City of Salem, Virginia

CITY OF SALEM, VIRGINIA COMPREHENSIVE ANNUAL FINANCIAL REPORT YEAR ENDED JUNE 30, 2016 DEPARTMENT OF FINANCE CITY OF SALEM, VIRGINIA TABLE OF CONTENTS JUNE 30, 2016 Page INTRODUCTORY SECTION Letter of Transmittal 4 Directory of Principal Officials 15 Organizational Chart 16 Certificate of Achievement for Excellence in Financial Reporting 17 FINANCIAL SECTION Report of Independent Auditor 19 Management’s Discussion and Analysis 22 Basic Financial Statements Government-wide Financial Statements Exhibit 1 Statement of Net Position 37 Exhibit 2 Statement of Activities 38 Governmental Funds’ Financial Statements Exhibit 3 Balance Sheet 39 Exhibit 4 Reconciliation of the Governmental Funds’ Balance Sheet to the Statement of Net Position 40 Exhibit 5 Statement of Revenues, Expenditures and Changes in Fund Balances 41 Exhibit 6 Reconciliation of the Governmental Funds’ Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities 42 Exhibit 7 Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual – General Fund 43 Proprietary Funds’ Financial Statements Exhibit 8 Statement of Net Position 44 Exhibit 9 Statement of Revenues, Expenses and Changes in Net Position 45 Exhibit 10 Statement of Cash Flows 46 Fiduciary Funds’ Financial Statements Exhibit 11 Statement of Fiduciary Net Position 47 Exhibit 12 Statement of Changes in Fiduciary Net Position 47 Notes to Financial Statements 48 Required Supplementary Information Exhibit 13 Schedule of Changes in Net Pension Liability (Asset) and Related Ratios 93 Exhibit 14 Schedule of Employer Pension Contributions 94 Exhibit 15 Schedule of Employer’s Share of Net Pension Liability - VRS Teacher Retirement Plan 95 Exhibit 16 Schedule of Employer Pension Contributions - VRS Teacher Retirement Plan 96 Exhibit 17 Schedule of Funding Progress for Other Postemployment Benefits 97 Exhibit 18 Schedule of Employer Contributions for Other Postemployment Benefits 97 Notes to Required Supplementary Information 98 CITY OF SALEM, VIRGINIA TABLE OF CONTENTS JUNE 30, 2016 Page Other Supplementary Information Nonmajor Proprietary Funds Combining Schedules Exhibit 19 Combining Statement of Net Position 101 Exhibit 20 Combining Statement of Revenues, Expenses, and Changes in Net Position 102 Exhibit 21 Combining Statement of Cash Flows 103 Agency Funds Combining Schedules Exhibit 22 Combining Statement of Fiduciary Assets and Liabilities 104 Exhibit 23 Combining Statement of Changes in Fiduciary Assets and Liabilities 105 STATISTICAL SECTION Table 1 Net Position by Component 108 Table 2 Changes in Net Position 109 Table 3 Fund Balances, Governmental Funds 111 Table 4 Changes in Fund Balance, Governmental Funds 112 Table 5 Assessed Value and Actual Value of Taxable Property 113 Table 6 Property Tax Levies and Collections 114 Table 7 Principal Real Estate Property Taxpayers 115 Table 8 Principal Electric Customers 115 Table 9 Ratios of General Bonded Debt Outstanding 116 Table 10 Legal Debt Margin Information 117 Table 11 Demographic Statistics 118 Table 12 Principal Employers 119 Table 13 Full-time Equivalent City Government Employees by Function 120 Table 14 Operating Indicators by Function 121 Table 15 Capital Asset Statistics by Function 122 COMPLIANCE SECTION Schedule of Expenditures of Federal Awards 125 Report of Independent Auditor 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 127 Report of Independent Auditor on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Uniform Guidance 129 Schedule of Findings and Questioned Costs 131 THIS PAGE INTENTIONALLY BLANK 1 INTRODUCTORY SECTION The introductory section of the City of Salem, Virginia’s Comprehensive Annual Financial Report contains the Letter of Transmittal, which presents an overview of the profile of the City of Salem government, the local economic condition and outlook, major initiatives and accomplishments, and financial policies and financial planning. Also included in this section are an organizational chart and the Certificate of Achievement for Excellence in Financial Reporting awarded by the Government Finance Officers Association of the United States and Canada (GFOA) for the Comprehensive Annual Financial Report for the fiscal year ended June 30, 2015. It is the highest form of recognition in governmental financial reporting. 