rochester public schools independent school district no. 535

ROCHESTER PUBLIC SCHOOLS INDEPENDENT SCHOOL DISTRICT NO. 535

FINANCIAL STATEMENTS

YEAR ENDED JUNE 30, 2014


TABLE OF CONTENTS YEAR ENDED JUNE 30, 2014

INTRODUCTORY SECTION

BOARD OF EDUCATION AND ADMINISTRATION 1

FINANCIAL SECTION

INDEPENDENT AUDITORS’ REPORT 2

REQUIRED SUPPLEMENTARY INFORMATION

MANAGEMENT’S DISCUSSION AND ANALYSIS 5

BASIC FINANCIAL STATEMENTS

STATEMENT OF NET POSITION 17

STATEMENT OF ACTIVITIES 18

BALANCE SHEET – GOVERNMENTAL FUNDS 20

RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION 22

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES – GOVERNMENTAL FUNDS 23

RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES 25

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES – BUDGET AND ACTUAL – GENERAL FUND 27

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES – BUDGET AND ACTUAL – FOOD SERVICE FUND 28

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES – BUDGET AND ACTUAL – COMMUNITY SERVICE FUND 29

STATEMENT OF NET POSITION – PROPRIETARY FUND 30

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION – PROPRIETARY FUND 31

STATEMENT CASH FLOWS – PROPRIETARY FUND 32

NOTES TO FINANCIAL STATEMENTS 33




SCHEDULE OF FUNDING PROGRESS FOR POSTEMPLOYMENT BENEFIT PLAN 60

SUPPLEMENTARY INFORMATION

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL – CAPITAL PROJECTS FUND 61

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL – DEBT SERVICE FUND 62

COMBINING BALANCE SHEET – CAPITAL PROJECTS FUND 63

COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL – CAPITAL PROJECTS FUND 64

COMBINING STATEMENT OF NET POSITION – PROPRIETARY FUNDS 66

COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION – PROPRIETARY FUNDS 67

COMBINING STATEMENT OF CASH FLOWS – PROPRIETARY FUNDS 68

SINGLE AUDIT AND OTHER REQUIRED REPORTS

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 69

NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 71

INDEPENDENT AUDITORS’ 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 72

INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 74

INDEPENDENT AUDITORS’ REPORT ON MINNESOTA LEGAL COMPLIANCE 76

SCHEDULE OF FINDINGS AND QUESTIONED COSTS 77

SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 80



UNIFORM FINANCIAL ACCOUNTING AND REPORTING STANDARDS COMPLIANCE TABLE 81

STUDENT ACTIVITY FUNDS

INDEPENDENT AUDITORS’ REPORT 82

STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS – STUDENT ACTIVITY ACCOUNTS 84

NOTE TO STUDENT ACTIVITY FUND FINANCIAL STATEMENTS 85

INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH THE MANUAL FOR ACTIVITY FUND ACCOUNTING 86

INTRODUCTORY SECTION


BOARD OF EDUCATION AND ADMINISTRATION YEAR ENDED JUNE 30, 2014

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BOARD OF EDUCATION Anne Becker Chair Deborah Seelinger Vice Chair Terry Throndson Clerk Richard Hinds Treasurer Dan O’Neil Director Garold Smith Director Julia Workman Director

* * * * * * * * * * * * * * * * * * * * ADMINISTRATION Mr. Michael Muñoz Superintendent

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FINANCIAL SECTION


(2) An independent member of Nexia International

INDEPENDENT AUDITORS’ REPORT Board of Education Independent School District No. 535 Rochester, Minnesota Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535, as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements as listed in the table of contents. 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. Auditors’ Responsibility

Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 auditors’ 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 opinions.

Board of Education Independent School District No. 535

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Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535 as of June 30, 2014, and the respective changes in financial position and, where applicable, cash flows, and budgetary comparison for General Fund, Food Service Fund, and Community Service Fund thereof, for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited Independent School District No. 535’s 2013 financial statements of the governmental activities, each major fund, and the aggregate remaining fund information, and we expressed unmodified audit opinions on those audited financial statements in our report dated October 28, 2013. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2013 is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and the schedule of funding progress for postemployment benefit plan, as listed in the table of contents, 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. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Independent School District No. 535’s basic financial statements. The supplementary information section and the Uniform Financial Accounting and Reporting Standards Compliance Table are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards, as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is also presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information section, the Uniform Financial Accounting and Reporting Standards Compliance Table, and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such 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.


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Other Information (Continued)

In our opinion, the supplementary information section, the Uniform Financial Accounting and Reporting Standards Compliance Table, and the schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 29, 2014, on our consideration of Independent School District No. 535’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result 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 Independent School District No. 535’s internal control over financial reporting and compliance.

CliftonLarsonAllen LLP Austin, Minnesota October 29, 2014





MANAGEMENT’S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014

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This section of Independent School District No. 535's annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, 2014. Please read it in conjunction with the District's financial statements, which immediately follows this section. FINANCIAL HIGHLIGHTS Key financial highlights for fiscal year 2013-2014 include the following: Total General Fund revenues were $168,227,860 and total General Fund expenditures were

$173,993,442 for the fiscal year ended June 30, 2014. Total revenues and expenditures for all governmental funds combined were $201,115,412 and $220,212,817 respectively.

The total fund balance in the General Fund decreased by $5,129,942 to $35,581,307. The Unassigned fund balance in the General Fund decreased by $6,208,169 to $23,363,880. Total General Fund revenues were 1.20% less than the final budget, and total General Fund expenditures were 3.92% less than the final budget. The District spent less than budgeted in several areas, with the largest savings in the area of contracted services followed by capital expenditures and supplies.

The total fund balance in the Food Services fund decreased by $495,090 to $3,480,212, with

revenue of $7,900,782 and expenditures of $8,402,198. The Food Service budget projected that expenditures would exceed revenue by approximately $1,218,229. The District spent less than the amount budgeted for food, and some replacement equipment purchased did not arrive until after June 30, 2014, and will therefore be part of the 2014-2015 expenditures..

Community Service programs offered by the District generated revenue of $9,868,546 and

expenditures of $9,535,890 for the fiscal year. The total fund balance in the Community Services fund is $1,240,396. The Community Service fund budget projected that revenue would exceed expenditures by approximately $100,053. Revenue was greater than budgeted by $243,022, primarily in the area of fees and tuition for programs and services offered. Expenditures for programs offered were $10,419 greater than budgeted.

The District spent $17,433,282 on facility construction and deferred maintenance projects during the fiscal year. Of that amount, $3,886,219 was spent to begin construction of building additions at six elementary schools to provide space necessary to implement all-day every-day kindergarten district wide beginning in 2014-2015 and $12,200,948 was spent on major maintenance projects as several district facilities. The major cost of those projects was primarily HVAC system replacement at three elementary schools.

The long-term liability for compensated absences amounts to $13,557,628 at June 30, 2014. This is an increase of $81,250. The long-term liability for other postemployment benefits is $4,941,809 at June 30, 2014. This is an increase of $944,303. The District has established a committed fund balance to begin to fund the postemployment obligation. The fund balance amount is equal to the liability.

The District has general obligation bonded debt principal outstanding in the amount of $84,475,000

and certificates of participation payable principal outstanding in the amount of $28,790,000 as of June 30, 2014. This is a combined decrease of $1,955,000 from the previous fiscal year end, due to the issuance of certificates of participation offsetting most of repayment of principal for the year.

Net position of governmental activities decreased by $1,924,501 or 1.52 percent to $124,530,163.

The total expense of governmental activities was $202,933,457. Program revenues totaled $70,746,537 and general revenues totaled $130,262,419.



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OVERVIEW OF THE FINANCIAL STATEMENTS

The financial section of the annual report consists of four parts - Independent Auditors’ Report, required supplementary information which includes the management's discussion and analysis (this section), the basic financial statements, and single audit and other required reports. The basic financial statements include two kinds of statements that present different views of the District:

The first two statements are district-wide financial statements that provide both short-term and long-term information about the District's overall financial status.

The remaining statements are fund financial statements that focus on individual parts of the District, reporting the District's operations in more detail than the district-wide statements.

The governmental funds statements tell how basic services such as regular and special education were financed in the short term as well as what remains for future spending.

The proprietary funds statements offer short-term and long-term financial information about the activities the School District operates in a manner similar to businesses.

DISTRICT-WIDE STATEMENTS

The District-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The statement of net position includes all of the District's assets, deferred outflows of resources, liabilities, and deferred inflows of resources. All of the current year's revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two district-wide statements report the District's net position and how they have changed. Net position, the difference between the District's assets and deferred outflows of resources and liabilities and deferred inflows of resources, is one way to measure the District's financial health or position.

Over time, increases or decreases in the District's net position are an indicator of whether its financial position is improving or deteriorating, respectively.

To assess the overall health of the District, you need to consider additional non-financial factors such as changes in the District's property tax base and the condition of school buildings and other facilities.

In the district-wide financial statements the District's activities are shown as Governmental activities:

Governmental activities - Most of the District's basic services are included here, such as regular and special education, transportation, administration, food services and community education. Property taxes and state aids finance most of these activities.

FUND FINANCIAL STATEMENTS

The fund financial statements provide more detailed information about the District's funds - focusing on its most significant or "major" funds - not the District as a whole. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs:

Some funds are required by State law and by bond covenants.

The District establishes other funds to control and manage money for particular purposes.



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FUND FINANCIAL STATEMENTS (CONTINUED)

The District has two kinds of funds:

Governmental funds - Most of the District's basic services are included in governmental funds, which generally focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps to determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. Because this information does not encompass the additional long-term focus of the district-wide statements, we provide additional information at the bottom of the governmental funds statements that explain the relationship (or differences) between them.

Proprietary funds – Services for which the District charges a fee are generally reported in proprietary funds. Proprietary funds are reported in the same way as the district-wide statements. The District’s sole Proprietary fund is an internal service fund. o The District uses internal service funds to report activities that provide supplies and services for

the District’s other programs and activities. The District currently uses internal service funds for the Health and Dental Care self-insurance program and the Workers’ Compensation self-insurance program.

FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE

Net position. The District's combined net position from Governmental activities was $124,530,163 on June 30, 2014. (See Table A-1) This represents a decrease of 1.5% in net position. Total assets increased by approximately $9.2 million or 2.9%. Current and other assets increased by approximately $1.0 million or 0.7%. Capital and non-current assets increased by $8.2 million or 4.5% due to the completion and capitalization of facility major maintenance and renovation projects. Total liabilities decreased by approximately $0.3 million or 0.2% with current liabilities increasing by $17.4 million and long-term liabilities decreasing by $17.7 million primarily due to refunding and planned retirement of bonds issued in 2004, on February 1, 2015.

Percentage2014 2013 Change

Current and Other Assets 141,421,410$ 140,415,179$ 0.7%Capital and Non-Current Assets 188,782,971 180,587,554 4.5%

Total Assets 330,204,381 321,002,733 2.9%

Deferred Outflows of Resources 1,214,574 1,326,871 -8.5%

Current Liabilities 59,725,896 42,319,474 41.1%Long Term Liabilities 112,209,716 129,899,824 -13.6%

Total Liabilities 171,935,612 172,219,298 -0.2%

Deferred Inflows of Resources 34,953,180 23,655,642 47.8%

Net PositionNet Investment in Capital Assets 91,608,827 88,269,979 3.8%Restricted 16,316,996 14,485,446 12.6%Unrestricted 16,604,340 23,699,239 -29.9%

Total Net Position 124,530,163$ 126,454,664$ -1.5%

Governmental Activities

Table A-1The District's Net Position



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FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED)

Changes in net position. The District's total revenues were $201,008,956 for the year ended June 30, 2014. Property taxes and state formula aid accounted for 64.6% of total revenue for the year (See Figure A-1). Another 35.2% came from program revenues. Less than 0.2% comes from investment earnings and other general revenues. The total cost of all programs and services was $202,933,457. The District's expenses are predominantly related to educating and caring for students, approximately 76% (See Figure A-2). The purely administrative activities of the District accounted for just 4% of total costs. Total expenses surpassed revenues, decreasing net position by $1,924,501 from the previous year.

Total %2014 2013 Change

RevenuesProgram Revenues Charges for Services 10,660,264$ 9,941,886$ 7.23% Operating Grants and Contributions 58,524,281 54,545,447 7.29% Capital Grants and Contributions 1,561,992 1,434,165 8.91%General Revenues Property Taxes 26,081,180 37,291,876 -30.06% Unrestricted State Aid 103,870,561 92,259,769 12.58% Investment Earnings 230,380 109,538 110.32% Other 80,298 9,727 725.52%

Total Revenues 201,008,956 195,592,408

ExpensesAdministration 7,889,479 8,561,090 -7.84%District Support Services 4,492,281 5,624,783 -20.13%Regular Instruction 88,780,739 85,787,088 3.49%Vocational Education Instruction 2,203,224 2,187,284 0.73%Special Education Instruction 31,349,878 27,941,248 12.20%Instructional Support Services 10,954,224 8,481,579 29.15%Pupil Support Services 16,758,849 15,385,808 8.92%Sites and Buildings 17,264,367 18,929,127 -8.79%Fiscal and Other Fixed Cost Programs 382,620 397,020 -3.63%Food Service 7,744,624 6,936,079 11.66%Community Service 10,044,575 9,941,512 1.04%Interest and Fiscal Charges on Long-Term Liabilities 5,068,597 3,398,225 49.15% Total Expenses 202,933,457 193,570,843 4.84%

Increase (Decrease) in Net Position (1,924,501) 2,021,565

Beginning Net Position 126,454,664 124,433,099 Ending Net Position 124,530,163$ 126,454,664$

Governmental Activities for the fiscal year ended June 30,

Table A-2Change in Net Position



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Figure A-1 Rochester Public Schools

Revenues by Category

Charges for Services5%

Operating and Capital Grants30%

Property Taxes13%

Unrestricted State Aid52%

All other0%

Figure A-1 Sources of District's Revenues for Fiscal 2014

Figure A-2 Rochester Public Schools

Expenses by Category

Administration4%

Instruction-Related60%

Student Support Services

16%

Food & Comm Serv9%

Maintenance8%

Other3%

Figure A-2 District Expenses for Fiscal 2014



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The cost of all governmental activities was $202,933,457 which is an increase of $9,362,614 or 4.8% over the previous year. Some of the cost was paid by the users of the District's programs ($10,660,264). The federal and state governments subsidized certain programs with grants and contributions

($60,086,273). Most of the District's costs ($132,186,920), however, were paid for by District taxpayers and the

taxpayers of the State of Minnesota. The net expense of governmental activities in excess of program revenue was paid for with

$26,081,180 in property taxes, $103,870,561 of state aid based on the statewide education aid formula, and $310,678 in investment earnings and other general revenues.

Percentage Percentage

2014 2013 Change 2014 2013 Change

Administration 7,889,479$ 8,561,090$ -7.8% 7,809,297$ 8,452,058$ -7.6%District Support Services 4,492,281 5,624,783 -20.1% 4,298,284 5,106,816 -15.8%Regular Instruction 88,780,739 85,787,088 3.5% 64,101,668 61,806,237 3.7%Vocational Education Instruction 2,203,224 2,187,284 0.7% 1,986,821 1,995,026 -0.4%Special Education Instruction 31,349,878 27,941,248 12.2% 7,583,596 5,656,415 34.1%Instructional Support Services 10,954,224 8,481,579 29.2% 7,862,120 7,760,593 1.3%Pupil Support Services 16,758,849 15,385,808 8.9% 15,586,534 14,337,615 8.7%Sites and Buildings 17,264,367 18,929,127 -8.8% 15,630,840 17,395,624 -10.1%Fiscal and Other Fixed Cost Programs 382,620 397,020 -3.6% 382,620 397,020 -3.6%Food Service 7,744,624 6,936,079 11.7% (145,535) (793,207) -81.7%Community Service 10,044,575 9,941,512 1.0% 2,022,078 2,192,706 -7.8%Interest and Fiscal Charges on

Long-Term Liabilities 5,068,597 3,398,225 49.2% 5,068,597 3,342,442 51.6%

Total 202,933,457$ 193,570,843$ 4.8% 132,186,920$ 127,649,345$ 3.6%

Total Cost of Services Net Cost of Services

Table A-3Change in Net Position

FINANCIAL ANALYSIS OF THE DISTRICT'S FUNDS The financial performance of the District as a whole is reflected in its governmental funds as well. As the District completed the year its governmental funds reported a combined fund balance of $66,249,528, which is a decrease of $11,585,020 from the prior year ending fund balance. Revenues for the District's governmental funds were $201,115,412, total expenditures were $220,212,817, and other sources and uses provided $7,512,385. The District issued Certificates of Participation, Series 2014A to finance the construction of additional kindergarten classroom space and remodeling of the alternative learning center. The District used proceeds of the newly issued debt in addition to previously issued debt to fund projects at ten school facilities. The Capital Projects fund balance decrease totaled $5,901,068. The fund balance of the General fund decreased by $5,129,942, which was also a planned and approved utilization of fund balance by the School Board. The operations of the other governmental funds: Food Service, Community Service, and Debt Service resulted in a decrease in fund balance of $554,010.



