NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The City of Houston, Texas ("City") was incorporated under the laws of the Republic of Texas in 1837 and again under the laws of the State of Texas in 1905. The City operates under a Home Rule Charter with a Mayor-Council form of government and provides the following services as authorized or required by its charter: public safety (police and fire), highways and streets, sanitation, water, airports, health services, culture-recreation, storm drainage, solid waste disposal, planning and inspection, civil defense, public improvements, and general administrative services, including pension and other benefits for its employees.

    The financial statements presented in this report conform to the reporting requirements of the Governmental Accounting Standards Board ("GASB") which establishes combined statements as the required reporting level for governmental entities that present financial statements in accordance with generally accepted accounting principles.

    The significant accounting policies of the City are as follows:

    A. Principles Used in Determining the Reporting Entity for Financial Reporting Purposes

    The accompanying financial statements include financial statements for related organizations in accordance with GASB Statement No.14, The Financial Reporting Entity. Organizations are included if they are financially accountable to the City, or the nature and significance of their relationship with the City are such that exclusion would cause the financial statements to be misleading or incomplete. Inclusion is determined on the basis of the City’s ability to exercise significant influence. Significant influence or accountability is based primarily on its operational or financial relationship with the City (as distinct from legal relationship).

     

    The City is financially accountable if it appoints a voting majority of an organization’s governing body and is able to impose its will on that organization, or there is a potential for the organization to provide specific financial benefits to or impose specific financial burdens on the City. Blended component units, although legally separate entities are, in substance, part of the City’s operations. Blended component units provide services exclusively or almost exclusively for the City. Discretely presented component units are reported in a separate column in the combined financial statements to emphasize their legal separateness from the City.

     

    B. Basis of Presentation - Financial Reporting Entity

    1. Component Units

    Most component units of the City issue separately audited financial statements. Component units are reported in the City’s Comprehensive Annual Financial Report ("CAFR") as shown in the following tables. Additional information is available from the addresses shown.

    Following are the City’s blended component units:

     

     

     

    Blended Component Units Reported with the Primary Government


    Brief Description of Activities, Relationship to the City and Key Inclusion Criteria

    Firemen’s Relief & Retirement Fund
    602 Sawyer, Suite 650
    Houston, TX 77007

    Responsible for administration, management, and operation of the pension system solely for Houston City firefighters. Three members of the Board are appointed by the Mayor or City Council, four are elected by employees, and one is the City Treasurer.

    Reporting Fund: Firemen’s Relief and Retirement Pension Trust Fund.

    Municipal Employee’s

    Pension System
    1111 Bagby, Suite 1430
    Box 11
    Houston, TX 77002

    Responsible for administration, management, and operation of the pension system solely for municipal (non-classified) employees of the City. Four members of the Board are appointed by the Mayor or City Council, six are elected by active employees or retirees, and one is the City Treasurer.

    Reporting Fund: Municipal Employee’s Pension Trust Fund.

    Police Officer’s Pension System
    602 Sawyer, Suite 640
    Houston, TX 77007

    Responsible for administration, management, and operation of the pension system solely for active and retired police officers of the City. One member of the Board is appointed by the administrative head of the City, one is the City Treasurer, three are elected by employees, and two are appointed by elected Board members.

    Reporting Fund: Police Officer’s Pension Trust Fund.

    Following are the City’s discretely presented component units:

    Discretely Reported Component Units

    Brief Description of Activities, Relationship to City, and Key Inclusion Criteria

    Cultural Arts Council of Houston ("CACH")
    1964 W. Gray, Suite 224
    Houston, TX 77019

    Non-profit organization that is the officially designated arts agency of the City. The City does not appoint a voting majority, but is financially accountable because CACH is fiscally dependent on the revenues provided from a portion of hotel occupancy tax, which is levied by the City.

    HALAN - Houston Area Library Automated Network Board
    Houston Central Library
    500 McKinney
    Houston, TX 77002

    Provides review and guidance to the operation, funding and development of the Houston Area Library Automated Network, which provides library services to Houston and surrounding communities. Three members are appointed by City Council, two by the County, and one elected by the smaller libraries. The City does not appoint a voting majority, but is financially accountable for this organization because HALAN is fiscally dependent for all revenues and the City can impose will.

    Houston Housing Finance Corporation ("HHFC")
    9545 Katy Freeway, Suite 125.
    Houston, TX 77024

    Non-profit corporation incorporated by the City in accordance with the Texas Housing Finance Corporation Act to finance residential mortgage loans to low or moderate income persons through the sale of revenue bonds collateralized by the mortgage loans. The Board is nominated by the Mayor and confirmed by City Council. The City has financial accountability because it appoints a voting majority of the Board and the City can impose will.

