CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

·         Special Revenue Funds - Special revenue funds are used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to specified purposes.

·         Capital Project Funds - Capital project funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities.  Such resources are derived principally from proceeds of general obligation bonds and from federal and state grants.

Fiduciary Fund Types

·         Trust and Agency Funds - Fiduciary funds are used to account for assets held by the City in a trustee capacity or as an agent.  Trust funds include expendable trust funds and pension trust funds.  Expendable trust funds are accounted for similar to governmental funds.  Pension trust funds are reported on the accrual basis of accounting.  Agency funds are custodial in nature and do not involve measurement of results of operations.

Account Group

·         General Long-term Obligations Account Group - This account group is used to account for all long-term obligations of the City.

(c)     Basis of Accounting

The modified accrual basis of accounting is followed by governmental funds, expendable trust funds, and agency funds.  Under the modified accrual basis of accounting, revenues are recorded when they become measurable and available to pay liabilities of the current period.  Revenues not considered available are recorded as deferred revenues.  Expenditures are recorded when the liability is incurred except for (1) interest on general long-term obligations, which is recorded when due, and (2) the noncurrent portion of compensated absences and judgments and claims, which are recorded in the general long-term obligations account group.

In applying the susceptible to accrual concept to intergovernmental revenues, there are essentially two types of revenues.  In one, monies must be expended on the specific purpose or project before any amounts will be paid to the City; therefore, revenues are recognized based upon the expenditures incurred.  In the other, monies are virtually unrestricted and are usually revocable only for failure to comply with prescribed compliance requirements.  These resources are reflected as revenues at the time of receipt or earlier if the susceptible to accrual criteria are met.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

Property taxes are recognized as revenue in the year for which taxes have been levied, provided they are collected within 60 days after year-end.  Special assessments are recorded as revenue in the year the individual installments are due.  Licenses and permits, fines and forfeitures, and miscellaneous revenues are recorded as revenues when received in cash because they are generally not measurable until actually received.  Investment earnings are recorded as earned.

The accrual basis of accounting is used by the pension trust fund.

(d)     Encumbrances and Continuing Appropriations

Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation, is employed in governmental funds.  Open encumbrances at year-end are reported as reservations of fund balances.  Encumbrances do not constitute expenditures or liabilities, except for budgetary purposes.

Certain unexpended and unencumbered appropriations for incomplete projects are carried over to succeeding years.  Such continuing appropriations are accounted for similar to encumbrances.

(e)     Compensated Absences

Employees are granted sick and vacation leave in varying amounts.  Upon retirement, termination, or death, certain employees are compensated for unused sick and vacation leave (subject to certain limitations) at specified payment rates established by contract, regulation or policy.  The amount of sick and vacation costs which are not due and payable is recorded in the general long-term obligations account group.  The amount recorded is the unused days earned at the current rate of pay.

(f)     Total Columns

Total columns on the general purpose financial statements are captioned “Memorandum only” to indicate that they are presented only to facilitate financial analysis.  Data in these columns do not present financial position, results of operations or changes in financial position in conformity with generally accepted accounting principles.  Such data are not comparable to a consolidation.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

(3)     Property Taxes

Real and personal property taxes are based on values assessed as of each January 1 and are normally due on a quarterly basis beginning August 1st.  By law, all taxable property in the Commonwealth must be assessed at 100% of fair cash value.  Taxes due and unpaid after the respective due dates are subject to interest and penalties.  The City has an ultimate right to foreclose on property for which taxes have not been paid.  Property taxes levied are recorded as receivables in the fiscal year of the levy.

A statewide tax limitation statute known as “Proposition 2-1/2” limits the property tax levy to an amount equal to 2-1/2% of the value of all taxable property in the City.  A secondary limitation is that no levy in a fiscal year may exceed the preceding year’s allowable tax levy by more than 2-1/2%, plus taxes levied on certain property newly added to the tax rolls.  Certain Proposition 2-1/2 taxing limitations can be overridden by a City-wide referendum vote.

