PRELIMINARY OFFICIAL STATEMENT DATED DECEMBER 10, 2013
NEW ISSUE Moody’s Rating: A1
BOOK-ENTRY ONLY See “RATING”
BANK QUALIFIED
In the opinion of Bond Counsel, under existing federal law and assuming compliance with applicable requirements of the Internal Revenue Code of
1986, as amended (the “Code”), that must be satisfied subsequent to the issue date of the Bonds, interest on the Bonds is excluded from gross income
for federal income tax purposes and is not an item of tax preference for purposes of the alternative minimum tax applicable to individuals. However,
while interest on the Bonds also is not an item of tax preference for purposes of the alternative minimum tax applicable to corporations, interest on the
Bonds received by corporations is taken into account in the computation of adjusted current earnings for purposes of the alternative minimum tax
applicable to corporations, interest on the Bonds received by certain S corporations may be subject to tax, and interest on the Bonds received by
foreign corporations with United States branches may be subject to a foreign branch profits tax. Receipt of interest on the Bonds may have other
federal tax consequences for certain taxpayers. The District has designated the Bonds as “qualified tax-exempt obligations” for banks, thrift
institutions and other financial institutions under Section 265(b)(3)(B) of the Code. See “TAX EXEMPTION."
$4,450,000*
PUBLIC UTILITY DISTRICT NO. 1
OF KITSAP COUNTY, WASHINGTON
WATER SYSTEM REVENUE AND REFUNDING BONDS, 2013
DATED: Date of Delivery DUE: December 1, as shown below
The Public Utility District No. 1 of Kitsap County, Washington (the “District”), Water System Revenue and Refunding Bonds, 2013 (the
“Bonds”) are being issued as fully registered bonds under a book-entry system, initially registered in the name of Cede & Co. (the “Registered
Owner”), as nominee for The Depository Trust Company, New York, New York (“DTC”), which will act as securities depository for the
Bonds. Individual purchases of the Bonds will be made in the principal amount of $5,000 or any integral multiple thereof within a maturity.
Purchasers of the Bonds (the “Beneficial Owners”) will not receive certificates representing their beneficial ownership interests in the Bonds.
Interest on the Bonds is payable on June 1 and December 1, commencing June 1, 2014, until maturity or prior redemption, by the fiscal agent
of the State of Washington (the “State”), currently The Bank of New York Mellon, New York, New York (the “Bond Registrar”). As long as
DTC or its nominee is the Registered Owner of the Bonds, such payments will be made by the Bond Registrar to DTC, which is obligated to
remit such principal and interest to its broker-dealer Participants, which will in turn remit such payments to the Beneficial Owners of the
Bonds as described in Appendix D – “BOOK-ENTRY ONLY SYSTEM.”
MATURITY SCHEDULE
Dec. 1*
Amount*
Interest
Rate
Price or
Yield
CUSIP No.**
Dec. 1*
Amount*
Interest
Rate
Price or
Yield
CUSIP No.**
2014 $215,000 2024 $160,000
2015 225,000 2025 165,000
2016 230,000 2026 170,000
2017 240,000 2027 180,000
2018 240,000 2028 185,000
2019 250,000 2029 195,000
2020 260,000 2030 205,000
2021 275,000 2031 215,000
2022 285,000 2032 225,000
2023 295,000 2033 235,000
The Bonds are subject to redemption prior to maturity as described herein under the heading “THE BONDS – Redemption Provisions.”
The Bonds are being issued to finance capital improvements, to refund certain outstanding Water System Revenue Bonds, 2004 Series B if
interest rates are favorable, to fund the Reserve Fund and to pay the costs of issuance of the Bonds. See “PURPOSE AND APPLICATION
OF BOND PROCEEDS.”
The Bonds are special obligations of the District and are not obligations of the State or any political subdivision thereof other than the District,
and neither the full faith and credit nor the taxing power of the District or the State is pledged to the payment of the Bonds. The Bonds are
payable from and secured by the Gross Revenue of the System and from any LUD Assessments, subject only to the payment of Operations and
Maintenance Expenses. The Bonds are issued on parity with $8,615,000 of Outstanding Revenue Bonds, of which $1,140,000 is expected to
be refunded with the Bonds if interest rates are favorable, and any Future Parity Bonds. The District has pledged that it will not issue any
additional bonds which are secured by a lien on the revenues of the System that is superior to the lien on the Bonds. See “SECURITY FOR
THE BONDS.”
This cover page contains certain information for quick reference only. Investors must read the entire Official Statement to obtain
information essential to making an informed investment decision.
The Bonds are offered by the Underwriter when, as and if issued, subject to the approving legal opinion of Foster Pepper PLLC of Seattle,
Washington, Bond Counsel. It is expected that the Bonds in book-entry form will be ready for delivery at the facilities of DTC in New York,
New York, by FAST Automated Securities Transfer on or about December 30, 2013 (the “Date of Delivery”).
registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by
Standard & Poor’s. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds.
Th
is P
reli
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info
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The information set forth herein has been obtained from the District and other sources that the District believes to be
reliable. However, the information set forth in Appendix D - “BOOK-ENTRY ONLY SYSTEM” has been obtained
from DTC’s website. Quotations from, summaries and explanations of the laws and documents do not purport to be
complete statements of their provisions; reference is made to the entirety of such documents or laws. This Official
Statement is not to be construed as a contract or agreement between the District and the purchasers or owners of any
of the Bonds. The cover page hereof and appendices attached hereto are part of this Official Statement. The order
and placement of materials in this Official Statement, including the Appendices, are not to be interpreted as a
determination of relevance, materiality or importance, and this Official Statement, including the appendices must be
considered in its entirety. The offering of the Bonds is made only by means of this entire Official Statement.
No dealer, broker, sales representative or other person has been authorized by the District to give any information or
to make any representations, other than as contained in this Official Statement in connection with the offering made
hereby and, if given or made, such information or representations must not be relied upon. The information and
expressions of opinions herein are subject to change without notice, and neither the delivery of this Official
Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no
change in the information set forth herein since the date hereof. This Official Statement does not constitute an offer
to sell or the solicitation of an offer to buy nor will there be any sale of the Bonds by any person, in any jurisdiction
in which it is unlawful for such persons to make such offer, solicitation or sale.
The Bonds have not been registered under the Securities Act of 1933, as amended, and the Bond Resolution has not
been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions contained in such
Acts. The registration or qualification of the Bonds in accordance with applicable provisions of securities laws of
the states in which the Bonds have been registered or qualified and the exemption from registration or qualification
in other states cannot be regarded as a recommendation thereof. Neither these states nor any of their agencies have
passed upon the merits of the bonds or the accuracy or completeness of this Official Statement. Any representation
to the contrary may be a criminal offense.
The presentation of certain information, including tables of receipts from revenues, is intended to show recent
historical information and is not intended to indicate future or continuing trends in the financial position or other
affairs of the District. No representation is made that past experience will continue to be repeated in the future.
This Official Statement contains forecasts, projections, and estimates that are based upon expectations and
assumptions that existed at the time such forecasts, projections, and estimates were prepared. The inclusion of such
forecasts, projections, and estimates should not be regarded as a representation by the District that such forecasts,
projections, and estimates will occur and they are not intended as representations of fact or as guarantees of results.
If and when included in this Official Statement, the words “plan,” “expect,” “forecast,” “estimate,” “budget,”
“project,” “intends,” “anticipates,” and similar words are intended to identify forward-looking statements, and any
such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. These forward-looking statements speak only as of the date they were prepared.
Information on websites referenced in this Official Statement is not incorporated into this Official Statement and
cannot be relied upon to be accurate as of the date of this Official Statement, nor can any such information be relied
upon in making investment decisions regarding the Bonds.
The Underwriter has provided the following three sentences for inclusion in this Official Statement. The
Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its
responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this
transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. In
connection with this offering, the Underwriter may over-allot or effect transactions that stabilize or maintain the
market price of the Bonds at levels above those which might otherwise prevail in the open market. Such stabilizing,
if commenced, may be discontinued at any time.
This Preliminary Official Statement, as of its date, is in a form “deemed final” by the District for purposes of
Securities and Exchange Commission Rule 15c2-12(b)(1), but is subject to revision, amendment, and completion in
a final Official Statement, which will be available within seven business days after the sale date.
i
PUBLIC UTILITY DISTRICT NO. 1
OF KITSAP COUNTY
1431 Finn Hill Road
Poulsbo, Washington 98370
(360) 779-7656
www.kpud.org*
Board of Commissioners
John Armstrong President
Lloyd Berg Vice President
Jim Civilla Secretary
Staff
David R. Siburg General Manager
Bob Hunter Assistant General Manager
Attorney
William H. Broughton
Kitsap County Officials
Meredith Green Treasurer
Jim Avery Assessor
Bond Counsel Foster Pepper PLLC
Seattle, Washington
Financial Advisor
A. Dashen & Associates
Bellevue, Washington
_______________
* None of the websites referenced in this Official Statement, including the District’s, is included as a part of this
Official Statement. Investors should not rely on information presented in the websites in determining whether to
purchase the Bonds. Any references to the website addresses are not hyperlinks and do not incorporate any of the
websites by reference.
ii
(This page intentionally left blank)
iii
TABLE OF CONTENTS
INTRODUCTION ......................................................................................................................................................... 1 THE BONDS ................................................................................................................................................................. 1
General ...................................................................................................................................................................... 1 Registration and Payment .......................................................................................................................................... 1 Redemption Provisions .............................................................................................................................................. 2 Book-Entry Bonds ..................................................................................................................................................... 3 Payment in the Event Bonds Are Not In Book-Entry Form ...................................................................................... 3 Transfer and Exchange .............................................................................................................................................. 3 Defeasance of Bonds ................................................................................................................................................. 3 Purchase of Bonds by the District.............................................................................................................................. 4
PURPOSE AND APPLICATION OF BOND PROCEEDS ......................................................................................... 4 Capital Improvements ................................................................................................................................................ 4 Plan of Refunding ...................................................................................................................................................... 4
SECURITY FOR THE BONDS .................................................................................................................................... 5 Revenue Fund ............................................................................................................................................................ 5 Rate Stabilization Fund.............................................................................................................................................. 5 Bond Fund ................................................................................................................................................................. 5 Flow of Funds ............................................................................................................................................................ 7 Rate Covenant............................................................................................................................................................ 7 Other Covenants ........................................................................................................................................................ 7 Future Parity Bonds ................................................................................................................................................... 8 Amendatory or Supplemental Resolutions ................................................................................................................ 9
DEBT SERVICE REQUIREMENTS AND ADDITIONAL BORROWING ............................................................. 10 Additional Borrowing .............................................................................................................................................. 10 Debt Payment Record .............................................................................................................................................. 11 Summary of Outstanding Debt ................................................................................................................................ 11
THE DISTRICT .......................................................................................................................................................... 11 Governance and Administration .............................................................................................................................. 11 Accounting Policies ................................................................................................................................................. 12 Auditing of District Finances ................................................................................................................................... 12 Pension System ........................................................................................................................................................ 12 Other Post Employment Benefits ............................................................................................................................ 14 Deferred Compensation ........................................................................................................................................... 15 Insurance .................................................................................................................................................................. 15 Investments .............................................................................................................................................................. 15
WATER OPERATIONS ............................................................................................................................................. 16 Operations and Services .......................................................................................................................................... 16 Regional Transmission System ................................................................................................................................ 16 Capital Improvements .............................................................................................................................................. 17 Historical Number of Customers ............................................................................................................................. 17 Water Rates and Charges ......................................................................................................................................... 17
PROPERTY TAXES ................................................................................................................................................... 21 Use of Property Taxes ............................................................................................................................................. 21 Property Tax Limitations ......................................................................................................................................... 21
HISTORICAL FINANCIAL RESULTS ..................................................................................................................... 22 Historical Operating Results .................................................................................................................................... 22 Statement of Net Position ........................................................................................................................................ 23 Management Discussion of Operations for 2013 ..................................................................................................... 24
iv
GENERAL AND ECONOMIC INFORMATION ...................................................................................................... 24 LEGAL OPINION/APPROVAL OF COUNSEL ....................................................................................................... 26 LIMITATIONS ON REMEDIES; BANKRUPTCY ................................................................................................... 26 CONTINUING DISCLOSURE UNDERTAKING ..................................................................................................... 26 TAX EXEMPTION ..................................................................................................................................................... 28 INITIATIVE AND REFERENDUM .......................................................................................................................... 29 LITIGATION .............................................................................................................................................................. 29 ENFORCEABILITY ................................................................................................................................................... 29 RATING ...................................................................................................................................................................... 29 CONFLICTS OF INTEREST...................................................................................................................................... 30 FINANCIAL ADVISOR ............................................................................................................................................. 30 UNDERWRITING ...................................................................................................................................................... 30 OFFICIAL STATEMENT........................................................................................................................................... 30
APPENDICES
CERTAIN DEFINITIONS FROM THE BOND RESOLUTION ........................................................... APPENDIX A
AUDITED 2012 FINANCIAL STATEMENTS ..................................................................................... APPENDIX B
FORM OF OPINION OF BOND COUNSEL ......................................................................................... APPENDIX C
BOOK-ENTRY ONLY SYSTEM .......................................................................................................... APPENDIX D
1
OFFICIAL STATEMENT
$4,450,000*
PUBLIC UTILITY DISTRICT NO. 1
OF KITSAP COUNTY, WASHINGTON
WATER SYSTEM REVENUE AND REFUNDING BONDS, 2013
INTRODUCTION
This Official Statement of Public Utility District No. 1 of Kitsap County (the “District”) in the state of Washington
(the “State”), is provided for the purpose of setting forth information in connection with the issuance by the District
of its Water System Revenue and Refunding Bonds, 2013 (the “Bonds”). The District owns and operates a water
utility system (the “System”). The System also includes a telecommunication system developed by the District.
Additionally, the District provides water resource management services throughout Kitsap County. This Official
Statement provides information concerning the District, the System, and the Bonds.
The Bonds are issued pursuant to Title 54 of the Revised Code of Washington (“RCW”), RCW 39.53, and
Resolution No. 13-11-26B of the District providing for the issuance and sale of the Bonds (the “Bond Resolution”),
adopted by the Commission of the District (the “Commission”) at a regular meeting on November 26, 2013.
The District has outstanding $1,140,000 principal amount of Water Revenue System Bonds, 2004 Series B (the
“2004 Bonds”), $3,095,000 principal amount of Water System Revenue Bonds, 2005 (the “2005 Bonds”), and
$4,380,000 principal amount of Water System Revenue and Refunding Bonds, 2010 (the “2010 Bonds”)
(collectively the “Outstanding Revenue Bonds”). The Bonds, the Outstanding Revenue Bonds and any bonds issued
in the future on parity with the Bonds and the Outstanding Revenue Bonds (“Future Parity Bonds”) are referred to as
“Parity Bonds.” The District additionally has outstanding $312,975 of subordinate lien notes and leases. See
“DEBT SERVICE REQUIREMENTS AND ADDITIONAL BORROWING” herein. Depending on market
conditions, the District plans to refund the 2004 Bonds with proceeds of the Bonds. The proceeds of the Bonds not
needed for such refunding will be used to finance distribution, transmission and regional infrastructure
improvements and for other System capital improvements, to fund the Reserve Fund, and to pay costs of issuance.
Simultaneously with the issuance of the Bonds, the District expects to issue $2,730,000* of limited tax general
obligation and refunding bonds (the “2013 LTGO Bonds”), which are secured by annual property tax collections.
THE BONDS
General
The Bonds will be dated as of their date of delivery, will be issued in denominations of $5,000 or any integral
multiple thereof within a single maturity, and will bear interest from their dated date (or the most recent date to
which interest has been paid thereon). Interest on the Bonds will be payable semiannually on each June 1 and
December 1, commencing June 1, 2014. The Bonds will bear interest at the rates and will mature on the dates and in
the amounts set forth on the cover of this Official Statement, subject to prior redemption as described herein.
Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
Registration and Payment
The Bonds will be issued only as fully registered bonds under a book-entry system and will be initially registered in
the name of Cede & Co., as nominee for The Depository Trust Company (“DTC”), New York, New York, which
will act as securities depository for the Bonds. Purchasers of interests in the Bonds will not receive certificates
representing such interests.
Principal and interest are payable directly to DTC by the State’s fiscal agent (currently The Bank of New York
Mellon), as initial paying agent and registrar (the “Bond Registrar”). The Bond Registrar is obligated to make
principal and interest payments to Cede & Co. which, in turn, is obligated to disburse such principal and interest
payments to its participants (the “DTC Participants”) in accordance with DTC policies. Payments by such DTC
Participants to the beneficial owners of the Bonds will be governed by standing instructions and customary
* Preliminary; subject to change.
2
practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street
name,” and will be the responsibility of such DTC Participants and not of DTC, the Bond Registrar or the District.
For so long as any Bonds are held in fully immobilized form, DTC, its nominee or a successor depository will be
deemed to be the Registered Owner for all purposes under the Bond Resolution and all references to Registered
Owners will mean DTC or its nominee or a successor depository and will not mean the beneficial owners. Neither
the District nor the Bond Registrar has any responsibility or obligation to DTC Participants or to the persons for
whom the DTC Participants act as nominees with respect to the Bonds regarding the accuracy of any records
maintained by DTC or DTC Participants of any amount in respect of principal of or interest on the Bonds, or any
notice that is permitted or required to be given to Registered Owners under the Bond Resolution (except such notice
as is required to be given by the Bond Registrar to DTC or its nominee or a successor depository).
Redemption Provisions
Optional Redemption. The Bonds maturing in the years 2014 through 20__, inclusive, shall be issued without the
right or option of the District to redeem those Bonds prior to their stated maturity dates. The District reserves the
right and option to redeem the Bonds maturing on or after December 1, 20__, prior to their stated maturity dates at
any time on or after ______ 1, 20__, as a whole or in part (within one or more maturities selected by the District), at
par plus accrued interest to the date fixed for redemption.
Mandatory Redemption. The Bonds maturing in 20__ are Term Bonds and, if not redeemed under the optional
redemption provisions set forth above or purchased in the open market under the provisions set forth below, will be
called for redemption at a price of par, plus accrued interest to the date of redemption, on December 1 in years and
amounts as follows:
20__ Term Bond
Mandatory Redemption Year Mandatory Redemption Amount
*
* Maturity.
If the District redeems the Term Bonds under the optional redemption provisions described above or purchases or
defeases the Term Bonds, the Term Bonds so redeemed, purchased or defeased (irrespective of their actual
redemption or purchase prices) will be credited at the par amount thereof against one or more scheduled mandatory
redemption amounts for those Term Bonds in the manner described below regarding the selection of Bonds for
redemption.
Selection of Bonds for Redemption. If fewer than all of the Bonds are to be redeemed prior to maturity, the District
will select the maturity or maturities to be redeemed. If fewer than all of the bonds of a single maturity of Bonds are
to be redeemed prior to maturity, then: (i) if such Bonds are in book-entry form at the time of such redemption,
DTC is required to select the specific Bonds in accordance with the Letter of Representations, and (ii) if such Bonds
are not in book-entry form at the time of such redemption, on each redemption date, the Bond Registrar is required
to select the specific Bonds for redemption by lot or in such manner as the Bond Registrar in its discretion may
deem to be fair and appropriate.
The portion of any Bond of a denomination more than $5,000 to be redeemed will be in the principal amount of
$5,000 or any integral multiple thereof, to be selected, as the case may be, by DTC in accordance with the Letter of
Representations or by the Bond Registrar in such manner as the Bond Registrar in its discretion may deem to be fair
and appropriate.
Notice of Redemption. While the Bonds are held by DTC in book-entry only form, any notice of redemption shall
be given at the time, to the entity and in the manner required by DTC in accordance with the Letter of
Representations, and the Bond Registrar shall not be required to give any other notice of redemption. If the Bonds
cease to be in book-entry only form, the District shall cause notice of any intended redemption of Bonds to be given
by the Bond Registrar not less than 20 nor more than 60 days prior to the date fixed for redemption by first-class
mail, postage prepaid, to the registered owner of any Bond to be redeemed at the address appearing on the Bond
Register at the time the Bond Registrar prepares the notice, and the requirements of this sentence shall be deemed to
3
have been fulfilled when notice has been mailed as so provided, whether or not it is actually received by the owner
of any Bond.
In the case of an optional redemption, the notice may state that the District retains the right to rescind the redemption
notice and the related optional redemption of Bonds by giving a notice of rescission to the affected registered
owners at any time prior to the scheduled optional redemption date. Any notice of optional redemption that is so
rescinded shall be of no effect, and the Bonds for which the notice of optional redemption has been rescinded shall
remain outstanding.
Interest on Bonds called for redemption shall cease to accrue on the date fixed for redemption unless the Bond or
Bonds called are not redeemed when presented pursuant to the call. In addition, the redemption notice shall be
mailed within the same period, postage prepaid, to Moody’s Investors Service, Inc. at their office in New York,
New York, or its successors, to the Municipal Securities Rulemaking Board (“MSRB”) and to such other persons
and with such additional information as the District General Manager shall determine, but these additional mailings
shall not be a condition precedent to the redemption of Bonds.
Book-Entry Bonds
DTC will act as securities depository for the Bonds. So long as Cede & Co. is the registered owner of the Bonds, as
nominee of DTC, references herein to the “registered owners” or “bondowners” will mean Cede & Co. and will not
mean the “Beneficial Owners” of the Bonds. In this Official Statement, the term “Beneficial Owner” will mean the
person for whom a DTC participant acquires an interest in the Bonds. For a description of the book-entry system,
see Appendix D—“BOOK-ENTRY ONLY SYSTEM.”
