CITY OF NEWPORT NEWS, VIRGINIA

Comprehensive Annual Financial Report

Fiscal Year Ended June 30, 2005

Prepared by the Department of Finance LaVerne Lovett, CPA, CGFM Director

Ronald L. DeWitt, CPA, MBA, CGFM Cynthia J. Davis Pamela N. Barclay, CPA Keith M. Ferguson Bertha M. Harris Vanessa K. Olenik Kimberly S. Powell Charles S. Rayle Darlene H. Slade

2400 Washington Avenue Newport News VA 23607

CITY OF NEWPORT NEWS, VIRGINIA

Table of Contents

Page

Introductory Section (unaudited): Letter of Transmittal ...... i-xii City Government Officials...... xiii Organizational Chart...... xiv GFOA Certificate of Excellence in Financial Reporting ...... xv

Financial Section: Independent Auditors’ Report...... 1-2 Management’s Discussion and Analysis (unaudited) ...... 3-13

Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets ...... 14 Statement of Activities...... 15 Governmental Fund Financial Statements: Balance Sheet...... 16 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets...... 17 Statement of Revenues, Expenditures and Changes in Fund Balances...... 18 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement of Activities...... 19 Proprietary Fund Financial Statements: Statement of Net Assets...... 20 Statement of Revenues, Expenses and Changes in Net Assets ...... 21 Statement of Cash Flows...... 22 Fiduciary Fund Financial Statements: Statement of Fiduciary Net Assets ...... 23 Statement of Changes in Fiduciary Net Assets – Pension Trust Employees’ Retirement...... 24

Notes to Basic Financial Statements ...... 25-66

Required Supplementary Information other than Management’s Discussion and Analysis (unaudited):

Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual – General Fund ...... 67-71

Public Employee Retirement Systems – Schedules of Funding Progress...... 72 Newport News Employees’ Retirement Fund – Schedule of Employer Contributions ...... 73 Notes to Required Supplementary Information...... 74-75

CITY OF NEWPORT NEWS, VIRGINIA

Table of Contents

Table Page

Supplementary Information: Nonmajor Governmental Funds: Combining Balance Sheet...... 76-77 Combining Statement of Revenues, Expenditures and Changes in Fund Balances...... 78-79 Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual – Special Revenue Funds...... 80-81 Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual – Debt Service Fund ...... 82 Statement of Changes in Assets and Liabilities – Agency Funds ...... 83

Other Discretely Presented Component Units: Combining Statement of Net Assets ...... 84 Combining Statement of Revenues, Expenses and Changes in Net Assets...... 85 Combining Statement of Cash Flows...... 86

Statistical Section (unaudited):

General Governmental Revenues by Source...... I ...... S-1 General Governmental Expenditures by Function ...... II ...... S-2 Property Tax Levies and Collections ...... III ...... S-3 Assessed Value of Taxable Property...... IV ...... S-4 Property Tax Rates ...... V ...... S-5 Ratio of Debt to Assessed Value and Debt Per Capita...... VI ...... S-6 Ratio of Annual Debt Service to General Government Expenditures...... VII ...... S-7 Demographic Statistics ...... VIII ...... S-8 Property Values, Construction and Bank Deposits ...... IX ...... S-9 Principal Taxpayers ...... X ...... S-10 Computation of Legal Debt Margin...... XI ...... S-11 Miscellaneous Statistical Data ...... XII ...... S-12 Compliance Section:

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...... C-1 Independent Auditors’ Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133...... C-3 Independent Auditors’ Report on Compliance with Commonwealth of Virginia Laws, Regulations, Contracts and Grants ...... C-5 Schedule of Expenditures of Federal Awards...... C-6 Notes to Schedule of Expenditures of Federal Awards ...... C-9 Schedule of Findings and Questioned Costs...... C-10

The Honorable City Council City of Newport News Newport News, Virginia

The Honorable City Council:

We are pleased to submit the Comprehensive Annual Financial Report (CAFR) of the City of Newport News, Virginia (the City or Newport News) as of and for the fiscal year (FY) ended June 30, 2005. Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements.

We experienced a delay in receiving the audited financial report of our component unit, Peninsula Airport Commission (PAC). The delay impacted final compilation and audit of the City’s CAFR. Realizing the importance of timeliness to the quality of financial reporting, the City is working with PAC to see what changes can be made to better handle their workload.

Cherry, Bekaert & Holland, LLP, Certified Public Accountants, have issued an unqualified (“clean”) opinion on the City of Newport News’ financial statements for the year ended June 30, 2005. The independent auditor’s report is located at the front of the financial section of this report.

Management’s discussion and analysis (MD&A) immediately follows the independent auditor’s report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complement this letter of transmittal and should be read in conjunction with it.

Profile of the Government

The City of Newport News, incorporated in 1896, is centrally located on the eastern coast of Virginia. It currently occupies 69 square miles and serves a population of 185,240. Newport News is the fourth largest city by acreage and the fifth largest city by population in the Commonwealth of Virginia. Northrop Grumman Newport News is one of the largest maritime yards in the world, employing approximately 18,500 people.

The City of Newport News has a council-manager form of government. Policy-making and legislative authority are vested in a Council consisting of the mayor and six other members, all elected on a non-partisan basis. The mayor and council members serve four-year terms, with three members elected every two years. The mayor is elected at large and the six members of council are elected by voters of the districts in which they reside. The Council appoints the city manager who carries out its policies, directs daily operations and appoints the heads of various departments. The Council also appoints the City Attorney, who is the legal advisor to the Council, the City administration, boards, commissions and agencies of the City.

The City of Newport News provides a full range of services, including police and fire protection, juvenile detention, adult correction, sanitation and human services, the construction and maintenance of highways, streets and infrastructure, recreational activities and cultural events. In addition to general government activities, the City

i The Honorable City Council City of Newport News March 1, 2006

provides street lighting, water and wastewater services to its citizens. The City’s Public Utilities Department (Waterworks) also provides water to the cities of Hampton, Poquoson and parts of York and James City Counties. This report covers financial transactions of all services provided by the City. The City is also financially accountable for a legally separate school district which is reported separately within the financial statements. We have also included, as enterprise funds and/or component units, the Newport News Parking Authority, the Peninsula Airport Commission (PAC), the Economic/Industrial Development Authorities (E/IDA) because of City Council financial accountability or significant financial ties with the City.

Those independent agencies that we excluded are Newport News Redevelopment and Housing Authority, Office of Human Affairs, Hampton-Newport News Community Services Board, Peninsula Transportation Commission, Peninsula Ports Authority of Virginia and Virginia Peninsula Economic Development Council.

The Council is required to adopt a final budget no later than the fifteenth day of the last month of the fiscal year. This annual budget serves as the foundation for the City’s financial planning and control. The budget is prepared by fund, function (e.g., public safety), and department (e.g., police).

Local economy

Newport News is centrally located to serve Eastern Virginia and the East Coast, with convenient access to both the industrial Midwest and the growing southeast Sunbelt. Newport News is part of the Hampton Roads Metropolitan Statistical Area (MSA), the 31st largest market in the U.S. and the largest between Washington and Atlanta. The City’s location on the world’s greatest natural harbor provides a window of opportunity onto the international marketplace. The City has a diverse economic base with manufacturing, retail, services, distribution and one of the world’s major shipbuilding centers, Northrop Grumman Newport News.

Northrop Grumman Newport News, the City’s largest employer, continues to remain strong, employing approximately 18,500 white collar and production workers. During FY 2005, the company announced capital investments of almost $65 million. These investments include the construction of a new training facility at the northern end of the Downtown. This is the continuation of a multi-year capital upgrade in preparation for building the new generation of nuclear aircraft carrier.

During FY 2005 national unemployment decreased from 5.8% to 5.2%, while the City’s unemployment rate decreased from 5.2% to 4.8%.

Since the early 1990’s, the number of national defense sector jobs in Newport News has declined. While this decline has stabilized, the future threat remains that Navy shipbuilding decisions and/or future BRAC decisions could significantly impact employment at Northrop Grumman Newport News and Ft. Eustis—the City’s two largest employers. Overall defense spending also affects the region’s economy and, thus, the health of the City’s local economic sector. Beyond defense, the federal government’s funding and priorities for the Department of Energy and for NASA directly affect the number of high-paying jobs located at Jefferson lab and NASA Langley Research Center. Though located in Hampton, because of NASA Langley’s importance for the entire region the City has a vital stake in its future viability.

The City is now more than 95% developed, with most of the built environment oriented around automobile-dependent forms of development. The new urbanism movement seeks to recreate more pedestrian-friendly neighborhoods and the city has been fortunate to have caught this new trend in a timely fashion, with such projects as City Center at Oyster Point, Port Warwick and Asheton all incorporating the principles of new urbanism. Recreating the City in this mode

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will be increasingly important for enhancing the City’s quality of life and, thus, making it globally competitive to attract and retain a skilled, educated and creative labor force to support continued economic development. During FY 2005, positive steps were taken toward business retention and expansion, business attraction and community development--goals that serve to enhance Newport News’ tax and job base. The City’s economic development focus during this past fiscal year has been on the traditional Downtown, the Southeast Community, the Newmarket/Brentwood area, the Greater Hilton area, Oyster Point of Newport News, Denbigh, Oakland Industrial Park and the Greater Lee Hall area. Significant economic development also occurred along the City’s “Cultural Corridor” and in the Patrick Henry Retail District.

During the past ten years, the government’s expenses related to public safety have increased not only in amount, but also as a percentage of total expenses (a ten-year increase of $34.1 million or 58.5 %). In the case of public safety, much of the increase reflects a regional trend that has seen the salaries and benefits of police and firefighters growing at a much faster rate than those of other categories of public-sector employees.

Long-term financial planning

The City develops a new multi-year Capital Improvements Plan annually that is separate from the Annual Operating Budget. The Capital Improvements Plan is not a commitment of funds, a budget, nor an appropriation of funds. The Capital Improvements Plan is a multi-year plan of expenditures, developed within the context of its impact on the operating budget. Generally, most projects are funded by General Obligation Bonds (GOB) issued by the City. The bonds are usually repaid over twenty years, and the annual payment on those bonds is called “debt service.” Debt service is budgeted for and paid out of the City’s annual operating budget. FY 2006 calls for total General Fund supported funding of $29.3 million.

On June 30, 2005, the City’s total authorized indebtedness, subject to limitation, was approximately $439.5 million. The limit of indebtedness is established by the City Charter at 10% of the total assessed value of real estate, or approximately $925 million. An additional $10 million in water bonds, authorized by voter referendum, can be issued. The margin for additional borrowing was approximately $522 million at June 30, 2005.

The City has a self-imposed policy to limit annual debt service cost to 9.5% of annual revenues, less Public Utilities. The current actual percentage is 8%. The City’s credit ratings for general obligation bond issues have remained very good: Aa2 by Moody’s and Aa by Standard and Poor’s rating services.

The General Fund fund balance is an important element in the financial position of the City. The fund balance is divided into reserved and unreserved portions, and the unreserved fund balance is subdivided into designated and undesignated portions. Reserved fund balance is used to reserve assets that are not available for current spending, and designated fund balance represents planned uses of current resources. Fund balance is a positive factor when the rating agencies consider bond ratings for the City. At the end of the year, $61 million has been set aside in various reserves and other designations.

The undesignated General Fund fund balance, which represents available current financial resources, totaled $32.1 million at June 30, 2005. Uses of the undesignated fund balance are carefully evaluated to ensure that the balance will be sufficient for future needs. A healthy undesignated fund balance allows the City to provide adequate services for the citizens, plan for future projects, and retain its sound financial position. City Council established a goal of maintaining an undesignated fund balance not less than 5% of actual general fund revenues for the year. The goal was reached in FY92, and with the undesignated General Fund fund balance at $32.1 million, the City continues to enjoy a comfortable fund balance position.

iii The Honorable City Council City of Newport News March 1, 2006

Fund Balance of the General Fund (Undesignated)

$40.0 $32.1 $30.0 $30.0 $30.0 $30.0 $30.0 $27.8 $27.9 $27.9 $30.0 $26.4

$20.0 Millions $10.0

$0.0 96 97 98 99 00 01 02 03 04 05

Real estate property tax revenues continue to be the staple of the City’s funding sources. Dependence on strong growth must be cautiously guarded as state and federal revenues continue to make up a smaller percentage of the City’s revenue. On the expense side, we expect continuing increases in the cost of health care and pension contributions.

The City continues to guarantee the payment of principal and interest for the Peninsula Airport Commission Airport bonds, Series 2001, whose outstanding balance totaled $6.0 million at June 30, 2005. Additional information regarding the City’s debt outstanding and debt administration is provided in the notes to the financial statements and the statistical section contained in this report.

Major Initiatives

During the year, the City made substantial progress toward finalization of a Development Agreement and Master Development Plan, which will govern the development of the 400+/- acres and establish accountability by both parties to maintain the commitment and vision over the ten-year development period. The project objective is to create a legacy community that offers more choices of high-quality housing products, establishes a balanced plan with lifestyle choices and values the City’s historical assets while preserving and protecting the sensitive water and environmental resources.

In FY 2005 Newport News Town Center, LLC (NNTC) began construction of 205,000 square feet of retail and office space in the Phase Two section of City Center. Also included in the new Phase Two construction is an 85,000-square- foot office building, One City Center. Simultaneously, the NNEDA is constructing an 885-car parking garage along Thimble Shoals Boulevard to support the retail shopping and office development. The parking garage will have ground-level retail shops along Mariner’s Row, a pedestrian plaza that will link the Phase Two City Center buildings. The City is reconstructing Thimble Shoals Boulevard as an attractive, pedestrian friendly urban boulevard and installing new entrance signage at the intersection of Thimble Shoals Boulevard and Jefferson Avenue.

Side by side with the Phase Two City Center construction, a 256-room Marriott Hotel and 70,000-square-foot conference center is expected to open by June 15, 2006. The 11-story structure includes rooms with wireless Internet

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access and a T-1 line for high-speed access. Also being marketed are up to 75 condominiums that could be built along side the hotel above the conference center. Additionally, more than 50 high-end condominiums are being marketed by NNTC as part of a continuation of the Phase Two City Center development.

The first block of the Park Place luxury apartments has been completed and leased, and leasing and occupancy of the second block has also taken place. Construction of the remaining third, fourth and fifth apartment blocks began in FY 2005 and will be completed in FY 2006. The Red Star Tavern, an upscale restaurant and pub between Fountain Plaza One and Fountain Plaza Three began and will be completed in FY 2006.

In the Southeast Community, planning for the development of the Southeast Commerce Center along Terminal Avenue has continued. The NNRHA is expected to complete acquisition and demolition in this 16-acre area in FY 2006. The Southeast Commerce Center has been identified as a target Brownfields area. Level one environmental assessments took place and the process of conducting level two environmental assessments was begun. The City’s goal is to attract industrial and commercial businesses that can take advantage of the Commerce Center’s Virginia Enterprise Zone and federal HUBZone location. The Department of Development is marketing a 5-acre retail parcel located at the corner of Marshall Avenue and 39th Street to attract a grocery store to the community. Additionally, in the City’s Seafood Industrial Park, Chesapeake Bay Packing is undertaking a major expansion, adding 8,750 square feet to its existing plant and investing more than $1.2 million in the expansion.

The construction of a new Police headquarters building will begin in FY2006 with cost projection of $22 million, which is being funded with City bonds. Besides providing a home for the Police headquarters, this project advances the City’s redevelopment and beautification goals in its Mid-City Enterprise Zone. Elsewhere in this neighborhood, Riverside Healthcare made more than $1.3 million in investments in renovating the Brentwood Shopping Center for medical and training offices.

In the Greater Hilton Area, the City’s Industrial Development Authority (NNIDA) renegotiated its lease with United Parcel Service (UPS) and refinanced its debt on the building occupied by the UPS customer service center. The NNIDA’s refinancing prompted UPS to convert its operating lease to a capital lease, thus eliminating the NNIDA’s end-of-term risk. UPS has since added 80 new jobs at the customer service center.

The City continues to work with the U.S. Government Services Administration on the siting of a new federal district courthouse on land owned by the City near City Hall.

Other Initiatives and Accomplishments

Adult Corrections – During FY 2005, the department installed cold storage units which provide storage space for approximately thirty days’ supply of food if needed during potential emergencies. In addition, backup emergency generators were installed which provide full operational capabilities for the Dining Hall, Jail Housing Area, Gymnasium, and Pumping Station. New fencing and mechanical entrance gate to the facility were also installed with voice and visual capabilities at the entrance to limit and control after hours and weekend access to the facility.

Commissioner of the Revenue - The Personal Property, Related Tax and Business License sections, the department will outsource the printing and mailing of returns for 2006. This new venture will improve customer service and office efficiency. The Virginia Department of Taxation is transitioning from its outdated accounting system to a new system called Integrated Revenue Management System (IRMS). IRMS will be implemented in August 2005 and will be used for taxpayer assistance in checking on the status of returns, processing accelerated state tax refunds researching assessments and payments.

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Court Services – Work continues with the Annie E. Casey Foundation to reduce reliance on secure detention for youthful offenders. Consequently, the average daily population in detention has been reduced without compromising public safety. The department is participating in gang initiatives on the state and local level.

Development - The Department is responsible for a full range of economic and industrial development activities undertaken by the City. In addition to the initiatives discussed on page iv, during FY2005, the department:

• Coordinated with the City Manager’s Office and other City departments to negotiate and finance the purchase of the CSB Building (2501 Washington Avenue) to be used for offices by the City and other public sector agencies.

• Leased two commercial units in the Downtown Engineering Center; renegotiated a lease between the Industrial Development Authority of the City of Newport News (NNIDA) and United Parcel Service (UPS); subleased the vacant MCI Building to Ferguson Enterprises; leased, through a capital lease, a 64,000 square-foot industrial building to Kitchen Design for the expansion of its manufacturing operation.

Emergency Management – The following projects/initiatives were in process or completed during FY 2005:

• In October 2004, the Peninsula Hazard Mitigation Planning Committee (PHMPC) was awarded a $126,000 grant to develop a Regional Natural Hazard Mitigation Plan. Newport News was selected to serve as the grant manager. The Committee includes the cities of: Hampton, Newport News and Williamsburg; the counties of: James City and York.

• National Incident Management System (NIMS) Implementation – City personnel have completed NIMS training, and first responders are in the process of completing Basic to Advanced Incident Command. In July 2005, City Council adopted a resolution formally recognizing NIMS. • Emergency Notification System - The Office of Emergency Management is currently working to upgrade the Dialogic Communicator, Emergency Notification System, from a ten phone line system used to notify City EOC emergency support staff only, to one possessing access to 100 phone lines, off-site system backups, and off-site use of hundreds of phone lines. The system will be used to notify all City employees and Newport News citizens of pending or active emergencies or disasters and provide critical emergency information. The system upgrade is made possible through the 2004 Homeland Security Grant Program at a cost of $132,000, and should be fully operational by December 31, 2005.

Engineering - Major initiatives for FY 2005 include the following: • In conjunction with the Department of Public Works, the program involving the replacement of radio monitoring units at sewage pumping stations continues. The units transmit reports to a centralized location at the Operations Center, providing real-time information to support operational and maintenance activities related to the pump station network. Approximately $3.2 million sanitary sewer rehabilitation projects were programmed for FY2005.

• The Commonwealth Transportation Board approved $50 million in matching funds for localities to improve their roads and bridges. These funds were made available under the Virginia Department of Transportation’s (VDOT) Revenue Sharing Program. VDOT awarded the City $744,920 for the Deep Creek Road widening project.

vi The Honorable City Council City of Newport News March 1, 2006

• During FY2005, the Transportation Division, in conjunction with VDOT, continued the Citywide Signal Retiming Program using Congestion Mitigation and Air Quality (CMAQ) funding. Yearly grant funding for the program is $185,000 utilizing 100 % Federal funds. There are approximately 250 traffic signals in the City and the department retimes traffic signals on a three-year cycle. This year 91 signals were retimed.

• The department has been working with the Mayors Committee for Disabilities to eliminate trouble spots throughout the City where there is little or no handicap accessibility. Approximately, $109,000 was spent to install ramps and sidewalks in the Huntington Heights area.

Fire – The following projects and initiatives were in process or completed during FY 2005:

• The department received 191 complete self-contained breathing apparatus (SCBA) units, 400 face pieces and other associated equipment. The upgrade increases the time a firefighter can operate in a toxic environment from 30 to 45 minutes. The SCBA units now meet the Occupational Safety and Health Administration’s criteria to protect the fire fighter’s from chemicals released during a terrorist attack. • The department received $225,200 from the Department of Homeland Security Assistance to Firefighter’s Grant for the installation of Plymovent Diesel Exhaust Extraction equipment into seven of our fire stations and an ambient air filtration system into an eighth. Additionally, the grant funded the modification of all fire and EMS response vehicle exhaust piping. The equipment will significantly improve the fire station working environment by eliminating the harmful effects associated with diesel emissions.

• The department completed contract negotiations to outsource the Emergency Medical Service billing for EMS transport service to include follow-up billing and claim disputes. This initiative is projected to improve the collection of revenue generated by EMS Bureau. • During the past year the department has completed a total reorganization of its Maritime Incident Response Team (MIRT) capability. The department is equipped with two fireboats and 3 inflatable zodiac boats which provide the department with various response options when dealing with water related incidents. The large 45 ft. fireboat can provide the pumping capacity greater than two fire engines along with supporting dive operations. The smaller 24 ft. fireboat is used for quick response calls. The three inflatable Zodiac boats and trailers are used to support dive operations in lakes and ponds and water rescue operations due to flooding conditions in the city. The department also developed and built a Special Emergency Response Vehicle (SERV) and placed it in service. This unit provides the department with the ability to evacuate citizens from high water emergencies.

Juvenile Services – The following initiatives were in process or completed during FY 2005:

• The department moved into the new 110-bed detention facility on January 9, 2005 allowing the department to operate in a more cost effective and efficient manner.

• The replacement of the mainframe Juvenile Tracking System with a state-of-the-art windows-based system has enhanced the department’s ability to generate reports, and to conduct trend analysis required for grant applications. This system, referred to as HYPE (Helping Young People Excel), was instrumental in securing over $750,000 in funding and awaiting the status of a $1.5 million grant by September 2005.

• The department continues to participate in the Virginia Department of Juvenile Justice, Juvenile Detention Alternative Initiative (JDAI), in partnership with the Annie E. Casey Foundation. JDAI is designed to assist

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jurisdictions in implementing more effective and efficient systems, and best practices and methods to reduce the number of children unnecessarily or inappropriately detained. In addition, the initiative enhances case processing and decreases the disproportionate minority contacts. As a result of the initiative, the Newport News detention population drastically decreased from an average daily population of 99 to 45.

Libraries and Information Services - During FY 2005, the Newport News Public Library System (NNPLS) circulated more than 625,000 materials and answered more than 110,000 reference questions. During the last fiscal year more than 808,000 citizens entered the public libraries to check out materials, attend a program or use the research materials. Patrons used the electronic resources more than 563,000 times; and library customers used the Library System’s electronic databases more than 15,000 times. During FY 2005 there were over 104,700 registered users of the Newport News Public Library System. The store carries used books, CDs, mugs, movies, books on tape and a few videos. Proceeds from the sales in the bookstore help fund programs and equipment at the libraries.

Parks and Recreation – The following are initiatives and accomplishments during FY 2005:

ƒ The Midtown Community Center added an outside playground to the facility. The playground is handicap accessible and has sections designed for children 3 - 5 and 6 - 11 years old. The surfacing is rubberized poured-in- place and allows easy access to wheel chair participants to all areas. The playground is surrounded by a fence to ensure the safety of all users.

• The department developed and implemented the Fit-Natics Fitness Program at Doris Miller Community Center for mature adults. The program includes a fitness trainer, equipment, and individualized programs for each participant.

• The department promoted and implemented the Active Aging initiative through programs focusing on the six components of positive lifestyle choices. The Active Aging initiative is a national program sponsored by the Administration on Aging and the International Council on Active Aging.

Planning – The following projects and initiatives were in process or completed during FY 2005:

• The department completed the Chesapeake Bay Preservation Act Ordinance revisions, the Dr. Martin Luther King, Jr. Memorial Committee conceptual design (Dr. Martin Luther King, Jr. Plaza), the Mariners’ Museum Multi- Purpose Trail design, the Peninsula Light Rail Minimal Operable Segment (MOS) and the adaptive reuse of the former Walter Reed School into the Downing Gross Cultural Arts Center.

• City planning projects underway during the year included continued effort for the following projects: the urban waterfront plan for the Southeast Community, the Southeast Community Plan, the TEAM 2030 Regional Transportation Plan, the Stoney Run Greenway Corridor Plan implementation phase, the Rivermont Streetscape Enhancement Project, the Ft. Eustis Second Access Road, the Lee Hall Train Station, the Greater Lee Hall development proposal, the Lee Hall historic district and Greater Lee Hall overlay district proposal, the Downing Gross Cultural Arts Building Phase II (second floor), the City Wayfinding Sign Plan, the Denbigh/Warwick Town Center (Newport Crossing) study, Warwick Boulevard landscape project, draft revisions to the City’s Sign Ordinance, and the City Center at Oyster Point project activities.