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GENERAL FUND

The General Fund includes the primary operations of the District in providing educational services to students from early childhood through grade 12 including pupil transportation activities and operating capital expenditures. The following table shows that the number of students has increased slightly over the last four years, increasing by 476 students since 2010. Membership decreased slightly in 2012, 3 students less than in 2011, but increased by 224 students or 1.4% in 2013, and 215 students or 1.3% in 2014.

Table A-4 Five-Year Enrollment Trend

Average Daily Membership (ADM)

Grade 2010 2011 2012 2013 2014ECSE 126 147 172 183 182 Kdgt. 1,273 1,263 1,218 1,294 1,366 1-3 3,774 3,867 3,944 3,888 3,972 4-6 3,497 3,486 3,540 3,663 3,746 7-12 7,241 7,188 7,074 7,144 7,121

Total K-12 ADM 15,911 15,951 15,948 16,172 16,387 ADM Change N/A 40 (3) 224 215 Percent Change N/A 0.3% 0.0% 1.4% 1.3%

District enrollment peaked in 2003 at 16,222 students in average daily membership, declined to 15,689 in 2006, and has been generally increasing since then to 16,387 in 2014. The enrollment growth is occurring at the elementary grade levels, with enrollment holding fairly steady at the secondary grade levels. District projections indicate that enrollments will be steady with slight growth for the next five years. The District did realize higher than projected enrollment for 2013-2014. The previous decline in enrollment was largely due to new charter schools opening within the District boundaries. The overall population of the School District continues to increase. The following schedule presents a summary of General Fund Revenues.

Table A-5 General Fund Revenues

June 30, June 30, Increase2014 2013 (Decrease) Percent

Local SourcesProperty Taxes 11,020,964$ 19,247,115$ (8,226,151)$ -42.7%Earnings on Investments 81,317 21,066 60,251 286.0%Other 5,676,350 5,431,644 244,706 4.5%

State Sources 144,472,743 129,577,320 14,895,423 11.5%Federal Sources 6,976,486 7,138,858 (162,372) -2.3%

Total General Fund Revenue 168,227,860$ 161,416,003$ 6,811,857$ 4.2%

Fund

ChangeYear Ended

Total General Fund revenue of $168,227,860 increased by $6,811,857 or 4.2% compared to the previous year. Basic general education revenue is determined by the state per student funding formula and consists of state aid revenue. Other state-authorized revenue including excess levy referendum and operating capital involve an equalized mix of property tax and state aid revenue. The mix of property tax and state aid can change significantly from year to year without any net change of revenue.



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GENERAL FUND (CONTINUED)

State sources increased by $14,895,423 or 11.5% due to legislative increases in per pupil funding formulas and state repayment of a shift in recognition of property tax and state aid which initially impacted the fiscal year ended June 30, 2012. Local sources decreased by $7,921,194 primarily as a result of the offsetting recognition of the shift with state aid. Federal sources decreased by $162,372 or 2.3%. The following schedule presents a summary of General Fund expenditures.

Table A-6 General Fund Expenditures

Amount of PercentJune 30, June 30, Increase Increase

2014 2013 (Decrease) (Decrease)Salaries 101,652,339$ 95,433,361$ 6,218,978$ 6.5%Employee Benefits 37,551,921 34,024,593 3,527,328 10.4%Purchased Services 20,268,903 20,045,453 223,450 1.1%Supplies and Materials 7,102,415 6,219,583 882,832 14.2%Capital Expenditures 4,569,970 8,480,313 (3,910,343) -46.1%Debt Service Expenditures 2,607,913 1,834,097 773,816 42.2%Other Expenditures 239,981 920,179 (680,198) -73.9% Total Expenditures 173,993,442$ 166,957,579$ 7,035,863$ 4.2%

Year Ended

The total General Fund expenditure of $173,993,442 was an increase of $7,035,863 or 4.2% over the prior year. Salaries and benefits increased by $9,746,306 combined. Salaries increased 6.5% and employee benefits increased by 10.4%. The District continues to look at cost containment measures to minimize the effect of rising health insurance premiums on the costs of the district’s employee compensation packages. Bargaining unit contracts now contain language that caps the District contribution toward health insurance premiums. Capital expenditure costs decreased by $3,910,343 or 46.1%, from the prior year. The capital expenditures for fiscal year ended June 30, 2013 were higher than normal primarily due to the purchase of student-use technology and the acquisition of a facility for maintenance and other operations. The remaining categories of purchased services, supplies and materials, debt service, and other expenditures net to an overall cost increase of $1,199,900 or 4.1% from 2013 to 2014. In 2013-2014, General Fund expenditures exceeded revenue by $5,765,582 which was $5,066,688 better than budget. Revenue received was $2,036,717 less than budgeted and expenditures were $7,103,405 less than budgeted. State special education revenue was the largest line-item lower than budget by $1,410,076. The unassigned fund balance decreased from $29,572,049 at June 30, 2013 to $23,363,880 at June 30, 2014, a decrease of $6,208,169. This was a planned utilization of fund balance to maintain opportunities for students. Expenditures were less than budgeted in several areas, including salaries, contracted services, supplies, and capital expenditures. Additional discussion of budget variances is provided in the next section – General Fund Budgetary Highlights.



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GENERAL FUND (CONTINUED)

General Fund Budgetary Highlights

Over the course of the year, the District revised the annual operating budget. The budget amendments fall into two categories:

Implementing budgets for specially funded projects, which include both federal and state grants, reinstating prior year designated carryover reserves, and changes in enrollment estimates.

Increases in appropriations for significant unbudgeted costs or revenues.

The District's final budget for the general fund anticipated a net reduction in fund balance of $10,241,788 while the actual results for the year show a reduction of $5,129,942.

In our analysis of significant variances between original and final budget amounts and between final budget amounts and actual results in the General Fund, there are no variances in revenues that will have a significant effect on future services or liquidity. The main reasons for the difference between the original budget and the final budget are for additional grants awarded to the District after the original budget was adopted and revised enrollment estimates. The District historically has used the October 1 student enrollment as the basis for the final budget. The largest variance between the final budget and actual revenue is in State Sources where revenue was less than the budget amount by $1,442,999. The District earned less revenue from the Special Education funding formulas than was budgeted.

On the expenditure side of the budget, the major reasons for the variance between original and final budget amounts (approximately $8.1 million) were the addition of funding for capital projects (approximately $3.1 million); certain restricted, committed or assigned fund balances from the previous fiscal year (approximately $4.4 million); and additional grants awarded to the District after the original budget was approved.

Taking a look at the $7.1 million difference between the final expenditure budget and actual expenditures, the unspent supply budgets were approximately $1.8 million. Of this amount, approximately $1.4 million was set aside in a committed fund balance to be carried over and added to the site supply budgets in the following year. Several contracted services budgets were not fully utilized (approximately $2.7 million) because the services were not utilized this year. Of the $2.7 million, approximately $515,000 was in the area of Staff development and will get carried over and added to the budget in 2014-2015, approximately $328,000 was for student transportation, approximately $360,000 was for utilities, and $331,000 was for special education services. The remaining savings was in a variety of budgets for consulting and contracted services. Finally, there were unspent capital expenditure allocations of approximately $2.2 million. These budgets were allocated for specific projects and the unspent dollars were set aside in restricted and committed fund balances and will be included in the 2014-2015 budget for completion of these projects. Some of these variances will have a positive effect on future budgets by allowing for ongoing budget reductions in certain areas.

FOOD SERVICE FUND The Food Service Fund accounts for the activities related to providing nutrition services to the K-12 academic program. The fund operates on the principle of revenues exceeding expenditures on day-to-day operations so that the excess can be used to systematically replace and upgrade kitchen equipment around the district. By operating in this manner, the Student Nutrition Services program is self-contained and does not pull resources away from direct K-12 instruction. The District served 1,563,207 lunches and 476,224 breakfasts to students and staff, in addition to a la carte sales during the 2013-2014 school year.



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FOOD SERVICE FUND (CONTINUED)

The fund balance decreased by $495,090 in 2013-2014. This is $723,139 better than budget. Food Service Fund revenue for 2013-2014 totaled $7,900,782 which is an increase of $167,324 or 2.2% from 2012-2013. Food Service Fund Expenditures for 2013-2014 totaled $8,402,198, an increase of $1,081,121 or 14.8% from 2012-2013. Salaries and benefits increased by $153,008; the cost of supplies, food and milk increased by $196,181; and expenditures for equipment increased by $708,109 in 2013-2014. Food and milk costs were impacted by the continued implementation of the requirements of the Healthy Hunger Free Kids Act. The increase in equipment expenditures was due to planned replacement of aging equipment and equipment needs for a new alternative learning center facility. COMMUNITY SERVICE FUND

The Community Service Fund accounts for the activities related to providing education services for Pre-Kindergarten and Post-Grade 12 students. The fund operates on a principle of breaking even on a year-to-year basis so that it does not pull resources away from K-12 instruction. The fund balance increased by $332,656 in 2013-2014. Community Service Fund Revenues for 2013-2014 totaled $9,868,546. This was an increase of $376,234 or 4.0% from 2012-2013. Community Service Fund Expenditures for 2013-2014 totaled $9,535,890. This was an increase of $53,798 or 0.6% from 2012-2013. The entire fund balance is restricted to be used for specific purposes based on state requirements. The minimal change fund balance from the previous year reflects the stability of the programs provided in this fund. CAPITAL PROJECTS FUND

The Capital Projects Fund accounts for the costs of school construction, addition and renovation projects. Bond proceeds are deposited in the Capital Projects Fund and are then drawn down as the payments are made for work completed on the various building projects. The proceeds of bonds can only be used for the purpose for which the bonds were issued. In 2013-2014 the District received property tax revenue in the amount of $4,060,014, state aid in the amount of $574,805, and had interest earnings on investments and other sources of $33,026 to fund deferred maintenance projects. In addition, the District had other financing sources from the issuance of certificates of participation, bond premiums, and utility rebates totaling 6,864,369 to fund the construction of building additions and capital improvements. The District expended $17,433,282 on deferred maintenance projects and building additions at several sites as planned. The fund balance decreased by $5,901,068 in 2013-2014 to $8,443,903 at June 30, 2014. Several projects are in process at the end of the fiscal year. At such time that the district has completed all construction projects in process, the fund balance of this fund should end up at $0 as long as no further construction or facility renovation is approved. DEBT SERVICE FUND

The Debt Service Fund exists to service the principal and interest payments on long-term debt issued by the district to construct school facilities or acquire school equipment. Annual levies will provide revenue at a rate of 105% of pending debt service payments for a fiscal year. This rate is specified in statute to ensure that principal and interest payments can be made as scheduled even if there are late property tax payments or delinquencies that may arise.



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DEBT SERVICE FUND (CONTINUED) Debt service revenue was $10,450,379 for 2013-2014, 99.2% of which came from property tax revenue. Debt service expenditures were $10,848,005. The District made principal payments in the amount of $7,140,000 and interest payments of $3,694,681. The Debt Service Fund has a fund balance of $17,503,710 as of June 30, 2014, which is restricted to be used for future debt payments. Of this amount, $15,528,547 is held in an escrow account, to be used on February 1, 2015, to retire in advance of maturity the 2016 through 2029 maturities of the Series 2004A G.O. Bonds. The Minnesota Department of Education monitors fund balances in the Debt Service Fund and limits the amount of funds that can be carried forward. If the fund balance gets too high, future levy authority will be reduced in order to reduce the debt service fund balance to a reasonable level. Fund balance and collection of tax levies will provide adequate cash flow for timely payment of principal and interest. The District currently has an underlying bond rating of Aa1 from Moody’s and AA+ from Standard & Poor’s. INTERNAL SERVICE FUND This fund accounts for the District’s self-funded employee’s health and dental benefits and the workers’ compensation program. The costs of these programs are charged back to the other funds of the District based on established premium rates. The programs have total net position of $8,082,392 as of June 30, 2014 as compared to $6,859,757 on June 30, 2013. This is an increase of $1,222,635 or 17.8%. Operating revenues exceeded operating expenses by $1,690,553. There was a $500,000 transfer of funds out to the General Fund of excess funds accumulated for workers’ compensation self-insurance. Including this transfer the net position of the workers’ compensation program decreased by $514,438. The operating income of the health and dental care trust was $1,711,834. This is primarily due to the level of health insurance claims for the fiscal year. Claims expense decreased by $196,455 from the prior year to $21,839,501. Net position related to the health and dental care trust in the amount of $6,531,257 can only be used to provide benefits and are not available to the District for other purposes. The Insurance Trust Committee, comprised of community experts and District employees, monitors the funding requirements on an ongoing basis. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets: By the end of 2014, the District had invested $188,782,971 in a broad range of capital assets including: school buildings, land, computer and audio-visual equipment, and other equipment for various instructional programs (see Table A-7). Accumulated depreciation as of June 30, 2014 was $142,516,237, with current year depreciation expense for Governmental Activities totaling $9,576,315. More detailed information about capital assets can be found in Note 4 to the financial statements.


Land 9,145,689$ 7,849,539$ 16.5%Construction in Progress 13,620,274 18,603,587 -26.8%Land Improvements 8,232,307 8,232,307 0.0%Buildings and Improvements 285,678,382 265,873,855 7.4%Equipment 14,622,556 13,357,736 9.5%

Less: Accumulated Depreciation (142,516,237) (133,329,470) 6.9%

Total 188,782,971$ 180,587,554$ 4.5%

Table A-7The District's Capital Assets



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CAPITAL ASSETS AND DEBT ADMINISTRATION (CONTINUED)

Long-Term Liabilities: For the fiscal year ended June 30, 2014, the District had $138,223,032 in long-term liabilities outstanding, including $84,475,000 in General Obligation Bonds, $28,790,000 in Certificates of Participation, and $13,557,628 for compensated absences. This is a decrease in total long-term liabilities of $1,639,708 or 1.2% from last year (see Table A-8). In addition to the normal principal payments reducing the outstanding amount of general obligation bonds, the District issued $6,560,000 in Certificates of Participation, Series 2014A to finance building additions at Folwell, Franklin, Gibbs, Lincoln K-8, Pinewood, and Washington schools and interior build-out at Rochester Alternative Learning Center during 2013-2014, and 2014-2015. More detailed information about the District’s long-term liabilities is presented in Note 5 of the financial statements.


General Obligation Bonds 84,475,000$ 90,380,000$ -6.5%Bond Premium 4,361,392 4,556,972 -4.3%Certificates of Participation Payable 28,790,000 24,840,000 15.9%Lease Purchase Agreement Payable 2,097,203 2,600,000 -19.3%Capital Leases Payable - 11,884 -100.0%Other Postemployment Benefits Payable 4,941,809 3,997,506 23.6%Compensated Absences Payable 13,557,628 13,476,378 0.6%

Total 138,223,032$ 139,862,740$ -1.2%

Long-Term Liabilities: Due Within One Year 26,013,316$ 9,962,916$ Due in More Than One Year 112,209,716 129,899,824

138,223,032$ 139,862,740$

Table A-8The District's Long-Term Liabilities

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, customers and investors and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Business Office, Independent School District No. 535, 615 7th Street SW, Rochester, Minnesota 55902.