Payment in the Event Bonds Are Not In Book-Entry Form
If the Bonds are no longer in book-entry form, the principal of the Bonds shall be payable upon due presentment and
surrender thereof at the principal office of the Bond Registrar, interest on the Bonds will be payable by check or
draft mailed to the persons in whose names such Bonds are registered, at the address appearing upon the registration
books on the 15th
day of the month prior to an interest payable date (the “record date”), and the Bonds will be
transferable as provided in the Bond Resolution.
Transfer and Exchange
Neither the District nor the Bond Registrar shall be required to transfer or exchange Bonds from the record date next
preceding an interest payment date for the Bonds through and including such interest payment date or from the
record date next preceding any selection of Bonds to be redeemed or thereafter until after the first mailing of any
notice of redemption, or to transfer or exchange any Bonds called for redemption. For purposes hereof, record date
shall mean in the case of each interest payment date, the Bond Registrar’s close of business on the 15th
day of the
month immediately preceding such interest payment date, and, in the case of each redemption, such record date shall
be specified by the Bond Registrar in the notice of redemption, provided that such record date shall not be less than
15 calendar days before the mailing of such notice of redemption.
For every transfer and exchange of the Bonds, the Beneficial Owner may be charged a sum sufficient to cover any
tax, fee or other governmental charge that may be imposed in relation thereto, and any reasonable fees and expenses
of the Bond Registrar and costs incurred in preparing bond certificates.
Defeasance of Bonds
The District may issue refunding bonds pursuant to the laws of the State or use money available from any other
lawful source to pay when due the principal of and interest on the Bonds, or any portion thereof included in a
refunding or defeasance plan, and to redeem and retire, refund or defease all such then-outstanding Bonds
(hereinafter collectively called the “defeased Bonds”) and to pay the costs of the refunding or defeasance. If money
and/or “government obligations” (as defined in chapter 39.53 RCW, as now or hereafter amended) maturing at a
time or times and bearing interest in amounts (together with money, if necessary) sufficient to redeem and retire,
refund or defease the defeased Bonds in accordance with their terms are set aside in a special trust fund or escrow
account irrevocably pledged to that redemption, retirement or defeasance of defeased Bonds (hereinafter called the
“trust account”), then all right and interest of the owners of the defeased Bonds in the covenants of the Bond
Resolution and in the funds and accounts obligated to the payment of the defeased Bonds shall cease and become
void. The owners of defeased Bonds shall have the right to receive payment of the principal of and interest on the
defeased Bonds from the trust account. The District shall include in the refunding or defeasance plan such
provisions as the District deems necessary for the random selection of any defeased Bonds that constitute less than
all of a particular maturity of the Bonds, for notice of the defeasance to be given to the owners of the defeased
Bonds and to such other persons as the District shall determine, and for any required replacement of Bond
4
certificates for defeased Bonds. The defeased Bonds shall be deemed no longer outstanding, and the District may
apply any money in any other fund or account established for the payment or redemption of the defeased Bonds to
any lawful purposes as it shall determine.
The term “Government Obligations” has the meaning given in chapter 39.53 RCW, as amended, currently:
(1) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by the
United States of America and bank certificates of deposit secured by such obligations; (2) bonds, debentures, notes,
participation certificates, or other obligations issued by the Banks for Cooperatives, the Federal Intermediate Credit
Bank, the Federal Home Loan Bank system, the Export-Import Bank of the United States, Federal Land Banks, or
the Federal National Mortgage Association; (3) public housing bonds and project notes fully secured by contracts
with the United States; and (4) obligations of financial institutions insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation, to the extent insured or to the extent
guaranteed as permitted under any other provision of State law.
If the Bonds are registered in the name of DTC or its nominee, notice of any defeasance of Bonds shall be given to
DTC in the manner prescribed in the Letter of Representations for notices of redemption of Bonds.
Purchase of Bonds by the District
The District has reserved the right to purchase Bonds offered to the District at any time and at any price deemed
reasonable to the District.
PURPOSE AND APPLICATION OF BOND PROCEEDS
Proceeds of the Bonds will be used to finance capital improvements, to refund a portion of the 2004 Bonds if interest
rates are favorable, to fund the Reserve Fund, and to pay the costs of issuance of the Bonds.
The following table shows the estimated sources and uses of the Bond proceeds:
Sources of Funds
Principal Amount of the Bonds
Net Premium / Discount
Total
Use of Funds
Deposit to Escrow Account
Deposit to Construction Fund
Deposit to Reserve Fund
Issuance Costs (1)
Total ____________________ (1) Issuance costs include Underwriter’s discount, bond counsel fees, financial advisor’s fees, refunding trustee fees, rating fee,
and other costs incurred in connection with the issuance of the Bonds.
Capital Improvements
The proceeds of the Bonds not needed to carry out the refunding plan for the 2004 Bonds will be used to finance
distribution, transmission and infrastructure improvements and for other System capital improvements, to fund the
Reserve Fund, and to pay costs of issuance. See “WATER OPERATIONS – Capital Improvements” herein.
Plan of Refunding
All or a portion of the following 2004 Bonds (the “Refunding Candidates”) may be refunded with a portion of the
proceeds of the Bonds. The Refunding Candidates refunded with proceeds of the Bonds will be the Refunded
Bonds.
Water System Revenue Bonds, 2004 Series B
Maturity Principal Amount Interest Rate
Redemption
Date
Redemption
Price CUSIP No.
December 1, 2014 $ 95,000 4.200% 1/29/2014 100% 49804E GA6
December 1, 2017 300,000 4.375 1/29/2014 100 49804E GD0
December 1, 2020 345,000 4.625 1/29/2014 100 49804E GG3
December 1, 2023 400,000 4.800 1/29/2014 100 49804E GK4
5
A portion of the net proceeds from the sale of the Bonds will be deposited in the Refunding Account (the
“Refunding Account”) and may be used to purchase Government Obligations to be held by U.S. Bank National
Association (the “Refunding Trustee”) under a refunding trust agreement (the “Refunding Trust Agreement”), dated
the date of delivery of the Bonds, between the District and the Refunding Trustee. If purchased, the Government
Obligation will mature at such times and pay interest in such amounts so that, with other available funds held by the
Refunding Trustee under the Refunding Trust Agreement, sufficient money will be available to pay the interest on
the Refunded Bonds coming due on and prior to their respective maturity or redemption dates and to redeem and
retire the Refunded Bonds on the respective dates set forth above. Since all payments of principal of and interest on
the Refunded Bonds will thereafter be provided for from money and securities on deposit with the Refunding
Trustee under the Refunding Trust Agreement, the liens, pledges and covenants securing the Refunded Bonds will
terminate and be discharged and released.
A. Dashen & Associates will certify the accuracy of the mathematical computations concerning the adequacy of the
maturing principal amounts of the Government Obligations (without taking into account interest thereon), to be
placed together with other moneys in the escrow account to pay when due, pursuant to call for redemption, the
principal of and interest on the Refunded Bonds.
SECURITY FOR THE BONDS
The principal of and interest on the Bonds are payable solely from and secured by the Gross Revenue of the System
and from certain LUD Assessments, subject only to the payment of Operation and Maintenance Expenses. LUD
Assessments are payable into the Bond Fund, except for any LUD Assessments purchased for investment by the
District. Operation and Maintenance Expenses are defined in the Bond Resolution as all expenses incurred by the
District in causing the System to be operated and maintained in good repair, working order and condition, which
expenses shall include without limitation payments (other than payments out of proceeds of bonds or other obligations)
of costs of insurance or self-insurance on the System and payments which may be made for utility services, taxes or the
use of utility facilities in the event the District enters into a contract for or otherwise pays for such services or use, but
shall not include any depreciation or District-levied taxes or payments by the District in lieu of taxes. For the purpose of
determining Net Revenue of the System under the Bond Resolution, Operation and Maintenance Expenses in any year
shall be reduced by the amount of such expenses paid from general tax levies of the District.
The Bonds are special limited obligations of the District and are not obligations of the State or any political
subdivision thereof except the District, and neither the full faith and credit nor taxing power of the District or the
State is pledged to the payment of the Bonds.
Revenue Fund
A special fund of the District known as the Revenue Fund has been created in the office of the Kitsap County
Treasurer into which the District has covenanted and agreed to pay all Gross Revenue of the System.
Rate Stabilization Fund
The District has the ability to create a Rate Stabilization Fund. The District may from time to time appropriate or
budget amounts in the Revenue Fund for deposit in the Rate Stabilization Fund and may from time to time withdraw
amounts therefrom to prevent or mitigate rate increases or for other lawful purposes of the District related to the
System. Amounts withdrawn from the Rate Stabilization Fund shall increase Gross Revenue for the period for
which they are withdrawn, and amounts deposited in the Rate Stabilization Fund shall reduce Gross Revenue for the
period for which they are deposited. Credits to or from the Rate Stabilization Fund that occur within 90 days after
the end of a fiscal year may be treated as occurring within such fiscal year. Earnings on the Rate Stabilization Fund
shall be credited to the Revenue Fund. The District has not created a Rate Stabilization Fund.
Bond Fund
A special fund of the District known as the Water System Revenue Bond Fund (the “Bond Fund”) has been created
in the office of the Kitsap County Treasurer. As long as any Parity Bonds are outstanding, the District shall pay into
the Bond Fund certain LUD Assessments pledged to the Bond Fund upon their collection and, out of the Gross
Revenue of the System, certain fixed amounts to secure and pay debt service on the Parity Bonds. The Bond Fund
has been divided into a Principal and Interest Account and a Reserve Fund.
Principal and Interest Account. The District shall deposit into the Principal and Interest Account on or before each
interest or principal payment date, an amount, together with other money on deposit therein, sufficient to pay the
next ensuing interest or principal and interest requirements on the Parity Bonds.
6
Reserve Fund. The District shall deposit into the Reserve Fund an amount, which together with deposits therein,
equals the Reserve Requirement. The Reserve Requirement is defined in the Bond Resolution as the least of (i)
Maximum Annual Debt Service, (ii) 1.25 times Average Annual Debt Service, or (iii) 10% of the proceeds of each
series of Parity Bonds. This amount may be accumulated in approximately equal annual payments by no later than
five years after the date of the issue of the Bonds. The District reserves the right to substitute Reserve Insurance or a
Reserve Letter of Credit for the money and investments on deposit in the Reserve Fund, so long as the total amount
of Reserve Insurance or Reserve Letter of Credit, money and investments remaining on deposit in the Reserve Fund
is at least equal to the Reserve Requirement for all Parity Bonds. The deposit to be made in the Reserve Fund shall
be decreased for any issue of Parity Bonds when and to the extent that the District provides for Reserve Insurance or
a Reserve Letter of Credit to secure the payment of principal of and interest on that issue of Parity Bonds.
The District obtained Reserve Insurance to satisfy the Reserve Requirement for the 2004 Bonds and the 2005 Bonds.
The Reserve Insurance was extended to cover the refunding portion of the 2010 Bonds and 2010 Bond proceeds
were deposited to fund the additional Reserve Requirement for the new money portion of the 2010 Bonds. As of
September 30, 2013, the Reserve Fund cash balance was approximately $241,027. The District plans to replace the
Reserve Insurance policies and fund the additional reserve requirement for the Bonds from Bond proceeds and with
District cash in annual installments over the next five years.
Reserve Account Reserve Insurance. Two Reserve Insurance policies were obtained from Financial Security
Assurance Inc., which is now known as Assured Guaranty Municipal Corp. (“AGM”), in the maximum amount of
$1,144,185.76 for both policies to satisfy the Reserve Requirement of the Outstanding Revenue Bonds. AGM is
currently rated A2 and AA- by Moody’s and S&P, respectively. Fitch has withdrawn its rating for AGM.
The bond resolutions for the Outstanding Revenue Bonds require that in the event that the rating of an insurer
providing Reserve Insurance or Reserve Letter of Credit falls below one of the two highest rating categories of
Moody’s Investors Service or Standard & Poor’s, as the case may be, the District shall make deposits from Net
Revenue of the System in approximately equal annual installments in amounts sufficient to bring the balance in the
Reserve fund to the Reserve Requirement within five years from the date the District receives notice of such
lowered rating or may provide alternative Reserve Insurance or Reserve Letter of Credit. The Reserve Insurance
policies purchased from AGM provide that upon the later of (i) one business day after the receipt by the insurer of a
demand for payment executed by the Bond Registrar certifying that provision for the payment of principal of or
interest on the Parity Bonds when due has not been made or (ii) the interest payment date specified in the demand
for payment submitted to the insurer, the insurer will promptly deposit funds with the Bond Registrar sufficient to
enable the Bond Registrar to make such payments due on the Parity Bonds, but in no event exceeding the policy
limit of the Reserve Insurance so drawn on.
Pursuant to the terms of the Reserve Insurance, the policy limits of each are automatically reduced to the extent of
each payment made by the insurer under the terms of the insurance policies, and the District is required to reimburse
the insurer for any draws under the insurance policies with interest at a market rate. Upon such reimbursement, the
insurance policies are reinstated to the extent of each reimbursement up to but not exceeding the applicable policy
limits. The reimbursement obligation of the District under the insurance policies is subordinate to the District’s
obligations with respect to the Parity Bonds.
In the event the amount on deposit in, or credited to, the Reserve Fund exceeds the amount of the insurance policies,
any draw on the insurance policies shall be made only after all the funds in the Reserve Fund have been expended.
Draws on the insurance policies or any Reserve Letters of Credit shall be made on a pro rata basis to fund the
insufficiency. The insurance policies do not insure against nonpayment caused by the insolvency or negligence of
the Bond Registrar.
AGM is subject to the informational requirements of the Exchange Act and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange Commission (“SEC”). Certain SEC
filings of AGM are available on the company’s website, www.assuredguaranty.com (which is not incorporated
herein by this reference). Such reports, proxy statements and other information may also be inspected and copied at
the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
7
Flow of Funds
The Gross Revenue of the System shall be used for the following purposes and in the following order of priority:
First: to pay Operation and Maintenance Expenses of the System;
Second: to make all payments required to be made into the Principal and Interest Account, which together with
certain LUD Assessments received and required to be paid into that account and other money on deposit
therein, are sufficient to pay the principal of and interest on the Parity Bonds;
Third: to make all payments required to be made into the Reserve Fund and to make all payments required to be
made in connection with Reserve Insurance or Reserve Letters of Credit except that if there is not
sufficient money to make all payments for Reserve Insurance or Reserve Letters of Credit, the payments
will be made on a pro rata basis;
Fourth: to make all payments required to be made into any junior lien revenue bond redemption and reserve
funds;
Fifth: to make necessary additions, betterments and improvements and repairs to or extensions and replacement
of the System, or to expend such revenue for any other proper purposes connected with the operation of
the System for which such money may be lawfully used; and
Sixth: to retire by redemption or purchase outstanding revenue bonds of the District as authorized in the various
bond resolutions of the District.
Rate Covenant
For so long as the Bonds are outstanding, the District covenants and agrees with the owners of each of the Bonds
that it will establish, maintain and collect rates or charges for water and telecommunications (and sewage disposal
service should any sanitary sewerage system of the District be combined with the System) and other commodities
and facilities sold, furnished or supplied by the System, which shall be fair and non-discriminatory, and which,
together with other Gross Revenue of the System and certain LUD Assessments, including interest earned on money
in the Bond Fund, shall at all times be sufficient to pay all obligations of the System and to assure that Net Revenue
of the System, together with certain LUD Assessments collected in each calendar year, be equal to at least the
Coverage Requirement. For purposes of the rate covenant, the Coverage Requirement is an amount of Net Revenue
of the System, together with certain LUD Assessments, at least equal to the sum of: (1) 1.00 times the actual
Annual Debt Service on that portion of the then outstanding Parity Bonds which are Assessment Bonds; and (2) 1.25
times the actual Annual Debt Service on that portion of the then outstanding Parity Bonds which are not Assessment
Bonds, excluding principal payments of Term Bonds, but including mandatory sinking fund payments.
As defined in the Bond Resolution, Assessment Bonds means the amount of Parity Bonds outstanding at any time that
is equal to the aggregate principal amount of non-delinquent LUD Assessments remaining to be paid into the Bond Fund
at such time plus the principal amount of LUD Assessments previously paid into and on deposit in the Bond Fund.
For a description of the District’s Local Utility Districts, see “LOCAL UTILITY DISTRICTS” herein.
Other Covenants
The District has agreed with the owners of each of the Bonds to several other covenants set forth in the Bond
Resolution, include the following:
LUD Assessments. All LUD Assessments shall be paid into the Principal and Interest Account of the Bond Fund
and may be used to pay the principal of and interest on any of the Parity Bonds, but are not specifically allocated to
any particular issue of Parity Bonds.
Operation and Maintenance. The District will at all times maintain, preserve and keep the System in good repair,
working order and condition and make all necessary repairs and betterments to the System in an efficient manner
and at a reasonable cost.
Sale or Disposition of the System. The District will not sell or otherwise dispose of the System in its entirety unless,
simultaneously with such sale or other disposition, all Parity Bonds are defeased pursuant to the Bond Resolution.
The District will not sell, lease, mortgage or encumber or dispose of any part of the System (other than timber) in
excess of 5% of the System, including all additions to and betterments to the System, unless (i) there has been filed
with the General Manager of the District a certificate of a Professional Utility Consultant stating it will not impact
the District’s ability to comply with the Bond Resolution or (ii) provision is made for the replacement thereof or for
payment into the Bond Fund as set forth in the Bond Resolution.
8
Insurance Coverage. The District will carry insurance on the property of the System in the amounts normally
carried by water utilities together with public liability insurance, if obtainable at rates the District finds reasonable,
and the cost of such insurance shall be considered part of the Operation and Maintenance Expenses. In lieu of any
such insurance, the District may implement a self-insurance pool program with reserves adequate, in the reasonable
judgment of the Commission, to protect the District against loss.
Books and Accounts. The District will keep proper and separate records and accounts in which complete and
separate entries shall be made of all transactions relating to the System. The District will furnish purchasers of the
Bonds, at the written request of such owners, complete operating and income statements of the System in reasonable
detail covering any calendar year not more than 180 days after the close of such calendar year and a copy of the
most recently completed audit of the District’s accounts by the Washington State Auditor. The District will grant
any Registered Owner or Owners of at least 25% of the principal amount of the outstanding Parity Bonds the right at
all reasonable times to inspect the entire System and all records, accounts and data of the District relating thereto.
No Free Service. The District will not furnish water or other utility service to any customer whatsoever free of
charge, except as provided by law. The District shall take such legal action as may be feasible to enforce collection
of delinquent accounts, and if on the first day of January in any year, two installments of any LUD Assessment are
delinquent, or the final installment of any LUD Assessment has been delinquent for more than one year, the District
shall proceed with the foreclosure of the delinquent assessment or installments thereof in the manner provided by
law.
Future Parity Bonds
The District has reserved the right to issue Future Parity Bonds if the following conditions described in the Bond
Resolution are met and complied with at the time of issuance of those Future Parity Bonds:
(a) There is no deficiency in the Bond Fund.
(b) All LUD Assessments shall be paid directly into the Bond Fund.
(c) The payment of the principal and interest of such Future Parity Bonds will be provided for out of the Bond
Fund.
(d) Funds shall be provided for deposit into the Reserve Fund which together with amounts on deposit therein is at
least equal to the Reserve Requirement for the Outstanding Revenue Bonds, the Bonds and those Future Parity
Bonds from the Future Parity Bond proceeds, Reserve Insurance or Reserve Letter of Credit, or within five
years from the date of issue of such Future Parity Bonds from the Gross Revenue of the System in five
approximately equal annual payments.
(e) The payment of sinking fund requirements into the Bond Fund for any Term Bonds to be issued and for regular
payments to be made for the payment of such Term Bonds on or before their maturity, or, as an alternative, the
mandatory redemption of those Term Bonds prior to their maturity date from money in the Principal and
Interest Account.
(f) There shall be on file from either a District representative or a licensed professional engineer experienced in the
design, construction and operation of municipal utilities, or from an independent certified public accountant, a
certificate showing that in his or her professional opinion the Net Revenue of the System for any 12 consecutive
calendar months shall be equal to the Coverage Requirement for each year thereafter for the Parity Bonds and
the proposed bonds. The certificate of a District representative shall be based on actual historical Net Revenue
of the System and no adjustments to that revenue shall be allowed, provided that the District Representative
may reflect the adjustments in (i) and (ii) below. The engineer or accountant’s certificate, in estimating the Net
Revenue of the System available for debt service, may adjust Net Revenue of the System to reflect any or all of
the following:
(i) Rates that recently were put into effect but were not applicable for the full 12-month consecutive time
period;
(ii) Rates that have been approved by resolution prior to the issuance of the new Future Parity Bonds;
(iii) Adjustments to revenue to reflect a full 12 months of revenue from recently added customers;
(iv) Revenue from customers expected to be added within 180 days after issuance of the new Future Parity
Bonds; and
(v) Any reasonable expected changes in Operation and Maintenance Expenses.
9
If Future Parity Bonds proposed to be so issued are for the sole purpose of refunding outstanding Parity Bonds, such
certification of coverage shall not be required if the amount required for the payment of the principal and interest in
each year for the refunding bonds is not increased more than $5,000 over the amount for that same year required for
the bonds or the portion of that bond issue to be refunded thereby and if the maturities of such refunding bonds are
not extended beyond the maturities of the bonds to be refunded thereby.
Nothing contained in the Bond Resolution prevents the District (i) from issuing water system revenue bonds (or
water and sewer revenue bonds should any sanitary sewerage system of the District ever be combined with the
System) which are a charge upon the Gross Revenue of the System junior or subordinate to the payments required to
be made therefrom into the Bond Fund, or (ii) from pledging the payment of LUD assessments into a fund or
account created to pay and secure the payment of the principal of and interest on such junior lien bonds as long as
those LUD assessments are levied for improvements constructed from the proceeds of the sale of such junior lien
bonds, or (iii) from issuing revenue bonds to refund maturing revenue bonds of the District for the payment of which
money is not otherwise available.