Police – The following projects and initiatives were in process or completed during FY 2005:

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• With funds received from a combination of three Homeland Security Grants, the Police Department was able to complete an Alternate Dispatch Center, purchase a new boat for Marine Patrol, purchase additional portable radios and accessories, complete the purchase of personnel protective equipment for all sworn personnel, purchase a new paging system and purchase ruggedized laptop computers.

• Effective December 2004, the Police Department was reorganized to enable the department to better respond to crime fighting efforts in the City. Organizational structures, programs, policies, and personnel deployment all revolve around the primary focus of fighting crime.

• During FY 2005, the local media printed lists of individuals with outstanding warrants. The purpose of the list is to obtain citizens assistance in identifying the location of wanted persons.

• A Crime Response Team (CRT) was formed to enhance crime fighting capabilities. The primary mission of CRT is to aggressively pursue armed offenders who are committing violent acts in the City.

Public Utilities (Waterworks) – The following are major initiatives and accomplishments for FY 2005:

• Securing Future Water Supply - Since 1987 the City of Newport News, in partnership with other Virginia Peninsula localities, has been working to develop and implement a long-term water supply plan including more aggressive water supply conservation, maximizing the use of available groundwater and constructing a 12 billion gallon off-stream reservoir and Mattaponi River pumping station in King William County. During FY 2005, Waterworks continued its work to bring the King William Reservoir Project to the point where a federal permit could be issued. During early FY 2005 a critical permit was obtained from the Virginia Marine Resources Commission. This State permit authorizes construction and operation of a water intake structure in the Mattaponi River. Also during FY 2005, the State issued a statement indicating the project is in conformance with its Coastal Resources Management Program, a requirement for the needed federal permit. A decision on the final permit is expected in early FY 2006.

• Lee Hall Water Treatment Plant – At the end of FY 2005, construction of a modern state-of-the-art treatment facility at Lee Hall was 98% complete and scheduled for completion in the fall of 2005. Once finished, the Lee Hall plant will be capable of meeting water treatment requirements necessitated by changes in drinking water regulations and should be able to operate for the next 50 years or more.

• Security Enhancements – During FY 2005, Waterworks completed its Environmental Protection Agency (EPA) Vulnerability Assessment and related Emergency Response Plan to provide certification to EPA as required by the Bioterrorism Act. Waterworks has improved control of facility and site access through guards, video surveillance, perimeter fencing and improved lighting. Perimeter security will be further improved along with other infrastructure physical protection systems as budget allows. In addition, Waterworks interfaces with interdependent utilities to respond to emergency events of all kinds.

• RENEWS Project - Waterworks has initiated a project for “Replacing Existing Newport News Waterworks Systems” (RENEWS). The RENEWS project will allow the department to move to newer technology and increase its customer offerings. The first system to be replaced is the Customer Information System (CIS). This system includes customer care, account management, billing, service orders and meter inventory management. Waterworks plans to begin implementation of the CIS Project in the fall of 2005.

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Public Works – The following are major initiatives and accomplishments for FY 2005:

• In September 2004, the CityWorks Call Center & Service Request systems were implemented in the offices of the City Manager, Mayor and City Clerk, the Departments of Management & Legislative Services, Intergovernmental & Community Relations, Engineering and Codes Compliance.

• Environmental improvements to ten buildings continue to provide substantial savings to the City in energy costs. Energy savings as a result of cost avoidance for year seven of the Honeywell contract was $575,308. The cumulative energy cost avoidance through the end of year seven is $4,221,876, as compared to the cumulative energy guarantee per the contract of $2,569,644.

• The Compost Facility at the closed Denbigh Landfill accepted 105,125 cubic yards of tree debris and yard waste for processing. The compost facility marketed 24,000 cubic yards of mulch, compost, and soil/compost blend, with sales of approximately $204,000. Processing costs have averaged $14.73 per ton. Compared to the average landfill disposal cost of $26.31 per ton, the Solid Waste Division realized $14.73 per ton in cost avoidance of Bethel Landfill tipping fees. Factoring in revenue from sale of the product, the City realized a cost avoidance of $17.98 per ton, for a net cost of $8.33 per ton.

Self Insurance - The Office implemented a plan to install and make operational Automated External Defibrillators (AED) in City facilities throughout the length of Newport News. Once written programs were approved by the Health Department, 14 of these lifesaving units were installed and plans are to acquire six (6) more units in the near future. More than 300 City employees representing 16 departments have received training on the AED as First Responders. Sheriff’s Office – The following are major initiatives and accomplishments for FY 2005.

• As a partner in the Newport News TRIAD Chapter, the sheriff’s office has expanded the TRIAD effort in 2005 with the Yellow Dot Medical Alert Program for seniors. Vehicles operated by seniors are equipped with medical alert stickers and medical history, which may be vital to emergency personnel responding in the event of an emergency.

• In conjunction with the Virginia Department of Corrections, the Virginia Serious and Violent Offenders Re-entry Initiative (VASAVOR) program was implemented at the Newport News City Jail in 2005. This is an offender re- entry initiative intended for inmates who have a parole plan for Newport News. Prior to release, inmates will be monitored by a transition team consisting of an on-site case manager, jail classification personnel, probation and parole staff and Community Service Board members. The program is designed to counsel and help prepare inmates, and provide assistance in gaining employment and housing upon release.

Office on Youth Development (OYD) - In support of the City’s Strategic Plan for Youth, the work of the OYD focused on the following major initiatives:

• The OYD staff has been instrumental in establishing and facilitating the development of this community-wide initiative to insure violence-free environments for children at home, in schools, and in neighborhoods. A team of city department and community agency representatives are developing a plan of action to prevent and reduce violence and its impact on children and youth.

x The Honorable City Council City of Newport News March 1, 2006

• The OYD staff supported the activities of the Commission on Youth to include the creation of the Asset Builder’s Award to recognize youth, adults, businesses, and community organizations that actively work to build assets in young people. The Commission also completed a survey of over 600 high school students to assess their transportation needs and utilization of public transportation. Survey results will be submitted to City Council for their review.

• In October 2004, City Council approved a recommendation from the Mayor’s Youth Commission for the appointment of two youth members to three city commissions. Two high school aged young people will now serve on the Human Rights Commission, the Arts Commission, and the Library Board of Trustees.

Awards

The Government Finance Officers Association (GFOA) of the United States and Canada awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Newport News for its comprehensive annual financial report (CAFR) for the year ended June 30, 2004. This was the 26th consecutive year that the government has received this prestigious award. In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for one year. We believe that our current CAFR continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate.

In addition, the government also received the GFOA’s Distinguished Budget Presentation Award for its annual budget document dated July 1, 2004. In order to qualify for the Distinguished Budget Presentation Award, the government’s budget document was judged to be proficient in several categories, including as a policy document, a financial, plan, an operations guide, and a communications device.

Recognitions

• The Commonwealth of Virginia Department of Historic Resources Board of Historic Resources designated West Avenue Library, which opened in 1929, as an historic site. West Avenue Library is now eligible for listing in the National Register for Historic Places.

• The Virginia Public Library Directors’ Association recognized Newport News Public Library System (NNPLS) for Outstanding Publicity for The ‘60s: A Decade of Change @ your libraryTM and also recognized NNPLS for Outstanding Adult Program for the opening reception for Explore Your Community Roots @ your library TM.

• Midtown Community Center and Doris Miller Community Center were designated “Age-Friendly Facilities” by the International Council on Active Aging.

• The Newport News Police Department was recognized as a “Meritorious Agency” which is granted to agencies with 5 or more continuous accreditations. In addition, the department was deemed a “Flagship Agency”, a national honor for continued excellence in maintaining accreditation at a heightened excellence.

• Newport News Park, with more than 8,000 acres, is the largest municipal park east of the Mississippi.

xi The Honorable City Council City of Newport News March 1, 2006

• Deer Run, the city’s public golf course, has been rated as “Best Value” by Golf Digest.

Acknowledgments

The preparation of this report could not be accomplished without the dedicated services of the entire staff of the Department of Finance. We would like to express our appreciation to all members of this Department, and to the many other City departments and agencies which have contributed to the completion of this report. We also acknowledge the members of City Council for their leadership, guidance, and establishment of policies for managing financial operations in a sound and progressive manner.

xii CITY OF NEWPORT NEWS, VIRGINIA City Government Officials

Year Ended June 30, 2005

City Council

Joe Frank ...... Mayor Charles C. Allen...... Vice Mayor Herbert H. Bateman, Jr...... Member William F. Haskins, Jr...... Member A. Madeline McMillan...... Member Sharon P. Scott...... Member Joseph C. Whitaker ...... Member

Office of the City Manager

Edgar E. Maroney ...... City Manager Randy W. Hildebrandt * ...... Assistant City Manager William P. Mitchell, Jr...... Assistant City Manager Neil A. Morgan ...... Assistant City Manager

Department of Finance

LaVerne Lovett ...... Director of Finance

Other Officials

Marty Eubank...... City Treasurer Charles D. Crowson, Jr...... Commissioner of the Revenue Joseph C. Street...... Real Estate Assessor John Hartman ...... Director of Budget and Evaluation Cathy S. Matthews ...... Director of Internal Audit

*Assumed City Manager position on February 1, 2006.

xiii

Independent Auditors’ Report

The Honorable Members of City Council City of Newport News, Virginia

We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Newport News, Virginia (the “City”) as of and for the year ended June 30, 2005, which collectively comprise the City’s basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the City’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Newport News Public Schools, nor did we audit the financial statements of the Peninsula Airport Commission, which represents 33% and 19% of the respective assets, and 93% and 2% of the respective operating revenues of the aggregate discretely presented component units. Those financial statements were audited by other auditors, whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for Newport News Public Schools and the Peninsula Airport Commission, are based on the reports of the other auditors.

We conducted our audit 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 Specifications for Audits of Counties, Cities and Towns, issued by the Auditor of Public Accounts of the Commonwealth of Virginia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions.

In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City as of June 30, 2005, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the Untied States of America.

In accordance with Government Auditing Standards, we have also issued our report dated February 17, 2006 on our consideration of the City’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

1 The Management’s Discussion and Analysis on Pages 3 through 13 and the other required supplementary information included on pages 67 through 75 are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquires of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The introductory section, supplementary information including nonmajor governmental funds and discretely presented component units, and statistical section, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is also presented for purpose of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The nonmajor governmental funds and discretely presented component unit statements and schedules, and the schedule of expenditures of federal awards, have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

Richmond, Virginia February 17, 2006

2 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

The following is a narrative overview and analysis of the financial activities of the City of Newport News, Virginia (the City) as of and for the fiscal year ended June 30, 2005. This discussion and analysis is intended to serve as an introduction to the City’s basic financial statements, which have the following components: (1) management’s discussion and analysis (MD&A), (2) government-wide financial statements, (3) fund financial statements, and (4) notes to the financial statements.

FINANCIAL HIGHLIGHTS FOR FISCAL YEAR (FY) 2005 • The assets of the City, on a government-wide basis excluding component units and business-type activities, exceeded its liabilities at the close of the FY 2005 by $196.6 million (net assets). Of this amount, $30.0 million is unrestricted. • At the close of the current fiscal year, the City’s governmental funds reported combined ending fund balances at $126.5 million, an increase of $8.9 million in comparison with the prior year. Approximately 72% or $90.8 million of this amount is unreserved. • The General Fund, on a current financial resources basis, reported an increase of revenues and other financing sources over expenditures and other financing uses of $12.7 million. The City’s operations were in line with the budget. • At the end of the current fiscal year, the undesignated fund balance for the General Fund was $32 million, or 11% of total General Fund expenditures. • The City’s total bonded debt decreased by approximately $4.9 million during the current fiscal year, due to the issuance of $45.1 million of General Obligation Bonds and payments of $50 million ($38.2 million scheduled repayment of principal and $11.8 million refunded)

OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City’s basic financial statements. The City’s basic financial statements comprise three components: government-wide financial statements, fund financial statements, and notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. • The first two statements are government-wide financial statements that provide both long-term and short- term information about the City’s overall financial status. • The remaining statements are fund financial statements that focus on individual parts of the City’s government, reporting the City’s operations in more detail than the government-wide statements. • Governmental fund statements tell how general government services like public safety were financed in the short term as well as what amounts remain for future spending.

• Proprietary fund statements offer short- and long-term financial information about the activities the government operates like businesses, such as the public utilities (water) system.

• Fiduciary fund statements provide information about the financial relationships in which the City acts solely as a trustee or agent for the benefit of others, to whom the resources in question belong.

3 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the information in the financial statements. Figure A shows how the required parts of this Management’s Discussion and Analysis and the City’s basic financial statements are arranged and relate to one another. Figure A

Required Components of Newport News’ Financial Statements

In the past, the primary focus of local government financial statements has been summarized fund type information on a current financial resources basis. However, with the implementation of Statement No. 34 of the Governmental Accounting Standards Board (GASB Statement No. 34) for June 30, 2002, the new focus is on both the City as a whole (government-wide) and the fund financial statements. Each view provides a different snapshot of the City’s finances. The government-wide financial statements, which were new for fiscal year 2002, provide both long-term and short-term information about the City’s overall financial status. The fund financial statements, which have been provided in the past, focus on the individual parts of the City government, reporting the City’s operations in more detail than the government-wide statements. Both perspectives (government-wide and fund) allow the user to address relevant questions, broaden the basis of comparison (year-to-year or government-to-government) and enhance the City’s accountability.

4 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

Government-Wide Statements The government-wide statements report information about the City as a whole using accounting methods similar to those used by private-sector companies. The Statement of Net Assets and the Statement of Activities, which are the government-wide statements, include all of the government’s assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid.

These two government-wide statements report the City’s net assets and how they have changed. Net assets—the difference between the City’s assets and liabilities—is one way to measure the City’s financial health, or financial position. Over time, increases or decreases in the City’s net assets are an indicator of whether its financial health is improving or deteriorating. Other non-financial factors, such as changes in the City’s property tax base and the condition of the City’s roads and other infrastructure, may need to be considered to assess the overall health of the City. In the Statement of Net Assets and the Statement of Activities, the City is divided into three categories: • Governmental activities – Most of the City’s basic services are included here, such as the police, fire, public works, parks, and general administration. Taxes, state and federal grants finance most of these activities. • Business-type activities – The City charges fees to customers to help cover the costs of certain services it provides. The City’s water and parking facilities are included here. • Component units – The City includes three separate legal entities in its report - the Peninsula Airport Commission, the Economic and Industrial Development Authorities, and the Newport News Public Schools. Although legally separate, these “component units” are important because the City is financially accountable for them, and provides operating funding. Fund Financial Statements The format of the fund financial statements will be more familiar to traditional users of government financial statements. The fund financial statements provide more detailed information about the City’s most significant funds, not the City as a whole. Funds are accounting mechanisms that the City uses to keep track of specific sources of funding and spending for particular purposes. Some funds are required by State law and by bond covenants; City Council establishes other funds to control and manage money for particular purposes or to show that it is properly using certain taxes and grants. The City has three kinds of funds: • Governmental funds – Most of the City’s basic services are included in governmental funds, which focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances remaining at year-end that are available for spending. Consequently, the governmental fund statements provide a detailed short-term view that helps the reader determine whether there are more or fewer financial resources that can be spent in the near future to finance the City’s programs. Because this information does not encompass the additional long-term focus of the government-wide statements, additional information is provided on a subsequent page that explains the relationship (or differences) between the government-wide and fund statements.

5 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

• Proprietary funds – The City maintains two different types of proprietary funds. (1) Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. Enterprise funds include the Public Utility Fund and the Parking Authority Fund. (2) Internal service funds are an accounting device used to accumulate and allocate costs internally among the City’s various functions. The City uses internal service funds to account for the operation of vehicles and equipment. • Fiduciary fund – The City is the trustee, or fiduciary, for certain donated funds. It is also responsible for other assets that, because of a trust arrangement, can be used only for the trust beneficiaries. The City is responsible for ensuring that the assets reported in this fund are used for their intended purpose. The fiduciary funds include the Pension Trust Fund and Agency Funds. These activities are reported in a separate statement of fiduciary net assets. The City excludes this activity from its government-wide financial statements because the City cannot use these assets to finance its operations. The Total Governmental Funds column requires reconciliation because of the different measurement focus from the government-wide statements (current financial resources versus total economic resources) which is reflected on the page following each statement. The flow of current financial resources will reflect bond proceeds and interfund transfers as other financing sources as well as capital expenditures and bond principal payments as expenditures. The reconciliation will eliminate these transactions and incorporate the capital assets and long-term obligations (bonds and others) into the Governmental Activities column (in the government-wide statements). Notes to the Basic Financial Statements The notes to the financial statements provide additional information that is essential for a full understanding of the information provided in the government-wide and fund financial statements. The notes also present certain required supplementary information concerning the City’s progress in funding its obligation to provide pension benefits to its employees.

FINANCIAL ANALYSIS OF THE CITY AS A WHOLE This is the fourth year that the City has presented its financial statements under the new reporting model required by GASB Statement No. 34. This reporting model changes significantly both the recording and presentation of financial data. Prior year information is shown in the following comparative analysis of government-wide information.

6 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

Statement of Net Assets The following table reflects the condensed net assets:

Table 1 - Summary of Net Assets (in millions):

Governmental Business-Type Total Primary Activities Activities Government

2004* 2005 2004 2005 2004* 2005 Current and other assets $ 146.4 157.1 50.2 45.7 196.6 202.8 Capital assets, net (restated) 536.0 543.1 402.9 407.8 938.9 950.9 Total assets $ 682.4 700.2 453.1 453.5 1,135.5 1,153.7

Current and other liabilities $ 26.5 73.8 15.4 35.0 41.9 108.8 Long-term liabilities 460.6 429.8 185.6 151.9 646.2 581.7 Total liabilities 487.1 503.6 201.0 186.9 688.1 690.5 Net assets: Invested in capital assets, net of related debt 125.9 162.6 224.9 249.5 350.8 412.1 Restricted net assets 34.0 4.0 17.0 0.2 51.0 4.2 Unrestricted net assets 35.4 30.0 10.2 16.9 45.6 46.9 Total net assets 195.3 196.6 252.1 266.6 447.4 463.2 Total liabilities and net assets $ 682.4 700.2 453.1 453.5 1,135.5 1,153.7

* Restated Net assets (assets over liabilities) may serve over time as a useful indicator of a government’s financial position. In the case of the City, assets exceeded liabilities by $463.2 million at the close of fiscal year 2005. By far the largest portion of the City’s net assets (89%) reflects its investment in capital assets (e.g., land, buildings, equipment, infrastructure), less accumulated depreciation and less any related outstanding debt used to acquire those assets. The City uses these assets to provide services to its citizens and consequently, these assets are not available for future spending. The resources needed to repay the debt related to these capital assets must be provided from other sources. Although the City’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Approximately 1% of the City’s net assets are subject to external restrictions. The remaining balance of unrestricted net assets (46.9 million or 10%) may be used to meet the City’s ongoing obligations to citizens and creditors. Governmental Activities

Net assets of the City’s governmental activities increased from $195.3 million at June 30, 2004 to $196.6 million at June 30, 2005 as a result of the increase in net assets of $1.3 million as shown on the Statement of Activities.

7 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

Business-Type Activities

The net assets of the City’s business-type activities increased from $252.1 million to $266.6 million. However, these resources cannot be used to make up for any net asset deficit in governmental activities. The City generally can only use these net assets to finance the continuing operations of its enterprise operations, which include the Public Utility and Parking Authority Funds. Statement of Activities The following table shows the revenues and expenses of the governmental and business-type activities: Table 2 - Changes in Net Assets (in millions):

Governmental Business-Type Total Primary Activities Activities Government Revenues: 2004 2005 2004 2005 2004 2005 Program revenues: Charges for services $ 45.9 48.1 63.9 64.7 109.8 112.8 Operating grants and contributions 49.5 59.9 - - 49.5 59.9 Capital grants and contributions 13.7 11.3 - - 13.7 11.3 General revenues: Property taxes 159.8 172.6 - - 159.8 172.6 Other taxes 80.1 83.4 - - 80.1 83.4 Grants and contributions not restricted to specific programs 39.5 37.7 - - 39.5 37.7 Investment earnings 4.2 3.1 0.3 0.5 4.5 3.6 Miscellaneous 5.8 8.0 4.8 4.7 10.6 12.7 Total revenues 398.5 424.1 69.0 69.9 467.5 494.0 Expenses: General government 75.7 57.0 - - 75.7 57.0 Judicial administration 5.3 6.1 - - 5.3 6.1 Public safety 87.9 96.6 - - 87.9 96.6 Public works 49.3 54.4 - - 49.3 54.4 Health and welfare 51.6 53.7 - - 51.6 53.7 Education 95.8 107.4 - - 95.8 107.4 Parks, recreation and culture 26.4 27.1 - - 26.4 27.1 Community development 6.6 10.5 - - 6.6 10.5 Public Utility - - 45.0 46.0 45.0 46.0 Parking Authority - - 0.3 0.3 0.3 0.3 Interest on long-term debt 19.1 19.1 - - 19.1 19.1 Total expenses 417.7 431.9 45.3 46.3 463.0 478.2 Excess (deficiency) before transfers (19.2) (7.8) 23.7 23.6 4.5 15.8 Transfers 9.1 9.1 (9.1) (9.1) - - Increase (decrease) in net assets (10.1) 1.3 14.6 14.5 4.5 15.8 Beginning Net Assets, as restated 205.4 195.3 237.5 252.1 442.9 447.4 Ending Net Assets $ 195.3 196.6 252.1 266.6 447.4 463.2

8 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

Governmental Activities The City’s total revenues from governmental activities were $424.1 million for the fiscal year ended June 30, 2005. The largest source of revenue ($172.6 million for fiscal year 2005) for the City is property taxes, composed of real estate and personal property taxes. The City’s assessed real property tax base for fiscal year 2005 increased 9%. The City maintained the same real estate tax rate ($1.27 per $100 of assessed value) from 2003 to 2005.

Approximately 60% of the City’s revenue from governmental activities comes from some type of tax, and 11% comes from fees charged for services.

The City’s expenses cover a wide range of services, with 22%, or $96.6 million for fiscal year 2005 related to public safety and 25%, or $107.4 million for fiscal year 2005 for education (payments to the Public Schools, a component unit).

Revenues by Source – Governmental Activities

Miscellaneous 2% Charges for services Investment earnings 11% 1% Grants and contributions not restricted Operating grants 9% 14%

Other taxes 20% Capital grants 3%

Property taxes 40%

Business-Type Activities Net assets for the City’s business-type activities increased by $14.5 million largely as a result of assets deeded over by developers. Charges for services, including water and parking fees, make up 93% of total revenues for business-type activities.

9 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

FINANCIAL ANALYSIS OF THE CITY’S FUNDS The City of Newport News uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. General Fund The General Fund is the chief operating fund of the City. At the end of the current fiscal year, unreserved fund balance was $85.7 million of which $32.1 million represents undesignated fund balance of the General Fund. As a measure of the general fund’s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balances represent 29% of the total fund expenditures, while total fund balance represents 31% of that same amount. Debt Service Fund The debt service fund has a fund balance of $1.1 million. During the current fiscal year, the net change in fund balance of $1.4 million is a net result of annual debt payments. Bond Fund The bond fund accounts for the proceeds of all general obligation bond issues except those of the Proprietary Funds. At the end of the current fiscal year, the bond fund balance has a balance of $19.7 million, resulting from recent bond proceeds. Proprietary Funds The City’s proprietary fund statements provide the same type of information found in the government-wide financial statements, but in more detail. Growth in net assets was $14.5 million, resulting mainly from connection fees in the amount of $2.9 million and an increase from operations of $24 million. The Parking Authority had $0.2 million in restricted net assets at June 30, 2005.

GENERAL FUND BUDGETARY HIGHLIGHTS General Fund (Budget Basis) Fiscal Year 2005 Original Final Budget Budget Actual Revenues: Taxes $ 250,804,282 250,857,113 253,743,821 Intergovernmental 39,120,558 39,386,347 42,418,995 Other 43,696,944 43,836,906 44,368,902 Total 333,621,784 334,080,366 340,531,718 Expenditures and Transfers: Expenditures 323,497,104 314,449,509 305,761,264 Transfers out 25,295,215 26,104,690 26,104,690 Total 348,792,319 340,554,199 331,865,954 Change in fund balance $ (15,170,535) (6,473,833) 8,665,764

10 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

The difference between the original budget and the final amended budget for the City’s General Fund expenditures was approximately $8.5 million (decrease in appropriations). Although it appears there has been a significant decrease from the original budget, the variance is mainly due to the accounting of special revenue funds: • $11.7 million reduced appropriation for street maintenance due to same appropriation adopted in the special revenue funds. • $3.2 million additional funding as follows: $1.0 million - vehicle equipment replacement $0.5 million - community support funding

$0.4 million - street construction

$0.4 million - Public Safety equipment

$0.3 million - Jefferson Park property acquisition

$0.2 million - supplemental appropriation for SPCA expenses

$0.2 million - salary increases

$0.1 million - emergency generators

$0.1 million - Judicial Services equipment

Actual General Fund revenues and transfers from other funds were above the final budgeted revenues by $6.5 million. Expenditures and transfers out were below budget by $8.5 million. This positive budget variance helped to partially offset the planned use of undesignated fund balance.

CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The City’s investment in capital assets for its governmental and business-type activities as of June 30, 2005 amounts to $950 million (net of depreciation). This investment includes land, buildings and improvements, drainage and water/sewer systems, machinery and equipment, roads, bridges, and construction in progress. Major capital asset events during the fiscal year included the following: • Construction in progress totaled $21.8 million for governmental activities at the end of the fiscal year (including certain Public Schools projects under construction). • Construction in progress totaled $121.7 million for business-type activities at the end of the fiscal year and relates to the following projects: regional raw water supply costs, Lee Hall Treatment Plant modifications, Harwoods Mill Dam Spillway improvements and Colonial Pipeline.

11 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

City of Newport News’ Capital Assets (net of depreciation): Governmental Business-Type Activities Activities Total

2004 * 2005 2004 2005 2004 * 2005 Land $ 75,445,332 75,473,967 6,393,724 6,539,545 81,839,056 82,013,512 Construction in progress 31,469,493 21,821,939 113,516,518 121,665,973 144,986,011 143,487,912 Buildings 197,603,054 196,769,025 15,315,183 15,035,161 212,918,237 211,804,186 Water systems - - 259,984,606 257,366,291 259,984,606 257,366,291 Improvements 53,817,809 67,137,468 1,753,884 1,648,099 55,571,693 68,785,567 Machinery and equipment 33,302,583 35,117,787 5,903,263 5,550,278 39,205,846 40,668,065 Infrastructure 144,432,288 146,767,537 - - 144,432,288 146,767,537 Total $ 536,070,559 543,087,723 402,867,178 407,805,347 938,937,737 950,893,070

* Restated

Additional information on the City’s capital assets can be found in note 4 to the basic financial statements. Long-Term Debt At the end of the current fiscal year, the City had total bonded debt outstanding (including literary loans) of $563.2 million, a decrease of 3% over last year, as shown in the table below. Capital leases, landfill liability, accrued vacation and claims payable are not included in these figures. City of Newport News’ Outstanding Debt, General Obligation Bonds and Literary Loans (in millions): Governmental Business-Type Activities Activities Total 2004 2005 2004 2005 2004 2005

General obligation bonds $ 399.2 394.4 178.0 165.2 577.2 559.6 Literary loans 4.2 3.6 - - 4.2 3.6 Total $ 403.4 398.0 178.0 165.2 581.4 563.2

The amount of the debt outstanding related to School Board activities is $120.7 million of the total outstanding general obligation bonds of the governmental activities.

The City issued new debt during the year totaling $45.1 million in the form of general obligation bonds and resulted mainly from issuing general obligation bonds.

The City maintains an Aa rating from Standard & Poor’s Corporation. Under Moody’s Investors Service, the City maintains an Aa2 rating.

Additional information on the City’s long-term debt can be found in Note 7 to the basic financial statements.

12 CITY OF NEWPORT NEWS, VIRGINIA Management’s Discussion and Analysis

ECONOMIC FACTORS AND NEXT YEAR’S BUDGETS The unemployment rate in June 2005 for the City of Newport News was 4.8%, which is a decrease from the average for 2004 of 5.2%. Local retail sales continued to improve during calendar year 2004, increasing 4.9% as of December 2004, when compared to 2003.

The City’s annual population growth rate has remained stable over the last two years, from approximately 185,200 at the end of fiscal year 2004 to 185,240 at the end of fiscal year 2005.

The growth in assessed real estate values allowed the city to lower the real estate tax rate effective July 1, 2005 from $1.27 per $100 in assessed value to $1.24 per $100.

Beginning in tax year 2006, the Commonwealth of Virginia will no longer reimburse localities for personal property tax assessments at the current rate of 70%. Rather, the Commonwealth will cap statewide reimbursements at $950 million with each locality receiving a percentage based on tax year 2004 reimbursements. At this time, it is not known how the City will handle the change in state funding for the personal property tax program.

CONTACTING THE CITY’S FINANCIAL MANAGEMENT This financial report is designed to provide citizens, taxpayers, customers, investors, and creditors with a general overview of the City’s finances and to demonstrate the City’s accountability for the funds it receives. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Director of Finance, 2400 Washington Avenue, Newport News, Virginia 23607.

13 CITY OF NEWPORT NEWS, VIRGINIA Statement of Net Assets June 30, 2005

Discretely presented Primary government component units Governmental Business-type Public Assets activities activities Total schools Others Cash and cash equivalents $ 65,893,377 12,796,571 78,689,948 29,673,237 8,012,039 Restricted cash and investment 25,335,820 15,472,650 40,808,470 — 26,887,686 Accounts receivable, net 18,553,665 9,062,430 27,616,095 590,892 7,440,917 Receivable from Industrial Development Authority 17,407,180 — 17,407,180 — — Receivable from primary governmen — — — 104,201 5,590,000 Receivables from other government 26,507,151 — 26,507,151 16,749,223 27,100,000 Inventory, at cost 1,551,876 3,037,302 4,589,178 1,274,570 53,928 Land held for lease or resale — — — — 16,725,914 Net investment in direct financing lease — — — — 20,618,967 Capital assets: Land 75,473,967 6,539,545 82,013,512 2,505,084 5,712,070 Construction in progress 21,821,939 121,665,973 143,487,912 121,151 19,401,438 Buildings 259,235,438 16,228,526 275,463,964 51,397,821 99,102,130 Improvements 111,186,060 3,532,823 114,718,883 30,816,017 9,931,878 Water system — 375,701,813 375,701,813 — — Airport assets — — — — 90,419,524 Machinery and equipmen 97,447,873 16,979,897 114,427,770 79,804,457 3,274,241 Infrastructure 399,361,975 — 399,361,975 — 1,521,049 964,527,252 540,648,577 1,505,175,829 164,644,530 229,362,330 Less accumulated depreciation (421,439,529) (132,843,230) (554,282,759) (75,444,188) (51,315,077) Capital assets, net 543,087,723 407,805,347 950,893,070 89,200,342 178,047,253 Other assets 1,879,943 5,370,069 7,250,012 7,973,197 262,026 Total assets $ 700,216,735 453,544,369 1,153,761,104 145,565,662 290,738,730 Liabilities and Net Assets Liabilities: Accounts payable $ 14,993,154 1,823,292 16,816,446 9,126,345 2,977,724 Accrued liabilities 7,194,001 8,374,712 15,568,713 21,822,400 846,748 Deposits 2,470,559 4,476,507 6,947,066 — — Unearned revenue 1,194,140 — 1,194,140 612,154 39,400 Payable to Newport News Public Schools 104,201 — 104,201 — 316,523 Payable to primary governmen — — — — 17,407,181 Other liabilities 70,500 — 70,500 — — Long term liabilities: Premium on bonds payable — 7,021,198 7,021,198 — — Due within one year 47,706,123 13,320,000 61,026,123 5,094,133 10,439,397 Due in more than one year 429,836,896 151,900,000 581,736,896 28,470,758 149,902,219 Total liabilities 503,569,574 186,915,709 690,485,283 65,125,790 181,929,192 Net assets: Invested in capital assets, net of related deb 162,580,785 249,491,400 412,072,185 62,882,021 87,404,488 Restricted for: Grants projects 2,275,789 — 2,275,789 — — Capital projects — 225,000 225,000 — 2,842,671 Capital loans — — — — 3,348,655 Other purposes 1,723,162 — 1,723,162 — — Unrestricted 30,067,425 16,912,260 46,979,685 17,557,851 15,213,724 Total net assets 196,647,161 266,628,660 463,275,821 80,439,872 108,809,538 Total liabilities and net assets $ 700,216,735 453,544,369 1,153,761,104 145,565,662 290,738,730

See accompanying notes to basic financial statements.

14 CITY OF NEWPORT NEWS, VIRGINIA Statement of Activities Year ended June 30, 2005

Program revenues Net (expense) revenue and changes in net assets Operating Capital Primary government Other Charges for grants and grants and Governmental Business-type Public component Expenses services contributions contributions activities activities Total schools units Primary government: Governmental activities General governmen $ 57,053,132 5,610,943 — 11,326,181 (40,116,008) — (40,116,008) Judicial administration 6,060,839 3,355,937 — — (2,704,902) — (2,704,902) Public safety 96,637,983 8,978,367 3,894,295 — (83,765,321) — (83,765,321) Public works 54,351,940 23,453,616 11,785,385 — (19,112,939) — (19,112,939) Health and welfare 53,692,902 225,774 12,996,926 — (40,470,202) — (40,470,202) Education 107,463,439 — 27,038,254 — (80,425,185) — (80,425,185) Parks, recreation and culture 27,059,823 6,433,202 60,073 — (20,566,548) — (20,566,548) Community developmen 10,455,402 66,840 4,067,058 — (6,321,504) — (6,321,504) Interest on long-term debt 19,109,084 — — — (19,109,084) — (19,109,084) Total governmental activities 431,884,544 48,124,679 59,841,991 11,326,181 (312,591,693) — (312,591,693) Business-type activities: Public utility 46,037,659 64,453,874 — — — 18,416,215 18,416,215 Parking authority 262,691 238,742 — — — (23,949) (23,949) Total business-type activities 46,300,350 64,692,616 — — — 18,392,266 18,392,266 Total primary government $ 478,184,894 112,817,295 59,841,991 11,326,181 (312,591,693) 18,392,266 (294,199,427) Component units: Public schools $ 285,301,870 6,268,681 52,405,547 3,088,078 (223,539,564) — Peninsula Airport Commission 8,528,083 6,232,082 — 5,586,868 — 3,290,867 Economic and Industrial Development Authoritie 13,770,083 10,282,507 — — — (3,487,576) Total component units $ 307,600,036 22,783,270 52,405,547 8,674,946 (223,539,564) (196,709) General revenues: City Taxes: General property 172,575,384 — 172,575,384 — — E-911 service 2,737,853 — 2,737,853 — — Local sales and use 20,955,339 — 20,955,339 — — Consumers' utility 9,515,933 — 9,515,933 — — Cellular telephone 2,848,339 — 2,848,339 — — Consumption 641,699 — 641,699 — — Business license 13,391,073 — 13,391,073 — — Rental car 870,813 — 870,813 — — Franchise license 1,670,013 — 1,670,013 — — Cable television 2,006,039 — 2,006,039 — — Motor vehicle license 3,585,609 — 3,585,609 — — Bank stock taxes 532,019 — 532,019 — — Recordation and wills 1,969,391 — 1,969,391 — — Tobacco 4,639,855 — 4,639,855 — — Hotel and motel room tax 2,686,120 — 2,686,120 — — Restaurant food tax 14,779,660 — 14,779,660 — — Amusement 566,599 — 566,599 — — Total City Taxes 255,971,738 — 255,971,738 — — Grants and contributions not restricted to specific programs 37,699,447 — 37,699,447 138,129,797 2,504,995 Payment from the City — — — 88,151,971 4,482,898 Investment earnings 3,116,612 485,453 3,602,065 5,235,651 1,220,561 Miscellaneous 8,013,660 4,836,670 12,850,330 83,085 551,177 Transfers 9,134,000 (9,134,000) — — — Total general revenues and transfers 313,935,457 (3,811,877) 566,095,318 231,600,504 8,759,631 Change in net assets 1,343,764 14,580,389 15,924,153 8,060,940 8,562,922 Net assets at beginning of year, as restated 195,303,397 252,048,271 447,351,668 72,378,932 100,246,616 Net assets at end of year $ 196,647,161 266,628,660 463,275,821 80,439,872 108,809,538

See accompanying notes to basic financial statements. 15 CITY OF NEWPORT NEWS, VIRGINIA Balance Sheet Governmental Funds June 30, 2005

Debt Nonmajor Total General service Bond governmental governmental Assets fund fund fund funds funds Cash and cash equivalents $ 53,137,318 183,213 — 11,131,794 64,452,325 Restricted cash — 1,104,311 24,231,509 — 25,335,820 Accounts receivable, net 16,716,213 — — 1,837,452 18,553,665 Advances to other funds 16,562,482 — — — 16,562,482 Receivable from component uni 17,407,180 — — — 17,407,180 Receivables from other government 6,345,950 5,904,094 — 14,257,107 26,507,151 Inventory, at cost 1,152,772 — — — 1,152,772 Total assets $ 111,321,915 7,191,618 24,231,509 27,226,353 169,971,395 Liabilities and Fund Balances Liabilities: Accounts payable $ 6,581,491 40,949 4,405,815 3,084,011 14,112,266 Accrued liabilities 1,124,786 — — 184,323 1,309,109 Deposits 2,470,560 — — — 2,470,560 Deferred revenue 8,136,255 38,786 — 705,269 8,880,310 Payable to Newport News Public Schools — — 104,201 — 104,201 Advances from major governmental fun — 5,904,094 — 10,658,388 16,562,482 Other liabilities — 70,500 — — 70,500 Total liabilities 18,313,092 6,054,329 4,510,016 14,631,991 43,509,428 Fund balances: Reserved for: Inventory 1,150,494 — — — 1,150,494 Encumbrances 6,134,045 — 27,619,458 742,493 34,495,996 Unreserved: Designated for: FY06 budget 1,723,162 — — — 1,723,162 Self-insurance activity 7,999,589 — — — 7,999,589 Debt service 6,410,205 1,137,289 — — 7,547,494 Applied Research Center 17,407,180 — — — 17,407,180 Specific projects: General fund 20,102,871 — — — 20,102,871 Bond fund — — (7,897,965) — (7,897,965) Non-Major funds: Capital projects - Gen cap improvemen — — — 1,177,166 1,177,166 Law library — — — 25 25 Stormwater — — — 2,142,109 2,142,109 Solid Waste — — — 1,925,632 1,925,632 Waste Water — — — 820,759 820,759 Other Federal and State — — — 2,472,257 2,472,257 Undesignated General fund 32,081,277 — — — 32,081,277 Non-Major funds: Economic Development — — — 710,082 710,082 Law Library — — — 91,664 91,664 Stormwater — — — 1,613,810 1,613,810 Solid Waste — — — 893,504 893,504 Revenue Sharing (Capital projects) — — — 4,861 4,861 Total fund balances 93,008,823 1,137,289 19,721,493 12,594,362 126,461,967 Total liabilities and fund balances $ 111,321,915 7,191,618 24,231,509 27,226,353 169,971,395

See accompanying notes to basic financial statement

16 CITY OF NEWPORT NEWS, VIRGINIA Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets June 30, 2005

Fund balances – total governmental funds $ 126,461,967 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds: Governmental capital assets $ 925,426,787 Less accumulated depreciation (398,385,981) 527,040,806 Other long-term assets are not available to pay for current period expenditures and therefore are deferred in the funds. 7,686,170 Internal service funds are used by management to charge the costs of certain activities to individual funds. 16,710,750 Governmental funds report the effect of issuance costs when the debt is issued. These costs, less accumulated amortization, are deferred in the statement of net assets. 1,879,944

Unmatured interest payable reported in governmental activities will not be paid with current financial resources and therefore, are not reported in the funds. (5,589,457) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds: General obligation bonds, net (399,673,279) Literary fund bonds (3,564,082) Capital leases payable (292,789) Land lease payable (2,312,606) Landfill liability (6,501,000) Accrued vacation (18,535,335) Workers’ compensation and other claims (11,618,928) Net pension obligations (32,245,000) Incurred but not reported claims (2,800,000) (477,543,019) Net assets of governmental activities $ 196,647,161

See accompanying notes to basic financial statements.

17 CITY OF NEWPORT NEWS, VIRGINIA Statement of Revenues, Expenditures and Changes in Fund Balance Governmental Funds Year ended June 30, 2005

Debt Nonmajor Total General service Bond governmental governmental fund fund fund funds funds Revenues: General property taxes $ 170,347,467 — — — 170,347,467 Other local taxes 83,396,354 — — — 83,396,354 Licenses and permits 3,706,436 — — — 3,706,436 Fines and forfeitures 2,186,887 — — — 2,186,887 Intergovernmental 42,418,995 27,038,254 34,139 34,040,820 103,532,208 Charges for services 14,357,383 — — 23,623,472 37,980,855 Interest and rent 2,946,476 — 182,556 3,129,032 Recovered costs 8,736,573 — — — 8,736,573 Miscellaneous 3,301,147 239,175 — 122,142 3,662,464 Total revenues 331,397,718 27,277,429 34,139 57,968,990 416,678,276 Expenditures: Current operating: General government 45,905,220 543,340 — 97,459 46,546,019 Judicial administration 5,183,646 — — — 5,183,646 Public safety 81,687,657 — — 5,222,291 86,909,948 Public works 10,314,785 — — 31,702,475 42,017,260 Health and welfare 31,916,336 — — 13,040,540 44,956,876 Education 97,502,709 — 12,136,051 — 109,638,760 Parks, recreation and culture 21,764,669 — — 57,029 21,821,698 Community developmen 3,299,002 — 1,500,000 4,132,770 8,931,772 Debt service: Principal — 38,750,475 — — 38,750,475 Interest and other charges — 19,645,588 979,581 — 20,625,169 Capital outlay — — 20,092,218 5,853,160 25,945,378 Total expenditures 297,574,024 58,939,403 34,707,850 60,105,724 451,327,001 Excess (deficiency) of revenues over (under) expenditures 33,823,694 (31,661,974) (34,673,711) (2,136,734) (34,648,725) Other financing sources (uses): Transfers in 9,134,000 30,275,043 — 5,190,298 44,599,341 Transfers out (30,230,988) — — (5,234,353) (35,465,341) Payments to refunded bonds escrow agen — — (11,785,000) — (11,785,000) Premium on bonds — — 1,109,184 — 1,109,184 Refunded bonds proceeds — — 12,720,000 — 12,720,000 Bond and note proceeds — — 32,366,903 — 32,366,903 Total other financing sources (uses) (21,096,988) 30,275,043 34,411,087 (44,055) 43,545,087 Net changes in fund balances 12,726,706 (1,386,931) (262,624) (2,180,789) 8,896,362 Fund balances at June 30, 2004 80,282,117 2,524,220 19,984,117 14,775,151 117,565,605 Fund balances at June 30, 2005 $ 93,008,823 1,137,289 19,721,493 12,594,362 126,461,967

See accompanying notes to basic financial statements.

18 CITY OF NEWPORT NEWS, VIRGINIA Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement of Activities Year ended June 30, 2005

Net change in fund balances – total governmental funds$ 8,896,362 Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures while governmental activities report depreciation expense to allocate those expenditures over the life of the assets. The statement of activities also includes expense that relate to assets acquired that do not meet the capitalization threshold of the City: Capital outlay expenditures $ 25,945,378 Less: Capital outlay expenditures not meeting capitalization threshold (3,752,700) Depreciation expense (20,608,854) 1,583,824 Newport News Public Schools, a component unit of the City, allows the City to record its construction in progress and certain capital assets on the City’s financial statements for any projects using bond funds as a funding source The City also records depreciation expense on these assets. These asset will revert back to the Schools when the debt is paid in full. These assets are not reported in the governmental funds 4,992,629 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. Deferred revenue increased by this amount in the current year 1,448,282 Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repay ment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets Principal repayments 50,625,664 Debt issued (and related costs) (45,066,111) Premium on issuance of long-term debt 611,736 Gain on bond refundings, net of amortization 53,719 Loss on bond refundings, net of amortization (390,073) Debt issuance costs, net of amortization 200,650 6,035,585 Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. These activities consist of changes in Accrued interest 536,504 Landfill liability 161,000 Accrued vacation (689,386) Net pension obligation (21,792,000) Workers’ compensation and other claims (806,820) Incurred but not reported liabilities 195,000 (22,395,702) Some capital additions were financed through capital leases in a prior year. In governmental funds, a capital lease arrangement is considered a source o financing, but in the statement of net assets, the lease obligation is reported as a liability. Payments on capital leases were made in this amount in the current year. 195,968 Internal service funds are used by management to charge the costs of certain services to individual funds. The net income of the internal service fund is reported with governmental activities 586,816 Change in net assets of governmental activities $ 1,343,764

See accompanying notes to basic financial statements.

19 CITY OF NEWPORT NEWS, VIRGINIA Statement of Net Assets Proprietary Funds June 30, 2005

Enterprises Funds Nonmajor fund - Major Fund - Parking Internal Assets Public Utility Authority Total Service Fund Current assets: Cash and cash equivalents $ 12,026,937 769,634 12,796,571 1,441,052 Restricted cash 15,247,650 225,000 15,472,650 — Accounts receivable, net 9,062,430 — 9,062,430 — Inventory 3,037,302 — 3,037,302 399,103 Total current assets 39,374,319 994,634 40,368,953 1,840,155 Noncurrent assets: Capital assets: Land 5,807,698 731,847 6,539,545 20,257 Improvements — 3,532,823 3,532,823 — Buildings 16,228,526 — 16,228,526 3,665,272 Water system 375,701,813 — 375,701,813 — Machinery and equipment 16,950,003 29,894 16,979,897 35,414,936 Construction in progress 121,665,973 — 121,665,973 — 536,354,013 4,294,564 540,648,577 39,100,465 Less accumulated depreciation (130,930,112) (1,913,118) (132,843,230) (23,053,548) Capital assets, net 405,423,901 2,381,446 407,805,347 16,046,917 Other assets 5,370,069 — 5,370,069 — Total noncurrent assets 410,793,970 2,381,446 413,175,416 16,046,917 Total assets $ 450,168,289 3,376,080 453,544,369 17,887,072 Liabilities and Net Assets Liabilities: Current liabilities: Accounts payable $ 1,801,765 21,527 1,823,292 880,888 Accrued liabilities 8,374,307 405 8,374,712 295,435 Current portion of general obligation bonds payable 13,320,000 — 13,320,000 — Total current liabilities 23,496,072 21,932 23,518,004 1,176,323 Noncurrent liabilities: Deposits 4,476,507 — 4,476,507 — General obligation bonds payable, net of current portion 151,900,000 — 151,900,000 — Premium on bonds payable 7,021,198 — 7,021,198 — Total noncurrent liabilities 163,397,705 — 163,397,705 — Total liabilities 186,893,777 21,932 186,915,709 1,176,323 Net assets: Invested in capital assets, net of related debt 247,109,954 2,381,446 249,491,400 16,046,917 Restricted for capital projects — 225,000 225,000 — Unrestricted 16,164,558 747,702 16,912,260 663,832 Total net assets 263,274,512 3,354,148 266,628,660 16,710,749 Total liabilities and net assets $ 450,168,289 3,376,080 453,544,369 17,887,072

See accompanying notes to basic financial statements.

20 CITY OF NEWPORT NEWS, VIRGINIA Statement of Revenues, Expenses and Changes in Net Assets Proprietary Funds Year ended June 30, 2005

Enterprises Funds Nonmajor fund - Major Fund - Parking Internal Public Utility Authority Total Service Fund Operating revenues: Water sales $ 55,415,931 — 55,415,931 — Charges for services 9,037,943 238,742 9,276,685 6,801,983 Miscellaneous 1,553,508 87,215 1,640,723 1,143,394 Total operating revenues 66,007,382 325,957 66,333,339 7,945,377 Operating expenses: Personal services 18,480,347 51,552 18,531,899 2,133,091 Contractual services 6,633,666 67,896 6,701,562 93,337 Internal services 1,344,528 225 1,344,753 52,382 Materials and supplies 2,926,566 32,544 2,959,110 3,641,156 Depreciation 9,411,251 107,885 9,519,136 2,764,081 Other 3,549,465 2,589 3,552,054 — Total operating expenses 42,345,823 262,691 42,608,514 8,684,047 Operating income (loss) 23,661,559 63,266 23,724,825 (738,670) Nonoperating revenues (expenses): Interest revenue 472,042 13,411 485,453 12,147 Gain on disposal of capital assets 270,867 — 270,867 128,793 Meter and service connection fees 2,925,080 — 2,925,080 — Amortization, cost of issuing bonds (149,943) — (149,943) — Interest expense (3,541,893) — (3,541,893) — Total nonoperating revenues (expenses) (23,847) 13,411 (10,436) 140,940 Income (loss) before capital contributions and transfers out 23,637,712 76,677 23,714,389 (597,730) Capital contributions — — — 1,184,545 Transfers out (9,134,000) — (9,134,000) — Change in net assets 14,503,712 76,677 14,580,389 586,815 Net assets at June 30, 2004 248,770,800 3,277,471 252,048,271 16,123,934 Net assets at June 30, 2005 $ 263,274,512 3,354,148 266,628,660 16,710,749

See accompanying notes to basic financial statements.