(4)     Budgetary Basis of Accounting

The City must establish its property tax rate each year so that the resulting property tax levy will comply with the limits required by Proposition 2-1/2 and also constitute that amount which will equal the sum of (a) the aggregate of all annual appropriations for expenditures and transfers, plus (b) provision for the prior fiscal year’s deficits, if any, less (c) the aggregate of all non-property tax revenue and transfers projected to be received by the City, including available surplus funds.

The budgets for all departments and operations of the City, except that of public schools, are prepared under the direction of the Mayor.  The School Department budget is prepared under the direction of the School Committee.  Original and supplemental appropriations are acted upon by City Council vote.

The City’s General Fund budget is prepared on a basis other than generally accepted accounting principles (“GAAP”).  The “actual” results column of the Statement of Revenues and Expenditures - Budgetary Basis is presented on a “budget basis” to provide a meaningful comparison with the budget.  The major differences between the budget and GAAP bases are that:

(a)     Budgeted revenues are recorded when cash is received, except for real estate and personal property taxes, which are recorded as revenue when levied (budget), as opposed to when susceptible to accrual (GAAP).

(b)     Encumbrances and continuing appropriations are recorded as the equivalent of expenditures (budget), as opposed to a reservation of fund balance (GAAP).

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

(c)     Certain activities and transactions are presented in separate funds (GAAP), rather than as a component of the General Fund (budget).

In addition, there are certain differences in classifications between revenues, expenditures and transfers.

The following reconciliation summarizes the differences between budget and GAAP basis accounting principles for the year ended June 30, 1998, (in thousands):

                                                                                         Revenue           Expenditures          Transfers

         As reported on a budgetary basis                          $    78,747                   79,199                    642

               Adjustment of property tax and other
                   revenues to a modified accrual basis                    1,739                          ––                      ––
               Adjustment for encumbrances, continuing
                   appropriations and accruals                                     ––                        512                      ––
               Reclassification of transactions that are
                   presented in separate fund                                       ––                          ––                    175

         As reported on a GAAP basis                               $   80,486                  79,711                    467

(5)     Cash and Investments

State and local statutes place certain limitations on the nature of deposits and investments available to the City.  Deposits (including demand deposits, term deposits and certificates of deposit) in any one financial institution may not exceed certain prescribed levels without collateralization by the financial institutions involved.  Investments can also be made in securities issued by or unconditionally guaranteed by the U.S. government or agencies that have a maturity of less than one year from the date of purchase, repurchase agreements guaranteed by the U.S. government or agencies that have a maturity of less than one year from the date of purchase, repurchase agreements guaranteed by such securities with maturity dates of no more than 90 days from the date of purchase, and units in the Massachusetts Municipal Depository Trust (“MMDT”).

In addition, the City’s Pension Trust Fund has additional investment powers, most notably the ability to invest in common stocks, corporate bonds and other specified investments.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

(a)     Deposits

The following summary presents the amount of City deposits which are fully insured or collateralized with securities held by the City or its agent in the City’s name (Category 1), those deposits which are collateralized with securities held by the pledging financial institution’s trust department or agent in the City’s name (Category 2), and those deposits which are not collateralized (Category 3) at June 30, 1998 (in thousands).

                                                                                            Bank balance                 Total
                                                                                                Category                      bank       Carrying

                                                                                           1          2            3            balance      amount

                  Cash                                                          $   326                  11,576       11,902         8,663

                  Total                                                          $   326                  11,576       11,902         8,663

(b)     Investments

The City categorizes investments according to the level of risk assumed by the City.  Category 1 includes investments that are insured, registered or held by the City’s agent in the City’s name.  Category 2 includes uninsured and unregistered investments held by the counterparty’s trust department or agent in the City’s name.  Category 3 includes uninsured and unregistered investments held by the counterparty, its trust department or its agent, but not in the City’s name.  Deferred compensation plan and pension plan funds are not categorized because they are managed investment pools (in thousands).