Amendatory or Supplemental Resolutions
The Commission may amend the Bond Resolution without the consent of or notice to the Registered Owners of the
Parity Bonds: (1) to cure any formal defect, omission, inconsistency or ambiguity in the Bond Resolution in a
manner not adverse to the owner of any Parity Bonds; (2) to impose upon the Bond Registrar (with its consent) for
the benefit of the Registered Owners of the Bonds any additional rights, remedies, powers, authority, security,
liabilities or duties which may lawfully be granted, conferred or imposed and which are not contrary to or
inconsistent with the Bond Resolution as thereto for in effect; (3) to add to the covenants and agreements of, and
limitations and restrictions upon, the District in the Bond Resolution other covenants, agreements, limitations and
restrictions to be observed by the District which are not contrary or inconsistent with the Bond Resolution as thereto
for in effect; (4) to confirm, as further assurance, any pledge under, and the subjection to any claim, lien or pledge
created or to be created by the Bond Resolution of any other money, securities or funds; (5) to authorize different
denominations of the Bonds and to make correlative amendments and modifications to the Bond Resolution
regarding exchangeability of Bonds of different authorized denominations, redemptions of portions of Bonds of
particular authorized denominations and similar amendments and modifications of a technical nature; (6) to modify,
alter, amend or supplement the Bond Resolution in any other respect which is not materially adverse to the
Registered Owners of the Bonds and which does not involve a change described below; and (7) because of change in
federal law or rulings, to maintain the exemption of the interest on the Bonds from federal income taxation.
Provided, however, that before the Commission adopts any such supplemental resolution, there shall have been
delivered to the District and the Bond Registrar an opinion of bond counsel stating that such supplemental resolution
is authorized or permitted by the Bond Resolution and will, upon the execution and delivery thereof, be valid and
binding upon the District in accordance with its terms and will not adversely affect the exclusion from gross income
for federal income tax purposes of interest on the Bonds.
With the consent of the owners of not less than 60% in aggregate principal amount of the Parity Bonds then
outstanding, the Commission may consent to and approve the adoption of any supplemental resolution deemed
necessary or desirable by the District for the purpose of modifying, altering, amending, supplementing or rescinding,
in any particular, any of the terms or provisions contained in the Bond Resolution; except that, unless approved in
writing by the Registered Owners of all the Parity Bonds then outstanding; provided, however, nothing contained in
the Bond Resolution shall permit, or be construed as permitting: (1) a change in the times, amounts or currency of
payment of the principal of or interest on any outstanding Bond, or a reduction in the principal amount or
redemption price of any outstanding Bond or a change in the method or redemption price of any outstanding Bond
or a change in the method of determining the rate of interest thereon, or (2) a preference of priority of any Parity
Bond or Bonds or any other bond or bonds, or (3) a reduction in the aggregate principal amount of Bonds, the
consent of the Registered Owners of Parity Bonds of which is required for any such supplemental resolution.
If at any time the District adopts any supplemental resolution for any of the above-mentioned purposes, the Bond
Registrar shall cause notice of the proposed supplemental resolution to be given by first-class United States mail to
all Registered Owners of the then outstanding Parity Bonds and to Moody’s Investors Service and Standard &
Poor’s, if the Parity Bonds are rated by those agencies. Such notice shall briefly set forth the nature of the proposed
supplemental resolution and shall state that a copy thereof is on file at the office of the Bond Registrar for inspection
by all Registered Owners of the outstanding Parity Bonds.
Within two years after the date of the mailing of such notice, the District may adopt such supplemental resolution in
substantially the form described in such notice, but only if there shall have first been delivered to the Bond Registrar
(i) the required consents, in writing, of the Registered Owners of the Parity Bonds, and (ii) an opinion of bond
10
counsel stating that such supplemental resolution is authorized or permitted by the Bond Resolution, and, upon the
execution and delivery thereof, will be valid and binding upon the District in accordance with its terms and will not
adversely affect the exemption from federal income taxation of interest on the Parity Bonds.
If Registered Owners of not less than the percentage of Parity Bonds required by this subsection shall have
consented to and approved the execution and delivery thereof as herein provided, no owner of the Parity Bonds shall
have any right to object to the adoption of such supplemental resolution, or to object to any of the terms and
provisions contained therein or the operation thereof, or in any manner to question the propriety of the adoption
thereof, or to enjoin or restrain the District or the Bond Registrar from adopting the same or from taking any action
pursuant to the provisions thereof.
Upon the execution and delivery of any supplemental resolution pursuant to the provisions of this section, the Bond
Resolution shall be, and be deemed to be, modified and amended in accordance therewith, and the respective rights,
duties and obligations under the Bond Resolution of the District, the Bond Registrar and all Registered Owners of
Bonds then outstanding, shall thereafter be determined, exercised and enforced under the Bond Resolution subject in
all respects to such modifications and amendments.
DEBT SERVICE REQUIREMENTS AND ADDITIONAL BORROWING
The following table shows debt service on the District’s Outstanding Revenue Bonds and the Bonds.
Revenue Bonds
Debt Service Requirements (1)
Outstanding Total Bond
Year Bonds (2)
Principal Interest Debt Service
2014 809,885$
2015 797,535
2016 790,683
2017 799,683
2018 797,483
2019 794,483
2020 795,683
2021 790,883
2022 563,433
2023 569,753
2024 564,860
2025 569,328
2026 237,563
2027 234,656
2028 236,550
2029 238,038
2030 234,119
2031 -
2032 -
2033 -
9,824,613$
The Bonds
__________________________ (1) Does not include debt service on the District’s outstanding limited tax general obligation bonds, the 2013 LTGO Bonds or
on $312,975 of the District’s State Public Works Trust Fund loans and other loan agreements which are junior lien water
revenue debt of the District. (2) Excludes the Refunding Candidates.
Source: The District
Additional Borrowing
The District currently has no plans to issue Future Parity Bonds in the next 12 months. However, the District plans
periodically to issue Future Parity Bonds for the regional transmission system and other expansions and
11
improvements to the System. Concurrently with the Bonds, the District plans to issue 2013 LTGO Bonds to refund
the outstanding Limited Tax General Obligation Refunding Bonds, 2001 Series B, if interest rates are favorable, and
finance telecommunication improvements.
Debt Payment Record
The District has promptly met all debt service payments on outstanding obligations. No refunding bonds have been
issued to prevent an impending default.
Summary of Outstanding Debt
The following table shows a summary of the Outstanding Revenue Bonds, the Bonds and the District’s outstanding
limited tax general obligation (“LTGO”) bonds. The LTGO bonds are secured from property taxes and not from
Gross Revenues of the System. The District’s property taxes are not pledged to pay the District’s revenue debt. The
table does not include the District’s State Public Works Trust Fund loan, totaling $185,526; the Frog Pond Notes
outstanding in the amount of $85,305; and a capital lease outstanding in the amount of $42,144. The Public Works
Trust Fund Loan and other loan agreements are revenue obligations and are junior in lien to the Bonds. Outstanding
balances for junior lien revenue debt are as of December 2, 2013.
Outstanding Bonds
Revenue Bonds (1)
Date of
Issue
Final
Maturity
Original
Par Amount
Outstanding
As of 12/2/13
Water System Revenue Bonds, 2005 12/21/05 12/1/25 $ 4,085,000 $ 3,095,000
Water System Revenue and Refunding Bonds, 2010 11/9/10 12/1/30 6,015,000 4,380,000
The Bonds* 12/30/13 12/1/33 4,450,000 4,450,000
Total Revenue Bonds $14,550,000 $11,925,000
General Obligation Bonds (2)
LTGO and Refunding Bonds, 2010A 11/9/10 12/1/30 $4,300,000 $3,130,000
Total General Obligation Bonds $7,495,000 $6,135,000
_________________________________
(1) Excludes the Refunding Candidates. (2) Excludes the Limited Tax General Obligation Refunding Bonds, 2001 Series B expected to be refunded by the 2013
LTGTO Bonds. See “Additional Borrowing” above.
* Preliminary; subject to change.
THE DISTRICT
Kitsap County (the “County”) is located in the northwest portion of the State on the Olympic Peninsula. The
District encompasses the entire County and provides water resource management services and operates water
systems throughout the County. Additionally, the District has installed a telecommunication system in the County.
The District was formed by a vote of the people in 1940. In the 1970s, the District started providing water services
by acquiring or taking over small private water systems. The District expanded slowly until the mid-1980s when
development in the County increased at a rapid pace. As development increased, the District has grown and
expanded its staff and services.
Governance and Administration
The District is a municipal corporation and political subdivision of the State. The governing body of the District
consists of an elected three person Board of Commissioners (the “Commission”) whose powers include the
financing, maintaining and collecting of rates and charges for water, water service, telecommunications, and any
other commodity or service furnished, developed or sold by the District.
12
The present members of the Commission are as follows:
Name Position Term Expires
John Armstrong President December 31, 2016
Lloyd Berg Vice President December 31, 2018
Jim Civilla Secretary December 31, 2014
The District has a staff of 43 people to operate the District’s water systems and to provide regional water resource
management and wholesale telecommunications services.
David R. Siburg is the General Manager of the District. In this position, he is the chief administrative officer and
reports to the Commission. He is directly accountable for all financial, personnel, resource, planning, and
operational aspects of the District. Mr. Siburg has a Master of Planning and Public Affairs degree (American
Institute of Certified Planners Planning Student Award) from the Humphrey Institute, University of Minnesota
(1985) and a Bachelor of Arts in Economics (cum laude) with a minor in Business Administration and extensive
work in environmental studies from Pacific Lutheran University, Tacoma, Washington (1980). His published works
include: Safe Water From Every Tap: Improving Water Service to Small Communities, Committee on Small Water
Supply Systems, National Research Council, National Academy Press, Washington D.C., 1997. Mr. Siburg has
worked at the District since 1990.
Bob Hunter is the Assistant General Manager for all Water Utility Operations. In this position, under the direction
of the General Manager he oversees all customer service, water resource activities and water utility operations. Mr.
Hunter has worked at the District since 1986.
Accounting Policies
The accounting policies of the District conform to generally accepted accounting principles as applicable to
proprietary funds of governmental units. The accounting records of the District are maintained in accordance with
methods prescribed by the State Auditor under the authority of Chapter 43.09 RCW. The District uses the Uniform
System of Accounts for Group A Water Utilities. The District uses the full-accrual method of accounting where
revenues are recognized when earned and expenses are recognized when incurred. Fixed asset purchases are
capitalized and long-term liabilities are accounted for in the appropriate funds. Unbilled District utility service
receivables are recorded at month-end. The District’s financial statements include the financial position and results
of operations of all enterprise operations which the District manages. The financial statements also include the
assets and liabilities of all funds for which the District has a custodial or trust responsibility.
Auditing of District Finances
The State Auditor is required to examine the affairs of public utility districts at least once every two years. The
examination must include, among other things, the financial condition and resources of the District, whether the
laws and Constitution of the State are being complied with, and the methods and accuracy of the accounts and
reports of the District. Reports of the Auditor’s examinations are required to be filed in the office of State Auditor
and in the auditing department of the District.
The audited financial statements of the District for calendar year 2012 are included as Appendix B hereto.
Pension System
Substantially all of the District’s employees are enrolled in the State Public Employees Retirement System
(“PERS”). PERS Plans 1 and 2 are defined benefit plans and PERS Plan 3 is both a defined benefit plan (employer
share) and defined contribution plan (employee share). All systems are administered by the Washington State
Department of Retirement Systems (“DRS”). Contributions by both employees and employers are based on gross
wages. PERS participants who joined the system by September 30, 1977 are Plan 1 members. Those PERS
participants who joined on or after October 1, 1977 are Plan 2 members, unless they exercise an option to transfer to
Plan 3. PERS participants joining on or after September 1, 2002 have the irrevocable option of choosing
membership in PERS Plan 2 or PERS Plan 3.
The District contributed $222,813 to PERS in 2012; $192,279 in 2011; and $164,263 in 2010 for all of the District’s
employees who are covered under PERS.
State law requires systematic actuarial funding to finance the retirement plans. Actuarial calculations to determine
employer and employee contributions are prepared by the Office of the State Actuary (“OSA”), a nonpartisan
legislative agency charged with advising the Legislature and Governor on pension benefits and funding policy. To
calculate employer and employee contribution rates necessary to pre-fund the plans’ benefits, OSA uses actuarial
cost and asset valuation methods selected by the Legislature as well as economic and demographic assumptions.
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The Legislature adopted the following economic assumptions for contribution rates beginning July 1, 2013:
(1) 7.9% rate of investment return; (2) general salary increases of 3.75%; (3) 3.0% rate of Consumer Price Index
increase; and (4) 0.95% growth in membership. Retirement funds are invested by the Washington State Investment
Board, a 15-member board created by the Legislature in 1981. The long-term investment return assumption is used
as the discount rate for determining the liabilities for a plan. The 10-year (2004-2013) annualized return on the
investment of retirement funds was 8.32%.
All State-administered retirement plans are funded by a combination of funding sources: (1) contributions from the
State; (2) contributions from employers (including the State as employer and the District and other governmental
employers); (3) contributions from employees; and (4) investment returns.
Under State statute, contribution rates are adopted by the Pension Funding Council (“PFC”) in even-numbered years
for the next ensuing State biennium. The rate-setting process begins with an actuarial valuation by the OSA, which
makes non-binding recommendations to the Select Committee on Pension Policy which then recommends
contribution rates to the PFC. No later than the end of July in even-numbered years, the PFC adopts contribution
rates, which are subject to revision by the Legislature.
The following table outlines the contribution rates of employees and employers under PERS.
Contribution Rates for the 2013-15 Biennium
Expressed as a Percentage of Covered Payroll
Employer(1)
Employee
PERS Plan 1 9.21% 6.00%
PERS Plan 2 9.21 4.92
PERS Plan 3 9.21 Variable (2)
____________ (1) Includes a 0.18% DRS administration expense fee. (2) Rates vary from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member.
Source: State Department of Retirement Systems.
While the District’s prior contributions represent its full current liability under the retirement systems, any unfunded
pension benefit obligations are likely to be reflected in future years as higher contribution rates. It is expected that
the contribution rates for employees and employers in the PERS Plans 2 and 3 will increase in the coming years.
The OSA website (which is not incorporated into this Official Statement by reference) includes information
regarding the values, funding levels and investments of these retirement plans. For additional information, see Note
7 to the Audited Financial Statements for the Year Ended December 31, 2012, attached hereto as Appendix B.
During the years 2001 through 2010 the rates adopted by the Legislature were lower than those that would have
been required to produce actuarially required contributions to PERS Plan 1, a closed plan with a large proportion of
the retirees. The State Actuary’s June 30, 2012 actuarial valuation showed that the funded status of PERS Plan 1
had an unfunded accrued liability of $3.8 billion (a 69% funded ratio on an actuarial value basis). PERS Plans 2 and
3 had a surplus of $2.3 billion as of June 30, 2012 (a 111% funded ratio). OSA uses the Projected Unit Credit
(“PUC”) cost method and the Actuarial Value of Assets (“AVA”) to report a plan’s funded status. PUC is one of
several acceptable measures of a plan’s funded status under current GASB rules. The PUC cost method projects
future benefits under the plan, using salary growth and other assumptions and applies the service that has been
earned as of the valuation date to determine accrued liabilities. The Actuarial Value of Assets (“AVA”) is
calculated using a methodology which smooths the effect of short-term volatility in the Market Value of Assets
(“MVA”) by deferring a portion of annual investment gains or losses over a period of up to eight years.
Assets for one plan may not be used to fund benefits for another plan: however, all employers in PERS are required
to make contributions at a rate (percentage of payroll) determined by the OSA every two years for the sole purpose
of amortizing the PERS Plan 1 unfunded actuarial accrued liability within a rolling 10-year period. The Legislature
has established certain maximum contribution rates that began in 2009 and will continue until 2015 and certain
minimum contribution rates that are to become effective in 2015 and remain in effect until the actuarial value of
assets in PERS Plan 1 equals 100% of the actuarial accrued liability of PERS Plan 1. These rates are subject to
change by future legislation enacted by the State Legislature to address future changes in actuarial and economic
assumptions and investment performance. In 2011, the Legislature ended the future automatic annual increase,
which is a fixed dollar amount multiplied by the member’s total years of service, for most retirees in the PERS Plan
1 plan, which is forecast to reduce the unfunded accrued actuarial liability in PERS Plan 1. A lawsuit has been filed
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challenging this legislation. The information in this section has been obtained from the District’s financial
statements and information on the OSA’s and State Department of Retirement System’s websites.
Other Post Employment Benefits
The District provides retiree medical care through the Public Employees Benefit Board (“PEBB”) under a single-
employer defined benefit healthcare plan (“Retiree Healthcare Plan”). The Board has authorized the District to
provide for payment of premiums for medical and dental insurance to retired employees, spouses and dependents
when the retired employee has worked for the District for a minimum of 15 years. Financial reporting for the PEBB
retiree healthcare plan is included in the District's 2012 annual financial report in Appendix B.
The District contributes between 70 and 85% based on years of service and the cost of current-year premiums for
eligible retired plan members and their spouses. Plan members receiving benefits contribute 15 to 30% of their
premium costs. The District's required contribution is based upon projected pay-as-you-go financing requirements.
There is currently one participant on the Retiree Healthcare Plan.
The District's annual other postemployment benefit (“OPEB”) cost (expense) is calculated based upon the annual
required contribution of the employer (“ARC”), an amount actuarially determined in accordance with the parameters
of GASB Statement No. 45. The District has elected to calculate the ARC and related information using the
alternative measurement method permitted under GASB Statement No. 45 for employers in plans with fewer than
100 total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to
cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period of 30
years as of January 1, 2009.
The following table shows the components of the District's annual OPEB cost for 2012, the amount actually
contributed to the plan, and changes in the District's net OPEB obligation to the Retiree Healthcare Plan. The net
OPEB obligation of $520,090 is included as a noncurrent liability on the Statement of Net Position in the audited
2012 Financial Statement in Appendix B. The District’s required contribution is based upon projected pay-as-you-go
financing requirements.
Costs, Contributions, and Changes in Net OPEB Obligation
Annual required contribution $ 164,542
Interest on net OPEB obligation 16,423
Adjustment to annual required contribution (22,406)
Annual OPEB (cost) expense 158,559
Contributions made (3,434)
Increase in net OPEB obligation 155,125
Net OPEB obligation - beginning of year 364,965
Net OPEB obligation - end of year $ 520,090
Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about
the probability of occurrence of events far into the future. Examples include assumptions about future employment,
mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual
required contributions of the employer are subject to continual revision as actual results are compared with past
expectations and new estimates are made about the future. The schedule of funding progress, presented as required
supplementary information following the notes to the financial statements included as Appendix A, presents
multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time
relative to the actuarial accrued liabilities for benefits.
Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by
the employer and the plan members) and include the types of benefits provided at the time of each valuation and the
historical pattern of sharing of benefit costs between the employer and plan members to that point.
In the December 31, 2012 actuarial valuation, the method used by the District utilizing a tool provided by OSA was
the alternative measurement method permitted under GASB Statement No. 45. A single retirement age of 62.20 was
assumed for all active members to determine the actuarial accrued liability and normal cost. Retirement,
disablement, termination, and mortality rates were assumed to follow the PERS 2 rates used in the June 30, 2010
actuarial valuation report issued by the OSA. Healthcare costs and trends were determined by Milliman and used by
OSA in the state-wide PEBB study performed in 2011. The results were based on grouped data with 4 active
groupings and 4 inactive groupings. The actuarial cost method used to determine the actuarial accrued liability was
Projected Unit Credit. The actuarial accrued liability and net OPEB obligation are amortized on an open basis as a
level dollar over 30 years. These assumptions are individually and collectively reasonable for the purposes of this
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valuation. As of December 31, 2012 and 2011, the most recent actuarial valuation dates, the actuarial accrued
liability for benefits was $1,406,407 and $881,869, respectively. The District does not fund the liability in a
separate irrevocable trust account, but has set aside approximately $401,500 in an unrestricted cash fund which has
been internally designated for the OPEB liability.
Deferred Compensation
The District offers its employees two deferred compensation plans created in accordance with Internal Revenue
Code Section 457. These plans are with independent plan administrators. The plans, available to eligible employees,
permit them to defer a portion of their salary until future years. The District matches a portion of employee deferrals.
The District contributed $86,785 and $86,446 in 2012 and 2011, respectively. The deferred compensation is not
available to employees until termination, retirement, death, or an unforeseeable emergency.
Insurance
The District is a member of the Public Utility Risk Management Services Self-Insurance Fund (“PURMS”). RCW
Chapter 48.62 authorizes the governing body of any one or more governmental entities to form together into or join
a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, an/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 RCW Chapter 54.16. The liability pool was formed on December 31, 1976 when
certain public utility districts in the State of Washington joined together by signing an agreement to pool their self-
insured losses and jointly purchase insurance and administrative services. Nineteen members currently belong to
PURMS.
Additional pools for property and health and welfare coverage were added in March 1997 and April 2000, under the
same agreements and with the same memberships. All members do not participate in all pools. The District does not
participate in the PURMS health and welfare pool.
Members of each pool are assessed to maintain the designated self-insured retention. After termination, a member is
still responsible for their share of contributions to the pools for any unresolved, unreported, and in-process claims
for the period they were a signatory to the agreement. The pools are fully funded by its current and former members.
Claims are filed by members with the Administrator, Pacific Underwriters of Seattle, Washington, which has been
contracted to perform claims adjustment and loss prevention services.
