTS The District paid $88,000 to the City of Edmonds during January 2012 as partial repayment of its December 31, 2011, liability to the City of $310,176 advanced to the District in 2011 under the Contingent Loan Agreement (CLA) described in Note 2.


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(SAO FACTS.DOC - Rev. 09/11)

ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Brian Sonntag, CGFM Chief of Staff Ted Rutt Deputy Chief of Staff Doug Cochran Chief Policy Advisor Jerry Pugnetti Director of Audit Chuck Pfeil, CPA Director of Performance Audit Larisa Benson Director of Special Investigations James E. Brittain, CPA, CFE Director for Legal Affairs Jan Jutte, CPA, CGFM Director of Quality Assurance Ivan Dansereau Local Government Liaison Mike Murphy Communications Director Mindy Chambers Public Records Officer Mary Leider Main number (360) 902-0370 Toll-free Citizen Hotline (866) 902-3900 Website www.sao.wa.gov Subscription Service https://www.sao.wa.gov/EN/News/Subscriptions/

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Edmonds SAO Financials

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