    Houston Library Board
    Houston Central Library
    500 McKinney
    Houston, TX 77002

    Solicits and manages funds raised privately for library improvements. Advises the Mayor and City Council on additions and improvements to the library system which provide a direct benefit to the City. Board members are nominated by the Mayor and confirmed by City Council.

    Houston Parks Board
    2999 South Wayside Drive
    Houston, TX 77023

    Solicits and manages funds raised privately for park acquisitions and advises the Mayor and City Council on park acquisitions and improvements, which provide a direct benefit to the City. Board members are nominated by the Mayor and confirmed by City Council.

    Lamar Terrace Public Improvement District
    City of Houston
    Box 1562
    Houston, TX 77251

    Special district organized under state statute to redevelop a blighted neighborhood in Southwest Houston. The City has financial accountability because the voting majority of the board members are nominated by City Council and the operations provide financial benefits to the City.

    Reinvestment Zone # 1
    City of Houston
    Box 1562
    Houston, TX 77251

    Special districts organized under state statute to redevelop blighted areas in Houston. The City has financial accountability because the voting majority of the board members are nominated by City Council and the operations provide financial benefits to the City.

     

     

     

    2. Related Organizations

    The following entities are related organizations to which the City appoints board members but for which the City has no significant financial accountability. Some of these organizations are Access Houston Cable Corporation, Coastal Water Authority, Employees Deferred Compensation Plan, Harris County Metropolitan Transportation Authority, Houston Clean City Commission, Miller Theater Advisory Council and the Small Business Development Corporation. All transactions with these related organizations are conducted in the ordinary course of business. Further financial information is available from the respective organizations.

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    C. Basis of Presentation - Fund and Account Group Categories

    The accounts of the City are organized on the basis of funds and account groups, each of which is accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund balance/retained earnings, revenues, and expenditures/expenses. Government resources are allocated to and accounted for in individual funds for the purpose of carrying on specific activities in accordance with special regulations, restrictions, or limitations. The various funds and account groups are reported by type in the financial statements as follows:

    1. Fund Accounting

    a. Governmental Fund Types

    (1) General Fund - is the principal operating fund of the City and is used to account for all financial resources except those required to be accounted for in another fund.

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

    (3) Debt Service Fund - is used to account for the accumulation of resources for, and the payment of principal, interest, and related costs of tax supported debt.

    (4) Capital Projects Fund - is used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds). Such resources are derived principally from proceeds of public improvement bonds and from special assessments.

    b. Proprietary Fund Types

    (1) Enterprise Funds - are used to account for operations that are financed and operated in a manner similar to private business enterprises and for which the intent of the City is that the costs (expenses, including depreciation) of providing the services to the general public on a continuing basis be financed or recovered primarily through user charges. The acquisition, maintenance, and improvement of the physical plant facilities required to provide these services are financed from existing cash resources, the issuance of revenue bonds, contributions, and federal grants.

    (2) Internal Service Funds - are used to account for the financing of goods or services provided by one department to other departments of the City on a cost-reimbursement basis.

    c. Fiduciary Fund Types

    Trust and Agency Funds are used to account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governmental units and other funds. These include the following:

    (1) Expendable Trust Funds - are accounted for in essentially the same manner as governmental funds.

    (2) Pension Trust Funds - are accounted for in essentially the same manner as proprietary funds.

    (3) Agency Funds - are custodial in nature and do not involve measurement of results of operations.

     

    2. Account Groups

    a. General Fixed Assets Account Group - This self-balancing group of accounts is established to account for all fixed assets of the City, except for those accounted for in the proprietary funds.

    b. General Long-Term Debt Account Group - This group of accounts is established to account for (1) the outstanding principal balance of public improvement bonds, assumed utility district bonds, general obligation bonds, certificates of obligation, and tax obligation contracts of the City; (2) liabilities associated with capital leases financed through governmental funds; and (3) accrued liabilities for compensated absences, claims, and judgments of governmental fund types which cannot be liquidated using currently available financial resources.

    D. Measurement Focus and Basis of Accounting

    All governmental funds and expendable trust funds are accounted for on a spending or "financial flow" measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. Their reported fund balances (net current assets) are considered a measure of "available spendable resources." Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets. Accordingly, they are said to present a summary of sources and uses of "available spendable resources" during a period.