The pools are governed by a Board of Directors, which is comprised of one designated representative from each
participating member. The Administrator and an elected Administrative Committee are responsible for conducting
the business affairs of the pools.
Settled claims have not exceeded insurance coverage in any of the past four fiscal years.
The liability pool has a $1 million self-insured retention with $3.0 million of reserves. In addition, the fund
purchases $35 million of excess general liability insurance over the $1 million retention.
The majority of the property in the property pool has a $250,000 self-insured retention. Certain classes of property
have higher retention requirements up to $500,000. Reserves for the Property Pool are set at $750,000. In addition,
the fund purchases $200 million of excess insurance over the $250,000 (or higher) retention level.
The District pays unemployment claims on a reimbursement basis administered by the State Department of
Employment Security.
Investments
The treasurer of the County serves as ex officio treasurer for the District (the “Treasurer”) and invests funds on its
behalf. The Treasurer has the authority to invest in a variety of securities specified by State law and the County’s
investment policy. These securities include U.S. Treasury and agency securities, repurchase agreements and reverse
purchase agreements for securities otherwise authorized as an investment, municipal bonds of the State or local
bonds of State municipalities with one of the three highest ratings of a national rating agency, certificates of deposit
issued by State depositories that participate in a state insurance pool managed by the Washington Public Deposit
Protection Commission, banker’s acceptances, commercial paper, the State Local Government Investment Pool
(“LGIP”), and deposits with State banks and savings and loan institutions. The LGIP is used daily to invest funds
when deemed appropriate. The County does not derive funds for investments from reverse repurchase agreements.
Kitsap County Treasurer’s Local Government Investment Pool. The Kitsap County Local Government Investment
Pool (the “Count Pool”), established in 1987, is administered by the County Treasurer’s Office. The County Pool is
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managed with three objectives: (1) preservation of capital, (2) sufficient liquidity to meet cash flow requirements,
and (3) attainment of the maximum return consistent with the first two objectives.
The County Pool restricts its investments to maturities of five years or less with an average life of generally less than
two years. Investments permitted in the County Pool’s investment policy include those investments authorized
under State law. Most typically, the portfolio includes deposits in the LGIP, deposits with qualified Washington
State banks protected by the Public Deposit Protection Commission, U.S. government and agency securities. The
District may withdraw funds in their entirety on less than 24-hours’ notice. As of November 20, 2013 the District
had $5,464,249.19 invested in the County Investment Pool.
Local Government Investment Pool. The State Treasurer’s Office administers the LGIP and reports that the LGIP
has approximately 644 accounts and a balance of approximately $10.1 billion as of August 2013. In its management
of LGIP, the State Treasurer is required to adhere, at all times, to the principles appropriate for the prudent
investment of public funds. These are, in priority order, (i) the safety of principal; (ii) the assurance of sufficient
liquidity to meet cash flow demands; and (iii) to attain the highest possible yield within the constraints of the first
two goals. Historically, the LGIP has had sufficient liquidity to meet all cash flow demands.
The LGIP, authorized by chapter 43.250 RCW, is a voluntary pool which provides its participants the opportunity to
benefit from the economies of scale inherent in pooling. It is also intended to offer participants increased safety of
principal and the ability to achieve a higher investment yield than would otherwise be available to them. The pool is
restricted to investments with maturities of one year or less, and the average life typically is less than 90 days.
Investments permitted under the pool's guidelines include U.S. government and agency securities, bankers'
acceptances, high quality commercial paper, repurchase and reverse repurchase agreements, motor vehicle fund
warrants, and certificates of deposit issued by qualified Washington State depositories.
WATER OPERATIONS
Operations and Services
The District owns and operates 56 water systems throughout the County of which 25 are Group A (regulated by
federal standards) and 31 are Group B (regulated by State standards). Various cities, public districts and private
operators in the County also own water systems. The System has grown through the acquisition of small private
water systems in the County and through the formation of local utility districts to finance construction of new
systems. The separate systems are supplied from groundwater wells. The District’s service area includes all areas
in the County not presently served by a purveyor or granted as a future service area. The District’s total water
customer base is approximately 91% residential, 3% multi-family residential and 6% commercial and industrial.
The District's 25 Group A public water systems provide drinking water service to over 36,300 residents of the
County. Combined, these systems include 72 active source wells with capacities from 25 gallons per minute
(“gpm”) to 1,000 gpm; 73 reservoirs; 65 different pressure zones with booster stations; over 310 miles of
distribution; four water treatment plants for iron and manganese removal; and 56 water telemetry sites for
monitoring reservoir levels and water production data
The District also owns 31 Group B water systems which provide drinking water service to another 435 residents.
Group B systems have between 2 and 14 water service connections. Each of these systems has a single well and
may either have storage or a pressure system. Main sizes are normally smaller and fire flow is not generally
required.
Based on current supply and expected usage, the District’s water supply is expected to provide sufficient capacity
for the next 50 years or more.
The District is responsible for regional water resource management in the County. In this capacity, the District
completes countywide water studies, functions as a regional water resource center, provides centralized planning for
water exploration, supply and transmission, and develops water transmission projects. The District also provides
technical, managerial, financial, and operational assistance related to water resource development, protection and
service. The District’s regional water resource management responsibilities are paid primarily from a countywide
property tax levied by the District.
Regional Transmission System
The regional system is an ongoing project of the District and provides improved reliability of water supply to the
north and central parts of the County. As part of the regional system, the District has entered into an agreement with
the Silverdale Water District to acquire a portion of Silverdale Water District’s water transmission to provide for
better water distribution within the System. A portion of the proceeds of the Bonds will be used to finance
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improvements to the regional transmission system, including the acquisition from the Silverdale Water District, and
to pay for other capital improvements of the System.
Capital Improvements
Water utility capital expenditures are estimated to be $3.8 million in 2014, $4.1 million in 2015, and $1.1 million in
2016. The projects include water main replacement and additions, new regional reservoirs, new transfer stations,
and new wells and pumps. With the issuance of the Bonds and committed grant proceeds, the District does not
anticipate it will need additional debt financing for at least the next five years for water projects.
Telecommunications capital projects are estimated to be $680,000 in 2014, $1.1 million in 2015, and $615,000 in
2016. The projects include additional fiber optic cable installations, a new “point of presence facility”, back-up
power supplies and upgrades, and backbone network and other electronics. With the issuance of the 2013 LTGO
Bonds, the District does not anticipate it will need additional debt financing for at least the next five years for
telecommunications projects.
Historical Number of Customers
The System currently serves approximately 13,400 water customers. Approximately 91% are residential customers.
The following table shows the historical number of customers of the System at the end of the years from 2008
through 2012.
Historical Number of Water Customers
Number of
Year Customers
2012 13,437
2011 13,143
2010 13,080
2009 13,185
2008 12,900 _______________________
Source: The District
The District’s largest customer in terms of revenues accounts for less than 1% of revenues from water sales.
Water Rates and Charges
The Commission has exclusive authority to set rates and charges for water services provided by the System. The
District currently bills customers on a bi-monthly basis at the following rates:
BALANCE AVAILABLE FOR DEBT SERVICE 2,044,722$ 2,401,611$ 1,703,269$ 2,308,585$ 2,411,824$
Outstanding Revenue Bond Debt Service 1,148,475$ 1,143,550$ 1,142,005$ 1,353,652$ 1,354,681$
BALANCE FOR OTHER PURPOSES 896,247$ 1,258,061$ 561,264$ 954,933$ 1,057,143$
DEBT SERVICE COVERAGE 1.78x 2.10x 1.49x 1.71x 1.78x
_________________________________________________ (1) Sale for resale to the City of Poulsbo, Washington. (2) Revenues received from billing certain street light customers on behalf of Puget Sound Energy; operating expenses include
offsetting expenses. (3) Includes approximately $100,000 pass-through that is expected to end in 2015. (4) Excludes depreciation and amortization. (5) In 2010 and 2011, the District changed the allocation of staff time resulting in labor costs being shifted from non-operating to
operating expenses. (6) Property taxes can be used by the District to pay debt service on general obligation bonds, for operating expenses and for
other expenses. Property taxes cannot be used to pay debt service on the Outstanding Revenue Bonds or the Bonds. (7) Non-operating water and telecom expenses or expenses that serve the regional purpose of the District. (8) Assessment payments are deposited in the Bond Fund when received. Excludes LUDs that the District has purchased as
investments, the payments from which are not pledged to the Bond Fund.
Source: The District
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Statement of Net Position
The following table shows the District’s statements of net position for the years 2008 through 2012.
Statement of Net Position
(As of December 31)
ASSETS 2008 2009 2010 2011 2012
CURRENT ASSETS
Cash and cash equivalents 4,677,463$ 3,949,042$ 7,807,917$ 6,334,896$ 4,952,125$
Total Equity 27,763,417$ 28,369,787$ 27,890,423$ 28,487,515$ 29,609,672$
TOTAL LIABILITIES AND NET POSITION 42,788,969$ 42,314,344$ 46,509,811$ 45,784,853$ 45,637,772$ __________________________ (1) A prior period adjustment to unrestricted net assets of $408,332 was made in 2010 to record compensated absences.
Source: The District
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Management Discussion of Operations for 2013
Through the first three quarters of 2013, total revenues were at 111% of budget and total expenses were at 99% of
budget. Total revenue for water service (excluding grant income) was 15% more than it was at the same time last
year due in part to increased rates and water usage over the prior year. Total revenue for telecommunications was
13% more than it was at the same time last year due in part to increases in non-recurring charges that include capital
facilities charges. The District currently has approximately $3 million of unrestricted cash. The District policy is to
have approximately 45 days of operating reserves and additional funds to cover replacement of the largest capital
asset.
GENERAL AND ECONOMIC INFORMATION
The County is located in the northwest portion of the State on the Olympic Peninsula across Puget Sound from the
Seattle metropolitan area. Historical population of the County and the cities of Bremerton and Poulsbo are shown
below.
Population
Year
Kitsap
County
City of
Bremerton
City of
Poulsbo
2013 254,000 37,850 9,585
2012 254,500 39,650 9,360
2011 253,900 38,790 9,245
2010 251,133 37,729 9,200
2009 247,600 36,620 8,855
2008 246,800 36,860 7,840
______________________________ (1) Figures for 2010 are census figures. All others figures are estimates as of April 1 of the respective years.
Source: Washington State Office of Financial Management.
Economic Overview
Federal defense spending in the form of Navy bases and facilities is a primary component of the County’s economy.
In addition to more traditional services (e.g., health, business, legal, etc.), the County, because of its military
community, has attracted several engineering and management firms, a number of which depend heavily upon
defense contracts.
The County has benefited from growth in the central Puget Sound region as a whole with a growing number of
commuters to King and Pierce counties. The County has a well-developed transportation network (both surface and
water), solid infrastructure, and still affordable housing—all of which are comparative advantages.
Income. Historic median household income and personal income levels for the County and State are shown below:
Median Household Income and Personal Income
Kitsap County Washington State
Year
Median Household
Income
Personal Income
$(000)
Median Household
Income
Personal Income
($000)
2012 $57,155 (1) $56,444 $317,574,707
2011 55,400 $10,842,161 55,500 303,087,834
2010 54,804 10.355,171 54,888 286,743,785
2009 56,863 10,243,282 55,458 280,778,028
2008 55,417 10,671,308 57,858 289,801,024
_________________________________ (1) 2011 most recent information available.
Source: Median Household Income – Washington State Office of Financial Management
Personal Income - U.S. Bureau of Economic Analysis
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Taxable Retail Sales. Taxable retail sales reflect only those sales subject to retail sales tax. Historic taxable retail
sales for the County, City of Bremerton, and City of Poulsbo are shown below:
Source: Washington State Department of Employment Security
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Kitsap County
2013 Major Employers
Employer Type of Business
Number of
Employees
Naval Base Kitsap (1)
Government 16,392
Harrison Hospital Health Care 2,442
Washington State Government 1,746
Central Kitsap School District Education 1,469
Olympic College Education 1,206
South Kitsap School District Education 1,176
Kitsap County Government 1,124
North Kitsap School District Education 844
Port Madison Enterprises Tribe 752
Bremerton School District Education 663
___________________________ (1) Does not include active duty military employees.
Source: Kitsap Economic Development Alliance.
LEGAL OPINION/APPROVAL OF COUNSEL
Legal matters incident to the authorization, issuance and sale of the Bonds by the District are subject to the
approving legal opinion of Foster Pepper PLLC, Seattle, Washington, Bond Counsel. The form of the opinion of
Bond Counsel with respect to the Bonds is attached as Appendix C. The opinion of Bond Counsel is given based on
factual representations made to Bond Counsel, and under existing law, as of the date of initial delivery of the Bonds,
and Bond Counsel assumes no obligation to revise or supplement its opinion to reflect any facts or circumstances
that may thereafter come to its attention, or any changes in law that may thereafter occur. The opinion of Bond
Counsel is an expression of its professional judgment on the matters expressly addressed in its opinion and does not
constitute a guarantee of result. Bond Counsel will be compensated only upon the issuance and sale of the Bonds.
Foster Pepper PLLC occasionally represents the underwriter on issues other than for the District.
LIMITATIONS ON REMEDIES; BANKRUPTCY
Any remedies available to the owners of the Bonds upon the occurrence of an event of default may be dependent
upon judicial actions, which are in turn often subject to discretion and delay and could be both expensive and time-
consuming to obtain. If the District fails to comply with its covenants under the Bond Resolution or to pay principal
of or interest on the Bonds, there can be no assurance that available remedies will be adequate to fully protect the
interests of the owners of the Bonds.
The rights and obligations under the Bonds and the Bond Resolution may be limited by and are subject to
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other laws relating to or affecting
creditors’ rights, to the application of equitable principles, and to the exercise of judicial discretion in appropriate
cases. The opinion to be delivered by Foster Pepper PLLC, Seattle, Washington as Bond Counsel, concurrently with
the issuance of the Bonds, will be subject to limitations regarding bankruptcy, insolvency and other laws relating to
or affecting creditors’ rights. The various other legal opinions to be delivered concurrently with the issuance of the
Bonds will be similarly qualified. A complete copy of the proposed form of opinion of Bond Counsel is set forth in
Appendix C.
A municipality such as the District must be specifically authorized under state law in order to seek relief under
Chapter 9 of the U.S. Bankruptcy Code (the “Bankruptcy Code”). Chapter 39.64 RCW, entitled the “Taxing Relief
Bankruptcy Act,” permits any “taxing district” (defined to include public utility districts) to voluntarily petition for
relief under the Bankruptcy Code. A creditor cannot bring an involuntary bankruptcy proceeding against a
municipality, including the District. The federal bankruptcy courts have certain discretionary powers under the
Bankruptcy Code.
CONTINUING DISCLOSURE UNDERTAKING
Basic Undertaking to Provide Annual Financial Information and Notice of Listed Events. To meet the requirements
of paragraph (b)(5) of United States Securities and Exchange Commission (“SEC”) Rule 15c2-12 (“Rule 15c2-12”),
as applicable to a participating underwriter for the Bonds, the District will undertake (the “Undertaking”) for the
benefit of holders of the Bonds to provide or cause to be provided, either directly or through a designated agent, to
the Municipal Securities Rulemaking Board (“MSRB”), in an electronic format as prescribed by the MSRB,
accompanied by identifying information as prescribed by the MSRB: (a) annual financial information and operating
27
data of the type include in this Official Statement as general described below (“annual financial information”); and
(b) timely notice (not in excess of ten business days after the occurrence of the event) of the occurrence of any of the
following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment
related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties;
(4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity
providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of
proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 – TEB) or other material
notices or determinations with respect to the tax status of the Bonds; (7) modifications to rights of holders of the
Bonds, if material; (8) Bond calls (other than scheduled mandatory redemptions of Term Bonds), if material, and
tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if
material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the District, as such
“Bankruptcy Events” are defined in Rule 15c2-12; (13) the consummation of a merger, consolidation, or acquisition
involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary
course of business, the entry into a definitive agreement to undertake such an action or the termination of a
definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment
of a successor or additional trustee or the change of name of a trustee, if material.
The District also will provide to the MSRB timely notice of a failure by the District to provide required annual
financial information on or before the date specified below.
Type of Annual Financial Information Undertaken to be Provided. The annual financial information the District
undertakes to provide will consist of (1) annual financial statements prepared (except as noted in the financial
statements) in accordance with applicable generally accepted accounting principles promulgated by the Government
Accounting Standards Board (“GASB”), as such principles may be changed from time to time, which will not be
audited, except that if and when audited financial statements are otherwise prepared and available to the District
they will be provided; (2) the outstanding long-term indebtedness of the System, identifying separately Parity Bonds
and any other debt of the System and the debt service coverage rations; and (3) rates for the System and number of
customers of the System; and will be provided to the MSRB not later than the last day of the ninth month after the
end of each fiscal year of the District (currently, a fiscal year ending December 31), as such fiscal year may be
changed as required or permitted by State law, commencing with the District’s fiscal year ending December 31,
2013.
The annual financial information may be provided in a single or multiple documents, and may be incorporated by
specific reference to documents available to the public on the Internet website of the MSRB or filed with the SEC.
Amendment of Undertaking. The Undertaking is subject to amendment after the primary offering of the Bonds
without the consent of any holder of any Bond, or of any broker, dealer, municipal securities dealer, participating
underwriter, rating agency or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12.
The District will give notice to the MSRB of the substance (or provide a copy) of any amendment to the
Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual
financial information to be provided, the annual financial information containing the amended financial information
will include a narrative explanation of the effect of that change on the type of information to be provided.
Termination of Undertaking. The District’s obligations under the Undertaking shall terminate upon the legal
defeasance of all of the Bonds. In addition, the District’s obligations under the Undertaking shall terminate if those
provisions of Rule 15c2-12 which require the District to comply with the Undertaking become legally inapplicable
in respect of the Bonds for any reason, as confirmed by an opinion of nationally recognized bond counsel or other
counsel familiar with federal securities laws delivered to the District, and the District provides timely notice of such
termination to the MSRB.
Remedy for Failure to Comply with Undertaking. As soon as practicable after the District learns of any failure to
comply with the Undertaking, the District will proceed with due diligence to cause such noncompliance to be
corrected. No failure by the District or other obligated person to comply with the Undertaking will constitute a
default in respect of the Bonds. The sole remedy of any holder of a Bond will be to take such actions as that holder
deems necessary, including seeking an order of specific performance from an appropriate court, to compel the
District or other obligated person to comply with the Undertaking.
Prior Compliance with Continuing Disclosure Undertaking. The District has entered into prior undertakings under
the Rule with respect to its obligations. The District in preparing for this issue discovered that it failed to include the
percentage of ad valorem taxes collected in each year for the fiscal years ended December 31, 2008 through 2012 in
a timely manner. The District also failed to file rates for the System for the fiscal years ended December 31, 2010
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and 2011. The rates for the System for the year ended December 31, 2010 were included in the official statement
for the 2010 Bonds filed through EMMA, but were not included by specific reference. Finally, the District failed to
file notice of a rating change resulting from a bond insurer downgrade. The District has filed the required annual
financial information, operating data, and event notices. The District believes that it has complied with its
continuing disclosure undertakings in all other material respects.
TAX EXEMPTION
Exclusion From Gross Income. In the opinion of Bond Counsel, under existing federal law and assuming
compliance with applicable requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must
be satisfied subsequent to the issue date of the Bonds, interest on the Bonds is excluded from gross income for
federal income tax purposes and is not an item of tax preference for purposes of the alternative minimum tax
applicable to individuals.
Continuing Requirements. The District is required to comply with certain requirements of the Code after the date of
issuance of the Bonds in order to maintain the exclusion of the interest on the Bonds from gross income for federal
income tax purposes, including, without limitation, requirements concerning the qualified use of Bond proceeds and
the facilities financed or refinanced with Bond proceeds, limitations on investing gross proceeds of the Bonds in
higher yielding investments in certain circumstances, and the requirement to comply with the arbitrage rebate
requirement to the extent applicable to the Bonds. The District has covenanted in the Bond Resolution to comply
with those requirements, but if the District fails to comply with those requirements, interest on the Bonds could
become taxable retroactive to the date of issuance of the Bonds. Bond Counsel has not undertaken and does not
undertake to monitor the District’s compliance with such requirements.
Corporate Alternative Minimum Tax. While interest on the Bonds also is not an item of tax preference for purposes
of the alternative minimum tax applicable to corporations, under Section 55 of the Code, tax exempt interest,
including interest on the Bonds, received by corporations is taken into account in the computation of adjusted
current earnings for purposes of the alternative minimum tax applicable to corporations (as defined for federal
income tax purposes). Under the Code, alternative minimum taxable income of a corporation will be increased by
75% of the excess of the corporation's adjusted current earnings (including any tax exempt interest) over the
corporation's alternative minimum taxable income determined without regard to such increase. A corporation's
alternative minimum taxable income, so computed, that is in excess of an exemption of $40,000, which exemption
will be reduced (but not below zero) by 25% of the amount by which the corporation's alternative minimum taxable
income exceeds $150,000, is then subject to a 20% minimum tax.
A small business corporation is exempt from the corporate alternative minimum tax for any taxable year beginning
after December 31, 1997, if its average annual gross receipts during the three-taxable-year period beginning after
December 31, 1993, did not exceed $5,000,000, and its average annual gross receipts during each successive three-
taxable-year period thereafter ending before the relevant taxable year did not exceed $7,500,000.
Tax on Certain Passive Investment Income of S Corporations. Under Section 1375 of the Code, certain excess net
passive investment income, including interest on the Bonds, received by an S corporation (a corporation treated as a
partnership for most federal tax purposes) that has Subchapter C earnings and profits at the close of the taxable year
may be subject to federal income taxation at the highest rate applicable to corporations if more than 25% of the
gross receipts of such S corporation is passive investment income.