2 THIS PAGE INTENTIONALLY BLANK 3 November 17, 2016 The Honorable Mayor, Members of City Council and Citizens of Salem, Virginia In accordance with Section 8.9 of the Salem City Charter, we are pleased to present the City of Salem, Virginia (City) Comprehensive Annual Financial Report (CAFR) as of and for the fiscal year ended June 30, 2016. The charter requires the City to issue an annual report on its financial position and activities and that the report be audited by an independent firm of certified public accountants. This report was prepared by the Department of Finance in conformity with accounting principles generally accepted in the United States of America (GAAP) as promulgated by the Governmental Accounting Standards Board (GASB). Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the City. The data as presented is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the City as measured by the financial activity of various funds and component units. All disclosures necessary to enable the reader to gain the maximum understanding of the City's financial activity have been included. The City has established a comprehensive internal control framework designed to both safeguard the government’s assets against loss from unauthorized use or theft and to properly record and adequately document transactions in order to compile information for the presentation of the City’s financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the City’s comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. Management’s discussion and analysis (MD&A) beginning on page 22 provides a narrative introduction, overview and analysis to assist users in interpreting the basic financial statements as required by GAAP. This letter is meant to complement the MD&A and should be read in conjunction with it. 4 Profile of the Government Salem is located in Virginia’s Blue Ridge Mountains, approximately 190 miles west of Richmond and 250 miles southwest of Washington, DC. Its position in the southeastern United States gives the City ready access, within a 500-mile radius, to nearly two-thirds of the total population of the United States. In addition, the City lies at the region’s crossroads of major rail and highway systems, making it a part of the principal trade, industrial, transportation, medical and cultural center of western Virginia. Chartered by the Commonwealth of Virginia as a town in 1806 and as a city in 1968, Salem encompasses a land area of 14.4 square miles. The City’s 2016 estimated population, 25,432, accounts for approximately 8.2% of the population in its metropolitan statistical area (MSA), which includes the neighboring City of Roanoke and Counties of Botetourt, Craig, Franklin and Roanoke. The City of Salem operates under a Council-Manager form of government. Under this form of government, City Council is elected by the voters and is comprised of five members, who elect two of their members Mayor and Vice-Mayor for a two-year term. The City Council employs a City Manager who is responsible for the proper administration of the City government. The Primary Government provides a full range of services including general government administration, judicial administration, public safety, public works, health and welfare, parks and recreation, community development activities and support for education. The City also owns and operates an electric distribution system, water and sewage facilities and a civic center. The financial reporting entity reflected in the CAFR, which is more fully described in Note 1 to the basic financial statements, conforms to the requirements of GAAP. The accounting and reporting principles of the GASB are based on the fundamental concept that publicly elected officials are accountable to their constituents, and the financial statements should emphasize the primary government and permit financial statement users to distinguish between the primary government and its component units. There are several commissions and authorities where the City’s accountability is limited to appointments to, or seats on, the respective boards. The City does not exercise financial or administrative control over these entities, so they are excluded from this report. The City’s reporting entity includes one discretely presented component unit, the City of Salem School Division. A component unit is a legally separate entity which meets one of three conditions: the governing board is appointed by the primary government, the entity is fiscally dependent on the primary government, or excluding the entity could potentially result in misleading financial reporting. A five-member School Board appointed by City Council supervises operations

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