    Non-current portions of certain long-term receivables, primarily property taxes and special assessments, are reported on the balance sheets of governmental funds in spite of their spending measurement focus. Special reporting treatments are used to indicate that they should not be considered "available spendable resources," since they do not represent net current assets. Recognition of governmental fund type revenues represented by noncurrent receivables is deferred until they become current receivables.

    Because of their spending measurement focus, expenditure recognition for governmental fund types is limited to exclude amounts represented by non-current liabilities. Since they do not affect net current assets, such long-term amounts are not recognized as governmental fund type expenditures or fund liabilities. They are instead reported as liabilities in the General Long-Term Debt Account Group.

    All proprietary funds and pension trust funds are accounted for on a cost of services or "economic resources" measurement focus. This means that all assets and all liabilities (whether current or noncurrent) associated with their activity are included on their balance sheets. Their reported fund equity (net total assets) is segregated into contributed capital and retained earnings components. In accordance with GASB Statement No. 20, the City has elected to follow all Financial Accounting Standards Board (FASB) pronouncements issued prior to November 30, 1989, including FASB 71, unless those pronouncements conflict with or contradict GASB pronouncements. The City has elected not to follow FASB pronouncements issued subsequent to that date.

    Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. All governmental funds, expendable trust funds and agency funds use the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recorded when susceptible to accrual; i.e., both measurable and available. Available means collectible within the current period or soon enough thereafter to pay current liabilities. Expenditures are generally recognized under the modified accrual basis of accounting in the accounting period in which the fund liability is incurred, if measurable. Claims, judgments and compensated absences are recognized to the extent that the liability will be liquidated within the next year. The following types of revenues are susceptible to accrual under the modified accrual basis of accounting: delinquent property taxes (including penalty and interest); services billed to other funds; sales tax; mixed drink tax; and investment earnings. Intergovernmental revenue from reimbursable grants and capital projects is recognized when the related expenditure is incurred.

    All proprietary and pension trust funds use the full accrual basis of accounting. Their revenues are recognized when they are earned, and their expenses and related liabilities, including claims, judgments, and compensated absences, are recognized when they are incurred.

    The two account groups are not "funds". They are concerned only with the measurement of financial position, not with the measurement of operation results.

     

    E. Budgetary Data

    1. General Budget Policies

    Annual budgets are adopted for the General Fund, the Debt Service Fund, the Special Revenue Funds (except for the Grants Revenue Fund, Health Special Fund and the Housing Special Fund) and the Proprietary Funds (except for the Sports Arena Fund). The budgets are adopted on a basis consistent with generally accepted accounting principles for all governmental funds. Budgets for proprietary funds are prepared on the accrual basis, but focus on expenses relating to maintenance and operations, and equipment purchases and, accordingly, exclude depreciation and other allocations related to income determination.

    The following provides a reconciliation of the City’s budgeting policy with respect to Special Revenue Funds for actual fiscal year 1998 results:

    Other

    Revenues

    Expenditures

    Source (Uses)

    Budgeted Special Revenue Funds

    $ 95,329

    $ 103,726

    $ 11,319

    Non-budgeted Grants Revenue Fund

    103,989

    102,957

    663

    Non-budgeted Health Special Fund

    987

    150

    -

    Non-budgeted Housing Special Fund

    3,154

    4,493

    (1,092)

    Total Special Revenue Funds - Actual

    $ 203,459

    $ 211,326

    $ 10,890

     

    During January of each year, the Mayor, with City Council input, establishes budget guidelines. All departments of the City submit requests for appropriations to the Mayor and the City’s Department of Finance and Administration so that a budget may be prepared. Generally, during June, the City Controller certifies that funds are available for appropriation and the budget is proposed to City Council. City Council holds public hearings and a final budget is adopted by June 30.

    The legal level of budgetary control is the departmental level within each fund, even though the budget is prepared by fund, department and expenditure category. The Mayor is authorized to transfer unlimited budgeted amounts within departments and amounts between departments, provided such transfers do not exceed 5% of an expenditure category. Expenditure categories are personnel services, other current expenditures and capital outlay. Appropriations related to funds with annual budgets lapse at year-end.

    During the year, City Council approved budget amendments increasing General fund expenditures $22 million and increasing Cable Television fund expenditures $2.5 million to fund additional operating costs. Budgeted Asset Forfeiture fund expenditures were decreased by $6.8 million due to fewer forfeited assets being seized.