                                                                                          Carrying amount     

                                                                                                Category                     Not        Market

                                                                                           1          2               3     categorized    value

                  MMDT                                                      $     —        —             —         1,312         1,312
                  Deferred compensation plan                              —        —             —         4,108         4,108
                  Pension Trust fund                                             —        —             —        49,312       49,312

                                          Totals                                 $     —        —             —        54,732       54,732

The composition of the City’s investments fluctuates depending primarily on the timing of real estate tax receipts, proceeds from borrowings, collections of state and federal aid, and capital outlays throughout the year.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

(6)     Pension Plan

In 1998, the City adopted the provisions of GASB No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 27, Accounting for Pensions by State and Local Governmental Employers.  The adoption of these new standards resulted in a change in the content of financial statement required disclosures and required supplemental information.

(a)     Plan Description

The City contributes to the Revere Retirement System (“System”), a cost-sharing, multiple-employer, defined benefit public employee retirement system that acts as the investment and administrative agent for the City.  The System covers eligible employees of the City, except school teachers, and eligible employees of the Revere Housing Authority.  Public school teachers are covered by the Commonwealth of Massachusetts Teachers’ Retirement System (TRS) to which the City of Revere does not contribute.  The Commonwealth of Massachusetts funds TRS benefits to the extent funding is not provided through employee contributions.

Instituted in 1940, the System is a member of the Massachusetts Contributory System and is governed by Chapter 32 of the Massachusetts General Laws.  Membership in the System is mandatory immediately upon the commencement of employment for all permanent, full-time employees.

The System provides for retirement allowance benefits up to a maximum of 80% of a member’s highest three-year average annual rate of regular compensation.  Benefit payments are based upon a member’s age, length of creditable service, level of compensation and group classification.  Members joining the System after January 1, 1979, were subject to a cap of $30,000 on the level of compensation upon which their benefits were calculated.  Effective December 21, 1990, the $30,000 cap was removed.

Members of both systems become vested after 10 years of creditable service.  A retirement allowance may be received upon reaching age 65 or upon attaining 20 years of service.  The systems also provide for early retirement at age 55 if a Participant (1) has a record of 10 years of creditable service, (2) was on the City payroll on January 1, 1978, (3) voluntarily left City employment on or after that date, and (4) left accumulated annuity deductions in the fund.  Active members contribute between 5% and 9% of their gross regular compensation depending on the date upon which their membership began.  Members hired after December 31, 1978 must contribute an additional 2% of regular compensation in excess of $30,000.

The System also provides death and disability benefits.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

The Revere Retirement System issues a publicly available financial report that can be obtained by contacting Revere City Hall.

(b)     Funding Policy and Contribution Requirements

The System’s funding policy is governed by Section 22D of Chapter 32 of the Massachusetts General Laws.  Accordingly, the City of Revere is required to fund each year the actuarially determined normal cost plus an amount to amortize the unfunded liability for retirees and active employees by June 30, 2007 and June 30, 2024, respectively.  The Commonwealth of Massachusetts currently reimburses the System on a quarterly basis for the portion of benefit payments owing to cost-of-living increases granted after the implementation of Proposition 2-1/2.

The City’s contribution to the System for the calendar year December 31, 1998, 1997 and 1996 were $5,857,000, $5,680,000 and $5,367,649, respectively.

(c)     Post-Retirement Benefits

All retired employees eligible for pension benefits receive certain post-retirement benefits including major health and life insurance.  Benefits received and costs borne by retirees are consistent with those of active employees.  The City’s cost of these post-retirement benefits for fiscal 1998 was approximately $1,488,969.33, which was accounted for on a pay-as-you-go basis.

(7)     Short-term and Long-Term Obligations

Under state law and by authorization of the City Council, the City is authorized to borrow on a temporary basis to fund capital project costs incurred prior to obtaining permanent financing through issuance of bond anticipation notes (BAN).  Temporary loans are general obligations of the City and carry maturity dates which are limited by statute.  Temporary borrowings are recorded as liabilities in the Capital Projects fund.  As of June 30, 1998, there were no temporary borrowings outstanding.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

The following is a summary of changes in long-term debt for the year ended June 30, 1998 (in thousands):

                                                                     Interest          June 30,                                           June 30,
                                                                       rates                1997      Additions Retirements     1998