Foreign Branch Profits Tax. Interest on the Bonds may be subject to the foreign branch profits tax imposed by
Section 884 of the Code when the Bonds are owned by, and effectively connected with a trade or business of, a
United States branch of a foreign corporation.
Possible Consequences of Tax Compliance Audit. The Internal Revenue Service (the “IRS”) has established a
general audit program to determine whether issuers of tax-exempt obligations, such as the Bonds, are in compliance
with requirements of the Code that must be satisfied in order for interest on those obligations to be, and continue to
be, excluded from gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS
would commence an audit of the Bonds. Depending on all the facts and circumstances and the type of audit
involved, it is possible that commencement of an audit of the Bonds could adversely affect the market value and
liquidity of the Bonds until the audit is concluded, regardless of its ultimate outcome.
Bonds are “Qualified Tax Exempt Obligations” for Financial Institutions. Section 265 of the Code provides that
100% of any interest expense incurred by banks and other financial institutions for interest allocable to tax exempt
obligations acquired after August 7, 1986, will be disallowed as a tax deduction. However, if the tax exempt
obligations are obligations other than private activity bonds, are issued by a governmental unit that, together with all
entities subordinate to it, does not reasonably anticipate issuing more than $10,000,000 of tax exempt obligations
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(other than private activity bonds and other obligations not required to be included in such calculation) in the current
calendar year, and are designated by the governmental unit as “qualified tax exempt obligations,” only 20% of any
interest expense deduction allocable to those obligations will be disallowed.
The District is a governmental unit that, together with all subordinate entities, reasonably anticipates issuing less
than $10,000,000 of tax exempt obligations (other than private activity bonds and other obligations not required to
be included in such calculation) during the current calendar year, and has designated the Bonds as “qualified tax
exempt obligations” for purposes of the 80% financial institution interest expense deduction. Therefore, only 20%
of the interest expense deduction of a financial institution allocable to the Bonds will be disallowed for federal
income tax purposes.
Reduction of Loss Reserve Deductions for Property and Casualty Insurance Companies. Under Section 832 of the
Code, interest on the Bonds received by property and casualty insurance companies will reduce tax deductions for
loss reserves otherwise available to such companies by an amount equal to 15% of tax exempt interest received
during the taxable year.
Effect on Certain Social Security and Retirement Benefits. Section 86 of the Code requires recipients of certain
Social Security and certain Railroad Retirement benefits to take receipts or accruals of interest on the Bonds into
account in determining gross income.
Other Possible Federal Tax Consequences. Receipt of interest on the Bonds may have other federal tax
consequences as to which prospective purchasers of the Bonds may wish to consult their own tax advisors.
Potential Future Federal Tax Law Changes. Current and future legislative proposals, if enacted into law, may
directly or indirectly cause interest on the Bonds to be subject in whole or in part to federal income taxation, prevent
the beneficial owners of the Bonds from realizing the full benefits of the current federal tax status of interest on the
Bonds, or affect, perhaps significantly, the market value or marketability of the Bonds. Prospective purchasers of
the Bonds should consult with their own tax advisors regarding the potential impact of any pending or proposed
legislation or regulations.
INITIATIVE AND REFERENDUM
Under the State Constitution, the voters of the State have the ability to initiate legislation through the power of
initiative and referendum. Initiatives and referenda are submitted to the voters upon receipt of petitions signed by at
least eight percent (initiatives) and four percent (referenda) of the number of voters registered and voting for the
office of Governor at the preceding regular gubernatorial election. Qualifying initiatives to the voters are submitted
at the next state general election and must be approved by a majority of voters to be enacted into law. Initiatives to
the Legislature are submitted to the Legislature at its regular session each January. Once submitted, the Legislature
must either adopt the initiative as proposed, reject the proposed initiative (in which case the initiative must be placed
on the ballot at the next state general election) or approve an amended version of the proposed initiative (in which
case both the amended version and the original proposal must be placed on the next state general election ballot).
Any initiative approved by a majority of voters may not be amended or repealed by the Legislature within a period
of two years following enactment, except by a vote of two–thirds of all the members elected to each house of the
Legislature; after two years, the law is subject to amendment or repeal by the Legislature in the same manner as
other laws. Additional initiative petitions may be filed from time to time. The District cannot predict whether any
initiatives affecting the District will qualify to be submitted to the people for vote or, if submitted, will be approved.
LITIGATION
There is no controversy or litigation pending or, to the best knowledge of the District, threatened which will affect
the issuance and delivery of the Bonds, the collection of revenues to pay the principal and interest thereon, the
proceedings and authority under which the Bonds are issued and the revenues collected, or the validity of the Bonds.
ENFORCEABILITY
The provisions of the Bonds and the Bond Resolution, respectively, constitute contracts between the District and the
owner or owners of the Bonds, and such provisions are enforceable by the Registered Owner or Owners in a court of
competent jurisdiction in the State by mandamus or other appropriate remedy, subject to judicial discretion and the
valid exercise of sovereign police power of the State and may be limited by laws affecting the rights of creditors.
RATING
The Bonds have been rated “A1” by Moody’s Investors Service (“Moody’s”). The rating was applied for by the
District and certain information was supplied by the District to Moody’s to be considered in evaluating the Bonds.
The rating reflects only the view of the rating agency and an explanation of the significance of the rating may be
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obtained from Moody’s. There is no assurance that the rating will be retained for any given period of time or that
the rating will not be revised downward or withdrawn entirely by the rating agency if, in its judgment, circumstances
so warrant. Any such downward revision or withdrawal of the rating would likely have an adverse effect on the
market price of the Bonds. An explanation of the significance of the rating may be obtained from Moody’s.
CONFLICTS OF INTEREST
Some or all of the fees of the Underwriter, the Financial Advisor, and Bond Counsel are contingent upon the
issuance and sale of the Bonds.
FINANCIAL ADVISOR
A. Dashen & Associates has served as Financial Advisor to the District relative to the preparation of the Bonds for
sale, timing of the sale and other factors relating to the Bonds. The Financial Advisor has not audited, authenticated
or otherwise verified the information set forth in this Official Statement or other information provided relative to the
Bonds. A. Dashen & Associates makes no guaranty, warranty or other representation on any matter related to the
information contained in the Official Statement. The Financial Advisor is an independent financial advisory firm
and is not engaged in the business of underwriting, marketing, trading or distributing municipal securities.
UNDERWRITING
The Bonds are being purchased by Piper Jaffray & Co., (the “Underwriter”) at a price of $_________. The Bonds
will be re-offered at a price of $__________. The Underwriter may offer and sell the Bonds to certain dealers
(including dealers depositing Bonds into investment trusts) and others at prices lower than the initial offering prices
set forth on cover hereof, and such initial offering prices may be changed from time to time by the Underwriter.
After the initial public offering, the public offering prices may be varied from time to time.
Piper Jaffray & Co. and Pershing LLC, a subsidiary of the Bank of New York Mellon Corporation, entered into an
agreement (the “Agreement”) which enables Pershing LLC to distribute certain new issue municipal securities
underwritten by or allocated Piper Jaffray & Co., including the Bonds. Under the Agreement, Piper Jaffray & Co.
will share with Pershing LLC a portion of the fee or commission paid to Piper Jaffray & Co.
Piper Jaffray & Co. has entered into a distribution agreement (“Distribution Agreement”) with Charles Schwab &
Co., Inc. (“CS&Co.”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to
the Distribution Agreement, CS&Co. may purchase Bonds from Piper Jaffray & Co. at the original issue price less a
negotiated portion of the selling concession applicable to any Bonds that CS&Co. sells.
OFFICIAL STATEMENT
Statements in this Official Statement, including matters of opinion, whether or not expressly so stated, are intended
as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement
between the District or the Underwriter and the Owners of the Bonds. The preparation and distribution of this
Official Statement has been authorized by the District.
APPENDIX A
CERTAIN DEFINITIONS FROM THE BOND RESOLUTION
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CERTAIN DEFINITIONS FROM THE BOND RESOLUTION
Following is a summary of certain definitions of the Bond Resolution, which summary is qualified in its entirety by
reference to the complete text of the Bond Resolution.
Certain words and phrases used in the Bond Resolution and in this Official Statement have the meanings set forth
below, unless the context shall clearly indicate another meaning is intended:
Annual Debt Service for the applicable issue or series of Parity Bonds for any year, means all the interest, plus all
principal (except principal of Term Bonds due in any Term Bond Maturity Year), plus all mandatory redemption
and sinking fund installments for that year, less all bond interest payable from the proceeds of any such bonds in that
year. With the consent of the appropriate percentage of Parity Bond owners, the District may adopt a supplemental
resolution supplementing the Bond Resolution for the purpose of providing that in calculating the Annual Debt
Service the District may deduct the direct payment the District is expected to receive in respect of Future Parity
Bonds for which the federal government will provide the District with a direct payment of a portion of the interest
from the interest portion of Annual Debt Service. The owners of the 2010 Bonds and the Bonds by taking and
holding the same shall be deemed to have consented to the adoption by the District of such supplemental resolution.
Acquired Obligations means those United States Treasury Certificates of Indebtedness, Notes, and Bonds--State and
Local Government Series and other direct, noncallable obligations of the United States of America that may be
purchased to accomplish the refunding of the Refunded Bonds as authorized by the Bond Resolution.
Assessment Bonds means the amount of Parity Bonds outstanding at any time which is equal to the aggregate
principal amount of non-delinquent LUD Assessments remaining to be paid into the Bond Fund at such time plus
the principal amount of LUD Assessments previously paid into and on deposit in the Bond Fund.
Average Annual Debt Service for the Parity Bonds means at the time of calculation, in any calendar year, the sum
of the remaining Annual Debt Service of the then outstanding bonds to which the term Average Annual Debt
Service refers, divided by the number of years such bonds are scheduled to remain outstanding, except that for
purposes of computing the Reserve Requirement the estimated amount of Parity Bonds to be redeemed prior to
maturity may be taken into account if required under federal arbitrage regulations.
Beneficial Owner means, with respect to a Bond, the owner of any beneficial interest in that Bond.
Bond Fund means the District’s Water System Revenue Bond Fund created in the office of the Treasurer pursuant
to Section 13 of Resolution No. 05-12-13.
Bond Register means the books or records maintained by the Bond Registrar for the purpose of identifying
ownership of each Bond.
Bond Registrar means the Fiscal Agent, or any successor bond registrar selected by the District.
Code means the Internal Revenue Code of 1986, as amended, together with corresponding and applicable final,
temporary or proposed regulations and revenue rulings issued or amended with respect thereto by the United States
Treasury Department or the Internal Revenue Service, to the extent applicable to the Bonds.
Commission means the Board of Commissioners of the District as the same shall be duly and regularly constituted
from time to time.
Construction Fund means the construction fund created by Resolution No. 93-07-27A in the office of the Treasurer
for the purpose of paying the costs of additions to and betterments and extensions of the System.
Coverage Requirement means an amount of Net Revenue of the System, together with LUD Assessments, at least
equal to the sum of:
(a) 1.00 times the Average Annual Debt Service (actual Annual Debt Service for the applicable year
for purposes of the rate covenant) on that portion of the then outstanding Parity Bonds which are
Assessment Bonds; and
(b) 1.25 times the Average Annual Debt Service (actual Annual Debt Service for the applicable year
for purposes of the rate covenant) on that portion of the then outstanding Parity Bonds which are not
Assessment Bonds, excluding principal payments of Term Bonds, but including mandatory sinking fund
payments.
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For calculating the Coverage Requirement for Variable Interest Rate Bonds, such Future Parity Bonds shall be
assumed to bear interest at a fixed rate equal to (a) the highest variable rate borne during the preceding 24 months by
any outstanding variable rate water revenue bonds of the District (or water and sewer revenue bonds should any
sanitary sewerage system or other system of the District ever be combined with the System) or (b) if no such
variable rate bonds of the District are outstanding at the time of calculation, the highest variable rate borne during
the preceding 24 months by other variable rate debt the interest rate for which is determined by reference to an index
comparable to the index to be used to determine the interest rate on the Future Parity Bonds proposed to be issued.
DTC means The Depository Trust Company, New York, New York, or its nominee.
District means Public Utility District No. 1 of Kitsap County, Washington, a municipal corporation duly organized
and existing as a public utility district under and by virtue of the laws of the State of Washington.
Fiscal Agent means the fiscal agent of the State, as the same may be designated by the State from time to time.
Future Parity Bonds means all System revenue bonds or other System obligations of the District issued after the
date of the issuance of the Bonds, the payment of which, both principal and interest, constitutes a lien and charge
upon the Gross Revenue of the System and LUD Assessments equal in rank with the lien and charge upon such
Gross Revenue and LUD Assessments required to be paid into the Bond Fund to pay and secure the payment of the
principal of and interest on the Parity Bonds.
Government Obligations has the meaning given in chapter 39.53.010, as now in effect or as may hereafter be
amended.
Gross Revenue of the System means all the earnings and revenue received by the System from any source
whatsoever, including connection charges, the sale of forest products from System-owned lands, but excluding LUD
Assessments, general ad valorem taxes, grants from state, federal or local governments, proceeds from the sale of
District property, earnings in any refunding or defeasance escrow or trust fund or account or held in a special
account for the purpose of paying a rebate to the United States Government under the Code, gifts to the System for
capital purposes, and proceeds of District or System obligations.
Letter of Representations means the Blanket Issuer Letter of Representations between the District and DTC.
LUD means a local utility district.
LUD Assessments means all assessments levied (including principal installments thereof and interest and any
penalties thereon) in LUDs Nos. 2, 3, 4, 6, 7, 8, 9, 10, 11 and 12 and any LUD which may be created pursuant to
state law in connection with an improvement to the System, together with all such assessments levied in Utility
Local Improvement Districts Nos. 6, 7 and 8 of the former Hansville Water District, the assessments in which are
payable into the Bond Fund, but excluding any LUD Assessments purchased for investment by the District. In the
case of LUD Assessments payable in installments, LUD Assessments shall be allocated either (i) to the years in
which they would be received if the unpaid principal balance of each assessment were paid in equal principal
amounts over the remaining number of installments with interest on the declining balance or (ii) to the years in
which they would be received if each assessment were paid in equal installment amounts, both principal and interest,
in either case in the manner, at the times and at the rate provided in the resolution confirming the final assessment
roll.
Maximum Annual Debt Service means, at the time of calculation, the maximum amount of Annual Debt Service
which will become due in any calendar year on all outstanding Parity Bonds.
MSRB means the Municipal Securities Rulemaking Board or any successor to its functions.
Net Revenue of the System means the Gross Revenue of the System minus Operation and Maintenance Expenses.
Operation and Maintenance Expenses means all expenses incurred by the District in causing the System to be
operated and maintained in good repair, working order and condition, which expenses shall include, without
limitation, payments (other than payments out of proceeds of bonds or other obligations) of costs of insurance or
self-insurance on the System and payments which may be made to any other municipal corporation or private party
for utility services, taxes or the use of utility facilities in the event the District enters into a contract for or otherwise
pays for such services or use, but shall not include any depreciation or District-levied taxes or payments by the
District in lieu of taxes. For the purpose of determining Net Revenue of the System under the Bond Resolution,
Operation and Maintenance Expenses in any year shall be reduced by the amount of such expenses paid from
general tax levies of the District.
Owner means, without distinction, the Registered Owner and the Beneficial Owner.
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Parity Bonds means the 2004 Bonds, the 2005 Bonds, the 2010 Bonds, the Bonds and any Future Parity Bonds.
Plan means that system or plan of additions to and betterments and extensions of the System adopted by Section 2
of the Bond Resolution.
Record Date means the Bond Registrar’s close of business on the 15th day of the month preceding an interest
payment date. With respect to redemption of a Bond prior to its maturity, the Record Date shall mean the Bond
Registrar’s close of business on the date on which the Bond Registrar sends the notice of redemption.
Refunding Trust Agreement means a Refunding Trust Agreement between the District and the Refunding Trustee.
Refunding Trustee means a bank or trust company appointed by the District to serve as trustee or escrow agent or
any successor trustee or escrow agent.
Registered Owner means, with respect to a Bond, the person in whose name that Bond is registered on the Bond
Register. For so long as the District utilizes the book–entry only system for the Bonds under the Letter of
Representations, Registered Owner shall mean the Securities Depository.
Reserve Fund means the fund of that name to secure the payment of the principal of and interest on the Parity
Bonds.
Reserve Insurance means, in lieu of cash and investments, insurance equal to the Reserve Requirement for any
Parity Bonds then outstanding for which such insurance is obtained, but no insurance may be used to satisfy the
Reserve Requirement for Parity Bonds unless (i) the insurance policy is non-cancelable and (ii) the insurer as of the
time of issuance of such insurance is rated in one of the two highest rating categories by either Moody’s Investors
Service or Standard & Poor’s or their successors.
Reserve Letter of Credit means any irrevocable letter of credit issued by a financial institution for the account of the
District on behalf of the owners of any Parity Bonds, which institution maintains an office, agency or branch in the
United States and as of the time of issuance of such letter of credit, is currently rated in one of the two highest rating
categories by Moody’s Investors Service and Standard & Poor’s or their comparably recognized business
successors.
Reserve Requirement means, for all Parity Bonds, an amount equal to the least of (i) Maximum Annual Debt
Service, (ii) 1.25 times Average Annual Debt Service or (iii) 10% of the proceeds of each series of Parity Bonds.
Notwithstanding the above, the deposit to be made in the Reserve Fund shall be decreased for any issue of Parity
Bonds when and to the extent that the District provides for Reserve Insurance or Reserve Letter of Credit to secure
the payment or principal of and interest on that issue of Parity Bonds. For calculating the Reserve Requirement for
Variable Interest Rate Bonds, such Future Parity Bonds shall be assumed to bear interest at a fixed rate equal to the
interest rate borne by those Future Parity Bonds on their date of issuance.
Revenue Fund means that special fund of the District created by Resolution No. 91-05-14B in the office of the
Treasurer, into which the Gross Revenue of the System is deposited.
Rule 15c2-12 means Rule 15c2-12 promulgated by the SEC under the Securities Exchange Act of 1934, as
amended.
SEC means the United States Securities and Exchange Commission.
Securities Depository means DTC, any successor thereto, any substitute securities depository selected by the
District that is qualified under applicable laws and regulations to provide the services proposed to be provided by it,
or the nominee of any of the foregoing.
State means the State of Washington.
System means the public utility properties and assets, real and personal, tangible and intangible, now owned and
operated by the District, including water and telecommunication properties, and the additions to and betterments and
extensions of such public utility properties heretofore made, installed and constructed, and the additions to and
betterments and extensions of such public utility properties authorized, and all property and assets hereafter
constructed or acquired as additions to and betterments and extensions of all such property, and any sewer or storm
water public utility property and assets subsequently owned and operated by the District if that sewer or storm water
public utility system is combined with the System. The District may combine any other public utility system with
the System.
Term Bond Maturity Year means any year in which Term Bonds are scheduled to mature (regardless of any
reservation of prior redemption rights or mandatory redemption requirements).
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Term Bonds means each Bond designated as a Term Bond and subject to mandatory.
Treasurer means the Treasurer of Kitsap County, Washington, as ex officio treasurer of the District, or any other
public officer as may hereafter be designated pursuant to law to have the custody of District funds.
2004 Bonds means the Water System Revenue Bonds, 2004 Series A and B issued pursuant to Resolution No. 04-
05-25.
2005 Bonds means the Water System Revenue Bonds, 2005 issued pursuant to Resolution No. 05-12-13.
2010 Bonds means the Water System Revenue and Refunding Bonds, 2010 issued pursuant to Resolution No. 10-
10-26D.
Undertaking means the undertaking to provide continuing disclosure entered into pursuant to Section 24 of the
Bond Resolution.
Underwriter means Piper Jaffray & Co.
Variable Interest Rate Bonds means those Future Parity Bonds bearing interest at a variable rate.
APPENDIX B
AUDITED 2012 FINANCIAL STATEMENTS
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Washington State Auditor’s Office
Financial Statements and Federal Single Audit Report
Public Utility District No. 1 of Kitsap County
Audit Period January 1, 2012 through December 31, 2012
Report No. 1010564
Issue Date September 27, 2013
September 27, 2013 Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on Public Utility District No. 1 of Kitsap County’s financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the District’s financial condition. Sincerely,
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
Federal Summary ...................................................................................................................... 1
Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ..................................................................... 3
Independent Auditor’s Report on Compliance For Each Major Federal Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133 ............................... 5
Independent Auditor’s Report on Financial Statements .............................................................. 8
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
The results of our audit of Public Utility District No. 1 of Kitsap County are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. FINANCIAL STATEMENTS An unmodified opinion was issued on the basic financial statements. Internal Control Over Financial Reporting:
• Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies.
• Material Weaknesses: We identified no deficiencies that we consider to be material
weaknesses. We noted no instances of noncompliance that were material to the financial statements of the District. FEDERAL AWARDS Internal Control Over Major Programs:
• Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies.
• Material Weaknesses: We identified no deficiencies that we consider to be material
weaknesses. We issued an unmodified opinion on the District’s compliance with requirements applicable to its major federal program. We reported no findings that are required to be disclosed under section 510(a) of OMB Circular A-133.
_________________________________________________________________________________________________________ Washington State Auditor's Office
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Identification of Major Programs: The following was a major program during the period under audit:
CFDA No. Program Title
11.557 ARRA - Broadband Technology Opportunities Program (Recovery Act)
The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $300,000. The District did not qualify as a low-risk auditee under OMB Circular A-133.