21 CITY OF NEWPORT NEWS, VIRGINIA Statement of Cash Flows Proprietary Funds Year ended June 30, 2005

Enterprise Funds Nonmajor fund - Major Fund - Parking Internal Public Utility Authority Total Service Fund Cash flows from operating activities: Receipts from customers $ 66,280,859 238,742 66,519,601 2,435,402 Payments to suppliers (9,641,380) (114,033) (9,755,413) — Payments to employees (18,347,558) (51,862) (18,399,420) — Internal activity – payment to other funds (1,344,528) — (1,344,528) — Other payments (3,271,730) 87,215 (3,184,515) — Net cash provided by operating activities 33,675,663 160,062 33,835,725 2,435,402 Cash flows from capital and related financing activities: Acquisition of capital assets (9,618,798) — (9,618,798) (2,322,927) Cash from sale of capital assets — — — 431,472 Repayment and retirement of long-term debt (12,805,000) — (12,805,000) — Meter and sewer connection fees 2,925,080 — 2,925,080 — Interest paid (8,035,496) — (8,035,496) — Net cash used in capital and related financing activities (27,534,214) — (27,534,214) (1,891,455) Cash flows used in noncapital financing activities - Transfer to other funds (9,134,000) — (9,134,000) —

Cash flows provided by investing activities - Interest received 472,042 13,411 485,453 12,147 Increase (decrease) in cash and restricted cash (2,520,509) 173,473 (2,347,036) 556,094 Cash and restricted cash at beginning of year 29,795,096 821,161 30,616,257 884,958 Cash and restricted cash at end of year $ 27,274,587 994,634 28,269,221 1,441,052 Reported as: Cash and cash equivalents 12,026,937 769,634 12,796,571 1,441,052 Restricted cash 15,247,650 225,000 15,472,650 — Total cash & cash equivaalents 27,274,587 994,634 28,269,221 1,441,052 Cash flows from operating activities: Operating income $ 23,661,559 63,266 23,724,825 (738,670) Adjustments to reconcile operating income to cash provided by operating activities: Depreciation 9,411,251 107,885 9,519,136 2,764,081 Gain on disposal of capital assets 270,867 — 270,867 — Changes in assets and liabilities: Accounts receivable 212,453 — 212,453 275,456 Inventories 105,247 — 105,247 (31,471) Accounts payable and accrued liabilities (53,608) (11,089) (64,697) 166,006 Deposits 67,894 — 67,894 — Total adjustments 10,014,104 96,796 10,110,900 3,174,072 Net cash provided by operating activities $ 33,675,663 160,062 33,835,725 2,435,402

See accompanying notes to basic financial statements.

22 CITY OF NEWPORT NEWS, VIRGINIA Statement of Fiduciary Net Assets Fiduciary Funds June 30, 2005

Pension Agency Assets Trust Funds Cash and cash equivalents $ 750,070 1,315,533 Cash and cash equivalents with trustee 11,919,911 – Securities lending 27,028,176 – Investments Corporate and government bonds 207,803,341 – Common stock 326,782,972 – International stock 89,514,823 – International emerging markets 30,101,919 – Real estate 29,450,439 – Accounts receivable 440,799 2,859,457 Interest receivable 1,901,031 – Sales receivable 44,035,670 – Inventory – 5,839 Total assets $ 769,729,151 4,180,829

Liabilities Accounts payable $ 2,110,891 267,542 Accrued vacation 39,435 – Due to other governments – 2,325,252 Due to other agencies – 1,588,035 Purchases payable 42,632,156 – Liabilities under securities lending 27,028,176 –

Total liabilities 71,810,658 4,180,829

Net Assets Assets held in trust: Postemployment healthcare benefits 13,908,774 – Employees' retirement 684,009,719 –

Total net assets 697,918,493 –

Total liabilities and net assets $ 769,729,151 4,180,829

See accompanying notes to basic financial statements.

23 CITY OF NEWPORT NEWS, VIRGINIA Statement of Changes in Fiduciary Net Assets Fiduciary Funds - Pension Trust Employees' Retirement Year ended June 30, 2005

Additions (decreases): Employer Contributions: City General Fund $ 8,900,307 Waterworks Fund 1,081,799 School Operating Fund 3,646,692 Other Contributions: Income from Leave Exchange 1,483,213 Employee Buy-back 869,617 Total contributions 15,981,628 Investment income: Net appreciation - bonds 5,606,759 Net appreciation - stocks 42,883,884 Interest 8,323,773 Dividends 6,135,453 Real estate operating income, net 5,195,375 Securities lending - gross earnings 647,391 Commission recapture 102,015 Total investment gain 68,894,650 Less investment expenses: Securities lending (628,864) Other investment expenses (2,854,449) Net investment gain 65,411,337 Total increase 81,392,965 Deductions: Benefits: Service 26,965,541 Occupational death 48,092 Nonoccupational death 44,550 Occupational disability 238,803 Nonoccupational disability 512,057 Reversionary annuity 1,904,431 Retirees insurance benefits 9,046,987 Portability transfer 20,926 Total benefits 38,781,387 Administrative expenses: Personal services 372,134 Board fees 5,167 Consultant fees 137,000 Actuary fees 53,317 Medical disability exam fees 6,683 Total administrative expenses 574,301 Total deductions 39,355,688 Net increase 42,037,277 Net assets held in trust for pension benefits at June 30, 2004 655,881,216 Net assets held in trust for pension benefits at June 30, 2005 $ 697,918,493

See accompanying notes to basic financial statements.

24 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(1) Summary of Significant Accounting Policies

(a) The Reporting Entity

The City of Newport News, Virginia (the City or the Primary Government) was established by act of the Virginia General Assembly in 1958. It is a political subdivision of the Commonwealth of Virginia operating under the council-manager form of government. City Council consists of a mayor and six other council members. The City is not part of a county and has taxing powers subject to statewide restrictions and tax limits. The City provides a full range of municipal services including police and fire, sanitation, health and social services, public improvements, planning and zoning, general administrative services, education, and water and sewer system administered by the Newport News Department of Public Utilities.

The City’s reporting entity consists of the Primary Government, as well as its component units, which are legally separate organizations for which the elected officials of the Primary Government are financially accountable. Financial accountability is defined as appointment of a voting majority of the component unit’s board, and either (a) the ability to impose will by the Primary Government, or (b) the possibility that the component unit will provide a financial benefit or impose a financial burden on the Primary Government.

The accompanying financial statements present the City (the primary government) and its component units. The financial data of the component units are included in the City’s reporting entity because of the significance of their operational or financial relationships with the City.

Blended component units. The Public Utility and the Parking Authority serve all the citizens of the City and are governed by a board comprised of the City’s elected council. Both the rates for user charges and bond issuance authorizations are approved by the City Council and the legal liability for the general obligation portion of the debt resides with the City. These funds are reported as enterprise funds.

Discretely presented component units. Three of the City’s component units are discretely presented. Discretely presented component units are entities that are legally separate from the City, but for which the City is financially accountable, or whose relationships with the City are such that exclusion would cause the City’s financial statements to be misleading or incomplete. These component units are reported in separate columns to emphasize that they are legally separate from the City. All of the component units have a fiscal year end of June 30.

• The Newport News Public Schools (Public Schools or School Board) are responsible for elementary and secondary education within the City. The School Board is elected by the voters of Newport News and operates the three early childhood centers, 27 elementary, eight middle, and five high schools and one elementary-middle school combination in the City. The School Board may not issue debt. City Council makes an annual appropriation to the School Board, but is prohibited from exercising any control over specific expenditures of School Board operating funds. Transfers within the School Operating Fund are under the control of the School Board at the categorical level. Expenditures are controlled in the School Cafeteria and School Grants Funds through use of budgets approved by the School Board. Separate audited financial statements are available from the Newport News Public Schools at 12465 Warwick Boulevard, Newport News, Virginia 23606.

25 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

• The Economic and Industrial Development Authorities (E/IDA) are legally separate entities included in the City’s financial statements due to financial/legal inter-dependency with the City. The E/IDA acquires, maintains and develops land for sale or lease, and promotes both economic and industrial development and growth in the City. The City Council approves the E/IDA’s budget. Separate audited financial statements are available from E/IDA, at Department of Planning and Development, 2400 Washington Avenue, Newport News, Virginia 23607.

• The Peninsula Airport Commission (PAC) is a legally separate entity included in the City’s financial statements due to financial/legal inter-dependency with the City. The PAC operates the Newport News/Williamsburg International Airport. Separate audited financial statements are available from PAC at 900 Bland Boulevard, Newport News, Virginia 23602.

(b) Government-wide and Fund Financial Statements

The government-wide financial statements report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for services. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable.

The statement of activities demonstrates the degree to which the direct expenses of a given function or activity is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Included in direct expenses are certain indirect costs that have been allocated to the various programs. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported as general revenues.

Separate fund financial statements are provided for governmental funds, proprietary funds, and the fiduciary funds, even though the latter is excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements.

(c) Measurement Focus, Basis of Accounting, and Financial Statement Presentation

The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund 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 recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized when they are susceptible to accrual (i.e., both measurable and available). Revenues are considered to be

26 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period, usually within 30-45 days after year-end. Expenditures, other than interest on long-term debt which is recorded when due, are recorded when the related fund liability is incurred.

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

In the fund financial statements, real and personal property taxes are recorded as revenues and receivables when levied and billed, net of allowances for uncollectible amounts. Property tax receivables not collected within 45 days after year-end are reflected as deferred revenues. Sales and utility taxes, which are collected by the Commonwealth of Virginia or utility companies by year-end and subsequently remitted to the City, are recognized as revenues and receivables upon collection by the Commonwealth of Virginia or utility company, which is generally in the month preceding receipt by the City.

Licenses and permits, fines and forfeitures, charges for services and miscellaneous revenues (except interest on temporary investments) are recorded as revenues when received in cash because they are generally not measurable until actually received.

The City reports the following major governmental funds:

The General Fund is the City’s primary operating fund. It is used to account for all financial resources except those required to be accounted for in another fund.

The Debt Service Fund accounts for the accumulation of resources for the payment of principal, interest, and related costs on long-term debt of governmental funds.

The Bond Fund is a capital projects fund used to account for the proceeds of all general obligation bond issues except those of the Proprietary Funds. Proceeds are used for various capital outlays in accordance with the respective bond ordinances.

The City reports the following major proprietary fund:

The Public Utility Fund accounts for the water utility that provides water service to the City and various surrounding localities. Operation of the proprietary fund is designed to be primarily self-supporting through user charges. This fund services its own debt and construction projects and records the acquisition of its depreciable assets and land.

Additionally, the City reports the following fund types:

Internal Service Fund accounts for the financing of vehicle and equipment services provided to other departments or agencies of the City on a cost reimbursement basis.

27 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Pension Trust Employees’ Retirement Fund accounts for all contributions and investments accumulated for employees’ retirement. Also, the fund pays for all related expenses incurred as well as retiree benefits. The City’s pension plan covers all full-time City and School employees. The Fund is accounted for in essentially the same manner as proprietary funds.

The Agency Funds account for assets held by the City in a trustee capacity or as an agent or custodian for the individuals, private organizations, and other funds. Agency funds are custodial in nature and do not involve measurement of results of operations.

Nonmajor governmental funds:

Special Revenue Funds account for revenues and expenditures related to programs that are restricted in nature for specific purposes. Examples include the Stormwater Fund, the Solid Waste Fund, and providing services to mental health, mental retardation and substance abuse programs, activities of the Community Development Block Grant Program, individual grant programs, and rendering economic aid to certain qualifying citizens under several different programs.

Capital Projects Funds, excluding the Bond Fund, account for the federal entitlements used for capital expenditures as well as various federal and state grants for capital outlay in accordance with the respective grant agreements.

Nonmajor proprietary fund:

Parking Authority Enterprise Fund accounts for the operation of certain parking facilities within the City.

In accordance with GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that use Proprietary Fund Accounting, the government-wide financial statements and the fund financial statements of the enterprise fund type follow all applicable GASB pronouncements and all Financial Accounting Standards Board (FASB) pronouncements and predecessor APB Opinions and Accounting Research Bulletins issued on or before November 30, 1989 that do not contradict or conflict with GASB pronouncements. Under paragraph 7 of Statement No. 20, the City has elected not to apply FASB pronouncements issued after November 30, 1989.

As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are payments-in-lieu of taxes and other charges between the City’s public utility function and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned.

Proprietary funds distinguish operating revenues and expenses from nonoperating 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 revenues of the City’s proprietary funds are charges to customers for sales and services. The Public Utilities Enterprise Fund also recognizes certain rental fees as operating revenue. Operating expenses for proprietary funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 28 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

In all funds, when both restricted and unrestricted resources are available for a particular use and have not been earmarked for other purposes, it is the City’s policy to use restricted resources first for any allowable costs. After restricted resources have been depleted, unrestricted resources are used as they are needed unless the City determines and documents otherwise.

(d) Cash and Cash Equivalents and Investments

The City utilizes the pooled cash investment method, except for the Peninsula Airport Commission. Income from the investment of pooled cash is allocated to the various funds, based on the percentage of cash and cash equivalents of each fund to the total pooled cash and cash equivalents. In addition, the City has restricted deposits held by trustees for future retirements of bonds at the appropriate call date, retirements of certain certificates of participation at maturity and construction projects.

Investments are stated at fair value, except for cash equivalents where cost approximates fair value. Retirement plan investments are reported at fair value. Plan short-term investments that are reported at cost approximate fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. The fair value of real estate investments is based on independent appraisals. All other investments are valued based on amounts provided by the investment advisor or fund administrator.

For purposes of the statement of cash flows, all highly liquid debt instruments with original maturities of three months or less from the date of purchase are considered to be cash equivalents.

(e) Receivables and Payables

Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either “due to/from other funds” or “advances to/from other funds” in the fund statements or as “internal balances” in the statement of net assets. All other outstanding balances between funds are reported as “due to/from other funds.” Any residual balances outstanding between governmental activities and business-type activities are reported in the government-wide financial statements as “internal balances.”

In the fund statements, long-term interfund advances and advances to component units are recorded as a receivable with a corresponding reservation of fund balance by the advancing fund.

Provisions for uncollectible water, sewer, stormwater and emergency medical bills are based upon an historical analysis of uncollected accounts and are applied as a percentage of delinquent/terminated accounts in the year-end accounts receivable balance. Provision for uncollectible property taxes is based upon a historical percentage of accounts written off applied to the total levies of all years carried in taxes receivable.

The two major sources of property taxes are described below as reported in the fund financial statements:

Real Estate – Each year as of July 1, the City levies real estate taxes on all real estate within its boundaries, except that exempted by statute. Real estate taxes are levied on the estimated market value of the property and become a lien on real property the first day of the levy year. 29 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The City follows the practice of reassessing all property annually. Real estate taxes are collected in semi-annual payments due December 5 and June 5. During the fiscal year, the current year real estate taxes reported as revenue are the levies on assessed valuation on July 1, less an allowance for uncollectible amounts and taxes not collected within 45 days after year-end. The tax rate for 2005 was $1.27 per $100 of assessed value.

Personal Property – The City levies personal property taxes on motor vehicles and tangible personal business property. These levies are made each year as of January 1 with payment due the following June 5 and December 5. The current year personal property taxes reported as revenue are the levies on assessed valuation at January 1, 2005 less an allowance for uncollectible amounts and taxes not collected within 45 days after year-end. The tax rates for 2005 were $1.27, $.90, $1.00, $3.50, and $4.15 per $100 of assessed value for mobile homes, trawlers, pleasure boats, machinery and tools, and motor vehicles, respectively.

(f) Allowances for Uncollectibles

The City calculates allowances for uncollectibles using historical collection data, specific account analysis and management’s judgment. The allowance at June 30, 2005, is composed of the following:

General Fund – Taxes receivable: Real Estate $ 832,691 Personal Property 3,986,248 Total Taxes $ 4,818,939 Special Revenue Funds – Accounts receivable $ 460,448

(g) Inventories

Inventories, which consist of materials and supplies held for future consumption, are stated at cost using the first-in, first-out and average cost methods. Inventory is accounted for under the purchase method. The costs are recorded as expenditures at the time of purchase.

(h) Capital Assets

Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, and similar items), are reported in the applicable governmental or business- type activities column in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than $2,000. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. Interest of $5,063,912 was capitalized during fiscal year 2005. 30 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Under Virginia law, certain property maintained by the School Board is subject to tenancy-in- common with the City if the City incurred a financial obligation for the property payable over more than one fiscal year. The School Board and the City have agreed that such property will be carried on the City’s financial statements until the outstanding debt is repaid. At June 30, 2005, the City holds capital assets related to school property with a net book value of $122,947,056.

Capital assets of the primary government, as well as the component units, are depreciated using the straight line method over the following estimated useful lives:

Buildings 50 - 60 years Building improvements 25 - 30 years Infrastructure (including water system) 15 - 100 years Machinery and equipment 4 - 20 years

(i) Land Held for Resale

Land held for resale by the E/IDA is stated at acquisition cost plus improvements and capitalized interest, if applicable, but not in excess of net realizable value. Capitalized costs of projects are assigned to individual components of the projects based on specific identification. If specific identification is not practicable, capitalized interest costs are allocated to each parcel benefited, based on relative fair value before construction. As land is sold, all costs associated with that land are charged to cost of land sold.

(j) Compensated Absences

City employees are granted vacation and sick pay in varying amounts as services are provided. They may accumulate, subject to certain limitations, unused vacation leave, and upon retirement, termination or death, may be compensated for certain amounts at their then current rates of pay. The costs of accumulated vacation are accrued as a liability as the benefits are earned by the employees if attributable to services already rendered and compensation through time off or some other means is probable. Sick leave liability is recorded by the City when paid. Upon termination, City employees are not paid for accumulated sick leave. Unused sick leave is added to the actual years of service for the purpose of computing pension benefits. These liabilities are accounted for in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, as a result of employee resignations and retirements.

The Public Schools Component Unit employees are granted vacation and sick pay in varying amounts as services are provided. They may accumulate, subject to certain limitations, unused vacation leave, and upon retirement, termination or death, may be compensated for certain amounts at their then current rates of pay. Upon termination, School Board employees are not paid for accumulated sick leave. Upon retirement, sick leave may be taken in cash between $50 to $65 per day depending upon employment status or may be used as a lifetime subsidy (based on number of unused days) for retiree health insurance.

(k) Long-term Obligations

In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the 31 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

applicable government activities, business-type activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and 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 other assets and amortized over the term of the related debt.

In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, 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.

(l) Fund Equity

In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change.

(m) Encumbrances

The City employs encumbrance accounting under which obligations in the form of purchase orders, contracts and other commitments for the expenditure of funds are reported as reservations of fund balances, since they do not constitute expenditures or liabilities. Appropriations with outstanding commitments or encumbrances are carried into the following year. According to the City Code, unexpended, unencumbered appropriations lapse at the end of the year.

(2) Deposits, Investments and Securities Lending

Deposits

All cash of the City is maintained in accounts collateralized in accordance with the Virginia Security for Public Deposits Act (the Act), Section 2.2-4400 et. Seq. of the Code of Virginia or covered by federal depository insurance. Under the Act, banks holding public deposits in excess of the amounts insured by the FDIC must pledge collateral of 50% of the excess deposits to a collateral pool in the name of the State Treasury Board. Savings and loan institutions are required to collateralize 100% of deposits in excess of the FDIC limits and are considered insured. The State Treasury Board is responsible for monitoring compliance with the collateralization and reporting requirements of the Act and for notifying local governments of compliance by banks and savings and loans.

To increase returns and minimize fees, the City follows the practice of pooling cash and investments of all funds held with the City Treasurer except for certain restricted funds requiring separate tracking or held by outside custodians. At year-end, the government’s cash and investment balances were as follows:

32 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Investments Carrying amount Cash and deposits: Cash on hand 49,523 Deposits with banks 4,572,103 Total cash and deposits 4,621,626 Investments: Local Government Investment Pool (LGIP) 102,561,815 Deposits with banks - Money market accounts 28,389,205 Deposits with banks - Repurchase agreements 337,015 Peninsula Airport Commision - Time Deposits 1,113,128 Commonwealth cash reserve 17,359,746 VA SNAP 30,611,085 Common stock - IDA 11,687 IDA escrow funds 381,606 Total deposits and investments$ 185,386,913

Cash and investments as of June 30, 2005 are classified in the accompanying financial statements as follows:

Statements of net assets June 30, 2005 Primary Government: Cash and cash equivalents$ 78,689,948 Restricted cash 40,808,470 Component Units: Cash and cash equivalents 37,685,276 Restricted cash 26,887,686 Fiducuiary Funds (page 23): Cash and cash equivalents - Agency Funds 1,315,533 Total cash and investments$ 185,386,913

Investment Policy

In accordance with the Code of Virginia and other applicable law, including regulations, the City Investment Policy (Policy) permits investments in obligations of the United States or agencies thereof, obligations of the Commonwealth of Virginia or political subdivision thereof, obligations of the International Bank for Reconstructions and Development (World Bank), the Asian Development Bank, the African Development Bank, “prime quality” commercial paper and certain corporate notes, banker’s acceptances, repurchase agreements, the State Treasurer’s Local Government Investment Pool (the Virginia LGIP, a 2a-7 like pool), the State Non-Arbitrage Pool (“SNAP”) or similar fund, Open-end mutual funds (provided the funds are registered under the Security Act of Virginia or the Federal Investment Act of 1940), and negotiable certifications of deposits and negotiable bank deposit notes of domestic banks and domestic offices of foreign banks with a rating of at least A-1/P- 1 .

33 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The City Investment Policy prohibits any other security not specifically authorized in the policy. No investment shall be purchased if the yield is less than that of the most recently auctioned issue of the United States Treasury of a similar term. At no time, shall more than 35% of the portfolio be invested in commercial paper. No more than five percent of the portfolio shall be invested in the commercial paper of a single entity. At no time shall an investment bear a maturity date greater than thirty-six (36) months from date of purchase. The City Policy does not set a limit on the amount that may be invested in any single Federal Agency issuer or in any obligation of the United States. However, the Treasurer shall endeavor to maintain an appropriate diversification in the portfolio. The Treasurer shall avoid an excessive concentration in any type of investment and excessive number of investment transactions with any financial institution or broker/dealer.

Interest Rate Risk: As a means of limiting exposure to fair value losses arising from rising interest rates, investment maturity is managed to proceed or coincide with expectance need of funds. The City’s Policy limits the investment of operating funds to investments with a stated maturity of no more than thirty-six (36) months from the date of purchase. Purchases of securities are laddered with staggered maturity dates. Proceeds from the sale of bonds must be invested in compliance with the specific requirements of the bond covenants and may be invested in securities with longer maturities. As of June 30, 2005, the carrying value and weighted average maturity of the city’s investments are listed below.

Custodial Credit Risk - Investments: The policy requires that all securities purchased for the City shall be held by the City Treasurer or by the City Treasurer’s designated third party custodian. If held by a custodian, the securities must be in the City’s or in the custodian’s nominee name and identifiable on the custodian’s books as belonging to the City and the custodian must be a third party, not a counter-party (buyer or seller).

Credit Risk of Debt Securities of Primary Government

The City’s rated debt investments as of June 30, 2005, were rated by Standard & Poor and Moody. The ratings are presented below using the Standard & Poor rating scale. The component units, School Boards and IDA, are pooled with the city and not separately identified.

34 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Weighted Average Credit Maturity Assets held by the Treasurer Fair Value Rating (Years)

Local Government Investment Pool (LGIP)$ 102,626,898 AAAm N/A Money Market Mutual Funds - Underlying U.S. Gov. Securities 913,145 AAA N/A U.S. Agencies 1,011,667 A-1+ 0.89 U.S. Gov. Bonds 498,063 AAA 0.89 U.S. Gov. Bonds 1,390,890 AAA 0.18 Commercial Paper 693,798 A-1 0.18 Repurchase Agreements 373,358 A-1+ N/A Money Market Mutuals 158,749 N/A N/A Commonwealth Cash Reserve (AIM) - Underlying: U.S. Agencies 1,825,467 AAA 0.02 U.S. Treasury Bonds 246,377 N/A 0.02 Money Markets 15,287,902 AAAm 0.02 VA SNAP 30,611,085 AAAm 0.02 Total Deposits and Investments$ 155,637,399

Deposits of Pension Fund

At year-end, the Pension Fund’s cash and investment balances were as follows: Investments Carrying amount Investments Common and international stocks Not on securities loan$ 423,017,224 On securities loan - Collateralized by securities 858,660 Corporate & government bonds - not on securities loan 204,941,093 Pension fund real estate trust funds 29,450,439 Total investments$ 658,267,416 Cash and deposits Deposits with banks 52,256 Deposits with banks - Repurchase agreements 697,814 Investments on Pension securites loaned, collateralized by cash: Common and international stocks 22,523,830 Corporate and government bonds 2,862,248 Securities lending collateral - short-term investsment pool 27,028,176 Pension trust fund money markets 11,919,911 Total deposits and investments$ 723,351,651

35 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The Pension fund’s cash and investments as of June 30, 2005 are classified in the accompanying financial statements as follows:

June 30, 2005 Cash and cash equivalents$ 750,070 Cash and cash equivalents with trustee 11,919,911 Securities lending 27,028,176 Investments Corporate and government bonds 207,803,341 Common stock 326,782,972 International stock 89,514,823 International emerging markets 30,101,919 Real estate 29,450,439 Total deposits and investments$ 723,351,651

Investment Policy of the Pension Fund

The Pension Trust Fund (the Fund) can be invested in obligations of the U.S. or agencies thereof, obligations of the Commonwealth of Virginia, or political subdivisions thereof, corporate bonds rated A or higher by two of three nationally known security rating concerns, federally insured mortgages under Titles 203, 207, 220 and 221 of the National Housing Act, equities, certificates of deposit, guaranteed investment contracts and real estate. Pension Trust Fund investments are subject to restrictions placed by policies of the City Council and the Retirement Board (the Board).

Credit Risk of Pension Fund

The credit risk profile for the Pension Fund securities by investment type as of June 30, 2005 is as follows:

S & P's Ratings as of June 30, 2005

AAA AA A BBB Not Rated Investment Types Asset-backed $ 5,182,691 4,514,522 - 668,169 - - Corporate Bonds 58,641,378 2,939,366 7,566,848 46,955,428 1,179,736 - Mortgage-backed 60,253,765 57,300,444 - - - 2,953,321 Mutual Funds 768,807 - - - - 768,807 Real Estate Inv. 852,194 - - - - 852,194 Short-Term 12,075,442 - - - - 12,075,442 U.S. Agencies 21,916,047 21,916,047 - - - - Exempt from disclosure 563,661,327 - - - - 563,661,327 Total$ 723,351,651 86,670,379 7,566,848 47,623,597 1,179,736 580,311,091

Concentration of Credit Risk – Pension Fund There were no investments in any one issuer that represented 5% or more of the total Pension Fund investments.

36 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Custodial Risk – Pension Fund

The Pension Fund Custodian (State Street Bank) holds investment securities in the Pension’s name. Accordingly, the fund is not exposed to custodial credit risk.

Foreign Currency Risk – Pension Fund

The Pension Fund does not have a formal policy to limit foreign currency risk. Risk of loss arises from changes in currency exchange rates. The Pension Fund’s exposure to foreign currency risk is as follows:

Investment Currency Fair Value Cash equivalent Brazilian Real$ 13,591 Common stock Canadian dollar 100,368 Common stock Euro currency 10,035,895 Cash equivalent Euro currency 2,921 Common stock Japanese yen 4,570,436 Cash equivalent Japanese yen 35,816 Common stock New Zealand dollar 310,077 Common stock Pound sterling 4,223,437 Common stock Singapore dollar 564,726 Rights Singapore dollar 22,936 Common stock Swiss franc 1,700,241 Total$ 21,580,444

State statutes do not prohibit the Pension Fund from participating in securities lending transactions, and the Board has, via a Securities Lending Authorization Agreement, authorized State Street Bank and Trust Company (State Street) to lend the Fund’s securities to broker-dealers and banks pursuant to a form of loan agreement. Cash collateral received in respect of such loans was invested at the direction of the Board, in the Quality Fund, a pooled external investment vehicle. Please note the following:

(i) Method for Determining Fair Value: The fair value of investments held by the Quality Fund is based upon valuations provided by a recognized pricing service.

(ii) Policy for Utilizing Amortized Cost Method: Because the Quality Fund does not meet the requirements of Rule 2a-7 of the Investment Company Act of 1940, State Street has valued the Fund’s investments at fair value for reporting purposes.

(iii) Regulatory Oversight: The Quality Fund is not registered with the Securities and Exchange Commission. State Street, and consequently the investment vehicles it sponsors are subject to the oversight of the Federal Reserve Board and the Massachusetts Commissioner of Banks. The fair value of the City’s position in the Quality Fund is not the same as the value of the Pension Fund shares.

(iv) Involuntary Participation: There was no involuntary participation in an external investment pool for the fiscal year. 37 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(v) Income Assignment: No income from one fund was assigned to another fund by State Street during the fiscal year.

During fiscal year 2005, State Street lent, at the direction of the Board, the Fund’s securities and received cash (including both U.S. and foreign currency), securities issued or guaranteed by the U. S. Government or its agencies, sovereign debt of foreign countries and irrevocable bank letters of credit as collateral. State Street did not have the ability to pledge or sell collateral securities delivered; therefore, there cannot be a borrower default. Borrowers were required to deliver collateral for each loan in amounts not less than 102% of the market value of the loaned securities.

The Board did not impose any restrictions during the fiscal year on the amount of the loans that State Street made on its behalf. There were no such failures by any borrowers to return loaned securities or pay distributions thereon during the fiscal Year. Moreover, there were no losses during the fiscal year resulting from default of the borrowers or State Street.

During the fiscal year, the Board and the borrowers maintained the right to terminate all securities lending transactions on demand. The cash collateral received on each loan was invested in a commingled investment pool. The average duration of such investment pool as of June 30, 2005, was 25 days and an average weighted maturity of 174 days. Because the loans were terminable at will, their duration did not generally match the duration of the investments made with cash collateral. On June 30, 2005, the Board had no credit risk exposure to borrowers. The collateral held and the market value of securities on loan for the Board as of June 30, 2005, were $17,028,176 and $26,244,738, respectively. The collateral includes securities totaling $885,660 that cannot be pledged or sold unless the borrower defaults.

38 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(3) Accounts Receivable

Net Accounts receivable in the statement of net assets are as follows:

Governmental Business-type activities activities Taxes receivable: Real Estate $ 4,105,413 - Personal Property 6,271,442 - Total taxes receivable, net 10,376,855 - Accounts receivable 8,176,810 9,062,430 Total receivables, net $ 18,553,665 9,062,430

Accounts receivable and receivables from other governments as of year-end for the City’s individual major funds and nonmajor and fiduciary funds, in the aggregate, including the applicable allowances for uncollectible accounts, are as follows:

Public Fiduciary Nonmajor General Utility Funds Funds Total Receivables: Taxes $ 15,195,795 - - - 15,195,795 Accounts 6,339,358 9,426,623 2,846,845 2,297,900 20,910,726 Intergovernmental: Federal - - - 3,018,864 3,018,864 State 6,345,950 - - 11,238,243 17,584,193 Local - - - - - Gross receivables 27,881,103 9,426,623 2,846,845 16,555,007 56,709,578 Less allowance for doubful accounts (4,818,940) (364,193) - (460,448) (5,643,581) Net total receivables $ 23,062,163 9,062,430 2,846,845 16,094,559 51,065,997

Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, deferred revenue of $0.7 million was reported in the governmental nonmajor funds. The general fund deferred revenue of $8.1 million includes approximately $6.3 million in property tax deferrals.

39 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(4) Capital Assets, Net

Capital asset activity for the year ended June 30, 2005 was as follows:

Primary Government Balance** Balance July 1, 2004 Increases Decreases June 30, 2005 Governmental activities: Capital assets, not being depreciated: Land $ 75,445,332 28,635 - 75,473,967 Construction in progress 31,469,493 10,542,433 20,189,987 21,821,939 Total capital assets, not being depreciated 106,914,825 10,571,068 20,189,987 97,295,906 Capital assets, being depreciated: Buildings 254,788,485 4,446,953 - 259,235,438 Improvements 93,782,166 17,403,894 - 111,186,060 Machinery and equipment 94,259,111 7,800,521 4,611,759 97,447,873 Infrastructure 388,814,023 10,547,952 - 399,361,975 Total capital assets being depreciated 831,643,785 40,199,320 4,611,759 867,231,346 Less accumulated depreciation for: Buildings 57,185,431 5,280,982 - 62,466,413 Improvements 39,964,357 4,084,235 - 44,048,592 Machinery and equipment 60,956,528 5,863,468 4,489,910 62,330,086 Infrastructure 244,381,735 8,212,936 233 252,594,438

Total accumulated depreciation * 402,488,051 23,441,621 4,490,143 421,439,529 Total capital assets being depreciated, net 429,155,734 16,757,699 121,616 445,791,817 Capital assets, net $ 536,070,559 27,328,767 20,311,603 543,087,723

* Increases in accumulated depreciation for Governmental Activities above include accumulated depreciation for tenancy-in-common assets transferred to the City in FY05 ($68,686). ** Restated due to Prior Period Adjustments (see Note 12)

Depreciation expense for governmental activities was charged to functions of the primary government as follows: General Government $ 2,760,472 Judicial Administration 410,058 Public Safety 1,895,967 Public Works 8,548,209 Health and Welfare 186,497 Education 2,817,308 Parks, Recreation and Culture 3,271,618 Community Development 718,725 Internal Service Fund 2,764,081 $ 23,372,935

40 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Construction in progress for the City at June 30, 2005 is composed of the following project authorizations (in millions):

Project Expended as of Balance of Future Authorization June 30, 2005 Authorization Requirements General Government$ 38.2 4.7 33.6 11.4 Parks and Recreation 7.8 5.9 1.9 12.0 Economic Development and Urban Renewal 19.6 2.5 17.1 11.6 Public Schools 27.0 8.7 18.2 8.4 Totals$ 92.6 21.8 70.8 43.4

In addition, the City had commitments of approximately $29.9 million relating to infrastructure at June 30, 2005.

Balance Balance Business-type activities: July 1, 2004 Increases Decreases June 30, 2005 Capital assets, not being depreciated: Land $ 6,393,724 150,000 4,179 6,539,545 Construction in progress 113,516,518 8,221,843 72,388 121,665,973 Total capital assets, not being depreciated 119,910,242 8,371,843 76,567 128,205,518 Capital assets, being depreciated: Buildings 16,176,504 52,022 - 16,228,526 Improvements 3,532,823 - - 3,532,823 Water system 371,163,707 5,012,234 474,128 375,701,813 Machinery and equipment 16,666,667 1,192,903 879,673 16,979,897 Total capital assets being depreciated 407,539,701 6,257,159 1,353,801 412,443,059 Less accumulated depreciation for: Buildings 897,590 332,044 - 1,229,634 Improvements 1,747,428 107,885 - 1,855,313 Water system 111,179,102 7,565,373 408,950 118,335,525 Machinery and equipment 10,758,645 1,513,834 849,721 11,422,758 Total accumulated depreciation 124,582,765 9,519,136 1,258,671 132,843,230 Total capital assets being depreciated, net 282,956,936 (3,261,977) 95,130 279,599,829 Capital assets, net $ 402,867,178 5,109,866 171,697 407,805,347

41 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Depreciation expense for business-type activities was charged to functions of the primary government as follows:

Water $ 9,411,251 Parking 107,885 Total $ 9,519,136

Balance Balance July 1, 2004 Increases Decreases June 30, 2005 Public Utility: Capital assets, not being depreciated: Land $ 5,661,877 150,000 4,179 5,807,698 Construction in progress 113,516,518 8,221,843 72,388 121,665,973 Total capital assets, not being depreciated 119,178,395 8,371,843 76,567 127,473,671 Capital assets, being depreciated: Buildings 16,176,504 52,022 - 16,228,526 Improvements 371,163,707 5,012,234 474,128 375,701,813 Machinery and equipment 16,635,656 1,192,903 878,556 16,950,003 Total capital assets being depreciated 403,975,867 6,257,159 1,352,684 408,880,342 Less accumulated depreciation for: Buildings 861,320 332,045 - 1,193,365 Improvements 111,179,101 7,565,372 408,951 118,335,522 Machinery and equipment 10,735,993 1,513,834 848,602 11,401,225

Total accumulated depreciation 122,776,414 9,411,251 1,257,553 130,930,112 Total capital assets being depreciated, net 281,199,453 (3,154,092) 95,131 277,950,230 Capital assets, net $ 400,377,848 5,217,751 171,698 405,423,901

42 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Discretely Presented Component Units

Balance Balance July 1, 2004 Increases Decreases June 30, 2005 Public Schools: Capital assets, not being depreciated: Land $ 2,505,084 - - 2,505,084 Construction in progress 4,599,316 11,459,093 15,937,258 121,151 Total capital assets, not being depreciated 7,104,400 11,459,093 15,937,258 2,626,235 Capital assets, being depreciated: Buildings 52,416,128 - 1,018,307 51,397,821 Improvements 11,150,069 20,729,276 1,063,328 30,816,017 Machinery and equipment 77,491,201 7,465,867 5,152,611 79,804,457 Total capital assets being depreciated 141,057,398 28,195,143 7,234,246 162,018,295 Less accumulated depreciation for: Buildings 21,747,360 894,476 491,945 22,149,891 Improvements 4,675,311 790,695 148,866 5,317,140 Machinery and equipment 45,099,606 7,731,916 4,854,365 47,977,157

Total accumulated depreciation 71,522,277 9,417,087 5,495,176 75,444,188 Total capital assets being depreciated, net 69,535,121 18,778,056 1,739,070 86,574,107 Capital assets, net $ 76,639,521 30,237,149 17,676,328 89,200,342

Depreciation of $9,417,087 was charged to the Public School’s governmental functions.

Construction in progress for the Public Schools at June 30, 2005 is composed of project authorizations of $9,122,380, amounts expended through June 30, 2005 of $121,151 with a remaining balance of $9,001,229.

43 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Balance Balance July 1, 2004 Increases Decreases June 30, 2005 E/IDA: Capital assets, not being depreciated - Construction in progress $ 1,814,068 10,453,596 202,960 12,064,704 Capital assets, being depreciated: Buildings 100,925,613 - 1,823,483 99,102,130 Improvements 9,931,878 - - 9,931,878 Infrastructure 1,521,049 - - 1,521,049 Machinery and equipment 96,674 - - 96,674 Total capital assets being depreciated 112,475,214 - 1,823,483 110,651,731 Less accumulated depreciation for: Buildings 8,977,671 2,209,644 120,822 11,066,493 Improvements 1,671,540 276,942 - 1,948,482 Infrastructure - 46,645 - 46,645 Machinery and equipment 77,924 3,750 - 81,674

Total accumulated depreciation 10,727,135 2,536,981 120,822 13,143,294 Total capital assets being depreciated, net 101,748,079 (2,536,981) 1,702,661 97,508,437 Capital assets, net $ 103,562,147 7,916,615 1,905,621 109,573,141

Balance Balance July 1, 2004 Increases Decreases June 30, 2005 PAC: Capital assets, not being depreciated - Land $ 4,879,510 832,560 - 5,712,070 Construction in progress 30,985,003 8,530,586 32,178,855 7,336,734 Total capital assets not being depreciated 35,864,513 9,363,146 32,178,855 13,048,804 Capital assets, being depreciated: Airfield 22,831,303 30,547,078 - 53,378,381 Terminal 34,250,581 759,218 - 35,009,799 Other 3,126,081 51,486 - 3,177,567 Machinery and equipment 2,031,344 - - 2,031,344 Total capital assets being depreciated 62,239,309 31,357,782 - 93,597,091 Less accumulated depreciation for: Airfield 18,908,833 2,059,177 - 20,968,010 Terminal 11,931,435 990,561 - 12,921,996 Other 2,119,638 171,291 - 2,290,929 Machinery and equipment 1,971,322 19,526 - 1,990,848 Total accumulated depreciation 34,931,228 3,240,555 - 38,171,783 Total capital assets being depreciated, net 27,308,081 28,117,227 - 55,425,308 Capital assets, net $ 63,172,594 36,647,813 32,178,855 68,474,112

44 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(5) Interfund Receivables, Payables, and Transfers

The composition of interfund balances as of June 30, 2005, is as follows:

Due to / from other funds:

Receivable Fund Payable Fund Amount General fund Nonmajor Gov. fund: Community Dev.$ 21,213 General fund Nonmajor Gov. fund: Street Maintenance 2,919,849 General fund Nonmajor Gov. fund: Comprehensive Services Act 2,499,719 General fund Nonmajor Gov. fund: Other Federal & State 5,217,607 General fund Debt Service 5,904,094 $ 16,562,482

All interfund balances resulted from the time lag between the dates that (1) interfund goods and services are provided or reimbursable expenditures occur and (2) payments between funds are made.

Due to / from Primary Government and component units:

Receivable Entity Payable Entity Amount City of Newport News Industrial Development Authority$ 17,407,180 Newport News Public Schools City of Newport News 104,201

The IDA Payable of $17,407,180 represents the outstanding balance of the City’s financing of the Applied Research Center (ARC). The repayment includes interest at 3.729%. Annual payments represent net revenues from the ARC.

Individual fund interfund transfers for the primary government at June 30, 2005 are as follows:

Transfers to Transfers From Other Funds Other Funds Operating Operating General Fund $ 30,230,988 9,134,000 Debt Service Fund - 30,275,043 Nonmajor governmental funds 5,234,353 5,190,298 Public Utility 9,134,000 - Total interfund transfers $ 44,599,341 44,599,341

Transfers are used when another governmental fund is required, legally or through budgetary design to provide resources for the payment of current debt requirements. One fund is responsible for the initial receipt of funds and another fund is authorized to use the resources to finance its operating expenditures or expenses. Transfer from the Public Utility Fund to the General Fund is used to finance general governmental expenditures.

45 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(6) Lease Agreements

(a) Capital Lease Payments – Primary Government

The City has entered into a lease agreement through 2009 to finance the acquisition of equipment. This lease is accounted for as a capital lease and recorded at the present value of the future minimum lease payments at the date of inception. The cost of equipment under a capital lease is $387,740 and is included in capital assets. The future minimum lease obligations and the net present value of these minimum lease payments as of June 30, 2005 were as follows:

Year ending June 30: 2006 $ 93,996 2007 93,996 2008 93,996 2009 54,811 Total $336,799 Less Interest 44,010 Total Lease Payments $292,789

(b) Capital Lease Payments – Public Schools (Component Unit) The School Board has entered into three lease agreements for financing the acquisition of property and equipment. These lease agreements qualify as capital leases for accounting purposes and, therefore, have been recorded at the present value of their future minimum lease payments as of the inception date. The assets acquired through capital leases are as follows: Buildings $ 1,435,000 Machinery and equipment 4,412,510 Less accumulated depreciation (2,071,892) Net assets acquired through capital leases $ 3,775,618

46 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The future minimum lease obligations and the net present value of these minimum lease payments as of June 30, 2005, were as follows:

Years ending June 30: 2006 $ 1,168,888 2007 1,163,847 2008 450,138 2009 418,970 2010 124,811 2011 - 2015 548,368 2016 - 2020 401,285 Total minimum lease payments $ 4,276,307 Less amounts representing interest (750,586) Present value of minimum capital lease payments $ 3,525,721

(c) Operating Lease Payments – Component Units The School Board leases machinery, equipment and buildings under noncancelable operating leases. The Authorities lease land and property in Newport News. Original lease terms ranged from one to five years. PAC leases equipment under long-term noncancelable operating leases. Original lese terms ranged from three to five years.

The future minimum lease payments for these leases are as follows: Economic and Industrial Peninsula Newport News Development Airport Public Schools Authorities Commission Years ending June 30: 2006 $ 223,776 347,903 23,281 2007 230,489 360,213 21,627 2008 237,404 360,980 19,908 2009 244,526 361,755 19,908 2010 251,862 362,537 11,613 2011-2015 — 572,579 — $ 1,188,057 2,365,967 96,337

47 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(d) Operating Lease Revenue – Component Units

The Authorities have developed several properties in which they own the land and buildings. These properties were developed with the purpose of entering into lease agreements with private companies. These lease agreements are made to increase the economic activity of the City.

The following schedule shows the composition of the Authorities’ investment in property in operating leases:

Land $ 2,652,960 Buildings 86,636,389 Less accumulated depreciation (10,754,847) Net investment in property held for lease $ 78,534,502

PAC leases property to tenants including terminal space, hangers and land.

Minimum future rental income on operating leases as of June 30, 2005 is as follows:

E/IDA PAC Year ending June 30: 2006 $ 7,546,539 1,769,710 2007 7,207,920 1,739,846 2008 6,267,224 1,754,104 2009 6,387,395 1,809,332 2010 6,163,697 1,856,795 2011-2015 29,528,893 — 2016-2020 21,201,006 — 2021-2025 7,243,524 — 2026-2030 4,904,238 — Total $ 96,450,436 8,929,787

Rental income on operating leases for year ended 2005 was $7,025,739 and 1,582,712 for E/IDA and PAC, respectively.

(e) Net Investment in Direct Financing Leases – E/IDA (Component Unit)

The E/IDA is lessor in three direct financing leases on various properties within the City. These lease agreements are agreements with private companies and the Newport News Public Schools to increase the economic activity in the City. The following schedule lists the composition of the net investment in the direct financing leases as of June 30, 2005:

48 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Minimum lease payments to be received $ 25,552,401 Less unearned income (4,933,435) Net investment in direct financing leases $ 20,618,966

Minimum future rental income on these direct financing leases as of June 30, 2005 are as follows: Year ending June 30: 2006 $ 3,399,397 2007 2,139,397 2008 2,139,397 2009 2,139,397 2010 2,139,397 2011-2015 10,696,985 2016-2020 2,898,431 Total $ 25,552,401

(7) Long-Term Liabilities

(a) A summary of changes in long-term liabilities for governmental activities for the year ended June 30, 2005 follows:

Balance Balance Due within July 1, 2004 Additions Reductions June 30, 2005 one year Bonds payable: General obligation bonds $ 399,243,847 45,066,111 (49,956,413) 394,353,545 30,490,298 Deferred amounts: Add bonds premiums 15,616,376 1,109,184 (1,720,920) 15,004,640 1,744,028 Net loss on refunded bonds (10,021,258) (756,701) 1,093,053 (9,684,906) (1,115,125) Total bonds payable 404,838,965 45,418,594 (50,584,280) 399,673,279 31,119,201 Literary loan bonds 4,233,331 — (669,249) 3,564,082 669,249 Capital leases payable 360,896 — (68,107) 292,789 73,644 Land lease payable 2,440,467 — (127,861) 2,312,606 135,747 Landfill liability 6,662,000 — (161,000) 6,501,000 169,000 Accrued vacation 17,845,949 10,946,054 (10,256,668) 18,535,335 10,639,282 Net pension obligation 10,453,000 35,421,000 (13,629,000) 32,245,000 — Workers' compensation and other claims 10,812,108 3,842,704 (3,035,884) 11,618,928 2,100,000 Incurred but not reported claims 2,995,000 23,243,851 (23,438,851) 2,800,000 2,800,000 Total long-term liabilities $ 460,641,716 118,872,203 (101,970,900) 477,543,019 47,706,123

Long-term liabilities are normally paid from the General Fund.

General obligation bonds of $36.4 million are authorized but unissued. 49 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

In December 2004, the City issued $29,170,000 of general improvement bonds Series 04D with a true interest cost of 5.0%. The net proceeds of $30,299,976 (after an original issue premium of $1,109,184 and payment of $279,184 for underwriting fees and other issuance costs) were used for various capital projects.

In February 2005, the City issued $12,720,000 of general improvement refunding bonds Series 05A with a true interest rate of 5.0% to refund a portion of the 1996B issue with an interest rate of 6.9%. The net proceeds of $12,758,786 (after a payment of $178,299 for underwriting fees and other issuance costs) were used to purchase U.S. securities and deposited in an irrevocable trust with an escrow agent to provide for all future debt service payments on the refunded bonds. As a result, the refunded bonds are considered to be defeased and the liabilities have been removed from the governmental activities column of the statement of net assets. On June 30, 2005, $295,000 remain outstanding. The reacquisition price was greater than the net carrying amount of the old debt by $45,000. This amount is being netted against the new debt and amortized over the remaining life of the refunded debt. This advance refunding resulted in an economic loss of $756,701. This issuance resulted in a cash flow savings from fiscal years 2005 through 2015 totaling $1,360,570.

At June 30, 2005, approximately $89.0 million of general obligation bonds are considered defeased because refunding trusts have been established to pay for them.

Landfill Liability: The City closed its Denbigh landfill site on June 30, 1996. State and federal laws and regulations require a final cover and the performance of certain maintenance monitoring functions at the site for 30 years after closure. The $6.5 million liability at June 30, 2005 represents the total estimated cost of closure and postclosure care through fiscal year 2027 and reflects what it would cost to perform all closure/postclosure care in 2005. Actual costs may be higher due to inflation, technology changes or regulation changes.

50 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Outstanding general obligation bonds at June 30, 2005, of the Primary Government governmental activites are comprised of the following issues:

Final Effective G.O. Bond Bond Maturity Interest Rate Balance Series Date Date (At Issue) June 30, 2005 VPSA 91 07/15/91 07/15/11 6.4%$ 1,645,335 Series 93B 04/01/93 11/01/05 5.4% - Series 93C 07/15/93 06/01/12 5.0% 90,000 Series 93E 11/15/93 01/01/14 5.1% 2,535,000 VRA 93D 09/17/93 06/01/15 4.5% 544,205 VRA 94A 06/02/94 01/01/16 4.5% 2,724,779 VMPL 95A 05/25/95 07/15/04 4.2% - Series 95A 06/15/95 07/01/06 5.5% 4,810,000 VMPL 95C 09/28/95 07/15/14 4.3% 5,912,565 VPSA 95C 12/01/95 07/15/15 5.2% 3,535,601 Series 96A 01/15/96 01/15/07 5.2% 1,160,000 Series 96B 01/15/96 01/15/25 6.9% 295,000 VRA 96C 01/24/96 10/01/16 4.8% 2,000,346 Series 96D 12/01/96 01/15/08 5.4% 3,905,000 VRA 97A 01/30/97 10/01/17 4.8% 2,056,279 VRA 98A 01/22/98 10/01/17 4.8% 1,661,485 Series 98A 03/01/98 03/01/18 4.0% 28,065,000 Series 98C 12/01/98 12/01/09 4.2% 2,575,000 Series 99A 04/01/99 07/01/07 4.1% 7,330,000 VRA 99A 03/09/99 12/01/19 4.3% 2,207,312 Series 99B 03/01/99 03/01/19 4.6% 19,600,000 VRA 00A 03/01/00 03/01/21 3.5% 2,374,592 Series 00A 05/01/00 05/01/10 5.6% 6,405,000 VPSA 00B 11/16/00 07/15/21 5.2% 4,819,149 VRA 01A 04/24/01 05/01/22 4.1% 1,909,653 Series 01A 09/15/01 09/15/21 4.3% 21,250,000 Series 01B 09/15/01 09/15/04 4.3% - VRA 02A 05/15/02 01/01/23 3.8% 2,520,599 Series 02A 09/26/02 07/01/22 3.5% 25,200,000 Series 02B 09/26/02 07/01/16 3.4% 57,180,000 Series 03A 03/01/03 06/01/12 3.6% 10,165,000 Series 03B 06/03/03 11/01/23 3.8% 25,650,000 VRA 03A 06/24/03 06/01/24 3.5% 2,970,689 Series 03C 07/15/03 11/01/09 5.0% 29,640,000 QZAB 03A 12/31/03 12/28/18 3.5% 1,090,819 QZAB 03B 12/31/03 12/28/18 3.5% 1,351,675 Series 04A 03/01/04 07/15/24 5.0% 25,000,000 Series 04B 03/01/04 01/15/18 4.5% 30,455,000 Series 04C 03/01/04 05/01/20 5.0% 10,130,000 VRA 04A 06/30/04 09/01/25 3.5% 1,698,462 Series 04D 12/01/04 12/01/24 5.0% 29,170,000 Series 05A 02/01/05 01/15/15 4.0% 12,720,000 Totals$ 394,353,545

51 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Outstanding literary loans at June 30, 2005, of the Primary Government governmental activities are comprised of the following issues:

Final Effective Bond Maturity Interest Rate Balance Project Date Date (at issue) June 30, 2005

Greenwood Elementary 12/01/86 12/01/06 3% $ 200,000 Menchville High 12/15/86 12/15/06 3% 96,000 New Horizons Tech 07/01/87 07/01/07 3% 150,000 Watkins Elementary 07/01/89 07/01/09 3% 500,000 Ferguson High 03/01/90 03/01/10 4% 250,000 Huntington Middle 03/01/90 03/01/10 4% 177,500 Hidenwood Elementary 04/01/90 04/01/10 4% 50,000 Denbigh High 10/01/89 10/01/09 3% 401,962 Gildersleeve Middle 03/01/91 03/01/11 3% 600,000 Warwick High 09/01/99 09/01/19 2% 138,000 Washington Middle 09/15/00 09/15/06 2% 15,000 Menchville High-2 10/01/00 10/01/20 2% 200,000 Denbigh High-2 08/01/01 08/01/21 2% 208,517 Crittenden Middle 08/15/01 08/15/06 2% 30,000 Gildersleeve Middle-2 08/15/01 08/15/21 2% 106,250 Dozier Middle 08/15/01 08/15/21 2% 106,250 Reservoir Middle 05/1/02 05/1/22 2% 106,250 Hines Middle 05/1/02 05/1/22 2% 106,250 Huntington Middle-2 09/1/02 09/1/22 2% 122,103 Totals $ 3,564,082

The following table summarizes future debt service requirements as of June 30, 2005:

General Obligation Bonds Literary Loans Fiscal year ending June 30: Principal Interest Principal Interest 2006 $ 30,490,298 18,264,099 $ 669,249 100,311 2007 32,275,636 17,014,822 654,249 80,236 2008 33,400,761 15,834,878 491,249 60,462 2009 34,515,090 14,299,882 441,249 45,426 2010 28,838,860 12,580,054 443,211 31,891 2011 - 2015 125,101,277 42,557,959 428,745 66,338 2016 - 2020 77,643,771 15,809,742 328,750 30,462 2021 - 2025 27,622,852 3,865,615 107,380 3,300 2026 4,465,000 1,667 - - Total future debt service $ 394,353,545 140,228,718 $ 3,564,082 418,426

52 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Business-Type Activities

A summary of changes in long-term liabilities for business-type activities for the year ended June 30, 2005 follows: Balance Balance Due within July 1, 2004 Additions Reductions June 30, 2005 one year Bonds payable: General obligation bonds $ 178,025,000 — 12,805,000 165,220,000 13,320,000 Deferred amounts: Add bond premiums 7,618,216 — 597,018 7,021,198 149,943

Total bonds payable $ 185,643,216 — 13,402,018 172,241,198 13,469,943

Outstanding public utility bonds at June 30, 2005 are comprised of the following issues:

Public Utility Issue Final Maturity Interest Rate Balance Bond Series Date Date (At Issue) June 30, 2005

Series 93B 04/15/93 11/01/08 5.4% $ – Series 93E 11/15/93 01/01/14 5.1% 955,000 Series 96E 12/01/96 01/15/17 5.4% 3,905,000 Series 98B 03/01/98 03/01/12 4.0% 15,320,000 Series 99A 04/01/99 07/01/07 4.5% 3,545,000 Series 99B 03/01/99 03/01/19 4.7% 22,060,000 Series 00A 05/01/00 05/01/20 5.6% 6,150,000 Series 01C 08/15/01 08/15/21 4.3% 31,870,000 Series 02A 09/26/02 07/01/22 4.3% 20,240,000 Series 02B 09/26/02 07/01/16 3.5% 9,905,000 Series 03B 06/03/03 06/30/24 4.1% 9,245,000 Series 03C 07/15/03 11/01/08 2.3% 5,750,000 Series 04B 06/05/03 01/15/18 3.6% 16,210,000 Series 04C 06/06/03 05/01/20 3.9% 20,065,000 Totals $ 165,220,000

Public utility bonds of $10.0 million are authorized but unissued.

53 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The following table summarizes future debt service requirements of Business-type Activities as of June 30, 2005.

Business-type Activities Public Utilities Principal Interest Fiscal year ending June 30: 2006 $ 13,320,000 7,529,079 2007 9,995,000 6,978,342 2008 11,065,000 6,532,831 2009 10,345,000 6,062,061 2010 10,480,000 5,607,149 2011-2015 52,460,000 20,782,158 2016-2020 44,915,000 8,722,363 2021-2024 12,640,000 865,754 Totals $ 165,220,000 63,079,737

Public Schools – Component Unit

A summary of changes in long-term liabilities for the discretely presented component unit – Public Schools for the year ended June 30, 2005 follows:

Balance Balance Due within July 1, 2004 Additions Reductions June 30, 2005 one year

Compensated absences $ 3,594,015 2,012,468 1,971,980 3,634,503 181,725 Workers’ compensation claims 1,679,218 619,239 712,190 1,586,267 222,198 Capital leases payable 4,280,611 — 754,890 3,525,721 991,991 Capital facilities notes payable 9,006,249 3,648,791 12,655,040 — — Network wring notes payable — 10,847,560 10,847,560 — — Capital facilities notes payable — 22,792,600 — 22,792,600 1,672,419 Incurred but not reported claims 2,017,000 21,051,652 21,042,852 2,025,800 2,025,800 Totals $ 20,577,093 60,972,310 47,984,512 33,564,891 5,094,133

The Code of Virginia, Section 22, sets forth the powers and responsibilities of the local school boards. School boards in Virginia have no taxing authority, but they are authorized to borrow money from the Commonwealth and to sell local school bonds through the City to the Virginia Public School Authority (VPSA). The City recorded the sale of school bonds to the VPSA as “other financing sources” in the City’s Debt Service Fund.

In February 2002, the Virginia General Assembly passed Senate Bill 276 which was subsequently signed by the Governor of Virginia, that provides that localities have a tenancy in common with the school board whenever a locality incurs a financial obligation for school property which is payable over more than one fiscal year. As a result, the City records on its statement of net assets any school property that is purchased with City long-term obligations. However, the Public Schools are still tasked with all care, management, and control over these properties.

54 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

E/IDA and PAC – Component Units

Industrial Revenue Bonds and Notes Payable (the Bonds and Notes) have been issued in the name of E/IDA to finance construction projects. The Bonds and Notes, both as to principal and interest, are payable solely from lease proceeds. In the event of default by the lessee, the holders of the Bonds and Notes have no recourse to the Authorities but must look to the property and lessee for indemnity. Approximately $45 million of the Bonds and Notes are considered a moral obligation of the City. A moral obligation of the City is a contingent guarantee of a third party’s debt. It is referred to as a “moral” obligation because it is not a legal obligation of the City but a good faith obligation, which, if called upon, would require appropriations by City Council of amounts sufficient to pay the guaranteed amounts.

The E/IDA bonds at June 30, 2005 are comprised of the following:

Effective Balance Balance Amount due Issue Mat uri t y interest July 1, June 30, within date date rates 2004 Additions Reductions 2005 one year Bonds payable: UPS, 04 06/04/04 07/01/15 5.58% 8,003,755 — 581,167 7,422,588 568,424 MCI, 95A* 12/28/95 04/01/06 6.35% 786,325 — 439,828 346,497 346,498 MCI, 95B* 12/28/95 04/01/06 6.65% 15,152 — 8,438 6,714 6,714 OPTON * 03/01/96 08/01/16 6.15% 1,941,735 — 109,858 1,831,877 116,802 EDA-NNS, 96* 03/22/96 07/15/06 7.00% 2,343,491 — 1,079,474 1,264,017 1,159,741 ICELAND* 04/10/97 10/01/17 4.10% 7,546,667 — 400,000 7,146,667 400,000 CITI, 97A* 04/29/97 08/01/22 7.28% 3,868,071 — 107,144 3,760,927 115,273 CITI, 97B* 04/29/97 08/01/22 6.20% 855,508 — 26,480 829,028 28,182 SEARS* 03/01/98 10/01/18 6.48% 11,070,125 — 485,784 10,584,341 518,679 VSS* 03/01/98 10/01/18 6.48% 10,043,128 — 440,717 9,602,411 470,560 Coats and Clarke 01/01/99 12/01/18 4.24% 1,469,407 — 97,961 1,371,446 97,961 Hidenwood Center 03/30/00 04/01/20 8.78% 1,147,455 — 75,972 1,071,483 73,366 Downtown Engineering 04/05/00 07/01/31 7.64% 27,440,000 — 1,060,000 26,380,000 1,060,000 VASCIC 07/27/00 09/30/10 4.54% 30,845,000 — 3,745,000 27,100,000 3,940,000 OPTC Merchant’s Walk 08/24/01 08/01/26 4.52% 12,600,000 — 300,000 12,300,000 560,000 HRSD - Bond A 04/29/03 07/01/08 2.64% 2,190,958 — — 2,190,958 — HRSD - Bond B 04/29/03 07/01/08 2.45% 2,325,880 — — 2,325,880 — Port Warwick/Light Rail 10/01/02 09/30/05 2.70% 690,137 — 366,667 323,470 323,470 PrintPack 08/15/03 09/01/18 3.61% 5,100,000 — 360,000 4,740,000 360,000 City Ops Center 12/07/04 07/01/26 4.63% — 2,160,000 — 2,160,000 — Conf Center 12/07/04 07/01/31 4.63% — 29,335,000 — 29,335,000 — Totals 130,282,794 31,495,000 9,684,490 152,093,304 10,145,670 Notes payable: Police Headquarters 02/01/03 01/31/05 1,500,000 — 1,500,000 — — Total bonds and notes payable $ 131,782,794 31,495,000 11,184,490 152,093,304 10,145,670

* Moral obligation of the City. The lessees of the Opton Building are the following: Custom Vinyl Products LLC Iceland Seafood Co.

55 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Conduit Debt Obligations: From time to time the E/IDA have issued Industrial Revenue Bonds (the Bonds) to provide financial assistance to private-sector and nonprofit entities for the acquisition and construction of industrial, commercial and residential facilities deemed to be in the public interest. The Bonds are secured by the property financed and are payable solely from payments received on the underlying mortgage loans. Upon repayment of the Bonds, ownership of the acquired facilities transfers to the private-sector entity served by the bond issuance. Neither the City, the State, nor any political subdivision thereof is obligated in any manner for repayment of the Bonds. Furthermore, in the event of default by the lessee, the holders of the Bonds have no recourse to the E/IDA, but must look to the property and lessee for indemnity. Accordingly, the Bonds are not reported as liabilities in the accompanying basic financial statements.

As of June 30, 2005, there are 16 series of the Bonds outstanding, with an aggregate principal amount payable of approximately $42 million. Approximately $2.3 million of the Bonds and Notes are considered a moral obligation of the City.

Interest Rate Swap Agreement: On April 6, 2000, the EDA entered into an interest rate swap agreement, a derivative instrument, with First Union National Bank, N.A. (First Union) whereby the EDA agreed to pay First Union a 7.64% fixed rate of interest on the EDA Taxable Incremental Variable Rate Demand Bonds, Series A, in the original principal amount of $5 million in exchange for the receipt of a floating rate. The floating rate is determined weekly by the Remarketing Agent at a rate equal to the rate of interest certified to the Trustee by the Remarketing Agent on and as of each Wednesday (the Determination Date) as the minimum rate of interest which, in the judgment of the Remarketing Agent taking into account market conditions prevailing on the Determination Date, would be necessary to enable the Remarketing Agent to arrange for sale of all the Bonds in the secondary market on the Determination Date at a price equal to the principal amount thereof. This agreement is to continue in effect until July 1, 2016 (the Termination Date).

Interest is payable monthly and mandatory sinking fund redemption payments are due quarterly in July, October, January, and April commencing October 1, 2001. The debt service requirements through the Termination Date for these bonds are based on the fixed rate. The EDA will be exposed to variable interest rates if the swap agreement is terminated or if there occurs an event of default. A termination of the swap agreement may also result in the EDA making or receiving a termination payment.

In connection with the 2004 United Parcel Service, Inc. Bond refinancing initiative, the IDA entered into an interest rate swap on April 4, 2004 with the Bank of America, N.A., whereby the IDA agreed to pay Bank of America a 5.58% fixed rate of interest on the IDA Taxable Industrial Development Revenue and Refunding Bond, Series 2004 (United Parcel Service, Inc. Project) in the amount of $8,046,278 in exchange for the receipt of a floating rate.

56 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

The PAC Airport Improvement Revenue Bonds at June 30, 2005, are comprised of the following:

Issue Maturity Eff. Int. Balance Balance Series Date Date Rate (%) July 1, 2004 Reductions June 30, 2005

2001 04/15/01 07/16/21 5.05-5.5 $ 6,245,000 215,000 6,030,000 2002 07/03/02 07/01/27 4.5 2,386,235 60,954 2,325,281

Totals $ 8,631,235 275,954 8,355,281

Maturities of industrial revenue bonds and notes payable for succeeding fiscal years are as follows:

E/IDA PAC

Prinicipal Interest Prinicipal Interest Fiscal year ending June 30: 2006 $ 10,145,669 6,780,917 293,728 402,636 2007 8,741,370 6,450,342 301,628 387,995 2008 11,126,555 6,162,354 319,660 372,717 2009 19,342,207 5,452,683 332,830 356,669 2010 11,568,525 5,094,283 351,144 356,382 2011-2015 41,710,616 19,830,164 2,060,959 1,497,806 2016-2020 24,065,881 11,422,554 2,669,601 915,093 2021-2025 13,322,484 6,161,133 1,710,318 229,205 2026-2030 6,615,000 2,405,606 315,413 17,872 2031-2032 5,455,000 428,093 — — Total $ 152,093,307 70,188,129 8,355,281 4,536,375

57 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

(8) Defined Benefit Retirement Plans (a) Newport News Employees’ Retirement Fund (NNERF) 1. Plan Description The NNERF is a single employer, defined benefit, public employee retirement system established and administered by the City to provide pension benefits for employees of the local government, including the Newport News School System. For those school teachers and administrative support personnel employed by the Newport News School Board, the City plan is a supplement to the Virginia Retirement System.

NNERF is a separate pension trust fund and is considered part of the City’s financial reporting entity. The City issues a publicly available financial report that includes financial statements and required information for NNERF. That report may be obtained by writing to NNERF, 2400 Washington Avenue, Newport News, VA 23607.

All full-time regular employees are members of this fund. For the year ended June 30, 2005, the total payroll of the City was approximately $304.5 million, with approximately $284.6 million covered by NNERF. At June 30, 2005, NNERF membership consisted of:

Retirees Vested Active and terminated employees beneficiaries employees vested Non-vested Total City general 657 567 1,829 630 3,683 City police and fire 441 183 892 269 1,785 Public utilities 154 100 353 68 675 School VRS 1,540 654 3,503 1,514 7,211 School Non-VRS 551 93 1,081 447 2,172 Total 3,343 1,597 7,658 2,928 15,526

NNERF provides retirement benefits as well as death and disability benefits. All benefits vest after five years of credited service. Employees who retire at or after age 60 (50 for police officers, firefighters and deputy sheriffs) with five years of credited service are entitled to an annual retirement benefit, payable monthly for life, in an amount equal to 2.0% of their final average salary for each year of credited service. Final average salary means the average rate of salary received during the highest paid 36 consecutive months of credited service. Employees with 30 years (25 for police officers, firefighters and deputy sheriffs) credited service may retire at any age with full benefits. Employees (other than police officers, firefighters and deputy sheriffs) with 25 years of service may retire prior to age 60 and receive a reduced benefit. Covered employees do not contribute to NNERF.

Benefits and contribution provisions are established by City Ordinance and may be amended only by the City Council. An actuarial service is employed to advise the City Council and the Retirement Board of the contributions necessary to fund the benefits.

2. Concentrations There are no significant investments (other than U.S. Government and U.S. Government- guaranteed obligations) in any one organization that represents 5% or more of net assets available for benefits.

58 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

3. Contributions Required and Contributions Made NNERF funding policy provides for periodic employer contributions at actuarially determined rates that, expressed as percentages of annual covered payroll, are sufficient to accumulate sufficient assets to pay benefits when due. Level percentage of payroll employer contribution rates are determined using the entry age actuarial cost method. The amortization period for the unfunded actuarial accrued liability has been reduced from 40 years to 30 years to comply with the requirements of GASB Statement No. 27.

Contributions for normal costs totaling $13,628,798 were made by the employer during the year ended June 30, 2005. The percentage of employer contributions to current year covered payroll was 1.28 for employees covered by VRS and 3.51for all others.

The percentage of normal cost to current year covered payroll was 4.8%. The employer’s annual pension cost and net pension obligation to NNERF for 2005 were as follows:

(000’s Omitted) Annual Required Contribution (ARC) $ 35,462 Interest on net pension obligation 836 Adjustment to ARC (877) Annual pension cost 35,421 Contributions made (13,629) Increase in net pension obligation 21,792 Net pension obligation (asset), beginning of year 10,453 Net pension obligation (asset), end of year $ 32,245

The annual required contribution for the current year was determined as part of the June 30, 2004 actuarial valuation using the entry age actuarial cost method. The actuarial assumptions included (a) 8.0% investment rate of return (net of administrative expenses) (b) projected salary increase of 5.25% per year and (c) 3.0% per year cost-of-living adjustments. All assumptions include an inflation component of 3.0%. The assumptions did not include funding of post-retirement benefit. Actuarial assumptions have been changed to reflect the actuarial experience analysis for the period July 1, 1998 to June 30, 2003. The actuarial value of assets was determined under the average value method.

59 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

4. Three-Year Trend Information (000’s Omitted) Annual Percentage Net pension Fiscal year Pension of APC obligation ended Cost (APC) contributed (asset) June 30, 2005 $ 35,421 38.4% $ 32,245 June 30, 2004 27,846 44.1% $ 10,453 June 30, 2003 15,920 73.2% (5,141)

(b) Newport News School System (NNSS) and Peninsula Airport Commission (PAC) 1. Plan Description The NNSS and the PAC contribute to the Virginia Retirement System (VRS or the System), an agent multiple-employer defined benefit pension plan administered by the System. All full-time, salaried permanent employees of participating employers must participate in the VRS. Benefits vest after five years of service. Employees are eligible for an unreduced retirement benefit at age 65 with five years of service (age 60 for participating law enforcement officers and firefighters) and at 50 with 30 years of service for participating employees (age 50 with 25 years for participating law enforcement officers and firefighters) payable monthly for life in an amount equal to 1.7% of their average final contribution (AFC) for each year of credited service. Benefits are actuarially reduced for retirees who retire prior to becoming eligible for full retirement benefits. In addition, retirees qualify for annual cost-of-living adjustments (COLA) beginning in their second year of retirement. The COLA is limited to 5% per year. AFC is defined as the highest consecutive 36 months of salary. Participating law enforcement officers and firefighters may receive a monthly benefit supplement if they retire prior to age 65. The VRS also provides death and disability benefits. Title 51.1 of the Code of Virginia (1950), as amended, assigns the authority to establish and amend benefit provisions to the state legislature. The System issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information for VRS. A copy of that report may be obtained by writing the System at P.O. Box 2500, Richmond, VA 23218-2500. 2. Funding Policy Plan members are required by Title 51.1 of the Code of Virginia (1950), as amended, to contribute 5% of their annual reported compensation to the VRS. This 5% member contribution has been assumed by the employer. In addition, the NNSS and the PAC are required to contribute the remaining amounts necessary to fund their participation in the VRS using the actuarial bases specified by the Code of Virginia and approved by the VRS Board of Trustees. The contribution rates for the fiscal year ended 2005 were 11.03% and 5.0% of covered annual payroll for the NNSS and the PAC, respectively.

60 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

3. Annual Pension Cost For 2005, the annual pension cost of $15,805,364 and $78,575 for the NNSS and the PAC, respectively, was equal to the required and actual contributions. The annual required contributions were determined as part of the June 30, 2004 actuarial valuation. The actuarial assumptions included (a) a rate of return on investment of 8%, (b) projected salary increases ranging from 4.25% to 6.10% per year, and (c) cost-of-living adjustments of 3%. Both (a) and (b) included an inflation component of 3%. The actuarial values of the respective entities’ assets are equal to the modified market value of the assets. This method was determined using techniques that smooth the effects of short-term volatility in the market value of assets over a five-year period. The NNSS’ and the PAC’s unfunded actuarial accrued liability is being amortized as a level percentage of payroll on an open basis within a period of 30 years or less.

4. Three-Year Trend Information Fiscal Pension Percentage Net year Cost of APC pension ending (APC) contributed obligation NNSS 06/30/05 $ 15,805,364 100.0% - 06/30/04 12,204,566 100.0% - 06/30/03 11,629,435 100.0% -

PAC 06/30/05 78,575 100.0% - 06/30/04 15,097 100.0% - 06/30/03 14,398 100.0% -

(c) Post-Retirement Benefits The City provides health and dental insurance for City retirees under the City’s group plans. The City contributes 75% of the cost and the retiree contributes 25% of the cost. At age 65, the retiree’s coverage converts to Medicare Extended. The City also provides life insurance at one-half salary without cost to retirees.

There is a legal requirement that the City provide health and dental benefits to retirees. Since 1958, the City has allowed employees to continue their coverage after retirement. Life insurance to retirees at one-half salary at no cost is provided by Ordinance Sec. 2-151 and 2-148.

The City funds the costs of retiree health and life insurance through the annual pension contribution amount. The actuary computes the current and next years’ cost of these in the bi-annual actuary study. The pension plan then pays the premiums out of its funds.

The actual costs to the fund for the 3,343 retirees for fiscal year 2005 were: health $7,588,973 (858 participating); dental $293,621 (901 participating); and life $1,164,389 (1,112 participating).

The School Board provides health and dental insurance for School Board retirees under the school’s group plans. The School Board also provides life insurance for retirees not covered by VRS. The amount of coverage is $10,000 or $5,000 depending on the retiree’s position at time of retirement, and the Board pays the entire cost. The actual costs for the 2,091 retirees for fiscal year 2005 were: health and dental $4,165,348 (1,836 participating), and life $71,481 (303 participating).

61 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

There is a legal requirement that the School Board provide health and dental benefits to retirees. Since 1978, the School Board has allowed employees to continue their coverage after retirement. The life insurance benefit for non-VRS retirees was implemented on January 1, 1991.

The School Board funds the cost of retiree health, dental and life insurance through the annual pension contribution amount. The actuary computes the current and next years’ cost of these on a pay-as-you-go basis in the annual actuary study and incorporates it in the percent of contributions required for the pension fund. The pension plan then pays the premiums out of its funds.

(d) Deferred Compensation Employees of the City, except those of the School System, may participate in a deferred compensation plan adopted under the provisions of Internal Revenue Code Sec. 457 (Deferred Compensation Plans With Respect to Service for State and Local Governments). Under the plan, employees may elect to defer a portion of their salaries and postpone paying taxes on the deferred portion until the withdrawal date. The deferred compensation amount is not available for withdrawal by employees until termination, retirement, death or unforeseeable emergency.

The deferred compensation plan is administered by an unrelated financial institution on behalf of the City. Investment options available to employees include common stock, corporate and government bonds, guaranteed interest, or combinations thereof. Under the terms of an IRC Sec. 457 Deferred Compensation Plan, all deferred compensation and income attributable to the investment of the deferred compensation amounts are held by the financial institution, until paid or made available to the employees or beneficiaries.

(9) Self Insurance (a) Medical Benefits The School Board is self-insured for medical benefits through the respective General Funds for employees up to $150,000, per employee per year, or 110% of adjusted subscriber charges for the year ($22,606,109 for 2005). The City self-insures for medical benefits for its employees up to $200,000 per employee per year, or 125% of adjusted subscriber charges for the year (estimated to be approximately $31,700,000), whichever is less. Claims in excess of the limitation are covered by third-party insurance. Expenditures are charged to the fund to which the employees’ payroll expenditure is charged at amounts that approximate what third-party insurers would have charged. The insurance coverage is substantially the same as in prior fiscal years.

Claims processing and payments for the medical claims are made through a third-party administrator. The City and the School Board’s settlement using reinsurance did not exceed insurance for fiscal years 2003, 2004 or 2005. Both the City and the School Board uses the information provided by the third-party administrator to aid in the determination of self-insurance liabilities. Amounts due in future years on claims as of June 30, 2005 are recognized as a long-term liability in the statement of net assets.