BASIC FINANCIAL STATEMENTS



STATEMENT OF NET POSITION JUNE 30, 2014

(WITH SUMMARIZED FINANCIAL INFORMATION AS OF JUNE 30, 2013)

See accompanying Notes to Financial Statements. (17)

Governmental Activities2014 2013

ASSETSCash and Investments 79,075,759$ 72,440,765$ Cash and Investments Held by Trustee 22,145,973 21,753,482 Receivables

Property Taxes 18,507,744 19,175,579 Other Governments 20,561,163 24,915,286 Other 786,556 749,914

Prepaid Items 262,444 261,999 Inventories 81,771 106,364 Bond Issuance Costs, Net - 1,011,790 Capital Assets

Land and Construction in Progress 22,765,963 26,453,126 Other Capital Assets, Net of Depreciation 166,017,008 154,134,428

Total Assets 330,204,381 321,002,733

DEFERRED OUTFLOWS OF RESOURCESLoss on Bond Refunding 1,214,574 1,326,871

Total Deferred Outflows of Resources 1,214,574 1,326,871

LIABILITIESSalaries Payable 17,255,946 16,292,057 Accounts and Contracts Payable 11,165,012 10,138,952 Accrued Interest 1,765,870 1,817,738 Due to Other Governmental Units 94,787 74,314 Claims Payable 2,465,945 2,887,493 Unearned Revenue 965,020 1,146,004 Long-Term Liabilities

Portion Due Within One Year 26,013,316 9,962,916 Portion Due in More Than One Year 112,209,716 129,899,824

Total Liabilities 171,935,612 172,219,298

DEFERRED INFLOWS OF RESOURCESProperty Taxes 34,953,180 23,655,642

Total Deferred Inflows of Resources 34,953,180 23,655,642

NET POSITIONNet Investment in Capital Assets 91,608,827 88,269,979 Restricted for:

Operating Capital Purposes 660,274 672,695 State-Mandated Restrictions 779,326 917,764 Food Service 3,480,212 3,975,302 Community Service 1,249,705 931,558 Debt Service 601,739 625,379 Capital Projects - Facilities 2,995,149 2,563,910 Capital Projects - Building Construction 19,334 4,654 Health and Dental Insurance Trust 6,531,257 4,794,184

Unrestricted 16,604,340 23,699,239

Total Net Position 124,530,163$ 126,454,664$


STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2014

(WITH SUMMARIZED FINANCIAL INFORMATION FOR THE YEAR ENDED JUNE 30, 2013)


ProgramOperating

Charges for Grants andFunctions Expenses Services Contributions

Governmental ActivitiesAdministration 7,889,479$ -$ 80,182$ District Support Services 4,492,281 6,773 73,950 Regular Instruction 88,780,739 961,395 23,334,325 Vocational Education Instruction 2,203,224 - 215,002 Special Education Instruction 31,349,878 1,929,349 21,836,609 Instructional Support Services 10,954,224 11,050 2,315,880 Pupil Support Services 16,758,849 216,889 952,174 Sites and Buildings 17,264,367 110,692 1,227,619 Fiscal and Other Fixed Cost Programs 382,620 - - Food Service 7,744,624 3,460,907 4,429,252 Community Service 10,044,575 3,963,209 4,059,288 Interest and Fiscal Charges on

Long-Term Liabilities 5,068,597 - - Total School District 202,933,457$ 10,660,264$ 58,524,281$

General RevenuesProperty Taxes Levied for:

General PurposesCommunity ServiceDebt ServiceCapital Projects

State Aid Not Restricted to Specific PurposesEarnings on InvestmentsGain on Sale of Fixed AssetsMiscellaneous

Total General RevenuesChange in Net Position

Net Position - Beginning

Net Position - Ending

2014

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2013Net (Expense) Net (Expense)Revenue and Revenue andChanges in Changes in

Revenues Net Position Net PositionCapital Total Total

Grants and Governmental GovernmentalContributions Activities Activities

-$ (7,809,297)$ (8,452,058)$ 113,274 (4,298,284) (5,106,816) 383,351 (64,101,668) (61,806,237)

1,401 (1,986,821) (1,995,026) 324 (7,583,596) (5,656,415)

765,174 (7,862,120) (7,760,593) 3,252 (15,586,534) (14,337,615)

295,216 (15,630,840) (17,395,624) - (382,620) (397,020) - 145,535 793,207 - (2,022,078) (2,192,706)

- (5,068,597) (3,342,442) 1,561,992$ (132,186,920) (127,649,345)

10,789,046 19,192,077 942,569 1,787,759

10,289,551 9,613,154 4,060,014 6,698,886

103,870,561 92,259,769 230,380 109,538

9,098 - 71,200 9,727

130,262,419 129,670,910 (1,924,501) 2,021,565

126,454,664 124,433,099

124,530,163$ 126,454,664$

2014


BALANCE SHEET GOVERNMENTAL FUNDS

JUNE 30, 2014 (WITH SUMMARIZED FINANCIAL INFORMATION AS OF JUNE 30, 2013)


Major

Food Community

General Service Service

ASSETSCash and Investments 41,330,684$ 3,966,987$ 2,361,596$

Cash and Investments Held by Trustee 457,661 - -

Receivables

Current Property Taxes 9,838,280 - 897,297

Delinquent Property Taxes 141,376 - 10,316

Due from Other Minnesota School Districts 36,726 - -

Due from Minnesota Department of Education 15,673,025 7,403 318,162

Due from Federal through Minnesota Department of Education 2,585,668 122,205 163,293

Due from Other Governmental Units 1,596,073 - -

Other Receivables 492,741 3,267 260,409

Prepaid Items 250,825 3,500 2,620

Inventory - 81,771 - Total Assets 72,403,059$ 4,185,133$ 4,013,693$

LIABILITIES, DEFERRED INFLOWS OF RESOURCES,

AND FUND BALANCELiabilities

Salaries Payable 16,143,624$ 437,232$ 639,816$

Accounts and Contracts Payable 1,931,843 65,732 118,459

Due to Other Governmental Units 94,787 - -

Claims Payable 166,634 - -

Unearned Revenue 578,537 201,957 184,526

Total Liabilities 18,915,425 704,921 942,801

Deferred Inflows of Resources

Property Taxes Levied for Subsequent Year 17,778,745 - 1,821,187

Unavailable Revenue - Delinquent Property Taxes 127,582 - 9,309

Total Deferred Inflows of Resources 17,906,327 - 1,830,496

Fund Balance

Nonspendable

Prepaid Items 250,825 3,500 2,620

Inventory - 81,771 -

Restricted

Staff Development 588,464 - -

Health and Safety 65,810 - -

Alternative Facilities - - - Project Funded by Certificates of Participation/Lease Purchase Agreement 419,110 - -

Operating Capital 660,274 - -

Safe Schools - Crime 82,852 - -

Community Education Programs - - 925,919

Early Childhood and Family Education Programs - - 244,504

School Readiness - - 7,628

Adult Basic Education - - 21,296

Bond Refundings - - -

Other Restricted - 3,394,941 38,429

Committed 6,439,449 - -

Assigned 3,710,643 - -

Unassigned 23,363,880 - -

Total Fund Balance 35,581,307 3,480,212 1,240,396

Total Liabilities, Deferred Inflows of Resources,and Fund Balance 72,403,059$ 4,185,133$ 4,013,693$

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Funds Total Governmental

Capital Debt Funds

Projects Service 2014 2013

12,797,580$ 7,439,809$ 67,896,656$ 62,064,070$

6,182,576 15,505,736 22,145,973 21,753,482

2,248,113 5,313,954 18,297,644 18,495,129

- 58,408 210,100 680,450

- - 36,726 42,217

57,481 1,127 16,057,198 21,465,397

- - 2,871,166 2,917,966

- - 1,596,073 489,706

6,597 22,811 785,825 733,582

- - 256,945 239,242

- - 81,771 106,364 21,292,347$ 28,341,845$ 130,236,077$ 128,987,605$

12,511$ -$ 17,233,183$ 16,269,048$

8,268,111 - 10,384,145 9,320,618

- - 94,787 74,314

- - 166,634 172,809

- - 965,020 1,146,004

8,280,622 - 28,843,769 26,982,793

4,567,822 10,785,426 34,953,180 23,655,642

- 52,709 189,600 514,622

4,567,822 10,838,135 35,142,780 24,170,264

- - 256,945 239,242

- - 81,771 106,364

- - 588,464 518,386

- - 65,810 374,552

5,967,999 - 5,967,999 13,445,692 2,475,904 - 2,895,014 1,927,028

- - 660,274 672,695

- - 82,852 24,575

- - 925,919 591,629

- - 244,504 133,773

- - 7,628 41,007

- - 21,296 -

- 15,528,547 15,528,547 15,940,505

- 1,975,163 5,408,533 5,954,789

- - 6,439,449 5,525,527

- - 3,710,643 2,766,735

- - 23,363,880 29,572,049

8,443,903 17,503,710 66,249,528 77,834,548

21,292,347$ 28,341,845$ 130,236,077$ 128,987,605$



RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION



2014 2013

Total Fund Balance for Governmental Funds 66,249,528$ 77,834,548$

Capital assets used in governmental funds are not financial resources and therefore are not reported in the funds. Those assets consist of:

Land 9,145,689 7,849,539 Construction in Progress 13,620,274 18,603,587 Land Improvements, Net of Accumulated Depreciation 3,299,970 3,660,814 Buildings and Improvements, Net of Accumulated Depreciation 157,298,801 145,966,323 Equipment, Net of Accumulated Depreciation 5,418,237 4,507,291

Some of the District's property taxes will be collected after year-end, but are not available soon enough to pay for the current period's expenditures, and therefore are reported as deferred inflows of resources in the funds. 189,600 514,622

Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. (1,765,870) (1,817,738)

Bond issuance costs are reported as expenditures in the governmental funds.- 1,011,790

Deferred amounts on refundings are not current financial resources and therefore are not reported in the governmental funds. 1,214,574 1,326,871

Internal service funds are used by management to charge the costs of health and dental insurance services to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net position. Internal service fund net position at year-end is: 8,082,392 6,859,757

Long-term liabilities that pertain to governmental funds, including bonds payable, are not due and payable in the current period and therefore are not reported as fund liabilities. All liabilities - both current and long-term - are reported in the statement of net position. Balances at year-end are:

Bonds Payable (84,475,000) (90,380,000) Unamortized Premiums (4,361,392) (4,556,972) Certificates of Participation Payable (28,790,000) (24,840,000) Lease Purchase Agreement Payable (2,097,203) (2,600,000) Capital Leases Payable - (11,884) Compensated Absences Payable (13,557,628) (13,476,378) Other Postemployment Benefits Payable (4,941,809) (3,997,506)

Total Net Position of Governmental Activities 124,530,163$ 126,454,664$

Total net position reported for governmental activities in the statement of net position is different because:


STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS

YEAR ENDED JUNE 30, 2014 (WITH SUMMARIZED FINANCIAL INFORMATION FOR THE YEAR ENDED JUNE 30, 2013)


Major

Food CommunityGeneral Service Service

REVENUESLocal Sources

Property Taxes 11,020,964$ -$ 957,078$ Earnings on Investments 81,317 10,624 2,364 Other 5,676,350 3,462,166 4,303,202

State Sources 144,472,743 300,428 4,008,437 Federal Sources 6,976,486 4,127,564 597,465

Total Revenues 168,227,860 7,900,782 9,868,546

EXPENDITURESCurrent

Administration 7,881,141 - - District Support Services 4,026,463 - - Regular Instruction 80,143,199 - - Vocational Education Instruction 2,262,048 - - Special Education Instruction 31,095,040 - - Instructional Support Services 10,609,023 - - Pupil Support Services 16,621,195 - - Sites and Buildings 13,794,830 - - Fiscal and Other Fixed Cost Programs 382,620 - - Food Service - 7,503,170 - Community Service - - 9,510,292

Capital Outlay 4,569,970 899,028 25,598 Debt Service

Principal 1,889,681 - - Interest and Fiscal Charges 718,232 - - Payment to Refunded Bond Escrow Agent - - - Issuance Costs on Refunding Transactions - - -

Total Expenditures 173,993,442 8,402,198 9,535,890 Excess (Deficiency) of Revenues

Over (Under) Expenditures (5,765,582) (501,416) 332,656

OTHER FINANCING SOURCES (USES)Sale of Equipment Proceeds 34,670 - - Sale of Real Property Proceeds - - - Insurance Recovery Proceeds 106,204 - - Utility Rebates 1,092 - - Sale of Bonds Proceeds - - - Certificates of Participation/Lease

Purchase Agreement Proceeds - - - Premium - - - Payment to Refunded Bond Escrow Agent - - - Transfers In 500,000 6,326 - Transfers Out (6,326) - -

Total Other Financing Sources (Uses) 635,640 6,326 -

Net Change in Fund Balances (5,129,942) (495,090) 332,656

Fund Balances - Beginning 40,711,249 3,975,302 907,740 Fund Balances - Ending 35,581,307$ 3,480,212$ 1,240,396$

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FundsTotal Governmental

Capital Debt FundsProjects Service 2014 2013

4,060,014$ 10,368,146$ 26,406,202$ 37,349,648$ 33,026 70,967 198,298 99,181

- - 13,441,718 13,213,674 574,805 11,266 149,367,679 133,395,631

- - 11,701,515 11,569,059 4,667,845 10,450,379 201,115,412 195,627,193

- - 7,881,141 8,423,204 - - 4,026,463 4,870,498 - - 80,143,199 76,876,721 - - 2,262,048 2,207,497 - - 31,095,040 27,600,752 - - 10,609,023 8,107,615 - - 16,621,195 15,334,140

2,381,521 - 16,176,351 14,916,111 - - 382,620 397,020 - - 7,503,170 7,130,158 - - 9,510,292 9,461,347

15,051,761 - 20,546,357 23,309,847

- 7,140,000 9,029,681 7,486,295 - 3,708,005 4,426,237 3,828,042 - - - 541,918 - - - 135,818

17,433,282 10,848,005 220,212,817 210,626,983

(12,765,437) (397,626) (19,097,405) (14,999,790)

- - 34,670 19,845 - 6,050 6,050 500 - - 106,204 2,900

70,090 - 71,182 9,730 - - - 14,870,000

6,560,000 - 6,560,000 22,815,000 234,279 - 234,279 1,645,424

- - - (9,116,095) - - 506,326 3,137 - - (6,326) (3,137)

6,864,369 6,050 7,512,385 30,247,304

(5,901,068) (391,576) (11,585,020) 15,247,514

14,344,971 17,895,286 77,834,548 62,587,034 8,443,903$ 17,503,710$ 66,249,528$ 77,834,548$


RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES



2014 2013

Net Change in Fund Balance-Total Governmental Funds (11,585,020)$ 15,247,514$

Governmental funds report capital outlays as expenditures. However, in the statement of activities, assets with an initial, individual cost of more than $5,000 for equipment and furnishings and $50,000 for buildings and improvements are capitalized and the cost is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period.

Capital Outlays 17,803,354 18,481,059 Gain (Loss) on Disposal of Capital Assets 9,098 (20,340) Proceeds from Sales of Capital Assets (40,720) (20,345) Depreciation Expense (9,576,315) (9,284,508)

Some capital asset additions are financed through capital leases. In governmental funds, a capital lease arrangement is considered a source of financing, but in the statement of net position, the lease obligation is reported as a liability. Repayment of capital lease principal is an expenditure in the governmental funds, but repayment reduces the lease obligation in the statement of net position.

Change in Accrued Interest - Capital Leases 2,834 (1,155) Principal Payments - Capital Leases 11,884 211,295

The governmental funds report bond proceeds as financing sources, while repayment of bond principal is reported as an expenditure. In the statement of net position, however, issuing debt increases long-term liabilities and does not affect the statement of activities and repayment of principal reduces the liability. Also, governmental funds report the effect of premiums when debt is first issued, whereas these amounts are amortized in the statement of activities. Interest is recognized as an expenditure in the governmental funds when it is due. In the statement of activities, however, interest expense is recognized as it accrues, regardless of when it is due. The net effect of these differences in the treatment of general obligation bonds and related items is as follows:

Bond Proceeds - (14,870,000) Certificate of Participation/Lease Purchase Agreement Proceeds (6,560,000) (22,815,000) Bond Premium/Discount (234,279) (1,645,424) Bond Issuance Costs - 593,646 Repayment of Certificates of Participation Payable 2,610,000 10,270,000 Change in Accrued Interest - Certificates of Participation Payable 14,461 (110,834) Repayment of Bond Principal 5,905,000 5,765,000 Change in Accrued Interest - General Obligation Bonds 34,573 (78,561) Repayment of Lease Purchase Agreement Payable 502,797 - Amortization of Bond Issuance Costs (1,011,790) (145,477) Amortization of Bond Premium 429,859 326,708 Amortization of Bond Discount - (91,039)

Delinquent property taxes receivable will be collected this year, but are not available soon enough to pay for the current period’s expenditures, and therefore are unavailable in the funds. (325,022) (57,772)

Amounts reported for governmental activities in the statement of activities are different because:


RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES

(CONTINUED) YEAR ENDED JUNE 30, 2014

(WITH SUMMARIZED FINANCIAL INFORMATION FOR THE YEAR ENDED JUNE 30, 2013)


2014 2013 Deferred amounts on refundings are not current financial resources and therefore are not reported in the governmental funds. Deferred loss on refunding is amortized in the statement of activities.