_________________________________________________________________________________________________________ Washington State Auditor's Office
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Independent Auditor’s Report on Internal Control over Financial Reporting and on
Compliance and Other Matters Based on an Audit of Financial Statements Performed in
Accordance with Government Auditing Standards
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington We have audited, 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, the financial statements of Public Utility District No. 1 of Kitsap County, Washington, as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements, and have issued our report thereon dated September 11, 2013. During the year ended December 31, 2012, the District implemented Governmental Accounting Standards Board Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audits of the financial statements, we considered the District’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances 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. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control. 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
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Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District’s financial statements are free from 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. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. 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.
TROY KELLEY STATE AUDITOR September 11, 2013
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Independent Auditor’s Report on Compliance For Each Major Federal Program and on
Internal Control Over Compliance in Accordance with OMB Circular A-133
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM We have audited the compliance of Public Utility District No. 1 of Kitsap County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2012. The District’s major federal programs are identified in the accompanying Federal Summary. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the District’s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the District’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. Our audit does not provide a legal determination on the District’s compliance.
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Opinion on Each Major Federal Program
In our opinion, the District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2012. REPORT ON INTERNAL CONTROL OVER COMPLIANCE Management of the District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the District’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program in order to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. PURPOSE OF THIS REPORT The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It
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also serves to disseminate information to the public as a reporting tool to help citizens assess government operations.
TROY KELLEY STATE AUDITOR September 11, 2013
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Independent Auditor’s Report on Financial Statements
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Public Utility District No. 1 of Kitsap County, Washington, as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements as listed on page 11. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
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Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Utility District No. 1 of Kitsap County, as of December 31, 2012 and 2011, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 63 to the financial statements, in 2012, the District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 12 through 16 and information on postemployment benefits other than pensions on page 46 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 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 our 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. Supplementary and Other Information
Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District’s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. This schedule is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated September 11, 2013 on our consideration of the District’s internal control over financial reporting
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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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control over financial reporting and compliance.
TROY KELLEY STATE AUDITOR September 11, 2013
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Financial Section
Public Utility District No. 1 of Kitsap County January 1, 2012 through December 31, 2012
REQUIRED SUPPLEMENTARY INFORMATION
Management’s Discussion and Analysis – 2012 and 2011
BASIC FINANCIAL STATEMENTS Statement of Net Position – 2012 and 2011 Statement of Revenues, Expenses and Changes in Net Position – 2012 and 2011 Statement of Cash Flows – 2012 and 2011 Notes to Financial Statements – 2012 and 2011
REQUIRED SUPPLEMENTARY INFORMATION
PEBB Retiree Medical Benefits – Schedule of Funding Progress – 2012 and 2011 SUPPLEMENTARY AND OTHER INFORMATION
Schedule of Expenditures of Federal Awards – 2012 Notes to the Schedule of Expenditures of Federal Awards – 2012
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370
(360) 779-7656 * Fax (360) 779-3284
COMMISSIONERS JOHN ARMSTRONG LLOYD S. BERG JIM CIVILLA ~ MANAGER DAVID R. SIBURG
Management’s Discussion and Analysis
This section provides an overview and analysis of key data presented in the basic financial statements for the years ended December 31, 2012 and 2011, with additional comparative data for 2010. Information within this section should be used in conjunction with the basic financial statements and accompanying notes.
Overview of the Financial Statements Public Utility District No. 1 of Kitsap County (KPUD or District) accounts for financial activities within its Proprietary Fund for its Utility System. The Utility System provides wholesale water and telecommunications service as well as retail water service and regional water resource activities to support the System.
In accordance with requirements set forth by the Governmental Accounting Standards Board, the District’s financial statements employ the accrual basis of accounting in recognizing increases and decreases in economic resources. Accrual accounting recognizes all revenues and expenses during the year, regardless of when cash is received or paid.
The basic financial statements, presented on a comparative format for the years ended December 31, 2012 and 2011, are comprised of:
• Statement of Net Position: The District presents its Statement of Net Position using the balance sheet format. The Statement of Net Position reflects the assets, liabilities and net position (equity) of the District at year-end. The net position sections of the Statement of Net Position are separated into three categories: net investment in capital assets; restricted for debt service; and unrestricted. The District had $238,388 in restricted for debt service as of December 31, 2012 and 2011.
• Statements of Revenues, Expenses, and Changes in Fund Net Position: These statements reflect the transactions and events that have increased or decreased the District’s total economic resources during the period. Revenues are presented net of allowances and are summarized by major source. Revenues and expenses are classified as operating or non-operating based on the nature of the transaction.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370
(360) 779-7656 * Fax (360) 779-3284
Management’s Discussion and Analysis (continued)
• Statements of Cash Flows: The Statements of Cash Flows reflect the sources and uses of cash separated into four categories of activities: operating, non-capital financing activities, capital and related financing, and investing.
The notes to the financial statements, presented at the end of the basic financial statements, are considered an integral part of the District’s presentation of financial position, results of operations, and changes in cash flows.
Financial AnalysisThe poor state of the economy affected almost all sectors and jurisdictions in 2012. The District was no exception. That said, the District's overall financial position and results of operations continued to be positive. The District’s net position increased by $1,122,157 in 2012.
Provided below is a year-over-year analysis of the change in net position by major component of income, with a primary focus on changes between 2012 and 2011.
Operating RevenuesFrom 2011 to 2012, total operating revenues increased by $ 394,111 (6.85%). From 2010 to 2011, total operating revenues increased $371,273 (6.90%).
Operating ExpensesFrom 2011 to 2012, District operating expenses decreased by $ 402,386 (5.51%). From 2010 to 2011, District operating expenses decreased by $37,584 (.51%). Depreciation and amortization expense accounted for 25.54% of total operating expenses in 2012. This figure was 23.32% in 2011 and 22.5% in 2010.
Depreciation and amortization increased by 3.48% from 2011 to 2012 after an increase of 2.9% from 2010 to 2011.
Other Income & ExpenseDuring 2012, property tax revenue increased $27,670. Interest income decreased due to decreasing cash and investment balances. Interest expense also decreased due to the refunding bonds issued in late 2010.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370
(360) 779-7656 * Fax (360) 779-3284
Management’s Discussion and Analysis (continued)
Capital ContributionsDuring 2012, Capital Contributions were $787,794, a decrease of $53,602 from the $841,396in 2011. Capital Contributions in 2010 were $718,934.
Summary of Financial PositionThe overall financial position of the District remained reasonably strong during 2012 with an increase in net position of $1,122,157. The increase in net position follows an increase of $597,092 in 2011.
District management’s financial policies require that financial plans be developed to maintain minimum cash and investment balances contained within unrestricted accounts sufficient to: 1) provide funding for 45 days of operating expenses based on the planned year’s operating budget, and 2) provide funding for unanticipated infrastructure replacement based on 1% of total net plant. The District’s unrestricted cash and cash equivalents totaled $4.9 million and $6.3 million at December 31, 2012 and 2011, respectively. Actual balances exceeded the minimum required level for each year.
In accordance with District financial policies and covenants established within the District’s bond resolutions, the District is required to maintain and collect rates and charges sufficient to provide Net Revenues (defined as net income less depreciation, amortization, and interest expense) in each fiscal year in an amount at least equal to 1.25 the Annual Debt Service. For the years ended 2012, 2011 and 2010, the District’s debt service coverage was 2.01, 1.66 and 1.69, respectively.
Capital Asset and Long Term Debt Activity The District continues to have a strong rating in the market. Moody’s Investor Services has assigned an underlying rating of A1 to the District on its last revenue bond issue. The District issued approximately $10.8 million in debt in 2010. The new debt was used to retire old debt and make improvements to the District's infrastructure assets. The District’s 2004 and 2005 revenue bonds were rated by Standard & Poors and were assigned an insured rating of AA-. The District does not anticipate going to the market in the near future.
The District continues to develop regional infrastructure for both wholesale water supply and wholesale telecommunications service. In August 2010, PUD was awarded $3.1 million in grants from the Broadband Technology Opportunities Program. This 3-year program includes various service obligations and projects with an estimated cost of $8.5 million. The district incurred $572,688 of costs related to the federal project in 2012 and received $403,373 in reimbursements for these costs in 2012.
Debt service payments totaled $2.3 million and $2.2 million in 2012 and 2011, respectively.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370
(360) 779-7656 * Fax (360) 779-3284
Management’s Discussion and Analysis (continued) Additional information about the District’s capital assets and long-term debt is presented in the following report and notes.
Net PositionNet investment in capital assets 23,630,462 20,848,485 18,679,040 2,781,977 13.34%Restricted 238,388 238,388 238,388 - 0.00%Unrestricted 5,740,822 7,400,642 8,972,995 (1,659,820) -22.43% Total net position 29,609,672 28,487,515 27,890,423 1,122,157 3.94%
Total liabilities and net position $45,637,772 $45,784,853 $46,634,802 $ (147,081) -0.32%
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370
(360) 779-7656 * Fax (360) 779-3284
Management’s Discussion and Analysis (continued)
Condensed Revenues, Expenses and Changes in Net Position
Total Expenses (8,877,270) (8,651,964) (8,610,827) (225,306) 2.60%
Income (Loss) Before Contributions 334,363 (244,304) (789,966) 578,667 -236.86%Capital Contributions 787,794 841,396 718,934 (53,602) -6.37%
Change in net position 1,122,157 597,092 (71,032) 525,065
Net position, beginning 28,487,515 27,890,423 27,961,455
Net position, ending $29,609,672 $ 28,487,515 $ 27,890,423
2012 2011 2010
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2012 2011
CURRENT ASSETS Cash and cash equivalents 4,952,125$ 6,334,896$ Accounts receivable 921,067 857,738 Property taxes receivable 114,182 123,183 Inventory materials and supplies 76,208 88,826 Short-term assessments receivable 211,058 142,813 Other current assets 26,485 17,083 Total current assets 6,301,125 7,564,539
NONCURRENT ASSETS Restricted cash and cash equivalents 238,388 238,388 Intangible assets, net of related amortization 361,730 403,250 Long-term notes and assessments receivable 642,934 738,369
Capital Assets Not Being Depreciated Land 1,180,127 1,148,698 Construction work in progress 1,551,936 862,477Capital Assets Being Depreciated Utility plant in service 59,154,544 57,098,122 Utility plant acquisition adjustment 249,046 249,046 Accumulated depreciation and amortization (24,143,974) (22,631,489) Net utility plant 37,991,679 36,726,854
Total noncurrent assets 39,234,731 38,106,861
Total Assets 45,535,856 45,671,400
DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding 101,916 113,453
TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES 45,637,772$ 45,784,853$
See accompanying notes to the financial statements.
PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTONSTATEMENT OF NET POSITIONDECEMBER 31, 2012 AND 2011
DECEMBER 31,
ASSETS AND DEFERRED OUTFLOWS OF RESOURCES
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2012 2011
CURRENT LIABILITIES Accounts payable 331,615$ 177,577$ Taxes payable 32,634 17,688 Interest payable 48,798 52,034 Retainage payable 24,811 16,372 Unamortized bond premium payable 248,420 262,543 Current portion of long-term debt 1,475,997 1,528,688 Total current liabilities 2,162,275 2,054,902
NONCURRENT LIABILITIES Revenue bonds 9,495,000 10,440,000 General obligation bonds 4,565,000 5,015,000 Other noncurrent debt 403,134 536,822 Accrued compensated absences (see Note 14) 358,598 414,337 Other post employment benefits liability 520,090 364,965 Less: current portion (1,475,997) (1,528,688) Total noncurrent liabilities, net of current portion 13,865,825 15,242,436
Total liabilities 16,028,100 17,297,338
NET POSITION Net Investment in Capital Assets 23,630,462 20,848,485 Restricted for debt service 238,388 238,388 Unrestricted 5,740,822 7,400,642 Total net position 29,609,672 28,487,515
TOTAL LIABILITIES AND NET POSITION 45,637,772$ 45,784,853$
See accompanying notes to the financial statements.
DECEMBER 31, 2012 AND 2011
DECEMBER 31,
PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTONSTATEMENT OF NET POSITION
LIABILITIES AND NET POSITION
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTONSTATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION
2012 2011OPERATING REVENUE Metered water sales 4,623,862$ 4,400,695$ Wholesale water sales 6,067 6,154 Wholesale telecom sales 1,164,128 1,023,458 Street light revenue 51,715 50,773 Miscellaneous operating revenues 301,258 271,839 Total operating revenue 6,147,030 5,752,919
OPERATING EXPENSES Operations and maintenance 4,640,018 5,122,187 Administration 233,625 233,866 Depreciation and amortization 1,762,947 1,703,625 Business taxes 266,427 245,725 Total operating expenses 6,903,017 7,305,403
OPERATING LOSS (755,987) (1,552,484)
NONOPERATING REVENUES (EXPENSES) Property taxes 2,124,004 2,096,334 Grant income 460,544 20,000 Interest income 88,397 118,368 Gain (loss) on disposal of assets (7,530) 9,169 Interest expense (608,132) (661,313) Nonoperating program expenses (1,366,121) (685,248) Contract revenue 399,188 410,870 Total nonoperating revenues (expenses) 1,090,350 1,308,180
INCOME (LOSS) BEFORE CONTRIBUTIONS 334,363 (244,304)
CAPITAL CONTRIBUTIONS 787,794 841,396
CHANGE IN NET POSITION 1,122,157 597,092
TOTAL NET POSITION, BEGINNING OF YEAR 28,487,515$ 27,890,423$
TOTAL NET POSITION, END OF YEAR 29,609,672$ 28,487,515$
See accompanying notes to the financial statements.
FOR YEARS ENDED DECEMBER 31, 2012 AND 2011
FOR YEARS ENDEDDECEMBER 31,
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON
2012 2011CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 6,083,701$ 5,620,201$ Payments to contractors, suppliers and employees (4,617,006) (5,243,147) Taxes paid (251,481) (244,420) Net cash provided by (used in) operating activities 1,215,214 132,634
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Contract revenue 399,188 410,870 Property taxes received 2,133,005 2,098,027 Other receipts (payments) for nonoperating program expenses (1,366,117) (685,247) Net cash provided by (used in) noncapital financing activities 1,166,076 1,823,650
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Additions to utility plant and construction work in progress (2,785,237) (1,814,767) Proceeds from disposition of assets 4,278 10,986 Proceeds from grants 460,544 20,000 Principal paid on debt (1,528,688) (1,510,924) Interest paid on debt (613,954) (671,242) Cash received from notes and assessments 27,190 99,774 Capital contributions 583,409 318,500 Net cash provided by (used in) capital and related financing activities (3,852,458) (3,547,673)
CASH FLOWS FROM INVESTING ACTIVITIES Interest income on investments 88,397 118,368 Net cash provided by (used in) investing activities 88,397 118,368
Net increase (decrease) in cash and cash equivalents (1,382,771) (1,473,021)
Cash and cash equivalents, beginning of year 6,573,284$ 8,046,305$
Cash and cash equivalents, end of year 5,190,513$ 6,573,284$
NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES:During 2012 and 2011 the District received non-cash capital contributions of $204,385 and $522,896 respectively.
See accompanying notes to the financial statements.
STATEMENT OF CASH FLOWSFOR YEARS ENDED DECEMBER 31, 2012 AND 2011
FOR YEARS ENDEDDECEMBER 31,
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RECONCILIATION OF OPERATING INCOME (LOSS) TO 2012 2011NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESOperating loss (755,987)$ (1,552,484)$ Adjustments to reconcile operating loss to netcash provided by (used in) operating activities: Depreciation and amortization expense 1,762,947 1,703,625 Change in assets and liabilities: Decrease (increase) in accounts receivable (63,329) (132,717) Decrease (increase) in inventory materials and supplies 12,618 (2,352) Decrease (increase) in other current assets (9,402) 27,386 (Decrease) increase in taxes payable 14,946 1,305 (Decrease) increase in accounts payable 154,035 (10,269) (Decrease) increase in other accrueds 99,386 98,140
Net cash provided by (used in) operating activities 1,215,214$ 132,634$
See accompanying notes to the financial statements.
STATEMENT OF CASH FLOWSFOR YEARS ENDED DECEMBER 31, 2012 AND 2011
FOR YEARS ENDEDDECEMBER 31,
PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Kitsap Public Utility District (KPUD or District) is a municipal corporation in Washington State with incorporated boundaries the same as Kitsap County. The District is governed by an elected board of commissioners. Its purpose is to preserve and protect the water resources of Kitsap County for the benefit of the people, and to supply public utility service. KPUD has broad authority and responsibility under Chapter 54, Revised Code of Washington.
KPUD was formed at the general election of 1940 by a vote of the county's electorate to explore providing electrical service as a public special purpose District instead of a private company. U.S. entry into World War II and rapid growth in and around the naval shipyard at Bremerton initially delayed and eventually precluded assumption of electric service in Kitsap County by KPUD. In 1959, the District initiated several actions to study regional water resources in Kitsap County. In 1963, KPUD's Board recognized the necessity for long-range water supply plans to avert future shortages. Regional resource plans, studies, and assessments have taken on increasing importance.
Kitsap Public Utility District strives to provide quality water and wholesale telecommunication utility services to citizens of Kitsap County. KPUD provides safe, reliable drinking water to over 13,400 customers throughout Kitsap County. The wholesale telecommunication service expands communication choices for Kitsap County residents, businesses and public agencies from Port Orchard to Bainbridge Island.
The accounting policies of Public Utility District #1 of Kitsap County, Washington (The District) conform to generally accepted accounting principles as applicable to proprietary funds of governments. GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In June 1999, GASB approved Statement 34, Basic Financial Statements – and Management Discussion and Analysis – for State and Local Governments. This and consecutive statements are reflected in the accompanying financial statements (including notes to financial statements). The following is a summary of the more significant policies:
Reporting entity – The District is a municipal corporation governed by an elected three-member board. As required by generally accepted accounting principles, management has considered all potential component units in defining the reporting entity. The District has no component units.
Basis of accounting and presentation – The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09 RCW. The District uses the Uniform System of Accounts for Class A Water Utilities.
The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Unbilled District utility service receivables are recorded at year-end.
The District distinguishes operating revenues and expenses from non-operating ones. Operating revenues and expenses result from providing services and producing and delivering goods in connection with the District’s principal ongoing operations. The principal operating revenues of the District are charges to customers for water and telecom services. The District also recognizes as operating revenue street light revenues and other miscellaneous operating revenues. Operating expenses for the District include costs to operate and maintain the water and telecom systems, customer service, marketing, administration, depreciation and business taxes. All revenues and expenses not meeting this definition are reported as non-operating revenues and expense.
Cash and Cash Equivalents – For the purpose of the statement of cash flows, the District considers all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents.
Utility Plant and Depreciation – Capital assets are defined by the District as assets with initial individual cost of more than $500 and an estimated useful life in excess of 1 year.
Major expenses for capital assets, including capital leases and major repairs that increase useful lives, are capitalized. Maintenance, repairs, and minor renewals are accounted for as expenses when incurred.
Utility plant in service and other capital assets are recorded at cost. Donations by developers and customers are recorded at the contract price and donor cost.
The original cost of operating property retired or otherwise disposed of and the cost of installation, less salvage, is charged to income.
Depreciation is computed on the straight-line method with the following useful lives:
Buildings and improvements 40 - 50 years Water storage, transportation and treatment 25 - 80 years Transportation equipment 5 - 7 years General equipment 5 - 10 years
See Note 4 for a detail schedule of assets and depreciation.
Restricted funds – The District obtained a Municipal Bond Insurance Policy from Financial Security Assurance Inc. The Policy guarantees the scheduled payment of principal and interest on bonds issued in 2004, 2005, and 2010.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with bond resolutions (and certain related agreements) separate restricted funds are required to be established for bonds issued in 2010. The assets held in these funds are restricted for specific uses, including debt service and other special reserve requirements. Restricted funds include $238,388 in cash as of December 31, 2012 and 2011.
Receivables - Receivables are written off in the year that they are deemed to be uncollectible.
Inventories - Inventories are valued at cost, which approximates the market value. The District uses specific identification to determine inventory costs.
Investments – All investments of the District’s funds are obligations of the U.S. Government, the Kitsap County Treasurer’s Investment Pool, banker’s acceptances, or deposits with Washington State banks and savings and loan institutions pursuant to the requirements of Chapter 39.58 RCW.
Compensated absences – Compensated absences are absences for which employees will be paid, such as vacation and sick leave. The District records unpaid leave for compensated absences as an expense and liability when incurred.
Personal leave may be accumulated up to 1,040 hours. However, a maximum of 520 hours is payable upon resignation, retirement or death.
Unamortized debt expenses – Costs relating to the sale of bonds are deferred and amortized over the lives of the various bond issues.
Deferred Inflows & Outflows of Resources – The District recognizes deferred losses on refunding of bonds as a deferred outflow of resource.
Capital Contributions – Capital contributions for the District consist mainly of connection fees and developer extensions.
Use of Estimates – The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications – Certain 2011 balances have been reclassified to conform to 2012 presentation.
_________________________________________________________________________________________________________ Washington State Auditor's Office
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 2 - DEPOSITS AND INVESTMENTS
As required by state law, all investments of the District’s funds are obligations of the U.S. Government, the Kitsap County Treasurer’s Investment Pool, banker’s acceptances, or deposits with Washington State banks and savings and loan institutions. The District does not have a formally adopted investment policy at this time.
Investments – As of December 31, 2012, the district had the following investments: Investment type Maturities Fair Value Kitsap County Treasurer’s Investment Pool 50 days Avg $ 4,063,717
As of December 31, 2011, the district had the following investments: Investment type Maturities Fair Value Kitsap County Treasurer’s Investment Pool 50 days Avg $ 6,042,815
All investments are listed at cost and approximate fair market value. Management intends to hold the time deposits and securities until maturity; therefore, temporary declines in market value are not reflected in the financial statements. The District’s investments were all held with the Kitsap County Treasurer’s Investment Pool, and are therefore not subject to risk categorization. The investment pool is administered by the Kitsap County Treasurer.