         General Obligation Bonds:
            Senior Center, serial maturities
               through 6/30/03                               4.75%       $           —              400                —              400
            MWRAI/I Phase II                             0.00%                   —              426                —              426
            School and RESCO; improve-
               ments, serial maturities through
               6/15/12                                   3.6% to 6.125%                         4,400           —              300                                                                       4,100
            School construction, serial
               maturities through 6/15/08           6.3% to 7%          1,025                —              100              925
            Schools, water and improvements,
               serial maturities, Series A
               through 6/15/16                         4.6% to 6.5%         8,015                —              525           7,490
            Equipment, serial maturities,
               Series B through 6/30/01                4.875%             1,000                —              250              750
            Massachusetts Water Pollution
               Abatement Trust, serial
               maturities through 2/1/15            4.0% to 5.7%            782                —                27              755
            MWRA, serial maturities
               through 5/15/00                               0.00%                 223                —                74              149
                                                                                            15,445              826           1,276        14,995

         Other long-term obligations:
            Compensated absences*                                             2,916                —              572           2,344
            Judgments and claims (note 10)                                   2,563           1,729              435           3,857

                                                                                       $   20,924           2,555           2,283        21,196

         * (activity shown net)

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

In June 1996, the City entered into a loan agreement with the Massachusetts Water Pollution Abatement Trust (MWPAT) to borrow $863,853 to finance certain wastewater capital improvements.  Remaining scheduled loan repayments are $1,191,754 including interest.  The City expects to receive $213,113 of interest subsidies from the MWPAT over the life of the loan.  Thus, the net debt service cost remaining to the City is $978,641.  Since the City is legally obligated for the total remaining amount of debt, such amount has been recorded in the accompanying financial statements.

Annual requirements to amortize all general obligation bonds outstanding as of June 30, 1998, including interest, are as follows (in thousands):

                                                                                                    Interest                      

         Year ending June 30                            Principal         Gross       Subsidy      Net           Total

                       1999                                    $       1,443              772           (21)         751           2,194
                       2000                                             1,445              701           (20)         681           2,126
                       2001                                             1,371              638           (19)         619           1,990
                       2002                                             1,098              574           (18)         556           1,654
                       2003 through 2017                        9,638           3,352         (135)       3,217         12,855

                                                                  $      14,995           6,037         (213)       5,824         20,819

The Commonwealth of Massachusetts has approved school construction assistance to the City.  The assistance program which is administered by the School Building Assistance Bureau (SBAB) provides resources for future debt service of general obligation school bonds outstanding.  These resources are subject to annual appropriation by the state legislature and the City’s compliance with certain reporting requirements.  During 1998, the City received $24,874 of such assistance.  Assuming satisfactory audit results and annual appropriations by the state legislature, $198,990 will be received annually for fiscal years 1999 through 2005.

The City is subject to a dual level general debt limit; the normal debt limit and the double debt limit.  Such limits are equal to 2-1/2% and 5%, respectively, of the valuation of taxable property in the City as last equalized by the Commonwealth’s Department of Revenue.  Debt may be authorized up to the normal debt limit without state approval.  Authorizations under the double debt limit, however, require the approval of the Commonwealth’s Emergency Finance Board.  Additionally, there are many categories of general obligation debt which are exempt from the debt limit but are subject to other limitations.

As of June 30, 1998, the City may issue $42,173,922 additional general obligation debt under the normal debt limit.  The City has $13,265,000 of debt exempt from the debt limit.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

Authorized and unissued debt at June 30, 1998 is as follows (in thousands):

                                       Roughan’s Point flood damage                              $    2,555
                                       Solid waste project                                                      1,590

                                                                                                                    $     4,145

The City pays assessments which include debt service payments to other local governmental units providing services within the City’s boundaries (commonly referred to as overlapping debt).  The primary overlapping debt relates to the Massachusetts Bay Transportation Authority (MBTA) and the Massachusetts Water Resources Authority (MWRA).  The following summary sets forth the long-term debt of each entity at June 30, 1998, the estimated share of such debt being serviced by the City, and the total of its share of estimated indirect debt.