Deferred Loss on Refunding -$ 1,055,456$ Amortization of Deferred Loss on Refunding (112,297) (85,096)

In the statement of activities, certain operating expenses - other postemployment benefits payable, severance benefits, and compensated absences - are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). (1,025,553) (407,273)

Internal service funds are used by the District to charge the costs of employee health and dental benefits and Workers' Compensation to individual funds. The net revenue of the internal service funds is reported with governmental activities. 1,222,635 (296,289)

Change in Net Position of Governmental Activities (1,924,501)$ 2,021,565$


STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES – BUDGET AND ACTUAL

GENERAL FUND YEAR ENDED JUNE 30, 2014


Actual Over (Under)Original Final Amounts Final Budget


Property Taxes 21,215,930$ 11,049,687$ 11,020,964$ (28,723)$ Earnings on Investments 12,500 67,500 81,317 13,817 Other 3,032,000 5,441,794 5,676,350 234,556

State Sources 134,208,903 145,915,742 144,472,743 (1,442,999) Federal Sources 7,398,683 7,789,854 6,976,486 (813,368)

Total Revenues 165,868,016 170,264,577 168,227,860 (2,036,717)

EXPENDITURESCurrent:

Administration 7,593,906 7,463,201 7,881,141 417,940 District Support Services 6,321,113 5,039,867 4,026,463 (1,013,404) Regular Instruction 82,802,646 85,950,798 80,143,199 (5,807,599) Vocational Education Instruction 2,101,165 2,288,391 2,262,048 (26,343) Specia l Education Instruction 28,542,419 28,568,398 31,095,040 2,526,642 Instructional Support Services 9,325,748 10,819,754 10,609,023 (210,731) Pupil Support Services 15,903,369 16,457,447 16,621,195 163,748 Sites and Buildings 13,728,321 14,738,502 13,794,830 (943,672) Fiscal and Other Fixed Cost Programs 415,500 415,500 382,620 (32,880)

Capital Outlay 3,675,307 6,747,075 4,569,970 (2,177,105) Debt Service

Principal 1,918,096 1,889,766 1,889,681 (85) Interest and Fiscal Charges 677,271 718,148 718,232 84

Total Expenditures 173,004,861 181,096,847 173,993,442 (7,103,405)

Excess (Deficiency) of RevenuesOver (Under) Expenditures (7,136,845) (10,832,270) (5,765,582) 5,066,688

OTHER FINANCING SOURCES (USES)Utility Rebates - 1,000 1,092 92 Sale of Equipment Proceeds 15,000 25,000 34,670 9,670 Insurance Recovery Proceeds - 70,809 106,204 35,395 Transfers In 500,000 500,000 500,000 - Transfers Out - (6,327) (6,326) 1

Total Other Financing Sources (Uses) 515,000 590,482 635,640 45,158

Net Change in Fund Balances (6,621,845)$ (10,241,788)$ (5,129,942) 5,111,846$

FUND BALANCEBeginning of Year 40,711,249

End of Year 35,581,307$

Budgeted Amounts



FOOD SERVICE FUND YEAR ENDED JUNE 30, 2014


Over (Under)

Actual FinalOriginal Final Amounts Budget

REVENUES

Local SourcesEarnings on Investments 2,500$ 8,000$ 10,624$ 2,624$ Other - Primarily Meal Sales 3,688,511 3,516,809 3,462,166 (54,643)

State Sources 295,077 290,888 300,428 9,540 Federal Sources 3,899,742 3,981,969 4,127,564 145,595

Total Revenues 7,885,830 7,797,666 7,900,782 103,116

EXPENDITURES

CurrentFood Service 7,867,300 7,885,746 7,503,170 (382,576)

Capital Outlay 150,000 1,130,149 899,028 (231,121) Total Expenditures 8,017,300 9,015,895 8,402,198 (613,697)

Excess (Deficiency) of Revenues Over (Under) Expenditures (131,470) (1,218,229) (501,416) 716,813

OTHER FINANCING SOURCES

Transfer in - - 6,326 6,326 Total Other Financing Sources - - 6,326 6,326

Net Change in Fund Balance (131,470)$ (1,218,229)$ (495,090) 723,139$

FUND BALANCE

Beginning of Year 3,975,302

End of Year 3,480,212$

Budgeted Amounts



COMMUNITY SERVICE FUND YEAR ENDED JUNE 30, 2014


Over(Under)

Actual FinalOriginal Final Amounts Budget


Property Taxes 1,827,411$ 941,462$ 957,078$ 15,616$ Earnings on Investments 200 1,053 2,364 1,311 Other - Primarily Tuition and Fees 3,962,831 3,998,319 4,303,202 304,883

State Sources 3,137,804 4,019,674 4,008,437 (11,237) Federal Sources 537,055 665,016 597,465 (67,551)

Total Revenues 9,465,301 9,625,524 9,868,546 243,022

EXPENDITURESCurrent

Community Service 9,204,889 9,491,110 9,510,292 19,182 Capital Outlay 54,675 34,361 25,598 (8,763)

Total Expenditures 9,259,564 9,525,471 9,535,890 10,419

Excess of Revenues Over Expenditures 205,737$ 100,053$ 332,656 232,603$

FUND BALANCEBeginning of Year 907,740

End of Year 1,240,396$

Budgeted Amounts


STATEMENT OF NET POSITION PROPRIETARY FUND



2014 2013

ASSETSCurrent Assets

Cash and Cash Equivalents 7,439,511$ 5,636,660$ Investments 3,739,592 4,740,035 Accounts Receivable - 10,733 Interest Receivable 731 5,599 Prepaids 5,499 22,757

Total Assets 11,185,333 10,415,784

LIABILITIESCurrent Liabilities

Salaries Payable 22,763 23,009 Accounts Payable 780,867 818,334 Claims Payable 2,299,311 2,714,684

Total Current Liabilities 3,102,941 3,556,027

NET POSITIONRestricted for Health and Dental Insurance Trust 6,531,257 4,794,184 Unrestricted 1,551,135 2,065,573

Total Net Position 8,082,392$ 6,859,757$

Governmental Activities - Internal Service Funds


STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUND



2014 2013

OPERATING REVENUESCharges for Premiums, Net of Refunds 24,790,718$ 22,578,598$

Total Operating Revenues 24,790,718 22,578,598

OPERATING EXPENSESSalaries 339,139 334,080 Employee Benefits 156,828 127,064 Claim Expense 22,596,191 22,405,445 Services, Supplies, and Fees 8,007 18,655

Total Operating Expenses 23,100,165 22,885,244

Operating Income (Loss) 1,690,553 (306,646)

NONOPERATING INCOMEEarnings on Investments 32,082 10,357

Total Nonoperating Income 32,082 10,357

Net Income (Loss) Before Transfers 1,722,635 (296,289)

Transfers Out (500,000) -

Change in Net Position 1,222,635 (296,289)

Total Net Position - Beginning 6,859,757 7,156,046

Total Net Position - Ending 8,082,392$ 6,859,757$



STATEMENT OF CASH FLOWS PROPRIETARY FUND



2014 2013CASH FLOWS FROM OPERATING ACTIVITIES

Receipts from Interfund Services Provided 24,801,451$ 22,571,162$ Payments for Administrative Costs (496,213) (478,838) Payments for Claims (23,049,031) (21,978,670) Payments for Services, Supplies, and Materials 9,251 (18,268)

Net Cash Provided by Operating Activities 1,265,458 95,386

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIESTransfers Out (500,000) -

Net Cash Used by Noncapital Financing Activities (500,000) -

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from Maturities of Investment Securities 1,094,813 1,000,036 Purchase of Investment Securities (94,370) (5,740,071) Interest Received 36,950 4,758

Net Cash Provided (Used) by Investing Activities 1,037,393 (4,735,277)

Net Increase (Decrease) in Cash and Cash Equivalents 1,802,851 (4,639,891)

Cash and Cash Equivalents - Beginning 5,636,660 10,276,551

Cash and Cash Equivalents - Ending 7,439,511$ 5,636,660$

RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Operating Income (Loss) 1,690,553$ (306,646)$ Adjustments to Reconcile Operating Income (Loss) to Net Cash

Provided by Operating Activities:(Increase) Decrease in Accounts Receivable 10,733 (7,436) Decrease in Prepaids 17,258 387 Decrease in Salaries Payable (246) (17,694) Decrease in Accounts Payable (37,467) (1,358) Increase (Decrease) in Claims Payable (415,373) 428,133

Total Adjustments (425,095) 402,032

Net Cash Provided by Operating Activities 1,265,458$ 95,386$




NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014

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NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

The financial statements of Independent School District No. 535 have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The GASB pronouncements are recognized as Accounting Principles Generally Accepted in the United States of America for state and local governments.

B. Financial Reporting Entity

Independent School District No. 535 (the District) is an instrumentality of the State of Minnesota established to function as an educational institution. The elected School Board (Board) is responsible for legislative and fiscal control of the District. A Superintendent is appointed by the Board and is responsible for administrative control of the District. Accounting principles generally accepted in the United States of America (GAAP) require that the District's financial statements include all funds, departments, agencies, boards, commissions, and other organizations which are not legally separated from the District. In addition, the District's financial statements are to include all component units - entities for which the District is financially accountable. Financial accountability includes such aspects as appointing a voting majority of the organization's governing body, significantly influencing the programs, projects, activities or level of services performed or provided by the organization or receiving specific financial benefits from, or imposing specific financial burden on, the organization. The Health and Dental Care Trust, a legally separate entity, is presented as a blended component unit because its sole purpose is to manage the District’s employee health and dental insurance programs. Other legally separate organizations that provide economic resources for use by the District or the students are not included as a component unit in the financial statements of the District because they are not significant. Student activities are determined primarily by student participants under the guidance of an adult and are generally conducted outside of school hours. The School Board does have a fiduciary responsibility in establishing broad policies and ensuring that appropriate financial records are maintained for student activities. In accordance with Minnesota Statutes, the District’s School Board has elected to control or be financially accountable for certain extracurricular student activities. Accordingly, the accounts and transactions for the activity funds are included in the financial statements within the General Fund. The District's School Board has also elected to not control or exercise oversight responsibility with respect to other student activities. Accordingly, those student activity accounts are not included in these financial statements.



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NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C. Basic Financial Statement Presentation The District-wide financial statements (i.e. the Statement of Net Position and the Statement of Activities) display information about the reporting government as a whole. The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and grants and contributions that are restricted to meeting the operational; or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The District applies restricted resources first when an expense is incurred for purposes for which both restricted and unrestricted net position is available. Depreciation expense that can be specifically identified by function is included in the direct expenses of each function. Interest on long-term debt is considered an indirect expense and is reported separately on the Statement of Activities. Generally, the effect of material interfund activity has been removed from the District-wide financial statements. Separate Fund financial statements are provided for governmental and proprietary funds. Major individual governmental funds are reported as separate columns in the fund financial statements. The Internal Service Fund is presented in the proprietary fund financial statements. Because the principal user of the internal services is the District’s governmental activities, the financial statement of the internal service fund is consolidated into the governmental column when presented in the government-wide financial statements. The cost of these services is reported in the appropriate functional activity. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenue of the District’s internal service fund is charges to customers for service. Operating expenses for the internal service fund include the cost of services. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

D. Measurement Focus and Basis of Accounting The accounting and financial reporting treatment applied is determined by its measurement focus and basis of accounting. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are generally recognized as revenues in the fiscal year for which they are levied, except for amounts advance recognized in accordance with a statutory “tax shift” described later in these notes. Grants and similar items are recognized when all eligibility requirements imposed by the provider have been met.



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D. Measurement Focus and Basis of Accounting (Continued)

Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this basis of accounting transactions are recorded in the following manner: 1. Revenue Recognition – Revenue is recognized when it becomes measurable and

available. “Measurable” means the amount of the transaction can be determined and “available” means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Property tax revenue is generally considered as available if collected within 60 days after year-end. State revenue is recognized in the year to which it applies according to Minnesota Statutes and accounting principles generally accepted in the United States of America. Minnesota Statutes include state aid funding formulas for specific fiscal years. Federal revenue is recorded in the year in which the related expenditure is made. Food service sales, community education tuition, and other miscellaneous revenue (except investment earnings) are recorded as revenues when received because they are generally not measurable until then. Investment earnings are recorded when earned because they are measurable and available. A six-month availability period is generally used for other fund revenue.

2. Recording of Expenditures – Expenditures are generally recorded when a liability is incurred. However, expenditures are recorded as prepaid for approved disbursements or liabilities incurred in advance of the year in which the item is to be used. Principal and interest on long-term debt issues are recognized on their due dates.

Description of Funds

The existence of the various District funds has been established by the State of Minnesota, Department of Education. The accounts of the district are organized on the basis of funds, each of which is considered a separate accounting entity. A description of the funds included in this report is as follows: Major Governmental Funds General Fund – The General Fund is used to account for all financial resources except those required to be accounted for in another fund. It includes the general operations and pupil transportation activities of the district, as well as the capital related activities such as maintenance of facilities equipment purchases, health and safety projects, and disabled accessibility projects. Food Service Special Revenue Fund - The Food Service Special Revenue Fund is used to account for food service revenues and expenditures. Revenues for the Food Service Special Revenue Fund are composed of user fees and reimbursements from the Federal and State governments. These revenues are restricted for the Food Service Special Revenue Fund.



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D. Measurement Focus and Basis of Accounting (Continued)

Major Governmental Funds (Continued) Community Service Special Revenue Fund - The Community Service Special Revenue Fund is used to account for services provided to residents in the areas of recreation, civic activities, nonpublic pupils, veterans, adult or early childhood programs, K-6 extended day programs, or other similar services. Revenues for the Community Service Special Revenue Fund are composed of user fees, local levy dollars, state tax credits, and aid from the Federal and State governments. These revenues are restricted for the Community Service Special Revenue Fund. Capital Projects Fund – The Capital Projects Fund is used to account for financial resources used for the acquisition of capital assets, construction or renovation of major capital facilities, and deferred facilities maintenance. The District uses project accounts to account for the transactions of the various projects. Debt Service Fund – The Debt Service Fund is used to account for the accumulation of resources for, and payment of, general long-term obligation bond principal, interest, and related costs. Proprietary Funds Internal Service Funds – Accounts for the financing of services, provided by one fund to other funds of the District on a cost reimbursement basis. The School District’s internal service funds and their purposes are as follows:

Health and Dental Care Trust – Accounts for the operations of the District’s Health and Dental Care Self-Insurance Program. Self-insurance costs are charged to the various funds based on established premium rates. Workers’ Compensation – Accounts for the operations of the District’s Workers’ Compensation Self-Insurance Program. Self-insurance costs are charged to the various funds based on established premium rates.

E. Budgeting

Budgets presented in this report for comparison to actual amounts are presented in accordance with accounting principles generally accepted in the United States of America. Each June, the School Board adopts an annual budget for the following fiscal year for the General, Food Service, Community Service, Capital Projects, and Debt Service Funds. Reported budget amounts represent the amended budget as adopted by the School Board. Legal budgetary control is at the fund level. Procedurally, in establishing the budgetary data reflected in these financial statements, the Superintendent submits to the School Board prior to July 1, a proposed operating budget for the fiscal year commencing July 1. The operating budget includes proposed expenditures and the means to finance them. The budget is legally enacted by School Board action. Revisions to budgeted amounts must be approved by the School Board.



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E. Budgeting (Continued)

Total fund expenditures in excess of the budget require approval of the School Board. Spending control is established by the amount of expenditures budgeted for the fund, but management control is exercised at line item levels.

F. Cash and Investments

Cash of the individual funds is combined for investment purposes. Investments consist primarily of money market funds, commercial paper, bankers acceptances, negotiated certificates of deposit, repurchase agreements, and United States Treasury Securities. Investments with an original maturity of less than one year are recorded at amortized cost, which approximates fair value. Investments with an original maturity of more than one year are recorded at fair value based on quoted market prices. Interest earned as a result of these investments and the combined deposit account is distributed to the appropriate funds based on average cash and investment balances of each fund.

G. Cash and Investments Held by Trustee

Investments held by trustee consisted of United States Treasury Securities, commercial paper, and money market funds held by an escrow agent for the purpose of refunding the Series 2004 bonds and for various improvements and acquisitions. These assets are sufficient to meet the debt service requirements of the Series 2012 bonds through the applicable crossover refunding date.

H. Cash and Cash Equivalents

For purposes of reporting cash flows, the District considers all demand accounts, savings accounts and money market funds to be cash and cash equivalents while all certificates of deposits, commercial paper, and government bonds, if any, regardless of maturities are considered investments.

I. Receivables

Represents amounts receivable from individuals, firms, and corporations for goods and services furnished by the District. No substantial losses are anticipated from present receivable balances, therefore, no allowance for uncollectible accounts is deemed necessary. The only receivables not expected to be collected within one year are current property taxes receivable.

J. Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepayments. Prepaid items are reported using the consumption method and recorded as an expense or expenditure at the time of consumption.



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K. Inventory Inventory is recorded using the consumption method of accounting and consists of food, paper, and other supplies on hand at June 30, 2014 and surplus commodities received from the federal government. Food and supply purchases are recorded at invoice cost, computed on a first-in, first-out method, and surplus commodities are stated at standardized cost, as determined by the Department of Agriculture.

L. Property Taxes Property tax levies are established by the School Board in December each year and are certified to the County for collection the following calendar year. In Minnesota, counties act as collection agents for all property taxes. The County spreads all levies over taxable property. Such taxes become a lien on January 1. Taxes are due on May 15 and October 15. The county generally remits taxes to the District at periodic intervals as they are collected. A portion of property taxes levied is paid through various state tax credits which are included in revenue from state sources in the financial statements. Generally, tax revenue is recognized in the fiscal year ending June 30, following the calendar year in which the tax levy is collectible, while the current calendar year tax levy is recorded as a deferred inflow of resources (property taxes levied for subsequent year). The majority of District revenue in the General (and to a lesser extent in the District’s Community Service Special Revenue Fund) is determined annually by statutory funding formulas. The total revenue allowed by these formulas is then allocated between taxes and state aids by the Legislature based on education funding priorities. Changes in this allocation are periodically accompanied by a change in property tax revenue recognition referred to as the “tax shift.” In accordance with State law, the current tax shift consists of an amount equal to 31% of the District's 2000 Pay 2001 operating referendum levy which is frozen at $1,773,579 for the District. Starting in fiscal year 2011, the shift was expanded to include all other general and community service fund levies. State aids were then reduced by this expanded shift amount, making this portion of the tax shift revenue neutral to school districts. In fiscal year 2014, the shift was reduced to only include the 2000 pay 2001 operating referendum levy. State aids were increased by this reduction in the shift, making it revenue neutral. Certain other portions of the District's 2013 Pay 2014 levy, normally revenue for the 2014-15 fiscal year, are also advance recognized at June 30, 2014, as required by state statute to match revenue with the same fiscal year as the related expenditures. Taxes that remain unpaid are classified as delinquent taxes receivable. Revenue from these delinquent property taxes that is not collected within 60 days of year-end is unavailable because it is not known to be available to finance the operations of the District in the current year. No allowance for uncollectible taxes has been provided as such amounts are not expected to be material. Current levies of local taxes, less the amount recognized as revenue in the current period, including portions assumed by the State which will be recognized as revenue in the next fiscal year beginning July 1, 2014, are included in the Property Taxes Levied for Subsequent Year to indicate that, while they are current assets, they will not be recognized as revenue until the following year.