Custodial credit risk – Deposits. For a deposit, this is the risk that in the event of a bank failure, the District’s deposits may not be returned to it. The District’s deposits are entirely covered by the Federal Deposit Insurance Corporation (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the PDPC. Under state law, public depositories under the PDPC may be assessed on a prorated basis if the pool’s collateral is insufficient to cover a loss. As a result, deposits covered by collateral held in the multiple financial institution collateral pool are considered to be insured. State law requires that deposits may be made only with institutions that are approved by the PDPC.
NOTE 3 – OPERATING LEASES
The District is committed under various leases for facilities to house water and telecommunications equipment. These leases are considered operating leases for accounting purposes. Lease expenses for the years ending December 31, 2012 and 2011 amounted to $48,541 and $47,378, respectively. Future minimum lease commitments for these leases are:
Fiscal Year Ending December 31: 2013 $ 49,501 2014 49,877 2015 50,210 2016 50,564 2017 48,455 Total $ 248,607
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 4 – UTILITY PLANT AND DEPRECIATION
Utility plant activity for the years ended December 31, 2012 was as follows:
12/31/2011 Increase Decrease 12/31/2012Capital assets not being depreciatedLand and land rights 1,148,698$ 31,429$ -$ 1,180,127$ Construction work in progress 862,477 689,459 1,551,936 Total capital assets not being depreciated 2,011,175 720,888 - 2,732,063
_________________________________________________________________________________________________________ Washington State Auditor's Office
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 4 – UTILITY PLANT AND DEPRECIATION (continued)
Utility plant activity for the years ended December 31, 2011 was as follows:
12/31/2010 Increase Decrease 12/31/2011Capital assets not being depreciatedLand and land rights 1,139,548$ 9,150$ -$ 1,148,698$ Construction work in progress 188,550 673,927 862,477 Total capital assets not being depreciated 1,328,098 683,077 - 2,011,175
Capital assets being depreciatedWells 5,566,965 97,361 5,664,326 Supply mains 21,160,385 622,726 21,783,111 Water treatment equipment 671,124 3,288 674,412 Pumping plant 4,227,756 48,460 4,276,216 Water storage 5,627,873 4,425 5,632,298 Water system comprehensive plan 678,549 62,628 741,177 Services 4,133,597 119,780 4,253,377 Hydrants 1,181,250 72,985 1,254,235 Communication equipment 62,090 9,500 1,190 70,400 Office building 954,177 34,441 988,618 Databases 2,299 - 2,299 Plant buildings 70,305 772 71,077 Office furniture and equipment 181,949 2,810 10,878 173,881 Vehicles 672,665 84,908 71,272 686,301 Utility equipment 423,472 44,404 467,876 Computer equipment 192,965 23,023 45,961 170,027 Telemetry equipment 308,037 12,190 320,227 Computer software 125,330 500 125,830 Leasehold improvements 31,247 - 31,247 Maintenance building and improv 992,665 536 993,201Utility plant adjustment account 249,046 - 249,046 Electronic equipment - telecom 1,072,102 89,562 5,058 1,156,606 Poles, towers & fixtures - telecom 109,422 - 109,422 Fiber systems - telecom 6,495,008 257,792 6,752,800 Services - telecom 335,994 10,813 346,807 Plant building - telecom 249,053 - 249,053 Communication equipment - telecom 28,696 40,494 69,190 Computers - telecom 29,006 7,361 2,259 34,108 Total capital assets being depreciated 55,833,027 1,650,759 136,618 57,347,168
Depreciation and amortizationAccumulated depreciation 20,857,280 1,660,240 134,800 22,382,720 Accumulated amortization (UPAA) 247,050 1,719 248,769 Total accum. depreciation and amort. 21,104,330 1,661,959 134,800 22,631,489
Total utility plant being depreciated, net 34,728,697 34,715,679
_________________________________________________________________________________________________________ Washington State Auditor's Office
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 5 - CONSTRUCTION IN PROGRESS
Construction in progress represents expenses to date on projects for which authorizations total $7,589,738 and $7,274,533 in 2012 and 2011, respectively.
NOTE 6 - LONG-TERM DEBT
During the year ended December 31, 2012, the following changes occurred in long-term debt:
Revenue Bonds BEGINNING
BALANCE ADDITIONS REDUCTIONS ENDING
BALANCE DUE WITHIN
ONE YEAR
2002 Revenue Bonds - Serial bonds $80,000-$225,000 due through December 1, 2021. Interest at 1.60% to 4.95% 150,000$ 150,000$ -$ -$
2004(B) Revenue Bonds - Serial bonds $25,000-$135,000 due through December 1, 2023. Interest at 3.00% to 4.90% 1,315,000 85,000 1,230,000 90,000
2005 Revenue Bonds - Serial bonds $65,000-$320,000 due through December 1, 2025. Interest at 4.00% to 4.20% 3,490,000 195,000 3,295,000 200,000
2010 Revenue Bonds - Serial bonds $160,000-$590,000 due through December 1, 2030. Interest at 2.00% to 4.50%. 5,485,000 515,000 4,970,000 590,000
Total revenue bonds 10,440,000$ -$ 945,000$ 9,495,000$ 880,000$
General Obligation Bonds2001(B) G/O Bonds - Serial bonds $60,000-$420,000 due through December 1, 2019. Interest at 4.95% 700,000 - 700,000 -
2010(A) G/O Bonds - Serial Bonds $80,000-$420,000 due through December 1, 2030. Interest at 0.87% to 6.20%. 3,915,000 390,000 3,525,000 395,000
2010(B) G/0 Bonds - Serial Bonds $65,000-$75,000 due through December 1, 2017. Interest at 2.00% to 3.00%. 400,000 60,000 340,000 65,000
Total general obligation bonds 5,015,000$ -$ 450,000$ 4,565,000$ 460,000$
Long Term Debt Note Payable: Public Works Trust Fund - Annual payments $92,763 plus interest due through July, 2015, interest at 1.00% 371,052$ 92,763$ 278,289$ 92,763$
Note Payable: Frog Pond Waters, Inc. - Monthly p&i payments $4,085 due through September, 2014, interest at 5.50% 165,770 40,925 124,845 43,234
Total other long term debt 536,822$ -$ 133,688$ 403,134$ 135,997$
Other Long Term Liability
OPEB Payable 364,965$ 155,125$ -$ 520,090$ -$
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 6 - LONG-TERM DEBT (continued)
During the year ended December 31, 2011, the following changes occurred in long-term debt:
Revenue Bonds BEGINNING
BALANCE ADDITIONS REDUCTIONS ENDING
BALANCE DUE WITHIN
ONE YEAR
2002 Revenue Bonds - Serial bonds $80,000-$225,000 due through December 1, 2021. Interest at 1.60% to 4.95% 295,000$ 145,000$ 150,000$ 150,000$
2004(B) Revenue Bonds - Serial bonds $25,000-$135,000 due through December 1, 2023. Interest at 3.00% to 4.90% 1,395,000 80,000 1,315,000 85,000
2005 Revenue Bonds - Serial bonds $65,000-$320,000 due through December 1, 2025. Interest at 4.00% to 4.20% 3,640,000 150,000 3,490,000 195,000 2010 Revenue Bonds - Serial bonds $160,000-$590,000 due through December 1, 2030. Interest at 2.00% to 4.50%. 6,015,000 530,000 5,485,000 515,000
Total revenue bonds 11,345,000$ -$ 905,000$ 10,440,000$ 945,000$
General Obligation Bonds2001(B) G/O Bonds - Serial bonds $60,000-$420,000 due through December 1, 2019. Interest at 4.95% 700,000$ -$ -$ 700,000$ -$ 2010(A) G/O Bonds - Serial Bonds $80,000-$420,000 due through December 1, 2030. Interest at 0.87% to 6.20%. 4,300,000 385,000 3,915,000 390,000
2010(B) G/0 Bonds - Serial Bonds $65,000-$75,000 due through December 1, 2017. Interest at 2.00% to 3.00%. 465,000 65,000 400,000 60,000
Total general obligation bonds 5,465,000$ -$ 450,000$ 5,015,000$ 450,000$
Long Term Debt
Note Payable: Public Works Trust Fund - Annual payments $5,162 plus interest due through July, 2011, interest at 1.00% 5,162$ -$ 5,162$ -$ -$
Note Payable: Public Works Trust Fund - Annual payments $92,763 plus interest due through July, 2015, interest at 1.00% 463,816 92,764 371,052 92,763 Note Payable: Frog Pond Waters, Inc. - Monthly p&i payments $4,085 due through September, 2014, interest at 5.50% 204,510 38,740 165,770 40,925
Note Payable: Sanderson & Associates - Semi annual p&i payments $19,836 due through January, 2011, interest at 6.00% 19,258 19,258 - - Total other long term debt 692,746$ -$ 155,924$ 536,822$ 133,688$
Other Long Term Liability OPEB Payable 252,923$ 112,042$ -$ 364,965$ -$
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 6 - LONG-TERM DEBT (continued)
The annual requirements to amortize all debts outstanding as of December 31, 2012 and 2011, including interest, are as follows.
Fiscal Year Ending December 31, Principal Interest Total 2011 $ 1,510,924 $ 671,243 $ 2,182,1672012 1,528,688 613,952 2,142,6402013 1,475,997 577,454 2,053,4512014 1,208,436 538,093 1,746,5292015 1,213,701 505,125 1,718,8262016 1,115,000 469,054 1,584,054
There is $238,388 in restricted assets of the district as of December 31, 2012 and 2011. These represent reserve requirements as contained in the various indentures.
There are a number of other limitations and restrictions contained in the various bond indentures. The District is in compliance with all significant limitations and restrictions.
Revenue Bonds
The District has pledged future gross revenue plus any LUD Assessments, net of operation and maintenance expenses to repay $6,015,000 in 2010 revenue bonds issued in November, 2010. Proceeds from the bonds will be used to finance capital improvements, to refund a portion of the District’s Outstanding Bonds, to fund the Reserve Fund, and to pay the costs of issuance of the Bonds. The bonds are payable solely from future gross revenue plus any LUD Assessments and are payable through 2030. The total principal and interest remaining to be paid on the bonds is $6,628,720 and $7,345,985 as of December 31, 2012 and 2011, respectively. Principal and interest paid during 2012 and 2011 was $717,265 and $755,873, respectively.
_________________________________________________________________________________________________________ Washington State Auditor's Office
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 6 - LONG-TERM DEBT (continued)
The following bond issues were refunded with the 2010 bond issue:
Bond Issue Amount Outstanding 1998 Water Improvement and Refunding Revenue Bonds, Series 1998
$1,075,000
1999 Water Revenue Bonds, Series 1999 70,000 2002 Water System Revenue Bonds, 2002 1,695,000 Total Refunded Bonds Outstanding $2,840,000
This advance and current refunding was undertaken to reduce total debt service payments through 2021 by $776,354.
Debt service on these bonds is met by cash and investments held by the refunding trustee. As of December 31, 2012 and 2011, the trustee was holding cash and investments which are expected to fund debt service fully. These refunded bonds constitute a contingent liability of the district but are excluded from the financial statements.
General Obligation Bonds
The District has pledged the full faith, credit and resources to repay $4,765,000 in 2010 revenue bonds issued in November 2010. Proceeds from the bonds will be used to finance capital improvements, to refund a portion of the District’s Outstanding Bonds, to fund the Reserve Fund, and to pay the costs of issuance of the Bonds. The bonds are payable solely from the full faith, credit and resources and are payable through 2030. The total principal and interest remaining to be paid on the bonds is $5,276,584 and $5,884,398 as of December 31, 2012 and 2011, respectively. Principal and interest paid during 2012 and 2011 was $607,815 and $622,392, respectively.
The following bond issues were refunded with the 2010 bond issue.
Bond Issue Amount Outstanding Limited Tax General Obligation Bonds, 2001 Series A (Taxable)
$2,235,000
Limited Tax General Obligation Bonds, 1998 475,000 Total Refunded Bonds Outstanding $2,710,000
This advance and current refunding was undertaken to reduce total debt service payments through 2021 by $804,681.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 6 - LONG-TERM DEBT (continued)
Debt service on these bonds is met by cash and investments held by the refunding trustee. As of December 31, 2012 and 2011, the trustee was holding cash and investments which are expected to fund debt service fully. These refunded bonds constitute a contingent liability of the district but are excluded from the financial statements
NOTE 7 - PENSION PLAN
Substantially all of the District’s full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380; or it may be downloaded from the DRS website at www.drs.wa.gov. The following disclosures are made pursuant to GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers and Statement No. 50,Pension Disclosures, an Amendment of GASB Statements No. 25 and No. 27.
Public Employees’ Retirement System (PERS) Plans 1, 2, and 3
Plan Description
The Legislature established PERS in 1947. Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts; employees of legislative committees; community and technical colleges, college and university employees not participating in higher education retirement programs; employees of district and municipal courts; and employees of local governments. Approximately 50% of PERS salaries are accounted for by state employment. PERS retirement benefit provisions are established in Chapters 41.34 and 41.40 RCW and may be amended only by the State Legislature.
PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined benefit plan with a defined contribution component.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
PERS members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 and by either, February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS members joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to Plan 3. Notwithstanding, PERS Plan 2 and Plan 3 members may opt out of plan membership if terminally ill, with less than five years to live.
PERS is comprised of and reported as three separate plans for accounting purposes: Plan 1, Plan 2/3, and Plan 3. Plan 1 accounts for the defined benefits of Plan 1 members. Plan 2/3 accounts for the defined benefits of Plan 2 members and the defined benefit portion of benefits for Plan 3 members. Plan 3 accounts for the defined contribution portion of benefits for Plan 3 members. Although members can only be a member of either Plan 2 or Plan 3, the defined benefit portions of Plan 2 and Plan 3 are accounted for in the same pension trust fund. All assets of this Plan 2/3 defined benefit plan may legally be used to pay the defined benefits of any of the Plan 2 or Plan 3 members or beneficiaries, as defined by the terms of the plan. Therefore, Plan 2/3 is considered to be a single plan for accounting purposes.
PERS Plan 1 and Plan 2 retirement benefits are financed from a combination of investment earnings and employer and employee contributions. Employee contributions to the PERS Plan 1 and Plan 2 defined benefit plans accrue at a rate specified by the Director of DRS. During DRS’ Fiscal Year 2012, the rate was five and one-half percent compounded quarterly. Members in PERS Plan 1 and Plan 2 can elect to withdraw total employee contributions and interest thereon upon separation from PERS-covered employment.
PERS Plan 1 members are vested after the completion of five years of eligible service.
PERS Plan 1 members are eligible for retirement after 30 years of service, or at the age of 60 with five years of service, or at the age of 55 with 25 years of service. The monthly benefit is two percent of the average final compensation (AFC) per year of service, but the benefit may not exceed 60% of the AFC. The AFC is the monthly average of the 24 consecutive highest-paid service credit months.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
The monthly benefit is subject to a minimum for retirees who have 25 years of service and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring from inactive status prior to the age of 65 may receive actuarially reduced benefits. Plan 1 members may elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at 3 percent annually. To offset the cost of this annual adjustment, the benefit is reduced.
PERS Plan 1 provides duty and non-duty disability benefits. Duty disability retirement benefits for disablement prior to the age of 60 consist of a temporary life annuity. The allowance amount is $350 a month, or two-thirds of the monthly AFC, whichever is less. The benefit is reduced by any workers’ compensation benefit and is payable as long as the member remains disabled or until the member attains the age of 60 at which time the benefit is converted to the member’s service retirement amount. A member with five years of covered employment is eligible for non-duty disability retirement. Prior to the age of 55, the benefit amount is 2 percent of the AFC for each year of service reduced by 2 percent for each year that the member’s age is less than 55. The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a survivor option. Plan 1 members may elect to receive an optional COLA amount (based on the consumer Price Index), capped at 3 percent annually. To offset the cost of this annual adjustment, the benefit is reduced.
PERS Plan 1 members can receive credit for military service while actively serving in the military if such credit makes them eligible to retire. Members can also purchase up to 24 months of service credit lost because of an on-the-job injury.
The survivor of a PERS Plan 1 member who dies after having earned ten years of service credit has the option, upon the member’s death, of either a monthly survivor benefit or the lump sum of contributions plus interest.
PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for normal retirement at the age of 65 with five years of service. The monthly benefit is 2 percent of the AFC per year of service. The AFC is the monthly average of the 60 consecutive highest-paid service months. There is no cap on years of service credit; and a cost-of-living allowance is granted (based on the Consumer Price Index), capped at 3 percent annually
PERS Plan 2 members who have at least 20 years of service credit and are 55 years of age or older are eligible for early retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to age, for each year before age 65.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions:
- With a benefit that is reduced by 3 percent for each year before age 65; or - With a benefit that has a smaller (or no) reduction (depending on age) that imposes
stricter return-to-work rules.
PERS Plan 2 retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. The surviving spouse or eligible child(ren) of a PERS Plan 2 member who dies after having earned ten years of service credit has the option of either a monthly benefit or a lump sum payment of the member’s contributions plus interest.
PERS Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member contributions finance a defined contribution component. As established by Chapter 41.34 RCW, employee contribution rates to the defined contribution component range from 5 percent to 15 percent of salaries, based on member choice. There are currently no requirements for employer contributions to the defined contribution component of PERS Plan 3.
PERS Plan 3 defined contribution retirement benefits are dependent upon the results of investment activities. Members may elect to self-direct the investment of their contributions. Any expenses incurred in conjunction with self-directed investments are paid by mmebers. Absent a member’s self-direction, PERS Plan 3 investments are made in the same portfolio as that of the PERS 2/3 defined benefit plan.
For DRS’ fiscal year 2012, PERS Plan 3 employee contributions were $95.2 million, and plan refunds paid out were $66.2 million.
The defined benefit portion of PERS Plan 3 provides members a monthly benefit that is 1 percent of the AFC per year of service. The AFC is the monthly average of the 60 consecutive highest-paid service months. There is no cap on years of service credit, and Plan 3 provides the same cost-of-living allowance as Plan 2.
Effective June 7, 2006, Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 by June 1, 2003. Plan 3 members are immediately vested in the defined contribution portion of their plan.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
Vested Plan 3 members are eligible for normal retirement at age 65, or they may retire early with the following conditions and benefits:
- If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that varies with age, for each year before age 65.
- If they have 30 service credit years and are at least 55 years old, they have the choice of a benefit that is reduced by 3 percent for each year before age 65; or a benefit with a smaller (or no) reduction factor (depending on age) that imposes stricter return-to-work rules.
PERS Plan 3 benefit retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option.
PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 monthly benefit amount is 2 percent of the AFC per year of service. For Plan 3, the monthly benefit amount is 1 percent of the AFC per year of service. These disability benefit amounts are actuarially reduced for each year that the member’s age is less than 65, and to reflect the choice of a survivor option. There is no cap on years of service credit, and a cost-of-living allowance is granted (based on the Consumer Price Index) capped at 3 percent annually.
PERS Plan 2 and Plan 3 members may have up to ten years of interruptive military service credit; five years at no cost and five years that may be purchased by paying the required contributions.
PERS Plan 2 and Plan 3 members who become totally incapacitated for continued employment while serving the uniformed services, or a surviving spouse or eligible child(ren), may request interruptive military service credit.
PERS Plan 2 and Plan 3 members can purchase up to 24 months of service credit lost because of an on-the-job injury.
PERS members may also purchase up to five years of additional service credit once eligible for retirement. This credit can only be purchased at the time of retirement and can be used only to provide the member with a monthly annuity that is paid in addition to the member’s retirement benefit.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
Beneficiaries of a PERS Plan 2 or Plan 3 member with ten years of service who is killed in the course of employment receive retirement benefits without actuarial reduction. This provision applies to any member killed in the course of employment, on or after June 10, 2004, if found eligible by the Department of Labor and Industries.
A one-time duty-related death benefit is provided to the estate (or duly designated nominee) of a PERS member who dies in the line of service as a result of injuries sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of said member's covered employment, if found eligible by the Director of the Department of Labor and Industries.
From January 1, 2007 through December 31, 2007, judicial members of PERS were given the choice to elect participation in the Judicial Benefit Multiplier (JBM) Program enacted in 2006. Justices and judges in PERS Plan 1 and Plan 2 were able to make an irrevocable election to pay increased contributions that would fund a retirement benefit with a 3.5 percent multiplier. The benefit would be capped at 75 percent of AFC. Judges in PERS Plan 3 could elect a 1.6 percent of pay per year of service benefit, capped at 37.5 percent of AFC.
Members who chose to participate would: accrue service credit at the higher multiplier beginning with the date of their election; be subject to the benefit cap of 75 percent of AFC; stop contributing to the Judicial Retirement Account (JRA); pay higher contributions; and be given the option to increase the multiplier on past judicial service. Members who did not choose to participate would: continue to accrue service credit at the regular multiplier; not be subject to a benefit cap; continue to participate in JRA, if applicable; continue to pay contributions at the regular PERS rate; and never be a participant in the JBM Program.
Newly elected or appointed justices and judges who chose to become PERS members on or after January 1, 2007, or who had not previously opted into PERS membership, were required to participate in the JBM Program. Members required into the JBM program would: return to prior PERS Plan if membership had previously been established; be mandated into Plan 2 and not have a Plan 3 transfer choice, if a new PERS member; accrue the higher multiplier for all judicial service; not contribute to JRA; and not have the option to increase the multiplier for past judicial service.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
There are 1,184 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2011:
Retirees and Beneficiaries Receiving Benefits 79,363Terminated Plan Members Entitled to But Not Yet Receiving Benefits 29,925Active Plan Members Vested 105,578Active Plan Members Nonvested 46,839
Total 261,705
Funding Policy Each biennium, the state Pension Funding Council adopts PERS Plan 1 employer contribution rates, PERS Plan 2 employer and employee contribution rates, and PERS Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at six percent for state agencies and local government unit employees, and at 7.5 percent for state government elected officials. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan, and member contributions finance the defined contribution portion. The Plan 3 employee contribution rates range from 5% to 15%, based on member choice. Two of the options are graduated rates dependent on the employee’s age.