                                                                                                                                                    City’s
                                                                              Long-term                     City’s                   estimated
                                                                                    debt                       estimated                 indirect
                                                                              outstanding                    share                       debt
                                                                              (unaudited)                (unaudited)             (unaudited)

         MBTA                                                    $   3,210,730,000                   2.09%                67,104,257
         MWRA:
              Water                                                        517,604,000                   1.99%                10,315,257
              Sewer                                                     2,957,117,000                   2.05%                60,569,469
         Regional schools                                                    370,000                 21.22%                       78,514

                                                                        $   6,685,821,000                                           138,067,497

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

(8)     Operating Transfers

Operating transfers constitute the transfer of resources from the fund that receives the resources to the fund that utilizes them.  Operating transfers during the year were as follows:

                                                                                                             Transfers in (out)                           

                                                                                                              Special        Capital     Expendable
                                                                                     General          Revenue     Projects          Trust

         Source of operating transfer:
             Receipts reserved for appropriation              $   455,500         (455,500)              —                 —
             Federal grants                                                     40,910          (40,910)              —                 —
             Revolving funds                                                    (1,931)            1,931                —                 —
             Trust actuaries                                                    (42,017)                 —                —           42,017
             Community development                                      14,530                   —        (14,530)                —

                                                                                 $   466,992         (494,479)      (14,530)         42,017

(9)     Deferred Compensation Plan

The City has a deferred compensation plan created in accordance with Section 457 of the Internal Revenue Code.  The Plan, available to all City employees, permits them to defer a portion of their current salary to future years.  The deferred compensation is not available to the participants until termination, retirement, death or unforeseeable emergency.

In accordance with Section 457 of the Internal Revenue Code, all amounts of compensation deferred under the Plan, all property and rights purchased with such amounts, and all income attributable to such amounts, property or rights are (until made available to the employee or other beneficiary) solely the property and rights of the City (without being restricted to the provisions of benefits under the Plan) subject only to the claims of the City’s general creditors.

Participants’ rights created under the Plan are equivalent to those of general creditors of the City and only in an amount equal to the fair market value of the deferred account maintained with respect to each participant.  Plan assets have been used for no purpose other than to pay benefits.  In addition, the City believes that it is unlikely that it will use the assets to satisfy the claims of general creditors in the future.  The City records the plan assets and the related liability to plan participants as an agency fund.

CITY OF REVERE, MASSACHUSETTS

Notes to General Purpose Financial Statements

June 30, 1998

The Plan allows its participants to direct their contributions among several publicly traded mutual funds and other pooled investment vehicles, as provided by the Plan.  These investment vehicles use derivatives in varying degrees to achieve their overall performance objectives.  The Plan’s investments are not subject to review or approval by the City.

(10)   Risk Management

The City is exposed to various risks of loss related to general liability, property and casualty, workers’ compensation, unemployment and employee health insurance claims.

Buildings and vehicles are insured through an outside agency.  The City is self-insured for other general liability; however, Chapter 258 of the Massachusetts General Laws limits the liability to a maximum of $100,000 per claim in all matters except actions relating to federal/civil rights, eminent domain and breach of contract.  The City is also self-insured for workers’ compensation and unemployment claims.

Approximately 8.1% of the City’s employees participate in a premium-based indemnity plan, with the remainder electing health maintenance organizations (HMOs) that are also premium based.  Both employees and the City contribute to the health care plans.  City and employee contributions are 75% and 25%, respectively, for the indemnity plan, and 90% and 10%, respectively, for HMOs.  The City also has a self-funded Medex insurance program for certain retirees wherein payments are based on actual claims.  Retirees contribute at a rate of 25% for the Medex plan or at the same rates in effect for current employees should they elect the indemnity plan or HMO.

Governmental Accounting Standards Board Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues requires that liabilities for self-insured claims and judgments be reported if it is probable that a loss has been incurred and the amount can be reasonably estimated.  The City accounts for its self-insurance costs to be paid from expendable available financial resources in the general fund.  Noncurrent liabilities for claims incurred but not paid or reported are recorded in the general long-term obligations account group.  Changes in the self-insurance liability during fiscal 1998 are reported in note 7 as judgments and  claims, where the “Additions” column represents changes in the estimated liability, and the “Retirements” column represents both expenditures and payments during the year.

There are several pending lawsuits in which the City is involved.  The City Solicitor estimates that the potential claims against the City resulting from such litigation would not materially affect the financial position of the City.