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M. Capital Assets

Capital assets are capitalized at historical cost, or estimated historical cost for assets where actual historical cost is not available. Donated assets are recorded as capital assets at their estimated fair market value at the date of donation. The District maintains a threshold level of $5,000 for capitalizing equipment and furnishings and $50,000 for capitalizing buildings and improvements. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Capital assets are recorded in the District-wide financial statement, but are not reported in the Fund financial statements. Capital assets are depreciated using the straight-line method over their estimated useful lives. Since surplus assets are sold for an immaterial amount when declared as no longer needed for public school purpose by the District, no salvage value is taken into consideration for depreciation purposes. Useful lives vary from 20 to 50 years for land improvements and buildings, and 5 to 20 years for equipment and furnishings. Capital assets not being depreciated include land and construction in progress. The District does not possess any material amounts of infrastructure capital assets. Items such as sidewalks and other land improvements are considered to be part of the cost of buildings or other improvable property.

N. Deferred Outflows of Resources

In addition to assets, the financial statements report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense) until that time. The District has one item that qualifies for reporting as this element – loss on bond refunding, which is being amortized over the life of the bonds.

O. Long-Term Liabilities

In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities. Bond premiums and discounts are amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as an expense in the period they are incurred. In the fund financial statements, governmental fund types recognize bond premiums and discounts during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.



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P. Accrued Employee Benefits

Compensated Absences

The District has employee and union contracts with several different employee groups. Employee benefits under the contracts are different, but generally include provisions for sick leave, vacation leave, and termination benefits. The District accounts for the employee benefits as follows: Vacation leave vests and may be carried forward for between six months and one year, depending on the contract. A liability is recorded for earned but unpaid vacation. Sick leave does not vest and is accounted for as an expenditure when paid, except as discussed below. Termination benefits generally vest after completion of ten years of service and attaining age 55. The maximum benefit obligation is generally based on accumulated unused sick leave, years of service, or a percent of salary, depending on the employment contract. A liability is recorded for vested benefits and unvested benefits which are expected to vest in future periods. The vesting method using historical data was used to calculate the liability. Other Postemployment Benefits Payable

Under the provisions of the various employee and union contracts the District provides Health and Dental Care coverage until age 65 if certain age and minimum years of service requirements are met. The amount to be incurred is limited as specified by contract. All premiums are funded on a pay-as-you-go basis. This amount was actuarially determined, in accordance with GASB 45.

Q. Unearned Revenue

Unearned revenues are those in which resources are received by the District before it has a legal claim to them. The District has reported unearned revenues for grants and 2014-2015 school year deposits.

R. Deferred Inflows of Resources

In addition to liabilities, the financial statements report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The District has two types of items which occur related to revenue recognition. The first occurs because property tax receivables are recorded in the current year, but the revenue will be recorded in the subsequent year. The second type of deferred inflow of resources occurs because governmental fund revenues are not recognized until available (collected not later than 60 days after the end of the District’s year end) under the modified accrual basis of accounting.



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S. Fund Balance

In the fund financial statements, governmental funds report nonspendable, restricted, committed, assigned, and unassigned fund balances. Nonspendable portions of fund balance are related to prepaid items and inventories. Restricted funds are constrained from outside parties (statute, grantors, bond agreements, etc.). Committed fund balances are established and modified by resolutions approved by the Board of Education. The Board of Education passed a resolution authorizing the Superintendent and Executive Director of Business and Operations to assign fund balances and their intended uses. Unassigned fund balances are considered the remaining amounts. In accordance with the District’s fund balance policy, when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, it is the District’s policy to use restricted first, then unrestricted fund balance. When an expenditure is incurred for purposes for which committed, assigned, and unassigned amounts are available, it is the District’s policy to use committed first, then assigned, and finally unassigned fund balance. It is also the District’s policy to maintain an unassigned general fund balance of no less than 6 percent of the annual budgeted expenditures.

T. Risk Management

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; natural disasters and workers compensation. The District is self-insured for employee related health, dental and workers’ compensation. The District purchases commercial insurance coverage for all other risks of loss. There has been no significant reduction in insurance coverage from the previous year in any of the District’s policies. Settled claims resulting from these risks have not exceeded insurance coverage in any of the past three fiscal years.

U. Self Insurance Claims

This liability represents an estimate of health, dental and workers’ compensation claims incurred but not reported as of June 30, 2014.

V. Net Position

Net position represents the difference between assets and deferred outflows of resources and liabilities and deferred inflows of resources in the District-wide and proprietary fund financial statements. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balance of any long-term debt used to build or acquire the capital assets. Net position is reported as restricted in the District-wide financial statement when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments.



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W. Summarized Financial Information The basic financial statements include certain prior-year summarized financial information in total, but not at the level of detail required for a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the District’s financial statements for the year ended June 30, 2013, from which the summarized financial information was derived.

NOTE 2 STEWARDSHIP AND ACCOUNTABILITY

A. Expenditures in Excess of Budget Budget Expenditures Excess

Special Revenue Fund: Community Service Fund 9,525,471$ 9,535,890$ 10,419$

B. Interfund Transfers

The District had the following interfund transfer for the year ended June 30, 2014:

Transfer Out: General Fund Total

General Fund -$ 6,326$ 6,326$ Internal Service Fund 500,000 - 500,000

Total 500,000$ 6,326$ 506,326$

Transfer In: Food Service

Special Revenue Fund

The General Fund transferred $6,326 to the Food Service Special Revenue Fund to fund certain receivables from students that were considered to be uncollectible. The Internal Service Fund transferred $500,000 to the General Fund to refund the General Fund for accumulated workers compensation premiums in excess of claims paid.

NOTE 3 DEPOSITS AND INVESTMENTS

A. Deposits

Custodial Credit Risk – Custodial credit risk is the risk that in the event of a bank failure, the District’s deposits may not be returned to it. The District’s deposit policy for custodial credit risk follows Minnesota Statutes for deposits. The District maintains a cash pool that is available for use by all funds. Each fund type's portion of this pool is displayed on the governmental funds balance sheet as "Cash and Investments". In accordance with Minnesota Statutes, the District maintains deposits at financial institutions which are authorized by the District's Board. Minnesota Statutes require that all deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or corporate surety bonds.



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NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED)

A. Deposits (Continued)

The District’s deposits in banks at June 30, 2014 were entirely covered by federal depository insurance or by surety bonds and collateral in accordance with Minnesota statutes.

B. Investments

The District may also invest idle funds as authorized by Minnesota Statutes, as follows: Direct obligations or obligations guaranteed by the United States or its agencies Shares of investment companies registered under the Federal Investment

Company Act of 1940 and receives the highest credit rating, is rated in one of the two highest rating categories by a statistical rating agency, and all of the investments have a final maturity of thirteen months or less

General obligations rated “A” or better; revenue obligations rated “AA” or better General obligations of the Minnesota Housing Finance Agency rated “A” or

better Bankers’ acceptances of United States banks eligible for purchase by the

Federal Reserve System Commercial paper issued by United States corporations or their Canadian

subsidiaries, of the highest quality category by at least two nationally recognized rating agencies, and maturing in 270 days or less

Guaranteed Investment Contracts guaranteed by a United States commercial bank, domestic branch of a foreign bank, or a United States insurance company, and with a credit quality in one of the top two highest categories

Repurchase or reverse purchase agreements and securities lending agreements financial institutions qualified as a “depository” by the government entity, with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000, a primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York, or certain Minnesota securities broker-dealers.

At June 30, 2014, the District had the following investments: External Investment Pools and Mutual Funds –

Amortized Cost Minnesota School District Liquid Asset Fund Plus (MSDLAF+) 49$ First American Government Obligations Fund Class D 10,126 Wells Fargo Advantage Heritage Money Market Fund 2,670

12,845$

The Minnesota School District Liquid Asset Fund Plus (MSDLAF+) is an external investment pool not registered with the Securities and Exchange Commission (SEC) that follows the same regulatory rules of the SEC under Rule 2a-7 of the Investment Company Act of 1940. The fair value of the position in the pool is the same as the value of the pool shares.



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B. Investments (Continued)

External Investment Pools and Mutual Funds – (Continued)

The First American Government Obligations Fund Class D is an external investment pool and its investments are valued at amortized cost, which approximates fair value in accordance with Rule 2a-7 of the Investment Company Act of 1940. The amortized cost method of valuation values a security at its cost on the date of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of investments. The Wells Fargo Advantage Heritage Money Market Fund is an external investment pool and its investments are valued at amortized cost, which approximates fair value in accordance with Rule 2a-7 of the Investment Company Act of 1940. The amortized cost method of valuation values a security at its cost on the date of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of investments. Other Investments –

Fair Value Repurchase Agreement - Bayerische Landesbank $ 6,765,476 Repurchase Agreement - Eastwood Bank 57,966,847 Commercial Paper 9,311,118 Bankers Acceptances 5,319,654 United States Treasury Securities (SLGS) 15,500,680

94,863,775$

In April 2013, the District entered into an investment repurchase agreement with Bayerische Landesbank in the amount of $14,865,562. The securities are held in the District’s name by Wells Fargo Bank, NA. The agreement guarantees an interest rate of 0.22% and the District may draw funds on demand until January 30, 2015. In June 2013, the District entered into a repurchase sweep agreement with Eastwood Bank. The securities sold to the District will be either US Government Bonds or US Agency Bonds with a AAA rating. The securities will be owned by Eastwood Bank and held in safekeeping by an independent third party. Commercial paper is issued by US Bank, NA. These investments mature on December 1, 2014 and bear interest at rates ranging from 0.00% to 0.20%. Bankers acceptances are issued by US Bank, NA. These investments mature on dates ranging from October 14, 2014 to January 23, 2015 and bear interest at rates ranging from 0.20% to 0.25%.



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B. Investments (Continued)

Other Investments – (Continued) The United States Treasury Securities (SLGS) are held by an escrow agent in accordance with escrow agreements established with the sale of the General Obligation Refunding Bonds, Series 2012A. The securities have maturities ranging from August 1, 2014 to February 1, 2015, at which time the proceeds will be used to pay in full the General Obligation School Building Bonds, Series 2004A. The interest rates on these investments range from 0.30% to 0.37%. Credit Risk

1. The MSDLAF+ pool is rated AAAm by Standard & Poor’s. 2. The First American Government Obligations Fund Class D is rated AAAm by

Standard & Poor’s and Aaa-mf by Moody’s. 3. The Wells Fargo Advantage Heritage Money Market Fund is rated AAAm by

Standard & Poor’s and Aaa-mf by Moody’s. 4. All investments in commercial paper were rated A-1+ by Standard and Poor’s,

P-1 by Moody’s, and F-1+ by Fitch. 5. Bankers acceptances were rated A-1+ by Standard and Poor’s, P-1 by

Moody’s, and F-1+ by Fitch.

Interest Rate Risk

The District has a formal investment policy that addresses permissible investments, portfolio diversification and instrument maturities. Investment maturities are scheduled to coincide with projected school district cash flow needs. Within these parameters, it is the District’s policy to stagger portfolio maturities to avoid undue concentration of assets, provide for stability of income, and limit exposure to fair value losses arising from rising interest rates. Information about the sensitivity of the fair values of the District’s investments to market interest rate risk fluctuations is provided by the following table that shows the distribution of the District’s investments by maturity:

12 MonthsTotal or Less

Repurchase Agreements 64,732,323$ 64,732,323$ Commercial Paper 9,311,118 9,311,118 Bankers Acceptances 5,319,654 5,319,654 US Treasury Securities 15,500,680 15,500,680 Total 94,863,775$ 94,863,775$

Type

Concentration of Credit Risk

The District places no limit on the amount the District may invest in any one issuer. More than 5 percent of the District’s investments are in commercial paper with US Bank, NA and in bankers acceptances with US Bank, NA. These investments are 9.08% and 5.19%, respectively, of the District’s total investments.



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C. Balance Sheet Presentation

The deposits and investments are presented in the financial statements as follows:

Deposits 6,326,125$ Cash on Hand 18,987 Minnesota School District Liquid Asset Fund Plus (MSDLAF+) 49 First American Treasury Obligations Fund Class D 10,126 Bankers Acceptances 5,319,654 Repurchase Agreement - Bayerische Landesbank 6,765,476 Repurchase Agreement - Eastwood Bank 57,966,847 Commercial Paper 9,311,118 United States Treasury Securities (SLGS) 15,500,680 Wells Fargo Advantage Government Money Market Fund 2,670

101,221,732$

Cash and Investments - Statement of Net Position 79,075,759$ Cash and Investments Held by Trustee - Statement of Net Position 22,145,973

101,221,732$

NOTE 4 CAPITAL ASSETS

Capital asset activity for the year ended June 30, 2014 was as follows:

Beginning EndingBalance Increases Decreases Balance

Governmental ActivitiesCapital Assets, Not Being Depreciated

Land 7,849,539$ 1,302,200$ (6,050)$ 9,145,689$ Construction in Progress 18,603,587 17,638,991 (22,622,304) 13,620,274

Total Capital Assets, Not Being Depreciated 26,453,126 18,941,191 (22,628,354) 22,765,963

Capital Assets, Being DepreciatedLand Improvements 8,232,307 - - 8,232,307 Buildings and Improvements 265,873,855 19,804,527 - 285,678,382 Equipment 13,357,736 1,679,940 (415,120) 14,622,556

Total Capital Assets, Being Depreciated 287,463,898 21,484,467 (415,120) 308,533,245

Accumulated Depreciation forLand Improvements (4,571,493) (360,844) - (4,932,337) Buildings and Improvements (119,907,532) (8,472,049) - (128,379,581) Equipment (8,850,445) (743,422) 389,548 (9,204,319)

Total Accumulated Depreciation (133,329,470) (9,576,315) 389,548 (142,516,237)

Total Capital Assets, Being Depreciated, Net 154,134,428 11,908,152 (25,572) 166,017,008

Governmental Activities Capital Assets, Net 180,587,554$ 30,849,343$ (22,653,926)$ 188,782,971$



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NOTE 4 CAPITAL ASSETS (CONTINUED)

Depreciation expense was charged to functions of the District as follows:

Governmental ActivitiesAdministration 4,603$ District Support Services 400,215 Regular Instruction 8,197,371 Vocational Education Instruction 4,768 Special Education Instruction 16,055 Instructional Support Services 9,265 Pupil Support Services 2,571 Sites and Buildings 277,640 Food Service 194,135 Community Service 469,692

Total Depreciation Expense, Governmental Activities 9,576,315$

NOTE 5 LONG-TERM LIABILITIES

A. Components of Long-Term Liabilities

The District has issued general obligation school building bonds to finance the construction of capital facilities or refinance previous bond issues. Assets of the Debt Service Fund, together with scheduled future tax levies, are dedicated for the retirement of these bonds. These levies are subject to reduction if fund balance amounts exceed limitations imposed by Minnesota law.

Net DueIssue Interest Original Final WithinDate Rate Issue Maturity One Year Total

General Obligation Bonds

8/12/2004 3.0% - 5.0% 20,895,000$ 2/1/2015 15,840,000$ 15,840,000$ 5/12/2005 3.5% - 4.5% 21,955,000 2/1/2020 860,000 5,680,000 2/15/2006 3.5% - 5.0% 9,340,000 2/1/2017 2,380,000 7,040,000 4/1/2007 4.0% - 5.0% 13,970,000 2/1/2021 1,580,000 12,450,000 4/1/2008 3.75% - 4.625% 17,400,000 2/1/2028 735,000 13,355,000 4/5/2012 1.25% - 3.75% 15,340,000 2/1/2029 - 15,340,000

3/28/2013 2.00% - 3.00% 14,870,000 2/1/2028 100,000 14,770,000 Total General Obligation Bonds 21,495,000 84,475,000

Bond Premium - Net - 4,361,392

Certificates of Participation Payable12/1/2009 3.00% - 3.50% 6,255,000 2/1/2020 625,000 4,025,000 12/1/2012 2.00% - 3.00% 16,455,000 2/1/2029 880,000 15,680,000 3/28/2013 2.00% - 4.00% 3,760,000 2/1/2016 1,245,000 2,525,000 3/19/2014 2.00% - 3.65% 6,560,000 2/1/2034 275,000 6,560,000

Total Certificates of Participation Payable 3,025,000 28,790,000

Lease Purchase Agreement Payable 511,264 2,097,203

Other Postemployment Benefits Payable - 4,941,809

Compensated Absences Payable 982,052 13,557,628

26,013,316$ 138,223,032$

Principal Outstanding



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NOTE 5 LONG-TERM LIABILITIES (CONTINUED)

B. Minimum Debt Payments

Minimum annual principal and interest payments necessary to retire long-term debt, not including capital leases, compensated absences payable and other postemployment benefits payable are as follows:

Year EndingJune 30 Principal Interest Principal Interest Principal Interest

2015 21,495,000$ 3,422,719$ 3,025,000$ 838,253$ 511,264$ 31,832$ 2016 6,835,000 2,384,556 3,070,000 777,914 519,856 23,241 2017 6,695,000 2,111,944 1,860,000 675,464 528,592 14,505 2018 4,635,000 1,812,694 1,920,000 619,664 537,491 5,623 2019 4,795,000 1,615,944 1,965,000 561,214 - -

2020 - 2024 21,005,000 5,308,325 7,645,000 1,997,727 - - 2025 - 2029 19,015,000 1,804,607 7,275,000 971,950 - - 2030 - 2034 - - 2,030,000 228,126 - -

84,475,000$ 18,460,789$ 28,790,000$ 6,670,312$ 2,097,203$ 75,201$

General ObligationBonds Payable

Certificates of ParticipationPayable

Lease PurchaseAgreement Payable

C. Description of Long-Term Liabilities

General Obligation Bonds

On August 12, 2004, the District issued $20,895,000 of General Obligation School Building Bonds, Series 2004A. The proceeds of the issue were being used to finance the acquisition and betterment of school facilities, included within the District’s ten-year facilities plan. Assets of the Debt Service Fund, together with scheduled future ad valorem tax levies, are dedicated to retire these bonds. On May 12, 2005, the District issued $21,955,000 of General Obligation Refunding Bonds, Series 2005A. The proceeds of the issue were used to refund, in advance of maturity, $13,430,000 of the outstanding maturities of the District’s General Obligation School Building Bonds, Series 1996A and $8,755,000 of the outstanding maturities of the District’s General Obligation School Building Bonds, Series 2000B. On February 15, 2006, the District issued $9,340,000 of General Obligation Refunding Bonds, Series 2006A. The proceeds of the issue were used, together with other District funds, to refund, in advance of maturity, $10,000,000 of the outstanding maturities of the District’s General Obligation School Buildings Bonds, Series 1998A. Future ad valorem tax levies are dedicated to the retirement of these bonds. On April 1, 2007, the District issued $13,970,000 of General Obligation Refunding Bonds, Series 2007A. The proceeds of the issue were used, together with other District funds, to refund, in advance of maturity, $14,470,000 of the outstanding maturities of the District’s General Obligation School Buildings Bonds, Series 2001A. Future ad valorem tax levies are dedicated to the retirement of these bonds.