    2. Encumbrances

    Encumbrance accounting is employed in the governmental, proprietary, and expendable trust funds. Under encumbrance accounting, purchase orders, contracts, and other commitments for the expenditure of funds are recorded in order to reserve a portion of the applicable appropriation. Outstanding encumbrances are deleted and the related appropriations lapse at year-end. Open encumbrances are then reestablished in the succeeding fiscal year against that fiscal year's appropriations. Encumbrances do not constitute expenditures or liabilities.

    F. Assets, Liabilities, and Fund Equity

    1. Deposits and Investments

    The City’s investment policy requires all deposits to be fully collateralized with depository insurance; obligations of the United States of America or its agencies and instrumentalities (excluding those mortgage backed securities prohibited by the Public Funds Investment Act); or in any other manner and amount provided by law for the deposits of the City. At all times, such securities are to have a market value of not less than 102% of the amount of the deposits collateralized thereby, adjusted by the amount of applicable depository insurance.

    Substantially all cash, except for imprest accounts, is deposited with financial institutions in interest bearing accounts or is invested. The majority of the City's cash and investments are administered using a pooled concept, which combines the monies of various funds for investment purposes. Interest earnings of the pool are apportioned to each fund, unless otherwise required by bond covenants, based on the fund’s relative share of the investment pool. Amounts on deposit in interest bearing accounts and other investments are displayed on the combined balance sheet as "Equity in pooled cash and investments" and are carried at market value. The blended and discretely presented component units separately invest their funds and report investments pursuant to their respective investment policies described in their separately audited financial statements at their fair market values. During 1998, the City implemented GASB Statement No. 31, which had no significant impact on the financial statements.

    Investments authorized by the City’s investment policy, which is guided by state laws and city ordinances generally include: obligations of the United States of America or its agencies and instrumentalities; fully-collateralized Certificates of Deposit from City Council-approved public depositories; direct obligations of the State of Texas or its agencies and instrumentalities; other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; obligations of states, agencies, counties, cities, and other political subdivisions; fully collateralized repurchase agreements; and reverse repurchase agreements within specific terms.

    2. Inventories of Materials and Supplies

    Inventories are valued at lower of average cost or market and are charged to expense as used.

    3. Property, Plant and Equipment

    a. General Fixed Assets Account Group

    Asset valuation is based on historical costs or estimated historical costs, if original costs are not available.

    General fixed assets are not capitalized in the funds used to acquire or construct them. Instead, capital acquisition and construction are reflected as expenditures in governmental funds, and the related assets are reported in the general fixed assets account group.

    Public domain ("infrastructure") general fixed assets consisting of roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems are not capitalized, as these assets are immovable and of value only to the city.

    Assets in the general fixed assets account group are not depreciated.

    The City adds construction costs incurred during the year to the value of construction work in progress until the assets are placed in service. Land and equipment costs are added to the fixed asset base in the year of acquisition. Construction period interest for the General Fixed Asset Account Group is not capitalized.

    b. Enterprise Funds

    Property, plant, and equipment owned by the Enterprise Funds are stated at cost or estimated historical cost if original cost is not available. Construction costs (excluding land and equipment) are added to construction work-in-progress until the assets are placed in service and are depreciated following completion. Depreciation on equipment begins in the year of acquisition. Land and equipment costs are added to the fixed asset base in the year of acquisition. Interest costs on funds borrowed to finance the construction of property, plant and equipment of the enterprise funds are capitalized when the costs materially exceed interest earnings on related revenue bond proceeds. For fiscal year 1998, no interest costs were capitalized because this difference was not material for any of the funds.

    Depreciation is computed using the straight-line method on the composite asset base over the estimated useful lives as follows:

    Assets

    Years

    Airport System Facilities

    4-45

    Convention & Entertainment Facilities

    4-45

    Water and Sewer System Facilities

    5-50

    Water rights and conveyance system rights of the Water and Sewer System Fund are amortized over the life of the related contracts. These rights are reported as other assets.

    Depreciation on property acquired through annexation capital grants in aid of construction on other contributed capital in the Airport System Fund and the Water and Sewer System Fund is included as an operating expense in the Statement of Revenues, Expenses, and Changes in Fund Equity, but is closed to contributed capital instead of retained earnings. The remaining portion of net income is closed to retained earnings.

    4. Bond Discounts and Issuance Costs

    Bond discounts and issuance costs in Enterprise Funds are amortized over the term of the bonds using the effective interest method. In addition, gains or losses on Enterprise Fund refundings are amortized over the term of the lesser of the new bonds or the refunded bonds using the effective interest method.

    5. Fund Equity

    a. Reserve - Indicates that portion of fund equity which has been legally segregated (e.g., by bond ordinance) for specific purposes.

    b. Designated Fund Balance - Indicates that portion of fund equity for which the City has made tentative plans.

    c. Undesignated Fund Balance - Indicates that portion of fund equity which is available for appropriation in future periods.

    G. Transfers, Revenues, Expenditures and Expenses

    1. Interfund Transactions

    A description of the four basic types of interfund transactions and the related accounting policies are as follows:

    a. Quasi-external transactions are those that would be treated as revenues, expenditures, or expenses if they involved organizations external to the City, and are accounted for as revenues, expenditures or expenses in the fund involved.

    b. Transactions to reimburse a fund for expenditures made by it for the benefit of another fund are recorded as expenditures or expenses in the reimbursing fund and as a reduction of expenditures or expenses in the fund that is reimbursed.

    c. Residual equity transfers are nonrecurring or nonroutine transfers of equity between funds and are reported as additions to or deductions from the beginning fund balance in governmental funds. Residual equity transfers to proprietary funds are reported as additions to contributed capital; those from proprietary funds are reported as reductions of retained earnings or contributed capital, as appropriate.

    d. All other interfund transfers, such as legally authorized transfers from a fund receiving revenue to the fund through which the resources are to be expended, are operating transfers. Operating transfers are classified as other financing sources or uses (or operating transfers for proprietary funds) in the Statement of Revenues, Expenditures (or expenses) and Changes in Fund Balances (or fund equity).

    2. Compensated Absences

    Full-time employees of the City are eligible for vacation leave of 10 working days per year. After 5 years of full-time employment with the City, they receive an extra day of vacation and continue to earn an extra day per year for each additional year of service up to a maximum of 12 extra days. Employees may accumulate up to 90 days of vacation leave. Upon termination or retirement, employees are paid for unused vacation leave, up to 90 days, in the amount determined by taking the average rate during the employee’s last sixty (60) days of employment. Part-time employees (those working less than 30 hours per week) are not eligible for vacation leave benefits.

    Generally all full-time employees are covered under the compensable sick leave plan and receive a bi-weekly leave time allowance of 2.5 hours per payroll period up to a maximum of 65 hours per year. Employees who use fewer than 65 hours during the benefit year will receive a match of additional hours equal to the number of hours accrued minus the number of hours used. Once an employee’s balance has reached 1,040 hours, no additional match for unused hours is given. Upon termination, all unused sick leave time allowances in excess of 1,040 hours are payable to the employee at the employee’s rate of pay at the time of termination. An employee who uses two days or less of sick leave in any benefit year receives up to three days of personal leave in the next year. Personal leave may be used in place of vacation leave, but will not accumulate and will not be paid out at termination.

    The City also has adopted policies of compensatory time to comply with the Fair Labor Standards Act as amended in 1985. These policies provide limits to the accumulation of compensatory time and also provide that time not used will be paid in cash. Only classified employees and civilian employees in certain pay grades routinely earn compensatory time.

    Vacation and compensatory time benefits are accrued as liabilities as the benefits are earned by employees to the extent that the City’s obligation is attributable to employees’ services already rendered, and it is probable that the City will compensate the employees for the benefits through paid time off or some other means, such as cash payments.

    Sick leave benefits are accrued as a liability as the benefits are earned by employees, but only to the extent that it is probable that the City will compensate the employees through cash payments conditioned on the employees’ termination or retirement. For governmental funds, the long-term portion of the liability for vacation, compensatory time and sick leave is reported in the General Long-Term Debt Account Group.

    H. Statement of Cash Flows ¾ Cash and Cash Equivalents

    The City considers cash and cash equivalents to be unrestricted equity in pooled cash and investments which consist of cash on hand, demand deposits and all highly liquid investments which can be deposited or withdrawn without notice or penalty. Generally, restricted assets have maturities greater than three months.

    I. Estimates

    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

    J. Reclassifications

    Certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year’s presentation. In addition, certain component unit’s financial statements have been reclassified in conformity with the rules of governmental accounting. These units normally follow other accounting conventions in their audited financial statements.

    K. "Memorandum Only" Total Columns

    Amounts presented as "Memorandum Only" totals are the aggregate of the fund types and account groups. No consolidating or eliminating entries were made in arriving at the totals, and they do not present consolidated information. Accordingly, all total columns in the combined statements are captioned "Memorandum Only" to indicate that they are presented only to facilitate financial analysis.

    L. Comparative Data

    Comparative total data for prior year have been presented in selected sections of the accompanying financial statements in order to provide an understanding of the changes in the City’s financial position and operations.

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