As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a second tier of employer and employee rates was developed to fund, along with investment earnings, the increased retirement benefits of those justices and judges that participate in the program.
The methods used to determine the contribution requirements are established under state statute in accordance with chapters 41.40 and 41.45 RCW.
The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2012, are as follows:
PERS Plan 1 PERS Plan 2 PERS Plan 3Employer* 7.21%** 7.21%** 7.21%*** Employee 6.00%**** 4.64%**** *****
* The employer rates include the employer administrative expense fee currently set at 0.16%. ** The employer rate for state elected officials is 10.74% for Plan 1 and 7.21% for Plan 2 and Plan 3. *** Plan 3 defined benefit portion only. **** The employee rate for state elected officials is 7.50% for Plan 1 and 4.64% for Plan 2. ***** Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member.
_________________________________________________________________________________________________________ Washington State Auditor's Office
38
PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 7 - PENSION PLAN (continued)
Both the District and the employees made the required contributions. The District’s required contributions for the years ending December 31 were as follows:
PERS Plan 1 PERS Plan 2 PERS Plan 3 2012 $ 4,142 $ 149,566 $ 69,105 2011 $ 3,508 $ 127,651 $ 61,120 2010 $ 2,841 $ 111,050 $ 50,372
NOTE 8 – TELECOMMUNICATION SERVICES
The Kitsap Public Utility District telecommunications/fiber optic network will provide cost-effective, high technology communication facilities allowing: open access to wholesale bandwidth facilitating the economic development of Kitsap County and customer choice, economical and efficient service to customers, now and in the future, by maximizing productivity of the District’s assets, efficient management of water resources in Kitsap County, improved transfer of Geographic Information Systems (GIS) data between the District and other agencies, and expanded and improved District telecommunications.
The Kitsap Public Utility District provides wholesale telecommunications service to internet service providers, cable companies, competitive and independent local exchange carriers, and other service providers. The District also facilitates cost-effective last mile solutions.
Depreciation is allocated based on the ratio of telecom assets to total assets in service.
Telecommunications revenue and expenses are as follows: Revenues: 2012 2011 Wholesale telecommunications sales $ 1,164,128 $ 1,023,458 Installation charges 48,600 102,048 Other telecommunications revenue 5,636 1,191 Total revenues $ 1,218,364 $ 1,126,697
Operating Expenses: Operations and maintenance (876,747) (1,172,141) Administrative (8,124) (7,200) Total operating expenses (884,871) (1,179,341)
Operating Income (Loss) $ 333,493 $ (52,644)
Depreciation (487,170) (471,007) Net Income (Loss) $ (153,677) $ (523,651)
Capital Investment: Capital investment (current) $ 510,291 $ 406,022 Capital investment (cumulative) $ 9,159,792 $ 8,717,984
_________________________________________________________________________________________________________ Washington State Auditor's Office
39
PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 9 – PROPERTY TAXES
The county treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. Taxes are levied annually on January 1, on property value listed as of the prior May 31. Assessed values are established by the county assessor at 100 percent of fair market value. A revaluation of all property is required every four years.
Taxes are due in two equal installments on April 30 and October 31. Collections are distributed monthly to the District by the county treasurer.
The District is permitted by law to levy up to $.45 per $1,000 of assessed valuation for general District purposes. Washington State constitution and Washington State Law, RCW 84.55.010, limit the rate. The District may also levy taxes at a lower rate.
For 2012, the District’s regular tax levy was .078042 per $1,000 on a total assessed valuation of $27,132,438,757 plus timber excise distribution of $1,962 for a total regular levy of $2,119,441.
For 2011, the District’s regular tax levy was .073755 per $1,000 on a total assessed valuation of $28,434,461,783 plus timber excise distribution of $1,438 for a total regular levy of $2,098,626.
Property taxes are recorded as receivables when levied. Since State law allows for sale of property for failure to pay taxes, no estimate of uncollectible taxes is made.
Special levies approved by the voters are not subject to the above limitations.
NOTE 10 - OTHER POSTEMPLOYMENT BENEFITS
Plan Description Public Utility District No. 1 of Kitsap County Board of Commissioners provides retiree medical care through the Public Employees Benefit Board (PEBB) under a single-employer defined benefit healthcare plan (Retiree Healthcare Plan). Resolution No. 07-02-13A authorizes the PUD to provide for payment of premiums for medical and dental insurance to retired employees, spouses and dependents when said retired employee has worked for Kitsap PUD for a minimum of fifteen years. Financial reporting for the PEBB retiree healthcare plan is included in the KPUD's Comprehensive Annual Financial Report.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 10 - OTHER POSTEMPLOYMENT BENEFITS (continued)
Funding Policy The PUD contributes between 70 and 85 percent based on years of service and the cost of current-year premiums for eligible retired plan members and their spouses. Plan members receiving benefits contribute 15 to 30 percent of their premium costs. The PUD's required contribution is based upon projected pay-as-you-go financing requirements. There is currently one participant on the Retiree Healthcare Plan.
Annual OPEB Cost and Net OPEB ObligationThe PUD's annual other postemployment benefit (OPEB) cost (expense) is calculated based upon the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The PUD has elected to calculate the ARC and related information using the alternative measurement method permitted under GASB Statement No. 45 for employers in plans with fewer than one hundred total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period of thirty years as of January 1, 2009.
The following table shows the components of the PUD's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the PUD's net OPEB obligation to the Retiree Health Plan. The net OPEB obligation of $520,090 is included as a noncurrent liability on the Statement of Net Position.
Annual required contribution $ 164,542Interest on net OPEB obligation 16,423Adjustment to annual required contribution (22,406) Annual OPEB (cost) expense 158,559Contributions made (3,434) Increase in net OPEB obligation 155,125Net OPEB obligation - beginning of year 364,965 Net OPEB obligation - end of year $ 520,090
The PUD's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal years 2012 and 2011:
_________________________________________________________________________________________________________ Washington State Auditor's Office
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 10 - OTHER POSTEMPLOYMENT BENEFITS (continued)
Funded Status and Funding Progress As of December 31, 2012 and 2011, the most recent actuarial valuation dates, the actuarial accrued liability for benefits was $1,406,407 and $881,869, respectively, of which 0% was funded.
Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.
Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point.
In the December 31, 2012, actuarial valuation, the method used was the alternative measurement method permitted under GASB Statement No. 45. A single retirement age of 62.20 was assumed for all active members to determine the AAL and normal cost. Retirement, disablement, termination, and mortality rates were assumed ot follow the PERS 2 rates used in the June 30, 2010 acutarial valuation report issued by the Office of the State Actuary (OSA). Healthcare costs and trends were determined by Milliman and used by OSA in the state-wide PEBB study performed in 2011. The results were based on grouped data with 4 active groupings and 4 inactive groupings. The actuarial cost method used to determine the AAL was Projected Unit Credit. The AAL and NOO are amortized on an open basis as a level dollar over 30 years. These assumptions are individually and collectively reasonable for the purposes of this valuation.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 11- DEFERRED COMPENSATION PLANS
The District offers its employees two deferred compensation plans created in accordance with Internal Revenue Code Section 457. These plans are with independent plan administrators. The plans, available to eligible employees, permit them to defer a portion of their salary until future years. The District matches a portion of employee deferrals. Totals were $86,785 and $86,446 in 2012 and 2011, respectively. The deferred compensation is not available to employees until termination, retirement, death, or an unforeseeable emergency.
NOTE 12 – SELF INSURANCE
The District is a member of the Public Utility Risk Management Services Self-Insurance Fund (PURMS). RCW Chapter 48.62 authorizes the governing body of any one or more governmental entities to form together into or join a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, an/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 RCW Chapter 54.16. The liability pool was formed on December 31, 1976 when certain PUDs in the State of Washington joined together by signing an Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. Nineteen members currently belong to PURMS.
Additional pools for property and health and welfare coverage were added in March 1997 and April 2000, under the same agreements and with the same memberships. All members do not participate in all pools. The District does not participate in the PURMS health and welfare pool.
Members of each pool are assessed to maintain the designated self-insured retention. After termination, a member is still responsible for their share of contributions to the pools for any unresolved, unreported, and in-process claims for the period they were a signatory to the agreement. The pools are fully funded by its current and former members. Claims are filed by members with the Administrator, Pacific Underwriters, Seattle, WA, which as been contracted to perform claims adjustment and loss prevention services.
The pools are governed by a Board of Directors which is comprised of one designated representative from each participating member. The Administrator and an elected Administrative Committee are responsible for conducting the business affairs of the pools.
Settled claims have not exceeded insurance coverage in any of the past four fiscal years.
The liability pool has a $1 million self-insured retention with $3.0 million of reserves. In addition, the fund purchases $35 million of excess general liability insurance over the $1 million retention.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 12 – SELF INSURANCE (continued)
The majority of the property in the property pool has a $250,000 self-insured retention. Certain classes of property have higher retention requirements up to $500,000. Reserves for the Property Pool are set at $750,000. In addition, the fund purchases $200 million of excess insurance over the $250,000 (or higher) retention level.
Unemployment Claims
The District pays unemployment claims on a reimbursement basis administered by the Washington State Department of Employment Security
NOTE 13 – PARTICIPATION IN NORTHWEST OPEN ACCESS NETWORK, INC. (NoaNet)
The district, along with 10 other Washington State public entities, is a member of NoaNet, a Washington nonprofit mutual corporation. NoaNet was incorporated in February 2000 to provide a broadband communications backbone over public benefit fibers leased from BPA throughout the Pacific Northwest for assisting its members in the efficient management of load, conservation and acquisition of electric energy as well as other purposes. The network began commercial operation in January 2001.
In July 2001, NoaNet issued $27 million in Telecommunications Network Revenue Bonds (taxable) to finance the repayment of the founding members and the costs of initial construction, operations and maintenance. The Bonds become due beginning in December 2003 through December 2016 with interest due semi-annually at rates ranging from 5.05% to 7.09%. The 2001 bonds were refunded in 2011 with new bonds issued in June 2011. The 2011 bonds become due beginning in December 2012 through December 2016 with interest done semi-annually at rates ranging from .75% to 3.00%. The amounts of outstanding bonds were $10,835,000 and $13,165,000 at December 31, 2012 and 2011, respectively. Each member of NoaNet has entered into a Repayment Agreement to guarantee the debt of NoaNet. The District’s guarantee is limited to 1.42% of the outstanding bonds. The District recorded as expense member assessments of $0 and $7,100 for 2012 and 2011, respectively.
The District provides communications transport and related services to NoaNet. Accounts receivable from NoaNet as of December 31, 2012 and 2011 were approximately $269,200 and $171,000, respectively. Revenue for the years ended December 31, 2012 and 2011 were $1,104,000 and $990,000, respectively.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
NOTE 13 – PARTICIPATION IN NORTHWEST OPEN ACCESS NETWORK, INC. (NoaNet) (continued)
In January 2003, NoaNet opened a $5 million line of credit (Note) with Bank of America to fund capital expenditures. A second $5 million line of credit was opened with Bank of America in June 2006, a third $1.5 million line of credit was opened with Bank of America in August 2008, a fourth $1.5 million line of credit was opened with Bank of America in March 2009 and a fifth $5 million line of credit was opened with Bank of America in August 2012. Combined balances of $1,556,400 and $1,433,333 were outstanding on the Notes as of December 31, 2012 and 2011, respectively. NoaNet may assess its Members for their percentage share of principal and interest on the Note to the extent that NoaNet does not have sufficient funds to pay the Note.
NoaNet recorded an increase in net position (excluding member assessments) of $47,709,253 for 2012 (unaudited) and an increase in net position (excluding member assessments) of $25,796,324 for 2011 (audited). In accordance with Government Accounting Standards Board No. 14, The Financial Reporting Entity, a proportionate share of these gains have not been recorded by the District since the District has no explicit measurable positive equity interest in NoaNet.
Financial statements for NoaNet may be obtained by writing to: Northwest Open Access Network, Accounting Department, 4312 Kitsap Way Suite 101, Bremerton, WA 98312.
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 & 2011
Required Supplemental Information PEBB Retiree Medical Benefits Schedule of Funding Progress
UnfundedActuarial ActuarialAccrued Accrued UAAL as a
Actuarial Liability Liabilities Percentage ofFiscal Value of (AAL) AAL Funded Covered Covered
Year Ended Assets Entry Age (AUUL) Ratio Payroll PayrollDec. 31, 2011 -$ 881,869$ 881,869$ -$ 3,014,427$ 29%Dec. 31, 2012 - 1,406,407 1,406,407 - 3,142,891 45%
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTONSCHEDULE OF EXPENDITURES OF FEDERAL AWARDSFOR THE YEAR ENDED DECEMBER 31, 2012
Grantor/Program Title Federal CFDA Number
From Pass-Through Awards
From Direct
Awards TotalUS. Department of Commerce/Pass-Throughfrom Northwest Open Access Network
ARRA - Broadband Technology Opporunities Program NT10BIX5570111 ARRA - 11.557 569,127$ -$ 569,127$
Expenditures
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PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY, WASHINGTON NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2012
NOTE 1 – BASIS OF PRESENTATION
The accompanying Schedule of Expenditures of Federal Awards (the Schedule) includes the federal grant activity of Public Utility District #1 of Kitsap County under programs of the federal government for the year ended December 31, 2012. The information presented in this Schedule is presented in accordance with the requirement of the Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations.Because the schedule presents only a selected portion of the operations of Public Utility District #1 of Kitsap County, it is not intended to and does not present the financial position, changes in equity or cash flows of Public Utility District #1 of Kitsap County.
NOTE 2 – PROGRAM COSTS
The amounts shown as current year expenditures represent only the federal grant portion of the program costs. Entire program costs, including the Public Utility District #1 of Kitsap County’s portion, are $572,688.
NOTE 3 – AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA) OF 2009
Expenditures for this program were funded by ARRA.
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in OMB Circular A-87, CostPrinciples for State, Local, and Indian Tribal Governments, wherein certain types of expenditures are not allowable or are limited as to reimbursement.
NOTE 5 – RELATIONSHIP TO BASIC FINANCIAL STATEMENTS
Federal awards are reported in the financial statements as grant revenue.
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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 Troy Kelley Chief of Staff Doug Cochran Director of State and Local Audit Chuck Pfeil, CPA Deputy Director of State and Local Audit Kelly Collins, CPA Deputy Director of State and Local Audit Jan M. Jutte, CPA, CGFM Deputy Director of State and Local Audit Sadie Armijo Deputy Director of Quality Assurance Barb Hinton Deputy Director of Communications Thomas Shapley Local Government Liaison Mike Murphy Public Records Officer Mary Leider Main number (360) 902-0370 Toll-free Citizen Hotline (866) 902-3900 Website www.sao.wa.gov Subscription Service www.sao.wa.gov/EN/News/Subscriptions
APPENDIX C
FORM OF OPINION OF BOND COUNSEL
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TEL: 206.447.4400 FAX: 206.447.9700 1111 THIRD AVENUE, SUITE 3400 SEATTLE, WASHINGTON 98101-3299 WWW.FOSTER.COM
SEATTLE WASHINGTON SPOKANE WASHINGTON
[FORM OF BOND COUNSEL OPINION]
Public Utility District No. 1 of
Kitsap County, Washington
Re: Public Utility District No. 1 of Kitsap County, Washington
Water System Revenue and Refunding Bonds, 2013 - $__________
We have served as bond counsel to Public Utility District No. 1 of Kitsap County,
Washington (the “District”), in connection with the issuance of the above referenced Water
System Revenue and Refunding Bonds, 2013 (the “Bonds”), and in that capacity have examined
such law and such certified proceedings and other documents as we have deemed necessary to
render this opinion. As to matters of fact material to this opinion, we have relied upon
representations contained in the certified proceedings and other certifications of public officials
furnished to us, without undertaking to verify the same by independent investigation.
The Bonds are issued by the District pursuant to Resolution No. 13-11-26B (the “Bond
Resolution”) to provide the funds to pay a part of the cost of improvements to District facilities,
to refund certain of the District’s outstanding water system bonds, to fund the Reserve Fund and
to pay the costs of issuance and sale of the Bonds, all as set forth in the Bond Resolution.
Reference is made to the Bonds and the Bond Resolution for the definitions of capitalized
terms used and not otherwise defined herein.
We have not been engaged to review and thus express no opinion concerning the
completeness or accuracy of any official statement, offering circular or other sales or disclosure
material relating to the issuance of the Bonds or otherwise used in connection with the Bonds.
Under the Internal Revenue Code of 1986, as amended (the “Code”), the District is
required to comply with certain requirements after the date of issuance of the Bonds in order to
maintain the exclusion of the interest on the Bonds from gross income for federal income tax
purposes, including, without limitation, requirements concerning the qualified use of Bond
proceeds and the facilities financed or refinanced with Bond proceeds, limitations on investing
gross proceeds of the Bonds in higher yielding investments in certain circumstances and the
arbitrage rebate requirement to the extent applicable to the Bonds. The District has covenanted
in the Bond Resolution to comply with those requirements, but if the District fails to comply
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Public Utility District No. 1 of Kitsap County
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51339432.1
with those requirements, interest on the Bonds could become taxable retroactive to the date of
issuance of the Bonds. We have not undertaken and do not undertake to monitor the District’s
compliance with such requirements.
Based upon the foregoing, as of the date of initial delivery of the Bonds to the purchaser
thereof and full payment therefor, it is our opinion that under existing law:
1. The District has the right and power under Title 54 of the Revised Code of
Washington (the “Act”) to adopt the Bond Resolution. The Bond Resolution has been duly and
lawfully adopted by the District, is in full force and effect, is valid and binding upon the District
and is enforceable in accordance with its terms.
2. The Bond Resolution creates the valid pledges under the Act which it purports to
create of (i) the proceeds of the sale of the Bonds to the extent held in the funds established by
the Bond Resolution, (ii) the Gross Revenue and LUD Assessments, subject to prior application
to pay Operation and Maintenance Expenses (as such terms are defined in the Bond Resolution),
and (iii) the money and investments, if any, credited to the Revenue Fund and the Bond Fund,
subject only to the terms and conditions set forth in the Bond Resolution.
3. The District is duly authorized and entitled to issue the Bonds, and the Bonds
have been duly and validly authorized and issued by the District in accordance with the laws of
the State of Washington, including the Act. The Bonds constitute the valid and binding
obligations of the District as provided in the Bond Resolution, are enforceable in accordance
with their terms and the terms of the Bond Resolution and are entitled to the benefits of the Act
and the Bond Resolution. The Bonds are special limited obligations of the District and neither
the State of Washington nor any political subdivision thereof, other than the District, is obligated
to pay the principal of and interest on the Bonds, except to the extent that the enforcement of the
rights and remedies of such owner of the Bonds may be limited by laws relating to bankruptcy,
insolvency, moratorium, reorganization or other similar laws of general application affecting the
rights of creditors, by the application of equitable principles and the exercise of judicial
discretion.
4. Assuming compliance by the District after the date of issuance of the Bonds with
applicable requirements of the Code, the interest on the Bonds is excluded from gross income for
federal income tax purposes and is not an item of tax preference for purposes of the alternative
minimum tax applicable to individuals; however, while interest on the Bonds also is not an item
of tax preference for purposes of the alternative minimum tax applicable to corporations, interest
on the Bonds received by corporations is to be taken into account in the computation of adjusted
current earnings for purposes of the alternative minimum tax applicable to corporations, interest
on the Bonds received by certain S corporations may be subject to tax, and interest on the Bonds
received by foreign corporations with United States branches may be subject to a foreign branch
profits tax. We express no opinion regarding any other federal tax consequences of receipt of
interest on the Bonds.
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51339432.1
This opinion is given as of the date hereof, and we assume no obligation to revise or
supplement this opinion to reflect any facts or circumstances that may hereafter come to our
attention, or any changes in law that may hereafter occur.
We bring to your attention the fact that the foregoing opinions are expressions of our
professional judgment on the matters expressly addressed and do not constitute guarantees of
result.
Respectfully submitted,
FOSTER PEPPER PLLC
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APPENDIX D
BOOK-ENTRY ONLY SYSTEM
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D-1
BOOK-ENTRY ONLY SYSTEM
The following information (except for the final paragraph) has been provided by The Depository Trust Company,
New York, New York (“DTC”), and the District makes no representation as to the accuracy or completeness thereof.
Each actual purchaser of a Bond (a “Beneficial Owner”) should confirm the following with DTC or the
Participants (as hereinafter defined).
DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered bonds registered in
the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized
representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds in the
principal amount of each such maturity and will be deposited with DTC.
DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York
Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code,
and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues,
corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s
participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct
Participants of sales and other securities transactions in deposited securities through electronic computerized book-
entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement
of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The
Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities
Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC
is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both
U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear
through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect
Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on
file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.
Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a
credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial
Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not
receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive
written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the
Direct or Indirect Participant through which the Beneficial Owners entered into the transaction. Transfers of
ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is
discontinued.
To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of
DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of
DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co., or such other DTC
nominee, do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners
of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are
credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS NOMINEE OF DTC,
REFERENCES HEREIN TO THE BONDOWNERS OR REGISTERED OWNERS OF THE BONDS SHALL
MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.
When notices are given, they shall be sent by the Bond Registrar to DTC only. Conveyance of notices and other
communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct