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C. Description of Long-Term Liabilities (Continued)

General Obligation Bonds (Continued)

On April 1, 2008, the District issued $17,400,000 of General Obligation School Building Bonds, Series 2008A. The proceeds of the issue were used to finance the acquisition and betterment of school facilities, included with the District’s ten-year facilities plan. Assets of the Debt Service Fund, together with scheduled future ad valorem tax levies, are dedicated to retire these bonds. On April 5, 2012, the District issued $15,340,000 of General Obligation Refunding Bonds, Series 2012A. The proceeds of the issue will be used, together with other District funds, to refund, in advance of maturity, $15,090,000 of the outstanding maturities of the District’s General Obligation School Buildings Bonds, Series 2004A. Future ad valorem tax levies are dedicated to the retirement of these bonds. On March 28, 2013, the District issued $14,870,000 of General Obligation Alternative Facilities Bonds, Series 2013A. The proceeds of the issue were used to finance the acquisition and betterment of school facilities, included with the District’s ten-year facilities plan. Assets of the Debt Service Fund, together with scheduled future ad valorem tax levies, are dedicated to the retirement of these bonds. Certificates of Participation

These debt obligations were incurred to finance the acquisition of equipment or construction of facilities under lease purchase option agreements as allowed under Minnesota Statutes Section 126C.40 and 126C.55. The certificates will be repaid from property tax levies in the General Fund and the Debt Service Fund. The obligations have been recorded at the present value of the future minimum lease payments. On December 1, 2009, the District issued $6,255,000 of Full Term Refunding Certificates of Participation, Series 2009B. The proceeds of the issue were used, together with other District funds, to purchase U.S. State and Local Government securities (SLGS) that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $6,460,000 of Certificates of Participation, Series 2001B. As a result, the refunded certificates were considered to be defeased and the liability was removed from the Governmental Activities column of the Statement of Net Position. On December 1, 2012, the District issued $16,455,000 of Full Term Certificates of Participation, Series 2012B. $8,790,000 of the proceeds of the issue were used, together with other District funds, to purchase U.S. State and Local Government securities (SLGS) that were placed in an irrevocable trust for the purpose of generating resources for all future debt service payments of $8,760,000 of Certificates of Participation, Series 2004B (of which $8,055,000 is still outstanding as of June 30, 2014). As a result, the refunded certificates are considered to be defeased and the liability has been removed from the Governmental Activities column of the Statement of Net Position.



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C. Description of Long-Term Liabilities (Continued)

Certificates of Participation (Continued)

On March 28, 2013, the District issued $3,760,000 of Full Term Certificates of Participation, Series 2013B. The proceeds of the issue were used to finance the acquisition of student use technology equipment. Scheduled future ad valorem tax levies are dedicated to the retirement of these certificates. On March 19, 2014, the District issued $6,560,000 of Full Term Certificates of Participation, Series 2014A. The proceeds of the issue were used to finance the construction of additional kindergarten classroom space and remodeling of their alternative learning center building. Scheduled future ad valorem tax levies are dedicated to the retirement of these certificates. Lease Purchase Agreement Payable

On June 1, 2013, the District entered into a lease purchase agreement with U.S. Bank, N.A. in the amount of $2,600,000. The proceeds of the issue were used to finance acquisition costs and costs of issuance related to a building for District maintenance staff and equipment. Scheduled future ad valorem tax levies are dedicated to the retirement of these certificates. Compensated Absences Payable

The amount of the estimated obligation at June 30, 2014 is $13,557,628. The District’s General Fund finances compensated absences on a pay-as-you-go basis.

D. Changes in Long-Term Liabilities

June 30, June 30,2013 Additions Retirements 2014

Bonds Payable 90,380,000$ -$ 5,905,000$ 84,475,000$ Bond Premium 4,556,972 234,279 429,859 4,361,392 Certificates of Participation

Payable 24,840,000 6,560,000 2,610,000 28,790,000 Lease Purchase Agreement

Payable 2,600,000 - 502,797 2,097,203 Capital Leases Payable 11,884 - 11,884 - Other Postemployment

Benefits Payable 3,997,506 2,368,824 1,424,521 4,941,809 Compensated Absences

Payable 13,476,378 1,342,627 1,261,377 13,557,628

139,862,740$ 10,505,730$ 12,145,438$ 138,223,032$



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NOTE 6 RISK MANAGEMENT

Self-Insurance The District acts as a self-insurer for certain insurable risks related to its employee health insurance, dental insurance and workers’ compensation programs. Losses and claims are accrued as incurred. The District has purchased reinsurance for amounts in excess of $500,000 per family and approximately $21,353,000 for annual aggregate health plan claims and for amounts in excess of $480,000 for annual aggregate workers’ compensation plan claims. All known claims and estimated claims incurred but not reported have been accrued as a liability. District liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claim liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing a claim liability does not necessarily result in an exact amount. Claims liabilities are re-evaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. An analysis of claims for the years ended June 30, 2014 and 2013 are as follows:

Health and Workers'Dental Compensation Total

Unpaid Claims - July 1, 2013 2,416,759$ 297,925$ 2,714,684$

Claims Incurred, Changes in Estimates and Other Charges 21,877,199 756,459 22,633,658

Payments on Claims (22,391,290) (657,741) (23,049,031)


Health and Workers'

Dental Compensation Total


Claims Incurred, Changes in Estimates and Other Charges 22,025,750 381,053 22,406,803

Payments on Claims (21,526,755) (451,915) (21,978,670)


NOTE 7 RESTRICTED FUND BALANCES

Certain portions of fund balance are restricted based on state requirements to track special program funding, to provide for funding on certain long-term liabilities, or as required by other outside parties. The following is a summary of the restricted fund balances for the governmental funds: A. Staff Development

Represents unspent staff development revenues set aside from General Education Revenue that were restricted for staff development.



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NOTE 7 RESTRICTED FUND BALANCES (CONTINUED)

B. Health and Safety

Restricted for health and safety represents available resources to be used only to provide for the removal of hazardous substances and other state approved life/health safety projects. Under Minnesota statute, a deficit in this restriction generates specific future levy authority.

C. Alternative Facilities

Represents the resources available for approved expenditures based on the ten-year plan for capital projects and deferred maintenance.

D. Projects Funded by Certificates of Participation/Lease Purchase Agreements

Represents the remaining resources available for projects funded by certificates of participation and lease purchase agreements with related lease levy authority under Minnesota Statutes, section 126C.40.

E. Operating Capital

The District levies taxes and receives state aid to be used for the purchase of equipment, books, and vehicles and to purchase, rent, improve, and repair school facilities as allowed by state statute. The cumulative excess of such revenues over equipment and facilities expenditures is reported as a restriction of fund balance in the General Fund.

F. Safe Schools - Crime

Represents available resources to be used for crime prevention, drug abuse, student and staff safety, and violence prevention measures.

G. Community Education Programs

Represents accumulated resources available to provide general community education programming.

H. Early Childhood and Family Education Programs

Represents accumulated resources available to provide services for early childhood family education programming.

I. School Readiness

Represents accumulated resources available to provide school readiness programming in accordance with funding made available for that purpose.

J. Adult Basic Education

Represents the balance of carryover monies for all activity involving Adult Basic Education (ABE). This would include all state aid and any grants or local funding used in support of ABE.



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NOTE 7 RESTRICTED FUND BALANCES (CONTINUED)

K. Bond Refundings

Represents resources from the 2012 bond refunding issues held in escrow available for a planned crossover refunding.

L. Other Restricted Fund Balance

Represents amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation.

NOTE 8 COMMITTED FUND BALANCES

The following fund balances have been committed through a resolution approved by the Board of Education:

Separation/Retirement Benefits 4,941,809$ Carryover of Unspent School Site Supply Allocations 971,529Post-Secondary Enrollment Options Joint Ventures 70,413Carryover of Unspent Memorial Donations Received 24,153Carryover of Unspent Classroom Fees and Donations 423,984Carryover of Unspent Rochester Public School Foundation Grant Awards 7,561

6,439,449$

NOTE 9 ASSIGNED FUND BALANCES

Assignment of the fund balance indicates that portion of the fund balance that reflects a tentative plan for future use of the funds. The following is a summary of the assigned fund balances:

Third Party Billing Support and Services for Students with Special Needs 1,680,324$

Special Education Bus Replacement 24,064Refuse Equipment 264,303Maintenance Building Improvements 500,000Construction in Progress 1,241,952

3,710,643$



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NOTE 10 PENSION PLANS

Substantially all employees of the District are required by state law to belong to pension plans administered by Teachers’ Retirement Association (TRA) or Public Employees Retirement Association (PERA), all of which are administered on a statewide basis. Disclosures relating to these plans are as follows: A. Teachers Retirement Association (TRA)

1. Plan Description

All teachers employed by the District are covered by a cost sharing, multiple employer defined benefit pension plan administered by the State of Minnesota Teachers Retirement Association (TRA). TRA members belong to either the Coordinated Plan or the Basic Plan. Coordinated members are covered by Social Security and Basic members are not. All new members must participate in the Coordinated Plan. These plans are established and administered in accordance with Minnesota Statutes, Chapters 354 and 356. TRA provides retirement benefits as well as death and disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by state statute and vest after three years of credited service. The defined retirement benefits are based on a member’s highest average salary for five consecutive years of allowable service, age, and years of credit at termination of service. TRA publicly issues a Comprehensive Annual Financial Report (CAFR) presenting financial statements, supplemental information on funding levels, investment performance, and further information on benefits provisions. The report may be accessed at the TRA website at www.tra.state.mn.us. Alternatively, a copy of the report may be obtained by writing TRA at Teachers Retirement Association, 60 Empire Drive Suite 400, St. Paul, MN 55103-1855 or by calling (651) 296-6449 or 1-800-657-3853.

2. Funding Policy

Minnesota Statutes Chapter 354 sets the rates for the employee and employer contributions. These statutes are established and amended by the state legislature. Coordinated and Basic Plan members are required to contribute 7.0% and 10.5%, respectively, of their annual covered salary while the District is required to contribute at an actuarially determined rate. The District is required to contribute the following percentages of annual covered payroll: 7.00% for Coordinated Plan members and 11.0% for Basic plan members. The contribution requirements of plan members and the District are established and may be amended by State Statute. The District contributions for the years ended June 30, 2014, 2013 and 2012 were $5,657,928, $5,082,646, and $4,657,047, respectively, equal to the required contributions for each year as set by state statute.



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NOTE 10 PENSION PLANS (CONTINUED)

B. Public Employees’ Retirement Association (PERA) 1. Plan Description

All full-time and certain part-time employees of the District (other than teachers) are covered by a defined benefit plan administered by the Public Employees’ Retirement Association of Minnesota (PERA). PERA administers the General Employees’ Retirement Fund (GERF) which is a cost-sharing, multiple-employer retirement plan. This plan is established and administered in accordance with Minnesota Statutes, Chapters 353 and 356. GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new members must participate in the Coordinated Plan.

PERA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by State Statute, and vest after three years of credited service. The defined retirement benefits are based on a member’s highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF. That report may be obtained on the internet at www.mnpera.org, by writing to PERA at 60 Empire Drive #200, St. Paul, MN 55103-2088 or by calling (651) 296-7460 or 1-800-652-9026.

2. Funding Policy

Minnesota Statutes Chapter 353 sets the rates for the employer and employee contributions. These statutes are established and amended by the state legislature. The District makes annual contribution to the pension plans equal to the amount required by State Statutes. GERF Basic Plan members and Coordinated Plan members are required to contribute 9.10% and 6.25%, respectively, of their annual covered salary.

The District was required to contribute the following percentages of annual covered payroll: 11.78% for Basic Plan GERF members, 7.25% for Coordinated Plan GERF members. The District’s contributions to the General Employees’ Retirement Fund for the years ending June 30, 2014, 2013, and 2012, were $1,955,466, $1,855,149, and $1,802,711, respectively. The District’s contributions were equal to the contractually required contributions for each year as set by state statute.

C. Defined Contribution Plan The District provides eligible employees future retirement benefits through the District’s 403(b) Plan (the “Plan”). Employees of the District are eligible to participate in the Plan commencing on the date of their employment. Eligible employees may elect to have a percentage of their pay contributed to the Plan. Some employees are eligible to receive a District match of employee contributions up to the qualifying amounts set forth in their respective collective bargaining agreements. Contributions are invested in tax deferred annuities selected and owned by Plan participants. The District contributions for the years ended June 30, 2014, 2013, and 2012 are $532,945, $518,569, and $506,182, respectively. The related employee contributions were $2,594,211, $2,544,605, and $2,449,916 for the years ended June 30, 2014, 2013, and 2012, respectively.



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NOTE 11 OTHER POSTEMPLOYMENT BENEFIT PLAN

A. Plan Description

The District operates a single-employer retiree benefit plan (“the Plan”) that provides health and dental insurance to eligible employees and their spouses through the District’s self-insured health insurance plan. There are 2,328 active participants, 107 retired participants, and 36 spouses receiving payments. Benefit and eligibility provisions are established through negotiations between the District and various unions representing District employees and are renegotiated each two-year bargaining period. The Plan does not issue a publicly available financial report.

B. Funding Policy

Contribution requirements are also negotiated between the District and union representatives. The District contributes 50% - 100% of the cost of current-year premiums for eligible retired plan members and their spouses. For fiscal year 2014, the District contributed $1,424,521 to the plan.

C. Annual OPEB Cost and Net OPEB Obligation

The District’s annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. 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 un-funded actuarial liabilities over a period not to exceed thirty years. The following table shows the components of the District’s annual OPEB cost for the year, the amount actually paid from the plan, and changes in the District’s net OPEB obligation.

Annual Required Contribution 2,439,723$ Interest on Net OPEB Obligation 179,888 Adjustment to Annual Required Contribution (250,787)

Annual OPEB Cost (Expense) 2,368,824 Contributions Made (1,424,521)

Increase in Net OPEB Obligation 944,303 Net OPEB Obligation - Beginning of Year 3,997,506 Net OPEB Obligation - End of Year 4,941,809$

The District’s annual OPEB cost, the percentage of the annual OPEB cost contributed to the plan, and the net OPEB obligation for the year ended June 30, 2014 and the two preceding years were as follows:

PercentageFiscal of Annual NetYear Annual OPEB Cost OPEB

Ended OPEB Cost Contributed Obligation6/30/2014 2,368,824$ 60.1% 4,941,809$ 6/30/2013 2,352,975 69.9% 3,997,506 6/30/2012 2,366,685 69.3% 3,288,813



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NOTE 11 OTHER POSTEMPLOYMENT BENEFIT PLAN (CONTINUED)

D. Funded Status and Funding Progress

As of January 1, 2013, the most recent actuarial valuation date, the District’s unfunded actuarial accrued liability (UAAL) was $19,911,553. The annual payroll for active employees covered by the plan in the actuarial valuation was $95,032,531 for a ratio of UAAL to covered payroll of 21.0%. 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 healthcare cost trends. 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.

E. 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 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. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the January 1, 2013 actuarial valuation, the projected unit credit actuarial cost method was used. The actuarial assumptions included a 4.5% investment rate of return (net of investment expenses), which is a blended rate of the expected long-term investment returns on plan assets and on the employer’s own investments calculated based on the funded level of the plan at the valuation date. The initial healthcare trend rate was 7.5%, reduced by decrements to an ultimate rate of 5% after five years. The UAAL is being amortized as a level dollar amount on a closed basis. The amortization period at June 30, 2014 did not exceed 30 years.

NOTE 12 FLEXIBLE BENEFIT PLAN

The District has a flexible benefit plan that is classified as a “cafeteria plan” under Section 125 of the Internal Revenue Code. All employee groups of the District are eligible if and when the collective bargaining agreement or contract with their group allows eligibility. Eligible employees can elect to participate by contributing pre-tax dollars withheld from payroll checks to the plan for health care and dependent care benefits.



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NOTE 12 FLEXIBLE BENEFIT PLAN (CONTINUED)

Before the beginning of the plan year, which is from January 1 to December 31, each participant designates a total amount of pre-tax dollars to be contributed to the plan during the year. At June 30, the District is contingently liable for claims against the total amount of participants’ annual contributions for the health care portion of the plan, whether or not such contributions have been made. Payments of health insurance premiums are made by the District directly to the designated insurance companies. These payments are made on a monthly basis and are accounted for in the General, Food Service, and Community Service Funds. Payments for amounts withheld for medical reimbursement and dependent care are made to participating employees upon submitting a request for reimbursement of eligible expenses. All plan property and income attributable to that property is solely the property of the District, subject to the claims of the District’s general creditors. Participants’ rights under the plan are equal to those of general creditors of the District in an amount equal to eligible health care and dependent care expenses incurred by the participants. The District believes that it is unlikely that it will use the assets to satisfy the claims of general creditors in the future.

NOTE 13 OPERATING LEASES

The District entered into various lease agreement for office space. The District has also entered into two cost-per-copy print management agreements that include all printing, copying, maintenance, toner, and equipment. The lease term for both is five years, ending on May 1, 2015 and November 1, 2018, respectively. Additionally, the District entered into a fiber optic lease agreement that includes various fiber facilities to operate the District’s network infrastructure. The lease term, as amended, is for ten years, ending on August 31, 2022. The following is a schedule by years of future minimum rental payments required under the operating leases.

Year EndingJune 30,

2015 619,940$ 2016 259,323 2017 256,042 2018 256,042 2019 176,960

2020 - 2023 404,398

1,972,705$

The District had $672,665 of expenditures for these leases in fiscal year 2014.



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NOTE 14 COMMITMENTS AND CONTINGENCIES

Federal and State Programs

Amounts received or receivable from federal and state agencies are subject to agency audit and adjustment. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable fund. The amount, if any, of funds which may be disallowed by the agencies cannot be determined at this time although the District expects such amounts, if any, to be immaterial.

NOTE 15 JOINT USE AGREEMENT

Effective December 1998, the City of Rochester and the District entered into a joint use agreement to provide for the operation and maintenance of a volleyball facility. The facility is operated by the City and maintained primarily by the District. Under the terms of the agreement, the District contributed approximately 45,000 square feet of land and the City obtained a grant from the State of Minnesota to finance construction of the facility. The City and the District each split 50% of the profits or deficits of the facility. For the year ended June 30, 2014, the District paid approximately $913 for their portion of the facility’s deficit.





REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS FOR POSTEMPLOYMENT BENEFIT PLAN

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Actuarial UAAL as a Actuarial Accrued Percentage

Actuarial Value of Liability Unfunded Funded Covered of CoveredValuation Assets (AAL) AAL Ratio Payroll Payroll

Date (a) (b) (b-a) (a/b) (c) ((b-a)/c)1/1/2013 -$ 19,911,553$ 19,991,553$ 0.0% 95,032,531$ 21.0%1/1/2011 - 20,027,597 20,027,597 0.0% 87,152,358 23.0%1/1/2009 - 20,939,935 20,939,935 0.0% 86,085,004 24.3%


SUPPLEMENTARY INFORMATION



STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL

CAPITAL PROJECTS FUND YEAR ENDED JUNE 30, 2014

(61)

OverOriginal Final (Under)

Budgeted Budgeted Actual FinalAmounts Amounts Amounts Budget

REVENUESLocal Sources:

Property Taxes 4,060,014$ 4,060,014$ 4,060,014$ -$ Earnings on Investments 7,500 31,805 33,026 1,221

State Sources 574,805 574,805 574,805 - Total Revenues 4,642,319 4,666,624 4,667,845 1,221


Salaries 201,750 185,731 175,674 (10,057) Employee Benefits 73,245 51,944 52,934 990 Purchased Services 2,346,161 2,889,999 2,073,577 (816,422) Supplies and Materials 9,000 93,237 78,870 (14,367) Other Expenditures 1,000 214,621 466 (214,155)

Capital Outlay 13,402,827 23,002,744 15,051,761 (7,950,983) Total Expenditures 16,033,983 26,438,276 17,433,282 (9,004,994)

Excess (Deficiency) of Revenues Over (Under) Expenditures (11,391,664) (21,771,652) (12,765,437) 9,006,215

OTHER FINANCING SOURCESUtility Rebates - 52,036 70,090 18,054 Certificates of Participation Proceeds - 6,794,280 6,560,000 (234,280) Bond Premiums - - 234,279 234,279

Total Other Financing Sources - 6,846,316 6,864,369 18,053

Net Change in Fund Balance (11,391,664)$ (14,925,336)$ (5,901,068) 9,024,268$

Fund Balance - Beginning 14,344,971

Fund Balance - Ending 8,443,903$

2014


STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL

DEBT SERVICE FUND YEAR ENDED JUNE 30, 2014

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OverOriginal Final (Under)

Budgeted Budgeted Actual FinalAmounts Amounts Amounts Budget


Property Tax 10,357,255$ 10,289,213$ 10,368,146$ 78,933$ Earnings on Investments 60,000 60,000 70,967 10,967

State Sources - 11,265 11,266 1 Total Revenues 10,417,255 10,360,478 10,450,379 89,901

EXPENDITURESDebt Service:

Bond Principal 7,140,000 7,140,000 7,140,000 - Bond Interest 3,694,681 3,694,681 3,694,681 - Paying Agent Fees and Other 15,000 15,000 13,324 (1,676)

Total Expenditures 10,849,681 10,849,681 10,848,005 (1,676)

Excess (Deficiency) of RevenuesOver (Under) Expenditures (432,426) (489,203) (397,626) 91,577

OTHER FINANCING SOURCESSale of Real Property Proceeds - - 6,050 6,050

Total Other Financing Sources - - 6,050 6,050

Net Change in Fund Balances (432,426)$ (489,203)$ (391,576) 97,627$

Fund Balance - Beginning 17,895,286

Fund Balance - Ending 17,503,710$

2014


COMBINING BALANCE SHEET CAPITAL PROJECTS FUND

JUNE 30, 2014

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Kindergarten Deferred Construction - Facilities -

Facilities - Maintenance Area Learning Deferred

Additions Series 2013A Center Maintenance Total

ASSETS

Cash and Investments (383,536)$ 6,558,024$ 2,980$ 6,620,112$ 12,797,580$

Cash and Investments Held by Trustee 5,817,706 - 364,870 - 6,182,576

Receivables:

Current Property Taxes - - - 2,248,113 2,248,113

Other Receivables - 6,428 - 169 6,597

Due From Minnesota Department

of Education - - - 57,481 57,481

Total Assets 5,434,170$ 6,564,452$ 367,850$ 8,925,875$ 21,292,347$

LIABILITIES

Salaries Payable -$ -$ -$ 12,511$ 12,511$

Accounts and Contracts Payable 3,017,756 3,522,904 308,360 1,419,091 8,268,111

Total Liabilities 3,017,756 3,522,904 308,360 1,431,602 8,280,622

DEFERRED INFLOWS OF RESOURCESProperty Taxes Levied for

Subsequent Year - - - 4,567,822 4,567,822 Total Deferred Inflows of Resources - - - 4,567,822 4,567,822

FUND BALANCES

Restricted

Alternative Facilities - 3,041,548 - 2,926,451 5,967,999

Projects Funded by Certificates

of Participation 2,416,414 - 59,490 - 2,475,904

Total Fund Balances 2,416,414 3,041,548 59,490 2,926,451 8,443,903

Total Liabilities, Deferred Inflowsof Resources, and Fund Balance 5,434,170$ 6,564,452$ 367,850$ 8,925,875$ 21,292,347$


COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL

CAPITAL PROJECTS FUND YEAR ENDED JUNE 30, 2014

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Budget Actual Budget ActualREVENUES

LocalProperty Taxes -$ -$ -$ -$ Earnings on Investments - 378 20,305 19,619

State Sources - - - - Total Revenues - 378 20,305 19,619


Sites and Buildings 1,008,760 546,678 858,013 695,010 Capital Outlay 5,293,495 3,339,541 10,086,793 7,213,922

Total Expenditures 6,302,255 3,886,219 10,944,806 7,908,932

Excess (Deficiency) of RevenuesOver (Under) Expenditures (6,302,255) (3,885,841) (10,924,501) (7,889,313)

OTHER FINANCING SOURCESUtility Rebates - - 35,036 41,396 Certificates of Participation Proceeds 6,302,255 6,085,000 - - Bond Premiums - 217,255 - -

Total Other Financing Sources 6,302,255 6,302,255 35,036 41,396

Net Change in Fund Balances -$ 2,416,414 (10,889,465)$ (7,847,917)

Fund Balances - Beginning - 10,889,465

Fund Balances - Ending 2,416,414$ 3,041,548$

Kindergarten Facilities - Additions

Deferred MaintenanceSeries 2013A

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Budget Actual Budget Actual Budget Actual

-$ -$ 4,060,014$ 4,060,014$ 4,060,014$ 4,060,014$ 500 432 11,000 12,597 31,805 33,026

- - 574,805 574,805 574,805 574,805 500 432 4,645,819 4,647,416 4,666,624 4,667,845

85,500 59,955 1,483,259 1,079,878 3,435,532 2,381,521 1,316,304 1,286,160 6,306,152 3,212,138 23,002,744 15,051,761 1,401,804 1,346,115 7,789,411 4,292,016 26,438,276 17,433,282

(1,401,304) (1,345,683) (3,143,592) 355,400 (21,771,652) (12,765,437)

10,000 13,870 7,000 14,824 52,036 70,090 492,025 475,000 - - 6,794,280 6,560,000

- 17,024 - - - 234,279 502,025 505,894 7,000 14,824 6,846,316 6,864,369

(899,279)$ (839,789) (3,136,592)$ 370,224 (14,925,336)$ (5,901,068)

899,279 2,556,227 14,344,971

59,490$ 2,926,451$ 8,443,903$

TotalArea Learning CenterConstruction - Facilities -

Deferred Maintenance


COMBINING STATEMENT OF NET POSITION PROPRIETARY FUNDS

JUNE 30, 2014

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Healthand Dental Workers' TotalCare Trust Compensation 2014

ASSETSCurrent Assets

Cash and Cash Equivalents 6,724,331$ 715,180$ 7,439,511$ Investments 2,500,207 1,239,385 3,739,592 Interest Receivable 341 390 731 Prepaids 5,499 - 5,499

Total Assets 9,230,378 1,954,955 11,185,333

LIABILITIESCurrent Liabilities

Salaries Payable 19,000 3,763 22,763 Accounts Payable 777,453 3,414 780,867 Claims Payable 1,902,668 396,643 2,299,311

Total Liabilities 2,699,121 403,820 3,102,941

NET POSITIONRestricted for Health and Dental Insurance Trust 6,531,257 - 6,531,257 Unrestricted - 1,551,135 1,551,135

Total Net Position 6,531,257$ 1,551,135$ 8,082,392$

Internal Service Funds


COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS


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OPERATING REVENUESCharges for Premiums, Net of Refunds 23,970,658$ 820,060$ 24,790,718$

Total Operating Revenues 23,970,658 820,060 24,790,718

OPERATING EXPENSESSalaries 284,115 55,024 339,139 Employee Benefits 129,093 27,735 156,828 Claim Expense 21,839,501 756,690 22,596,191 Services, Supplies, and Fees 6,115 1,892 8,007

Total Operating Expenses 22,258,824 841,341 23,100,165

Operating Income (Loss) 1,711,834 (21,281) 1,690,553

NONOPERATING INCOMEEarnings on Investments 25,239 6,843 32,082

Total Nonoperating Income 25,239 6,843 32,082

Transfers Out - (500,000) (500,000) Change in Net Position 1,737,073 (514,438) 1,222,635

Net Position - Beginning 4,794,184 2,065,573 6,859,757

Net Position - Ending 6,531,257$ 1,551,135$ 8,082,392$


ROCHESTER PUBLIC SCHOOLS INDEPENDENT SCHOOL DISTRICT NO. 535 COMBINING STATEMENT OF CASH FLOWS

PROPRIETARY FUNDS YEAR ENDED JUNE 30, 2014

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CASH FLOWS FROM OPERATING ACTIVITIESReceipts from Interfund Services Provided 23,981,391$ 820,060$ 24,801,451$ Payments for Administrative Costs (414,146) (82,067) (496,213) Payments for Claims (22,391,290) (657,741) (23,049,031) Payments for Services, Supplies, and Materials (4,653) 13,904 9,251

Net Cash Provided by Operating Activities 1,171,302 94,156 1,265,458

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

Transfers Out - (500,000) (500,000) Net Cash Used by Noncapital Financing Activities - (500,000) (500,000)

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from Maturities of Investment Securities 1,094,813 - 1,094,813 Purchase of Investment Securities - (94,370) (94,370) Interest Received 29,235 7,715 36,950

Net Cash Provided (Used) by Investing Activities 1,124,048 (86,655) 1,037,393

Net Increase (Decrease) in Cash and Cash Equivalents 2,295,350 (492,499) 1,802,851

Cash and Cash Equivalents - Beginning 4,428,981 1,207,679 5,636,660

Cash and Cash Equivalents - Ending 6,724,331$ 715,180$ 7,439,511$

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIESOperating Income (Loss) 1,711,834$ (21,281)$ 1,690,553$ Adjustments to Reconcile Operating Income (Loss) to

Net Cash Provided by Operating Activities:Decrease in Accounts Receivable 10,733 - 10,733 Decrease in Prepaids 1,462 15,796 17,258 Increase (Decrease) in Salaries Payable (938) 692 (246) Increase (Decrease) in Accounts Payable (37,697) 230 (37,467) Increase (Decrease) in Claims Payable (514,092) 98,719 (415,373)

Total Adjustments (540,532) 115,437 (425,095)

Net Cash Provided by Operating Activities 1,171,302$ 94,156$ 1,265,458$


SINGLE AUDIT AND OTHER REQUIRED REPORTS



SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2014

See accompanying Notes to Schedule of Expenditures of Federal Awards. (69)

Agency orCFDA Pass-Through Federal

Grantor/Program Number Number Expenditures

U.S. Department of AgriculturePass-Through Minnesota Department of Education

Non-Cash Assistance (Commodities):National School Lunch Program 10.555 ** 01-0535-000-000 407,492$

Cash Assistance:School Breakfast Program 10.553 ** 01-0535-000-000 700,641 National School Lunch Program 10.555 ** 01-0535-000-000 2,711,079 After School Snack 10.555 ** 01-0535-000-000 53,186 Special Milk Program for Children 10.556 ** 01-0535-000-000 5,826 Child and Adult Care Food Program 10.558 01-0535-000-000 3,647 Summer Food Program 10.559 ** 01-0535-000-000 182,348 Fresh Fruit & Vegetable Grant Program 10.582 01-0535-000-000 26,950

Total Cash Assistance 3,683,677

Total U.S. Department of Agriculture 4,091,169

U.S. Department of EducationPass-Through Minnesota Department of Education

Cash Assistance:

Adult Basic Education State Grant Program 84.002 01-0535-000-000 165,093 Title I Grants to Local Educational Agencies 84.010 01-0535-000-000 2,018,260 Title I, Part C - Migrant Education - State Grant Program 84.011 01-0535-000-000 142,725 Title I, Part D - Program for

Neglected and Delinquent Children 84.013 01-0535-000-000 69,459 Special Education Grants to States 84.027 * 01-0535-000-000 3,641,605 CIMP Special Education Grants 84.027 * 01-0535-000-000 13,245 Career and Technical Education - Basic Grants

to States (Perkins IV) 84.048 01-0535-000-000 158,417 Special Education - Preschool Grants 84.173 * 01-0535-000-000 52,645 Special Education Grants for

Infants and Families with Disabilities 84.181 01-0535-000-000 105,708 Title X, Part C - Sub B - Education for

Homeless Children and Youths 84.196 01-0535-000-000 26,764 Title I, Part C - Even Start State Education Agencies 84.213 01-0535-000-000Title IV, Part B - Twenty-First Century

Community Learning Centers 84.287 *** 396,169 Title III, Part A - English Language Acquisition Grants 84.365 01-0535-000-000 223,987 Title II - Improving Teacher Quality State Grants 84.367 01-0535-000-000 513,629

Pass-Through the Zumbro Education DistrictCash Assistance:

IDEA Part B 611 - Regional Low Incidence Discretionary 84.027 * *** 10,041 Total Cash Assistance - U.S. Department of Education 7,537,747


SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (CONTINUED) YEAR ENDED JUNE 30, 2014

See accompanying Notes to Schedule of Expenditures of Federal Awards. (70)

Agency or

CFDA Pass-Through FederalGrantor/Program Number Number Expenditures

U.S. Department of Homeland SecurityPass-Through the Minnesota Literacy Council

Cash Assistance:Citizenship Education and Training 97.010 *** 36,203$

Total Cash Assistance - U.S. Department of Homeland Security 36,203

Total Federal Awards Expended 11,665,119$

* - Special Education Cluster** - Child Nutrition Cluster*** - Pass-Through Number unavailable


NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2014

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NOTE 1 GENERAL

The accompanying Schedule of Expenditures of Federal Awards presents the expenditures of all federal financial assistance programs of Independent School District No. 535. The reporting entity is defined in Note 1 to the financial statements. All federal financial assistance received directly from federal agencies as well as federal financial assistance passed through other government agencies is included on the schedule.

NOTE 2 BASIS OF ACCOUNTING

The accompanying Schedule of Expenditures of Federal Awards is presented using the modified accrual basis of accounting, which is described in Note 1 to the District's financial statements.

NOTE 3 SUBRECIPIENTS

The District provided federal awards to subrecipients as follows:

Federal AmountCFDA Number Provided

Career and Technical Education - Basic Grantsto States (Perkins IV) 84.048 53,935$

53,935$

Program Title

NOTE 4 TOTALS BY CATALOG OF FEDERAL DOMESTIC ASSSISTANCE NUMBER

Federal TotalCFDA Number Expenditures

National School Lunch Program 10.555 3,171,757$ Special Education Grants to States 84.027 3,664,891

Program Title



INDEPENDENT AUDITORS’ 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

Board of Education Independent School District No. 535 Rochester, Minnesota We have audited, in accordance with the 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 the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535, as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise Independent School District No. 535’s basic financial statements, and have issued our report thereon dated October 29, 2014. Internal Control over Financial Reporting

In planning and performing our audit of the financial statements, we considered Independent School District No. 535’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 opinions 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. 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.


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Compliance and Other Matters

As part of obtaining reasonable assurance about whether Independent School District No. 535’s financial statements are free of material misstatement, we performed tests of its 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 result 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.



INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL

EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133

Board of Education Independent School District No. 535 Rochester, Minnesota Report on Compliance for Each Major Federal Program

We have audited Independent School District No. 535’s compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of Independent School District No. 535’s major federal programs for the year ended June 30, 2014. Independent School District No. 535’s major federal programs are identified in the summary of auditors’ results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility

Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors’ Responsibility

Our responsibility is to express an opinion on compliance for each of Independent School District No. 535’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 Independent School District No. 535’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. However, our audit does not provide a legal determination of Independent School District No. 535’s compliance.


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Opinion on Each Major Federal Program

In our opinion, Independent School District No. 535 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 June 30, 2014. Report on Internal Control Over Compliance

Management of Independent School District No. 535 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 Independent School District No. 535’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program 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 Independent School District No. 535’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 over compliance 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. 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 result of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose.



INDEPENDENT AUDITORS’ REPORT ON MINNESOTA LEGAL COMPLIANCE Board of Education Independent School District No. 535 Rochester, Minnesota 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 respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535, as of June 30, 2014, and the related notes to the financial statements and have issued our report thereon dated October 29, 2014. The Minnesota Legal Compliance Audit Guide for Political Subdivisions covers seven categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and uniform financial accounting and reporting standards. Our study included all of the listed categories. In connection with our audit, nothing came to our attention that caused us to believe that Independent School District No. 535 failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions, except as described in the Schedule of Findings and Questioned Costs as item 2014-001. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding Independent School District No. 535’s noncompliance with the above-referenced provisions. Independent School District No. 535’s response to the finding identified in our audit is described in the accompanying Schedule of Findings and Questioned Costs. Independent School District No. 535’s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this communication is not suitable for any other purpose.




SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2014

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Part I: Summary of the Independent Auditors’ Results:

1. The auditors’ report expresses an unmodified opinion on the basic financial statements of Independent School District No. 535.

2. No deficiencies were disclosed during the audit of the basic financial statements.

3. No instances of noncompliance material to the basic financial statements of Independent

School District No. 535 were disclosed during the audit.

4. No deficiencies were disclosed during the audit of the major federal award programs.

5. The auditors’ report on compliance for the major federal award programs for Independent School District No. 535 expresses an unqualified opinion.

6. The audit did not disclose findings which are required to be reported in accordance with Office

of Management and Budget Circular A-133, Section .510(a).

7. The programs tested as major programs included:

U.S. Department of Education Special Education Cluster: Passed Through the Minnesota Department of Education: Special Education Grants to States CFDA #84.027 CIMP Special Education Grants CFDA #84.027

Special Education – Preschool Grants CFDA #84.173 Passed Through Zumbro Education District: IDEA Part B 611 – Regional Low Incidence Discretionary CFDA #84.027

Title I, Part A – Grants to Local Educational Agencies CFDA #84.010

Title IV, Part B – Twenty-First Century Community Learning Centers CFDA #84.287

8. The threshold for distinguishing Types A and B programs was $349,954.

9. Independent School District No. 535 was not determined to be a low-risk auditee.

Part II: Findings Related to the Basic Financial Statements:

None Part III: Federal Awards Findings and Questioned Costs:

None



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Part IV: Minnesota Legal Compliance Findings: Finding: 2014-001 Conflict of Interest – Contract with Interested Officer Condition: Services were performed by a business controlled by an interested officer

and the District did not adopt the appropriate resolution or receive the appropriate affidavits.

Criteria: Minnesota Statute §471.89, subd. 2, requires that if an interested officer

enters into a contract for goods and services with the government, the governing body should, prior to performance of the contract, adopt a resolution setting forth the essential facts and determining that the contract price was as low or lower than the price at which the commodity or service could be obtained elsewhere. Additionally, prior to payment of the contract, the interested officer should file an affidavit with the clerk of the governing body to the same effect.

Questioned Costs: None Context: The District entered into a contract with this business for emergency services. Effect: The District is not in compliance with Minnesota Statutes. Cause: Lack of communication between the purchasing department, accounts

payable department, and the board of education regarding applicability of these requirements.

Recommendation: We recommend that the District complete the required steps indicated above

prior to entering into a contract with an interested officer.

CORRECTIVE ACTION PLAN (CAP): Explanation of Disagreement With Audit Findings There is no disagreement with the audit finding. Actions Planned in Response to Finding: Prior to newly elected or appointed School Board members taking the Oath of Office, the Assistant School Board Clerk will provide the new School Board members with a copy of School Board Policy #210, which aligns with the requirements of M.S. 471.87, M.S. 471.88, and M.S. 471.89, and request disclosure from each School board member the potential for conflict of interest. Annually, prior the first School Board meeting in July of each year, the Assistant School Board Clerk, will provide each School Board member who will be serving during the fiscal year, with a copy of School Board Policy #210, which aligns with the requirements of M.S. 471.87, M.S. 471.88, and M.S. 471.89, and request disclosure from each School board member the potential for conflict of interest.



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Part IV: Minnesota Legal Compliance Findings (Continued): Finding: 2014-001 Conflict of Interest – Contract with Interested Officer (Continued)

CORRECTIVE ACTION PLAN (CAP) (CONTINUED):

Actions Planned in Response to Finding (Continued): The Purchasing Department will be notified of any potential conflict of interest, and shall obtain competitive quotations or bids for any sale, lease, or contract which will involve a vendor in which a School Board member has an interest. If through the competitive quotation/bid proves, it is determined that the sale, lease, or contract will be awarded to a vendor in which a School Board member has an interest, the contract will be brought to the School Board for adoption of a resolution prior to the award, in compliance with the requirements of M.S. 471.89, Subd. 2. The School Board member with the conflict of interest will be required to provide, at the time of submission of the claim, an affidavit which complies with the requirements of M.S. 471.89, Subd. 3.

Official Responsible for Ensuring CAP: John Carlson, Controller, is the official responsible for ensuring corrective action of the deficiency. Planned Completion Date for CAP: December 31, 2014 Plan to Monitor Completion of CAP: Larry Smith, Executive Director of Finance, will be monitoring this corrective action plan.


SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS YEAR ENDED JUNE 30, 2014

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Comment Comment If not Corrected, Provide Planned Reference Title Status Corrective Action or Other Explanation 2013-001 Time and Effort Distribution

Records Corrected

2013-002 Allowable Activities Corrected


UNIFORM FINANCIAL ACCOUNTING AND REPORTING STANDARDS COMPLIANCE TABLE


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Audit - Audit -

Audit UFARS UFARS Audit UFARS UFARS01 GENERAL FUND 06 BUILDING CONSTRUCTION

Total Revenues 168,335,156$ 168,335,151$ 5$ Total Revenues 4,737,935$ 4,737,930$ 5$ Total Expenditures 173,993,442 173,993,439 3 Total Expenditures 17,433,282 17,433,280 2 Nonspendable Nonspendable

460 Nonspendable 250,825 250,825 - 460 Nonspendable - - - Restricted/Reserved Restricted/Reserved

403 Staff Development 588,464 588,464 - 407 Capital Projects Levy - - - 405 Deferred Maintenance - - - 409 Alternative Fac. Program 5,967,999 5,967,998 1 406 Health & Safety 65,810 65,810 - 413 Project Funded by COP 2,475,904 2,475,904 - 407 Capital Project Levy - - - Restricted408 Cooperative Rev. - - - 464 Restricted - - - 409 Alternative Fac Program - - - Unassigned413 Project Funded by COP - - - 463 Unassigned - - - 414 Operating Debt - - - 416 Levy Reduction - - - 07 DEBT SERVICE417 Taconite Building Maint - - - Total Revenues 10,450,379 10,450,378 1 423 Certain Teacher Programs - - - Total Expenditures 10,848,005 10,848,005 - 424 Operating Capital 660,274 660,275 (1) Nonspendable426 $25 Taconite - - - 460 Nonspendable - - - 427 Disabled Accessibility - - - Restricted/Reserved428 Learning & Development - - - 425 Bond Refundings 15,528,547 15,528,547 - 434 Area Learning Center - - - 451 QZAB Payments - - - 435 Contracted Alt. Programs - - - Restricted 436 St. Approved Alt. Prog. - - - 464 Restricted 1,975,163 1,975,163 - 438 Gifted & Talented - - - Unassigned 441 Basic Skills - - - 463 Unassigned - - - 445 Career & Tech Programs - - - 448 Achievement & Integration - - - 449 Safe Schools Levy 82,852 82,852 - 08 TRUST450 Pre-Kindergarten - - - Total Revenues - - - 451 QZAB Payments - - - Total Expenditures - - - 452 OPEB Liab. Not in Trust - - - Unassigned453 Unfunded Sev & Retiremt Levy - - - 422 Unassigned - - -

Restricted464 Restricted 419,110 419,111 (1) 20 INTERNAL SERVICE

Committed Total Revenues 24,822,800 24,822,801 (1) 418 Separation 4,941,809 4,941,809 - Total Expenditures 23,100,165 23,100,166 (1) 461 Committed 1,497,640 1,497,640 - Unassigned

Assigned 422 Unassigned 8,082,392 8,082,391 1 462 Assigned 3,710,643 3,710,642 1

Unassigned422 Unassigned 23,363,880 23,363,879 1 25 OPEB REVOCABLE TRUST

Total Revenues - - - 02 FOOD SERVICE Total Expenditures - - -

Total Revenues 7,900,782 7,900,783 (1) UnassignedTotal Expenditures 8,402,198 8,402,197 1 422 Unassigned - - - Nonspendable

460 Nonspendable 85,271 85,271 - 45 OPEB IRREVOCABLE TRUSTRestricted/Reserved Total Revenues - - -

452 OPEB Liab. Not in Trust - - - Total Expenditures - - - Restricted Unassigned

464 Restricted 3,394,941 3,394,943 (2) 422 Unassigned - - - Unassigned

463 Unassigned - - - 47 OPEB DEBT SERVICETotal Revenues - - -

04 COMMUNITY SERVICE Total Expenditures - - - Total Revenues 9,868,546 9,868,534 12 NonspendableTotal Expenditures 9,535,890 9,535,880 10 460 Nonspendable - Nonspendable Restricted

460 Nonspendable 2,620 2,620 - 464 Restricted - - - Restricted/Reserved Unassigned

426 $25 Taconite - - - 463 Unassigned - - - 431 Community Education 925,919 925,918 1 432 E.C.F.E. 244,504 244,503 1 444 School Readiness 7,628 7,628 - 447 Adult Basic Education 21,296 21,296 - 452 OPEB Liab. Not in Trust - - -

Restricted464 Restricted 38,429 38,429 -

Unassigned463 Unassigned - - -


STUDENT ACTIVITY FUNDS



INDEPENDENT AUDITORS’ REPORT Board of Education Independent School District No. 535 Rochester, Minnesota Report on the Financial Statement We have audited the statement of cash receipts and disbursements of the Student Activity Funds of Independent School District No. 535 as of and for the year ended June 30, 2014, and the related note to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the regulatory basis of accounting described in the note to the financial statements. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 auditors’ 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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Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles As described in the note to the financial statements, to meet the financial reporting requirements of the Minnesota Department of Education, the financial statements are prepared by the Independent School District No. 535 in accordance with the financial reporting provisions of the accounting practices prescribed or permitted by the Minnesota Department of Education, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the regulatory basis of accounting described in the note to the financial statements and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. Adverse Opinion on U.S. Generally Accepted Accounting Principles In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Student Activity Funds of Independent School District No. 535 as of June, 30 2014, or changes in financial position for the year then ended. Basis for Qualified Opinion on Regulatory Basis of Accounting We were unable to audit cash receipts because the District has not established procedures to provide assurance that all cash collections are recorded in the accounting records. We were unable to obtain sufficient appropriate audit evidence about the completeness of cash receipts by other auditing procedures. Qualified Opinion on Regulatory Basis of Accounting In our opinion, except for the possible effect of the matter discussed in the Basis for Qualified Opinion on Regulatory Basis paragraph, the financial statements referred to in the first paragraph present fairly, in all material respects, the cash balances of the Student Activity Funds of Independent School District No. 535 as of June 30, 2014, and the receipts and disbursements for the year then ended in accordance with the basis of accounting described in the note to the financial statements.



STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS STUDENT ACTIVITY ACCOUNTS

AS OF AND FOR THE YEAR ENDED JUNE 30, 2014

See accompanying Notes to Student Activity Fund Financial Statements. (84)

Balance Disbursements BalanceFunds 06/30/13 Receipts & Transfers 06/30/14Washington 2,545$ 3,721$ 4,317$ 1,949$ Friedell 6,276 9,058 7,779 7,555 John Adams 33,504 6,430 8,937 30,997 Kellogg 5,041 6,783 6,423 5,401 Willow Creek 15,623 10,004 5,007 20,620 Century 105,499 357,652 264,913 198,238 John Marshall 123,951 401,902 378,822 147,031 Mayo 155,376 367,747 364,403 158,720

447,815$ 1,163,297$ 1,040,601$ 570,511$


STUDENT ACTIVITY FUNDS NOTE TO STUDENT ACTIVITY FUND FINANCIAL STATEMENTS


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NOTE 1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Student activity fund transactions are defined as extracurricular programs conducted for the motivation and enjoyment of students. These programs and activities are not offered for school credits nor required for graduation. Activities are generally conducted outside of school hours. The content of the activities is determined primarily by students, under the guidance of a staff member or other adult. Student activities are to be self-sustaining with all expenses paid by dues, admissions, or other student fund raising events. The accounts of the Student Activity Fund are maintained, and the accompanying financial statements have been prepared, on the regulatory basis of accounting prescribed or permitted by the Minnesota Department of Education. Consequently, receipts are recognized when received rather than when earned, and disbursements are recognized when paid rather than when the obligations are incurred, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Student Activity bank deposits are covered by deposit insurance or were properly collateralized.


INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH THE MANUAL FOR ACTIVITY FUND ACCOUNTING

Board of Education Independent School District No. 535 Rochester, Minnesota Report on Compliance We have audited, in accordance with auditing standards generally accepted in the United States of America, the statement of cash receipts and disbursements of the Student Activity Funds of Independent School District No. 535 as of and for the year ended June 30, 2014, and the related note to the financial statements, which collectively comprises the basic financial statements, and have issued our report thereon dated October 29, 2014. We expressed an adverse opinion on U.S. generally accepted accounting principles because the financial statements are prepared on a basis of accounting that demonstrates compliance with the regulatory basis of accounting prescribed or permitted by the Minnesota Department of Education, which differs from accounting principles generally accepted in the United States of America. In addition, our report on the regulatory basis of accounting is qualified because the District has not established procedures to provide assurance that all cash collections are recorded in the accounting records. The Manual for Activity Fund Accounting, issued by the Minnesota Department of Education, provides uniform financial accounting and reporting standards for student activities. We have performed auditing procedures to test compliance with the provisions of this manual. In connection with our audit, nothing came to our attention that caused us to believe that the District failed to comply with the provisions of the Manual for Activity Fund Accounting. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the District’s noncompliance with the above-referenced provisions. The purpose of this report is solely to describe the scope of our testing of compliance relating to the provisions of the Manual for Activity Fund Accounting and the results of that testing, and not to provide an opinion on compliance. Accordingly, this report is not suitable for any other purpose.


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