62 CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Changes in the incurred but not reported amount during the fiscal years ended June 30, 2005 and 2004 for the City and the Public Schools were as follows:

City Public Schools 2005 2004 2005 2004 Claims payable at beginning of year $ 2,995,000 2,591,000 2,017,000 2,000,000 Claims and changes in estimates 23,243,851 22,930,824 21,051,652 17,979,068 Claim payments (23,438,851) (22,526,824) (21,042,852) (17,962,068) Claims payable at end of year $ 2,800,000 2,995,000 2,025,800 2,017,000

(b) Workers’ Compensation The City and the School Board self-insure for workers’ compensation through the respective General Funds up to $1,000,000 and $350,000 respectively, per claim. Expenditures are charged to the various departments at amounts that approximate what third-party insurers would have charged. Amounts due in future years on claims made as of June 30, 2005 are accounted for in the long-term liabilities. The following is a reconciliation of changes in workers’ compensation claims payable for years ended June 30, 2005 and 2004 for the City and the Public Schools.

City Public Schools 2005 2004 2005 2004 Claims payable at beginning of year $ 7,961,049 9,209,415 1,679,218 1,228,414 Claims and changes in estimates 4,167,246 1,165,050 619,239 1,451,291 Claim payments (3,035,884) (2,413,416) (712,190) (1,000,487) Claims payable at end of year $ 9,092,411 7,961,049 1,586,267 1,679,218

A loss analysis was conducted by Mercer Oliver Wyman on this fund. The total actuarially computed liability as of June 30, 2005 for the City and School Board was determined to be approximately $7.8 million and $1.6 million, respectively.

(c) Other The City self-insures for automotive and general liability through the General Fund up to $1 million per occurrence, which is included in accrued liabilities, and up to $250,000 for each fire and property claim. The School Board insures for property losses with self-insured retention per occurrence of $25,000 for basic, $5,000 for floods, and $25,000 for earthquakes. The School Board is self-insured for losses resulting from vehicular accidents of up to $1,000,000. Claims in excess of the self-insured retention limitations are covered by third party insurance.

Included in the fund balances of the General Fund of the City and the School Board are reserved and designated fund balances related to self-insurance activities.

63 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

City 2005 2004 Claims payable at beginning of year $ 2,851,059 2,414,826 Claims and changes in estimates 372,403 953,699 Claim payments (696,945) (517,466) Claims payable at end of year $ 2,526,517 2,851,059

(10) Contingent Liabilities (a) Grants The City received grant funds, principally from the U.S. Government, for construction and various other programs. Expenditures from these grants are subject to audit by the grantor, and the City is contingently liable to refund amounts received in excess of allowable expenditures. In the opinion of the management of the City, no material refunds will be required as a result of expenditures disallowed by the grantors.

(b) Litigation The City is involved in several lawsuits arising in the ordinary course of operations. The City is self- insured with respect to automotive liability, general liability, and property damage and workers’ compensation. It is the opinion of City management, based on the advice of the City Attorney, that any losses incurred as a result of claims not included in accrued liabilities as of June 30, 2005, will not be material to the financial statements.

(c) Regional Raw Water Project As of June 30, 2005, the City’s Public Utility has incurred cumulative costs of approximately $28.8 million related to the Regional Raw Water Project (the Project) known as the King William Reservoir. Although the project began in 1987, as of June 30, 2005, the necessary federal permit had not been obtained. On November 16, 2005, the U.S. Army Corps of Engineers issued the long awaited Federal permit. This was the final permit needed to begin implementing the project to create a 12 billion gallon reservoir in King William County to store water withdrawn from the Mattaponi River. Completion of this project in 2018 will add 20 million gallons per day to the water supply of the Peninsula.

(11) Jointly Governed Organizations and Joint Ventures (a) Hampton-Newport News Community Services Board (CSB) The CSB operates as an agent for the cities of Hampton and Newport News in the establishment and operation of community mental health, mental retardation and substance abuse programs as provided for in Chapter 10 of Title 37.1 of the Code of Virginia. The CSB designates its own management and adopts its own budget. The operations are financed principally by state and federal funds. Separate financial statements are available from the CSB, 2501 Washington Avenue, 1st Floor, Newport News, VA 23607. (b) Hampton Roads Regional Jail Authority (HRRJA) The HRRJA is a political subdivision of the Commonwealth of Virginia, created December 14, 1993, by the cities of Hampton, Newport News, Norfolk and Portsmouth. The HRRJA is governed by a twelve-member board, consisting of three members from each city. The purpose of the intergovernmental authority is to develop, construct, equip, maintain and operate a regional jail. No one locality contributes more than 50% of the HRRJA’s funding or has responsibility over its operations. 64 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

Separate financial statements are available from the Hampton Roads Regional Jail Authority, 2690 Elmhurst Lane, Portsmouth, Virginia 23701-2745. (12) Prior Period Adjustments The net assets of the Primary Government at the beginning of FY 2005 have been restated to correct for misclassifications and incorrect valuations identified in the prior period balances. The net asset amount was increased by $2.06 million as follows:

Balance Restated Balance June 30, 2004 Adjustment June 30, 2004 Governmental activities: Capital assets, not being depreciated: Land $ 74,856,232 589,100 75,445,332 Construction in progress 31,469,493 - 31,469,493 Total capital assets, not being depreciated 106,325,725 589,100 106,914,825 Capital assets, being depreciated: Buildings 254,788,485 - 254,788,485 Improvements 93,782,166 - 93,782,166 Machinery and equipment 91,518,686 2,740,425 94,259,111 Infrastructure 388,814,023 - 388,814,023 Total capital assets being depreciated 828,903,360 2,740,425 831,643,785 Less accumulated depreciation for: Buildings 57,185,431 - 57,185,431 Improvements 39,964,357 - 39,964,357 Machinery and equipment 59,689,161 1,267,367 60,956,528 Infrastructure 244,381,735 - 244,381,735

Total accumulated depreciation 401,220,684 1,267,367 402,488,051 Total capital assets being depreciated, net 427,682,676 1,473,058 429,155,734 Capital assets, net $ 534,008,401 2,062,158 536,070,559

The net assets of the Primary Government’s governmental activities at the beginning of FY 2005 have also been restated to reflect a capital lease obligation associated with the purchase of a parcel of land. The capital lease obligation was not previously reflected in the governmental activities of the Primary Government. The following is a summary of the above prior period adjustments’ effect on beginning assets:

Governmental activities net assets, July 1, 2004, as previously stated $195,681,706

Net adjustment: Reclassification and revaluations of capital assets 2,062,158 Omission of capital lease obligation (2,440,467) Governmental activities net assets, July 1, 2004, as adjusted $195,303,397

65 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Basic Financial Statements June 30, 2005

E/IDA Prior Period Adjustment: In accordance with generally accepted accounting principles (GAAP), the recognition of profit on real estate sales transactions must not be recognized in full until certain criteria is met. One of these criteria is a sale must be consummated and all consideration must be exchanged. The revenue from the sale of land to Wolsey PLC/Ferguson Enterprises was recognized and a note receivable was set up in 1998 when an agreement was reached, however, all consideration had not been exchanged. In 2005, the actual transaction occurred and the sale was consummated. Management has elected to restate the Authorities’ net assets in prior fiscal years and recognized the revenue in 2005 in accordance with GAAP.

The adjustment to the Authorities’ net assets at the beginning of fiscal year 2005 is as follows:

Net assets, July 1, 2004, as previously stated$ 31,363,297

Net adjustment removing note receivable (540,000)

Net assets, July 1, 2004, as adjusted$ 30,823,297

(13) Subsequent Events On August 24, 2005, the City received a loan of $3,400,000 from the Virginia Water Facilities Revolving Fund. This loan will be paid for over twenty years at an annual interest rate of 3.0%. The loan will be used to finance the replacement and rehabilitation of sanitary sewers and related improvements throughout the City.

66 (Continued) CITY OF NEWPORT NEWS, VIRGINIA General Fund Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Amended budget budget Actual Variance Revenues: Revenues from local sources: General property taxes: Real property taxes $ 112,470,001 112,470,001 113,723,603 1,253,602 Real and personal public service corporation property taxes 4,588,800 4,588,800 4,457,737 (131,063) Personal property taxes 39,952,650 39,952,650 39,710,394 (242,256) Machinery and tools taxes 10,608,000 10,608,000 11,462,803 854,803 Penalties and interest 1,045,000 1,045,000 992,930 (52,070) Total general property taxes 168,664,451 168,664,451 170,347,467 1,683,016 Other local taxes: E-911 service revenue 2,825,508 2,878,339 2,737,853 (140,486) Local sales and use taxes 20,492,000 20,492,000 20,955,339 463,339 Consumers’ utility taxes 9,719,492 9,719,492 9,515,933 (203,559) Cellular telephone taxes 2,353,000 2,353,000 2,848,339 495,339 Consumption tax 700,000 700,000 641,699 (58,301) Business license taxes 13,549,806 13,549,806 13,391,073 (158,733) Rental car taxes 792,298 792,298 870,813 78,515 Franchise license taxes 1,790,000 1,790,000 1,670,013 (119,987) Cable television tax 2,145,000 2,145,000 2,006,039 (138,961) Motor vehicle license 3,500,000 3,500,000 3,585,609 85,609 Bank stock taxes 587,000 587,000 532,019 (54,981) Taxes on recordation and wills 820,420 820,420 1,969,391 1,148,971 Tobacco taxes 5,100,000 5,100,000 4,639,855 (460,145) Hotel and motel room taxes 3,006,215 3,006,215 2,686,120 (320,095) Restaurant food taxes 14,200,000 14,200,000 14,779,660 579,660 Amusement taxes 559,092 559,092 566,599 7,507 Total other local taxes 82,139,831 82,192,662 83,396,354 1,203,692 Permits, privilege fees, and regulatory licenses: Animal licenses 50,000 50,000 43,043 (6,957) Permits and other licenses 3,045,637 3,045,637 3,663,393 617,756 Total permits, privilege fees, and regulatory licenses 3,095,637 3,095,637 3,706,436 610,799 Fines and forefeitures 2,098,705 2,098,705 2,186,887 88,182 Revenue from use of money and property Revenue from use of money 1,191,000 1,225,222 1,569,567 344,345 Revenue from use of property 1,787,033 1,787,033 1,376,909 (410,124) Total revenue from use of money and property 2,978,033 3,012,255 2,946,476 (65,779) Charges for services: Court costs 1,576,397 1,576,397 1,597,266 20,869 Law enforcement and traffic control 80,000 80,000 77,784 (2,216) Fire and rescue services 1,050,000 1,050,000 826,578 (223,422) Correction and detention 3,000 3,000 2,580 (420) Engineering costs — — 10,616 10,616 Information Technology 1,798,729 1,798,729 1,793,669 (5,060) Parks and recreation 5,903,544 5,901,462 6,139,422 237,960 Cultural enrichment 294,437 296,519 219,493 (77,026) Self-insurance premiums 1,573,965 1,539,743 1,662,680 122,937 Library 68,600 68,600 55,448 (13,152) Planning and community development 48,500 48,500 18,841 (29,659) Indirect costs 1,333,092 1,333,092 1,333,092 — Project services — 53,544 66,156 12,612 Applied research center 863,874 863,874 553,758 (310,116) Total charges for services $ 14,594,138 14,613,460 14,357,383 (256,077)

67 CITY OF NEWPORT NEWS, VIRGINIA General Fund Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Amended budget budget Actual Variance Recovered costs: Health department $ 197,055 209,973 225,774 15,801 Juvenile detention home 4,205,596 4,205,596 3,859,687 (345,909) City farm 1,826,000 1,826,000 1,606,588 (219,412) City jail 2,046,158 2,118,658 2,032,514 (86,144) Fire hazardous material — — 850 850 Sewer assessments - debt service 87,000 87,000 784,637 697,637 Library assistance 15,600 15,600 14,880 (720) Office on youth development 217,782 217,782 211,643 (6,139) Total recovered costs 8,595,191 8,680,609 8,736,573 55,964 Miscellaneous revenue: Payments in lieu of taxes 2,315,794 2,315,794 2,455,621 139,827 Miscellaneous 885,446 886,446 845,526 (40,920) Total miscellaneous revenue 3,201,240 3,202,240 3,301,147 98,907 Total revenue from local sources 285,367,226 285,560,019 288,978,723 3,418,704 Revenue from the Commonwealth Noncategorical aid: ABC profits 207,785 207,785 105,932 (101,853) Wine taxes 150,524 150,524 111,037 (39,487) Motor vehicle carriers’ taxes 37,066 37,066 47,360 10,294 Mobile home titling taxes 100,000 100,000 72,812 (27,188) Tax on deeds 270,000 270,000 437,640 167,640 State rebate – recording tax 631,756 631,756 444,581 (187,175) DCJP grants for law enforcement 8,436,474 8,436,474 8,436,476 2 Total noncategorical aid 9,833,605 9,833,605 9,655,838 (177,767) Shared expenses: State compensation board — 59,210 59,035 (175) Commonwealth’s attorney 1,242,255 1,255,650 1,237,635 (18,015) Sheriff 5,735,346 5,825,448 5,646,531 (178,917) Commissioner of the revenue 382,368 382,368 380,626 (1,742) Treasurer 369,807 369,807 367,150 (2,657) Registrar/electoral board 60,126 60,126 69,054 8,928 Total shared expenses 7,789,902 7,952,609 7,760,031 (192,578) Categorical aid: Emergency services grant 46,445 46,445 52,408 5,963 Welfare 21,175,302 21,278,384 24,660,667 3,382,283 Emergency medical service funds 68,000 68,000 76,040 8,040 Library 207,304 207,304 207,526 222 Other — — 6,485 6,485 Total categorical state aid 21,497,051 21,600,133 25,003,126 3,402,993 Total revenue from the Commonwealth 39,120,558 39,386,347 42,418,995 3,032,648 Other financing sources: Transfers from other funds 9,134,000 9,134,000 9,134,000 — Total revenue $ 333,621,784 334,080,366 340,531,718 6,451,352

68 CITY OF NEWPORT NEWS, VIRGINIA General Fund Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Amended budget budget Actual Variance Expenditures: General government administration Legislative: City Council $ 314,032 314,088 295,874 18,214 City clerk 322,241 328,545 302,823 25,722 Total legislative 636,273 642,633 598,697 43,936 General and financial administration: City manager 821,842 844,277 822,006 22,271 Intergovernmental affairs 261,592 265,300 256,784 8,516 Personnel 1,016,310 1,040,415 1,001,641 38,774 Medical services 80,940 80,940 71,238 9,702 City attorney 1,297,579 1,308,151 1,332,503 (24,352) Management/legislative services 278,224 291,225 248,608 42,617 Video production service 437,604 437,763 419,362 18,401 Internal auditor 439,836 447,550 422,889 24,661 Commissioner of the Revenue 2,270,666 2,314,449 2,183,454 130,995 Real estate assessor 1,665,589 1,694,200 1,548,028 146,172 City treasurer 1,801,815 1,838,680 1,807,110 31,570 Finance 1,109,682 1,134,084 1,049,917 84,167 Budget and evaluation 491,821 500,692 458,535 42,157 Auto self-insurance 1,003,800 1,003,800 1,536,145 (532,345) General liability self-insurance 1,081,700 1,120,200 856,198 264,002 Workers’ compensation 2,344,500 2,344,500 3,587,761 (1,243,261) Purchasing 1,013,436 1,039,236 914,796 124,440 Information technology 7,014,419 7,109,917 6,279,986 829,931 Total general and financial administration 24,431,355 24,815,379 24,796,961 18,418 Board of elections - Registrar 361,746 397,918 378,687 19,231 Nondepartmental: Animal services 876,171 1,105,338 1,055,919 49,419 Appointed boards 118,497 120,497 107,137 13,360 Community support 2,003,857 2,303,857 2,288,488 15,369 Contract community agencies 4,349,737 4,349,737 4,201,976 147,761 City development 3,836,563 1,462,107 1,436,492 25,615 Contractual services 1,388,858 1,166,069 835,063 331,006 Internal services 359,800 279,613 256,179 23,434 Machinery and equipment 838,374 1,140,984 1,126,829 14,155 Street lighting 1,941,773 224,575 218,563 6,012 Other 6,612,221 7,823,807 6,937,541 886,266 Total nondepartmental 22,325,851 19,976,584 18,464,187 1,512,397 Total general government administration 47,755,225 45,832,514 44,238,532 1,593,982 Judicial administration: Courts: Circuit courts 488,593 495,616 476,452 19,164 District courts 333,494 333,494 305,453 28,041 Office of the Magistrate 209,149 213,392 202,751 10,641 Juvenile/domestic relations court 63,502 63,502 28,141 35,361 Clerk of the circuit court 1,261,223 1,335,864 1,263,052 72,812 Court services 450,677 453,099 434,242 18,857 Total courts 2,806,638 2,894,967 2,710,091 184,876 Commonwealth’s attorney 2,493,113 2,685,276 2,519,795 165,481 Total judicial administration $ 5,299,751 5,580,243 5,229,886 350,357

69 CITY OF NEWPORT NEWS, VIRGINIA General Fund Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Amended budget budget Actual Variance Public safety: Law enforcement and traffic control: Police department $ 34,868,055 35,625,519 34,074,161 1,551,358 Emergency communications 311,594 316,634 304,018 12,616 Total law enforcement and traffic control 35,179,649 35,942,153 34,378,179 1,563,974 Fire and rescue services: Fire department 24,439,257 24,863,135 25,007,152 (144,017) Ambulance and rescue service 841,510 822,022 756,197 65,825 Total fire and rescue services 25,280,767 25,685,157 25,763,349 (78,192) Correction and detention: Sheriff 9,779,134 9,874,376 9,649,865 224,511 Adult corrections 4,511,538 4,582,973 4,360,274 222,699 Juvenile detention 8,875,706 9,032,225 7,068,482 1,963,743 Total correction and detention 23,166,378 23,489,574 21,078,621 2,410,953 Inspection – codes compliance 2,652,732 2,699,727 2,273,754 425,973 Total public safety 86,279,526 87,816,611 83,493,903 4,322,708 Public works: Engineering: Administration 1,099,696 1,125,943 1,039,823 86,120 Technical services 967,675 963,860 923,959 39,901 Construction inspection 725,062 596,637 535,920 60,717 Asbestos inspection 433,695 437,860 397,335 40,525 Mapping 208,155 214,643 196,860 17,783 Project services 352,639 348,657 306,283 42,374 Traffic administration 619,705 451,291 393,499 57,792 Traffic operations 2,062,293 1,171,180 834,402 336,778 Total engineering 6,468,920 5,310,071 4,628,081 681,990 Public works administration 1,266,311 708,312 235,615 472,697 Maintenance of highways, streets, bridges, and sidewalks 10,315,608 2,638,138 2,550,671 87,467 Maintenance of general buildings and grounds 6,638,711 6,699,715 6,364,144 335,571 Total public works 24,689,550 15,356,236 13,778,511 1,577,725 Health and welfare: Health - Medical services 1,986,457 2,000,057 2,007,386 (7,329) Welfare: Social services administration 6,030,182 6,364,083 5,589,955 774,128 Financial services 6,560,010 6,560,010 5,656,237 903,773 Social work services 14,081,275 14,091,923 15,818,705 (1,726,782) Healthy families 584,019 614,601 558,455 56,146 Employment service program 2,153,894 2,153,894 1,942,667 211,227 CSA administration 3,476,360 3,476,360 3,712,150 (235,790) Fuel assistance 77,725 77,725 52,757 24,968 State/local hospitalization 51,437 51,437 55,422 (3,985) Cooperative extension 234,057 234,599 232,105 2,494 Office of Youth Development 629,359 638,359 620,545 17,814 Total welfare 33,878,318 34,262,991 34,238,998 23,993 Total health and welfare $ 35,864,775 36,263,048 36,246,384 16,664

70 CITY OF NEWPORT NEWS, VIRGINIA General Fund Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Amended budget budget Actual Variance Parks, recreation and cultural: Parks and recreation: Administration $ 613,658 1,422,689 1,429,787 (7,098) Recreation division 5,156,126 5,062,253 4,615,387 446,866 Parks division 4,225,537 3,629,401 3,519,929 109,472 Recreation classes 3,280,000 3,280,000 3,405,432 (125,432) Golf course 2,028,100 1,674,648 1,626,170 48,478 Leeward Marina 239,700 208,677 161,446 47,231 Festival support 680,570 688,082 665,690 22,392 Tourism, promotion and development 1,547,000 1,547,000 1,500,018 46,982 Total parks and recreation 17,770,691 17,512,750 16,923,859 588,891 Cultural enrichment – Museum 1,259,091 1,260,111 1,293,656 (33,545) Library 3,813,073 3,903,675 3,746,224 157,451 Total parks, recreation and cultural 22,842,855 22,676,536 21,963,739 712,797 Community development - Planning and community development Development 894,161 955,587 914,225 41,362 Planning 945,017 967,017 919,375 47,642 Economic development 323,097 366,444 341,436 25,008 Economic development-transfers to E/IDA 1,100,438 1,132,564 1,132,564 — Total community development 3,262,713 3,421,612 3,307,600 114,012 Education – transfer to Public Schools 97,502,709 97,502,709 97,502,709 — Transfers to other funds: Debt service 25,295,215 25,679,690 25,679,690 — Capital projects — 425,000 425,000 — Total transfers to other funds 25,295,215 26,104,690 26,104,690 — Total expenditures and transfers to other funds $ 348,792,319 340,554,199 331,865,954 8,688,245

Allocated budgeted expenditures in excess of revenues 15,170,535 6,473,833 — 6,473,833 Net change in fund balance $ — — 8,665,764 (8,665,764) Fund balance at beginning of year 80,282,117 Less encumbrances outstanding at June 30, 2004 expended or canceled at June 30, 2005 (3,764,918) Add encumbrances outstanding at June 30, 2005 4,969,819 Add self-insurance expenditures 2,856,041 Fund balance at end of year $ 93,008,823

See accompanying notes to required supplementary information

71 CITY OF NEWPORT NEWS, VIRGINIA Required Supplementary Information Schedule of Funding Progress (unaudited) Year ended June 30, 2005

Newport News Employee Retirement Fund (in millions):

Overfunded Actuarial Actuarial Actual (unfunded) UAAL as a valuation value of accrued accrued Funded Covered percentage of date assets liability (AAL) liability (UAAL) ratio payroll covered payroll June 30, 2005 $ 625 834 (209) 75% $ 285 -73.3% June 30, 2004 586 726 (140) 81% 283 -49.5% June 30, 2003 586 677 (91) 87% 262 -34.7%

Peninsula Airport Commission (PAC) (in thousands):

Actuarial Actuarial Actual Overfunded UAAL as a valuation value of accrued accrued Funded Covered percentage of date assets liability (AAL) liability (UAAL) ratio payroll covered payroll June 30, 2004 $ 2,881 2,988 (107) 96% $ 1,503 -7.1% June 30, 2003 2,954 2,885 69 102% 1,319 5.2% June 30, 2002 2,807 2,522 285 111% 1,091 26.1%

72 CITY OF NEWPORT NEWS, VIRGINIA Required Supplementary Information Employees' Retirement Fund Schedule of Employer Contributions (Unaudited) (in millions) Year ended June 30, 2005

Newport News Employee Retirement Fund (in millions):

Annual Fiscal year required Actual Percentage end contribution contribution contributed 2005 $ 35.5 $ 13.6 38% 2004 27.9 12.3 44% 2003 15.9 11.7 73% 2002 11.3 11.3 100% 2001 10.6 10.6 100% 2000 11.1 11.1 100% 1999 10.9 10.9 100%

See accompanying notes to required supplementary information.

73 CITY OF NEWPORT NEWS, VIRGINIA Notes to Required Supplementary Information Year ended June 30, 2005

(1) Budgetary Data The budgetary data reflected in the required supplementary information was established by the City using the following procedures:

On or before April 1, management submits to the City Council of the City proposed operating budgets that include proposed expenditures and other financing uses and the means of financing them. A public hearing on the budget is held after a synopsis of the budget is published in a local newspaper of general circulation. An appropriation ordinance must be adopted by the City Council by June 15. The City may amend the budget or make transfers between functions and budgetary line items without City Council approval. However, the City may not make transfers or expend any sum of money in excess of City Council appropriations, at the fund level, without the consent of the City Council. The legal level of budgetary control for the General Fund is the fund level; however, management control is exercised over the budget at the budgetary line item level. Appropriations, except for encumbrances and reserved fund balances, lapse at year-end. Encumbrances and reserved fund balances outstanding at year-end are reappropriated in the succeeding year. There were supplemental appropriations made during 2003 for the following reasons: (1) grant matching, (2) funding to meet the increase in operating expenses, (3) capital improvements not included in the Capital Improvements Plan, and (4) increases in school funding. (2) Legally Adopted Budgets Formal budgetary integration is employed as a management control device during the year for the General Fund, the Debt Service Fund, the Enterprise Funds and the Internal Service Fund. Annual operating budgets are adopted by ordinances passed by City Council for the General Fund; Debt Service Fund; Internal Service Fund; the following Enterprise Funds and Component Units: Public Utility, Parking Authority, E/IDA. City Council makes an annual appropriation to the School Board but is prohibited from exercising any control over specific expenditures of School Board operating funds.

Annual operating budgets are not adopted for Special Revenue Funds. Program budgets for these funds are approved by executive departments on a basis consistent with the related grant applications. Project and program budgets are utilized in the Capital Projects Funds where appropriations remain open and carry over to succeeding years.

74 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Notes to Required Supplementary Information Year ended June 30, 2005

Budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America (GAAP), except that encumbrances are included as budgetary expenditures. Expenditures may not exceed appropriations at the function level, the legal level of control, as defined in the budget ordinance. Management can transfer unencumbered appropriation balances, or portions thereof, within a function. Transfers within the School Operating Fund are controlled by the School Board.

Unencumbered appropriations lapse at the end of the fiscal year for the General, School Operating, Street Maintenance, Economic Development, Law Library and Debt Service Funds.

(3) Encumbrances Encumbrances outstanding at year-end represent the estimated amount of the expenditures required to complete contracts, purchase orders and commitments-in-process at year-end. Encumbrances outstanding at year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities under GAAP.

75 CITY OF NEWPORT NEWS, VIRGINIA Combining Balance Sheet Nonmajor Governmental Funds June 30, 2005

Special Revenue

Community Street Economic Law Solid Assets development maintenance development library Stormwater waste Wastewater Cash and cash equivalents $ — — 715,843 73,288 4,201,895 2,231,729 997,321 Accounts receivable, ne — — — 19,336 237,947 1,239,314 340,855 Receivable from other governments Federal 39,657 — — — 66,776 — — State — 2,919,849 — — 17,660 — — Advances to (from) other funds — — — — — — — Total assets $ 39,657 2,919,849 715,843 92,624 4,524,278 3,471,043 1,338,176 Liabilities and Fund Balances Liabilities: Accounts payable $ 18,444 — 2,470 935 207,495 605,823 138,096 Accrued liabilities — — — — 89,456 41,394 51,753 Deferred revenue — — — — 302,432 — — Advances from major governmental fund 21,213 2,919,849 — — — — — Total liabilities 39,657 2,919,849 2,470 935 599,383 647,217 189,849 Fund balances: Reserved for encumbrances — — 3,291 — 168,976 4,690 327,568 Unreserved: Designated: Imprest funds — — — 25 — — — Capital improvements — — — — — — — Specific projects — — — — 2,142,109 1,925,632 820,759 Undesignated — — 710,082 91,664 1,613,810 893,504 — Total fund balances — — 713,373 91,689 3,924,895 2,823,826 1,148,327 Total liabilities and fund balances $ 39,657 2,919,849 715,843 92,624 4,524,278 3,471,043 1,338,176

(continued)

76 CITY OF NEWPORT NEWS, VIRGINIA Combining Balance Sheet Nonmajor Governmental Funds June 30, 2005

Capital Projects Comprehensive Other General Other Services federal and capital Revenue federal and Total Assets Act state improvements sharing state nonmajor Cash and cash equivalents $ — 2,275,789 631,068 4,861 — 11,131,794 Accounts receivable, ne — — — — — 1,837,452 Receivable from other governments Federal — 430,506 — — 2,481,925 3,018,864 State 4,409,437 49,501 38,128 — 3,803,668 11,238,243 Advances to (from) other funds — — 993,154 — (993,154) — Total assets $ 4,409,437 2,755,796 1,662,350 4,861 5,292,439 27,226,353 Liabilities and Fund Balances Liabilities: Accounts payable $ 1,909,718 102,573 23,625 — 74,832 3,084,011 Accrued liabilities — — 1,720 — — 184,323 Deferred revenue — 252,837 150,000 — — 705,269 Advances from major governmental fund 2,499,719 — — — 5,217,607 10,658,388 Total liabilities 4,409,437 355,410 175,345 — 5,292,439 14,631,991 Fund balances: Reserved for encumbrances — — 237,968 — — 742,493 Unreserved: Designated: Imprest funds — — — — — 25 Capital improvements — — 1,177,166 — — 1,177,166 Specific projects — 2,400,386 71,871 — — 7,360,757 Undesignated — — — 4,861 — 3,313,921 Total fund balances — 2,400,386 1,487,005 4,861 — 12,594,362 Total liabilities and fund balances $ 4,409,437 2,755,796 1,662,350 4,861 5,292,439 27,226,353

77 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Governmental Funds Year ended June 30, 2005

Special Revenue

Community Street Economic Law Solid development maintenance development library Stormwater waste Wastewater Revenues: Intergovernmental: Local $ — — — — 3,864 — — State — 11,679,397 — — 17,660 17,688 — Federal 4,067,058 — — — 66,776 — — Charges for services — — — 118,639 5,575,612 9,882,212 7,980,169 Interest and rents — — 66,840 — 64,879 26,860 15,015 Miscellaneous — — 54,902 — — 57,240 10,000 Total revenues 4,067,058 11,679,397 121,742 118,639 5,728,791 9,984,000 8,005,184 Expenditures: Current operating: General government — — — 97,459 — — — Public safety — — — — — — — Public works — 11,679,397 — — 5,047,994 9,440,787 5,533,361 Health and welfare — — — — — — — Parks, recreation, and culture — — — — — — — Community development 4,067,058 — 65,255 — — — — Capital outlay — — — — — — — Total expenditures 4,067,058 11,679,397 65,255 97,459 5,047,994 9,440,787 5,533,361 Excess (deficiency) of revenues over (under) expenditures — — 56,487 21,180 680,797 543,213 2,471,823 Other financing sources (uses): Transfers in — — — — 639,000 — — Transfers out — — — — (1,030,550) (705,009) (2,859,794) Total other financing sources (uses) — — — — (391,550) (705,009) (2,859,794) Net changes in fund balances — — 56,487 21,180 289,247 (161,796) (387,971) Fund balances at June 30, 2004, as restated — — 656,886 70,509 3,635,648 2,985,622 1,536,298 Fund balances at June 30, 2005 $ — — 713,373 91,689 3,924,895 2,823,826 1,148,327

(continued)

78 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Governmental Funds Year ended June 30, 2005

Capital Projects Comprehensive Other General Other Services federal and capital Revenue federal and Total Act state improvements sharing state nonmajor Revenues: Intergovernmental: Local $ — 553,310 84,500 — 34,900 676,574 State 8,600,685 791,531 11,602 — 172,415 21,290,978 Federal — 2,879,470 2,576,645 — 2,483,319 12,073,268 Charges for services — — — — — 23,556,632 Interest and rents — 10,047 65,755 — — 249,396 Miscellaneous — — — — — 122,142 Total revenues 8,600,685 4,234,358 2,738,502 — 2,690,634 57,968,990 Expenditures: Current operating: General government — — — — — 97,459 Public safety — 5,222,291 — — — 5,222,291 Public works — — 936 — — 31,702,475 Health and welfare 12,726,983 313,557 — — — 13,040,540 Parks, recreation, and culture — 57,029 — — — 57,029 Community development — 457 — — — 4,132,770 Capital outlay — — 3,162,526 — 2,690,634 5,853,160 Total expenditures 12,726,983 5,593,334 3,163,462 — 2,690,634 60,105,724 Excess (deficiency) of revenues over (under) expenditures (4,126,298) (1,358,976) (424,960) — — (2,136,734) Other financing sources (uses): Transfers in 4,126,298 — 425,000 — — 5,190,298 Transfers out — — (639,000) — — (5,234,353) Total other financing sources (uses) 4,126,298 — (214,000) — — (44,055) Net changes in fund balances — (1,358,976) (638,960) — — (2,180,789) Fund balances at June 30, 2004, as restated — 3,759,362 2,125,965 4,861 — 14,775,151 Fund balances at June 30, 2005 $ — 2,400,386 1,487,005 4,861 — 12,594,362

79 CITY OF NEWPORT NEWS, VIRGINIA Statement of Revenues, Expenditures and Changes in Fund Balance Budget and Actual (Non-GAAP Basis Special Revenue Funds Year ended June 30, 2005 Page 1

Street Maintenance Economic Development Law Library Stormwater

Original Final Original Final Original Final Original Final Budget Budget Actual Variance Budget Budget Actual Variance Budget Budget Actual Variance Budget Budget Actual Variance Revenues: Intergovernmental: Local $ – – – – – – – – – – – – – 20,445 3,864 (16,581) State 11,287,868 11,679,397 11,679,397 – – – – – – – – – – 81,782 303,289 221,507 Federal – – – – – – – – – – – – – 306,680 66,776 (239,904) Charges for services – – – – – – – – 101,000 101,000 118,639 17,639 5,285,317 5,315,317 5,289,983 (25,334) Interest and rents – – – – 61,556 61,556 66,840 5,284 – – – – 40,000 40,000 64,879 24,879 Miscellaneous – – – – 28,444 28,444 54,902 26,458 – – – – 1,042,583 1,277,028 – (1,277,028)

Total revenues $ 11,287,868 11,679,397 11,679,397 – 90,000 90,000 121,742 31,742 101,000 101,000 118,639 17,639 6,367,900 7,041,252 5,728,791 (1,312,461) Expenditures: Current: General government – – – – – – – – 101,000 101,000 97,459 3,541 – – – – Public works 11,287,868 11,679,397 11,679,397 – – – – – – – – – 6,367,900 7,541,252 5,080,877 2,460,375 Community development – – – – 90,000 90,000 65,255 24,745 – – – – – – – –

Total expenditures $ 11,287,868 11,679,397 11,679,397 – 90,000 90,000 65,255 24,745 101,000 101,000 97,459 3,541 6,367,900 7,541,252 5,080,877 2,460,375

Operating Transfers In – – – – – – – – – – – – – – 639,000 – Operating Transfers Out – – – – – – – – – – – – – – (1,030,550) – Fund Balance Allocation – – – – – – – – – – – – – – – – Excess (deficiency) of revenues over expenditures $ – – – – – – 56,487 56,487 – – 21,180 21,180 – (500,000) 256,364 1,147,914 Less encumbrances outstanding at June 30, 2004, expended – – (136,093) as of June 30, 2005 Add encumbrances outstanding at June 30, 2005 – – 168,976 Excess (deficiency) of revenues over expenditures - GAAP basis 56,487 21,180 289,247 Fund balances at June 30, 2004 656,886 70,509 3,635,648

Fund balances at June 30, 2005 713,373 91,689 3,924,895

See accompanying notes to combined financial statements.

(Continued) 80 CITY OF NEWPORT NEWS, VIRGINIA Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual (Non-GAAP Basis) Special Revenue Funds Year ended June 30, 2005 Page 2

Solid Waste Wastewater Totals, Pages 1 & 2

Original Final Original Final Original Final Budget Budget Actual Variance Budget Budget Actual Variance Budget Budget Actual Variance

Revenues: Intergovernmental: Local – – – – – – – – – 20,445 3,864 (16,581) State $ 17,000 17,000 17,688 688 – – – – 11,304,868 11,778,179 12,000,374 222,195 Federal – – – – – – – – – 306,680 66,776 (239,904) Charges for services 10,290,481 10,290,481 9,882,212 (408,269) 8,260,001 8,260,001 7,980,169 (279,832) 23,936,799 23,966,799 23,271,003 (695,796) Interest and rents 7,500 7,500 26,860 19,360 1 1 15,015 15,014 109,057 109,057 173,594 64,537 Miscellaneous 64,319 64,319 57,240 (7,079) 419,098 419,098 10,000 (409,098) 1,554,444 1,788,889 122,142 (1,666,747)

Total revenues $ 10,379,300 10,379,300 9,984,000 (395,300) 8,679,100 8,679,100 8,005,184 (673,916) 36,905,168 37,970,049 35,637,753 (2,332,296)

Expenditures: Current: General government – – – – – – – – 101,000 101,000 97,459 3,541 Public works 10,379,300 10,379,300 10,125,845 (253,455) 8,679,100 8,679,100 8,071,669 607,431 36,714,168 38,279,049 34,957,788 3,321,261 Community development – – – – – – – – 90,000 90,000 65,255 24,745

Total expenditures $ 10,379,300 10,379,300 10,125,845 (253,455) 8,679,100 8,679,100 8,071,669 607,431 36,905,168 38,470,049 35,120,502 3,349,547

Operating Transfers In – – – – – – – – – – 639,000 639,000 Operating Transfers Out – – – – – – – – – – (1,030,550) (1,030,550) Transfer from Fund Balance – – – – – – – – – – – – Excess (deficiency) of revenues over expenditures $ – – (141,845) (141,845) – – (66,485) (66,485) – (500,000) 125,701 1,656,251 Less encumbrances outstanding at June 30, 2004, expended as of June 30, 2005 (24,641) (649,054) (809,788)

Add encumbrances outstanding at June 30, 2005 4,690 327,568 501,234

Excess (deficiency) of revenues over expenditures - GAAP basis (161,796) (387,971) (182,853)

Fund balances at June 30, 2004 2,985,622 1,536,298 8,884,963

Fund balances at June 30, 2005 2,823,826 1,148,327 8,702,110

See accompanying notes to combined financial statements.

81 CITY OF NEWPORT NEWS, VIRGINIA Debt Service Fund Schedule of Revenues, Expenditures and Changes in Fund Balances Budget and Actual (Budget Basis) Year ended June 30, 2005

Original Final Budget Budget Actual Variance

Revenues: Intergovernmental - Local $ 59,173,910 59,173,910 27,038,254 (32,135,656)

Miscellaneous - - 239,175 239,175

Total revenues $ 59,173,910 59,173,910 27,277,429 (31,896,481)

Expenditures: General government 543,342 543,342 543,340 2 Debt service payments 58,630,568 58,630,568 58,396,063 234,505

Total expenditures $ 59,173,910 59,173,910 58,939,403 234,507 Excess (deficiency) of revenues over expenditures $ – – (31,661,974) (31,661,974)

Transfers in (out) 30,275,043 Net changes in fund balances (1,386,931) Fund balances at June 30, 2004 2,524,220 Fund balances at June 30, 2005 1,137,289

82 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Changes in Assets and Liabilities Agency Funds Year Ended June 30, 2005

Balance Balance GPWDC June 30, 2004 Additions Deductions June 30, 2005 Assets: Cash and cash equivalents $ (1) 3,603,878 3,603,877 – Accounts receivable 556,783 1,104,282 1,227,641 433,424 Total assets $ 556,782 4,708,160 4,831,518 433,424 Liabilities: Accounts payable $ 208,178 193,252 208,178 193,252 Due to other agencies 348,604 240,172 348,604 240,172 Total assets $ 556,782 433,424 556,782 433,424

Other Agency Funds Assets: Cash and cash equivalents $ 2,129,033 27,651,223 28,464,723 1,315,533 Accounts receivable 2,117,074 14,284,897 13,975,938 2,426,033 Inventory 11,226 5,839 11,226 5,839 Total assets $ 4,257,333 41,941,959 42,451,887 3,747,405 Liabilities: Accounts payable $ 48,614 407,528 381,852 74,290 Due to other governments 2,071,025 254,227 – 2,325,252 Due to other agencies 2,137,694 837,234 1,627,065 1,347,863 Total liabilities $ 4,257,333 1,498,989 2,008,917 3,747,405

Total - Agency Funds Assets: Cash and cash equivalents $ 2,129,032 31,255,101 32,068,600 1,315,533 Accounts receivable 2,673,857 15,389,179 15,203,579 2,859,457 Inventory 11,226 5,839 11,226 5,839 Total assets $ 4,814,115 46,650,119 47,283,405 4,180,829 Liabilities: Accounts payable $ 256,792 600,780 590,030 267,542 Due to other governments 2,071,025 254,227 – 2,325,252 Due to other agencies 2,486,298 1,077,406 1,975,669 1,588,035 Total liabilities $ 4,814,115 1,932,413 2,565,699 4,180,829

83 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Net Assets Non-Major Component Units June 30, 2005

Economic and Peninsula Industrial Airport Development Assets Commission Authorities Totals Current Assets: Cash and cash equivalents $ 5,011,607 3,000,432 8,012,039 Restricted cash and investments 42 24,373,716 24,373,758 Receivables: Accounts 1,900,573 178,134 2,078,707 Loans – 113,870 113,870 Mortgages – 146,087 146,087 Primary government 230,000 – 230,000 Commonwealth of Virginia – 3,940,000 3,940,000 Net investment in direct financing leases – 2,636,715 2,636,715 Inventories 53,928 – 53,928 Other current assets 17,582 – 17,582 Total current assets 7,213,732 34,388,954 41,602,686 Restricted cash and investments 2,120,635 393,293 2,513,928 Receivables: Loans – 507,471 507,471 Mortgages – 894,782 894,782 Notes – 3,700,000 3,700,000 Primary government 5,360,000 – 5,360,000 Commonwealth of Virginia – 23,160,000 23,160,000 Land held for lease or resale – 16,725,914 16,725,914 Net investment in direct financing leases – 17,982,252 17,982,252 Other noncurrent assets 176,664 67,780 244,444 Property, plant and equipment: Land 5,712,070 – 5,712,070 Construction in progress 7,336,734 12,064,704 19,401,438 Infrastructure – 1,521,049 1,521,049 Buildings – 99,102,130 99,102,130 Improvements – 9,931,878 9,931,878 Airfield 53,378,381 – 53,378,381 Terminal 35,009,799 – 35,009,799 Trailer park and rental units 2,031,344 – 2,031,344 Machinery and equipment 3,177,567 96,674 3,274,241 Accumulated depreciation (38,171,783) (13,143,294) (51,315,077) Total assets $ 83,345,143 207,393,587 290,738,730 Liabilities Current Liabilities Accounts payable $ 1,349,131 1,628,593 2,977,724 Accrued liabilities 452,754 393,994 846,748 Deposits/deferred revenue 39,400 – 39,400 Due to primary govenrment – 951,314 951,314 General obligation bonds payable - due within one year 293,728 10,145,669 10,439,397 Total current liabilities 2,135,013 13,119,570 15,254,583 Due to primary government – 16,455,867 16,455,867 Due to Newport News Public Schools – 316,523 316,523 General obligation bonds payable 8,061,553 141,840,666 149,902,219 Total liabilities 10,196,566 171,732,626 181,929,192 Net Assets Invested in capital assets, net of related debt 60,118,831 27,285,657 87,404,488 Restricted for: Capital projects – 2,842,671 2,842,671 Capital loans 2,120,635 1,228,020 3,348,655 Unrestricted 10,909,111 4,304,613 15,213,724 Total net assets 73,148,577 35,660,961 108,809,538 Total liabilities and net assets $ 83,345,143 207,393,587 290,738,730

84 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Revenues, Expenses and Changes in Net Assets Non-Major Component Units Year ended June 30, 2005

Economic and Peninsula Industrial Airport Development Commission Authorities Totals Operating revenues: Charges for services $ 6,232,082 – 6,232,082 Parking contributions – 763,212 763,212 Property rentals – 9,519,295 9,519,295 Land sales – 2,329,470 2,329,470 Intergovernmental-PAC – 175,525 175,525 Intergovernmental-primary government – 4,482,898 4,482,898 Total operating revenues 6,232,082 17,270,400 23,502,482 Operating expenses: Cost of land sold – 1,556,496 1,556,496 Personal services 2,930,616 271,014 3,201,630 Contractual services – 2,266,473 2,266,473 Materials and supplies 1,274,846 402,670 1,677,516 Depreciation and amortization 3,240,555 2,536,982 5,777,537 Real estate commissions – 183,971 183,971 Rental expenses – 371,724 371,724 Miscellaneous 747,537 134,029 881,566 Total operating expenses 8,193,554 7,723,359 15,916,913 Operating income (loss) (1,961,472) 9,547,041 7,585,569 Nonoperating revenues (expenses): Interest revenue 410,193 468,369 878,562 Bond and admin fee income – 341,999 341,999 Interest expense (323,365) (5,928,750) (6,252,115) Letter of credit and trustee fees – (117,974) (117,974) Amortization - bond costs (11,164) – (11,164) Other revenues (expenses) 24,180 526,997 551,177 Nonoperating expenses, net 99,844 (4,709,359) (4,609,515) Capital contributions, net 5,586,868 – 5,586,868 Change in net assets 3,725,240 4,837,682 8,562,922

Net assets at June 30, 2004 69,423,337 30,823,279 100,246,616 Net assets at June 30, 2005 $ 73,148,577 35,660,961 108,809,538

85 CITY OF NEWPORT NEWS, VIRGINIA Combining Statement of Cash Flows Non-Major Component Units Year ended June 30, 2005 Economic and Peninsula Industrial Airport Development Commission Authorities Totals Cash flows from operating activities: Receipts from customers $ 6,273,938 14,407,499 20,681,437 Receipts from land sales, net of settlement charges - 2,329,470 2,329,470 Payments to suppliers (1,990,977) (2,594,244) (4,585,221) Payments to employees (2,937,801) (271,014) (3,208,815) Net cash provided by operating activities 1,345,160 13,871,711 15,216,871 Cash flows from capital and related financing activities: Acquisition of capital assets (8,300,748) (10,453,595) (18,754,343) Capital contributions, net 5,560,952 - 5,560,952 Proceeds from industrial revenue bonds - 31,388,028 31,388,028 Repayment and retirement of industrial revenue bonds and notes payable (275,954) (7,439,487) (7,715,441) Proceeds from Newport News Public Schools - 30,843 Proceeds from primary government - 553,758 30,843 Payment to primary government - (980,729) (980,729) Call premium and deferred bond costs (13,201) - (13,201) Interest paid (323,365) (5,928,750) (6,252,115) Other revenue, net - 751,022 751,022 Net cash used in capital and related financing activities (3,352,316) 7,921,090 4,015,016 Cash flows from investing activities: Net investment in direct financing leases - 2,270,320 2,270,320 Interest received 409,080 468,369 877,449 Issuance of hotel gap loan - (3,700,000) (3,700,000) Increase in restricted investments, net 499,796 - 499,796 Net cash provided by investing activities 908,876 (961,311) (52,435) Increase (decrease) in cash and cash equivalents at beginning of year (1,098,280) 20,831,490 19,179,452 Cash, cash equivalents and restricted cash at beginning of year 6,109,887 6,924,264 13,034,151 Cash, cash equivalents and restricted cash at end of year $ 5,011,607 27,755,754 32,213,603 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income (loss) $ (1,961,472) 9,547,041 7,585,569 Adjustment to reconcile operating income to cash provided by operating activities: Depreciation (3,240,555) 2,536,982 (703,573) Write-off of construction in progress - 202,958 202,958 Changes in assets and liabilities: Loans receivable - (138,372) (138,372) Mortgages receivable - 49,406 49,406 Other receivables 17,676 (98,906) (81,230) Inventories (4,713) 969,178 964,465 Other assets 22,587 - 22,587 Accounts payable and accrued liabilities 30,527 (322,476) (291,949) Construction accounts payable - 1,165,697 1,165,697 Deferred revenue - (39,797) (39,797) Net cash provided by operating activities $ (5,135,950) 13,871,711 8,735,761 Supplemental disclosure: Noncash capital activities: Payment by State on VASCIC bonds - 3,940,000 3,940,000 Sale of assets under direct financing leases $ - 2,099,660 2,099,660 Noncash investing and financing activities: Construction costs financed by accounts payable $ 1,232,796 - 1,232,796 Contributed capital funded by accounts receivable 1,548,260 - 1,548,260

86

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

The Honorable Members of City Council City of Newport News, Virginia

We have audited the financial statements of the City of Newport News, Virginia (the “City”) as of and for the year ended June 30, 2005, and have issued our report thereon dated February 17, 2006. We conducted our audit 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 the Specifications for Audits of Counties, Cities, and Towns, issued by the Auditor of Public Accounts of the Commonwealth of Virginia.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the City’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide assurance on internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be a material weakness.

We did note other matters involving internal control over financial reporting that we have reported to management of the City of Newport News, Virginia in a separate letter dated February 17, 2006.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the City’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.

C-1

This report is intended solely for the information and use of the City Council, management, federal and state awarding agencies, and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

Richmond, Virginia February 17, 2006

C-2

Independent Auditors’ Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control over Compliance in Accordance With OMB Circular A-133

The Honorable Members of City Council City of Newport News, Virginia

Compliance

We have audited the compliance of the City of Newport News, Virginia (the “City”) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended June 30, 2005. The City’s major federal programs are identified in the summary of auditors’ results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the City’s management. Our responsibility is to express an opinion on the City’s compliance based on our audit.

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 Untied 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 required referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City’s compliance with those requirements and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the City’s compliance with those requirements.

In our opinion, the City complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs for the year ended June 30, 2005. However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as item 2005-1 and 2005-2.

Internal Control Over Compliance

The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grant agreements applicable to federal programs. In planning and performing our audit, we considered the City’s internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133.

C-3

Our consideration of internal control over compliance would not necessarily disclose all matters in internal control that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts, and grants that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses.

This report is intended for the information and use of the City Council, management, federal awarding agencies, and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

Richmond Virginia February 17, 2006

C-4

Independent Auditors’ Report on Compliance with Commonwealth Of Virginia’s Laws, Regulations, Contracts and Grants

The Honorable Members of City Council City of Newport News, Virginia

We have audited the basic financial statements of the City of Newport News, Virginia (the “City”), as of and for the year ended June 30, 2005, and have issued our report thereon dated February 17, 2006.

We conducted our audit 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 Specifications for Audits of Counties, Cities and Towns, issued by the Auditor of Public Accounts of the Commonwealth of Virginia.

As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City’s compliance with certain provisions of the Commonwealth of Virginia’s laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, the objective of our audit of the basic financial statements was not to provide an opinion on overall compliance with such provisions, and, accordingly, we do not express such an opinion.

The following is a summary of the Commonwealth of Virginia’s laws, regulations, contracts, and grants for which we performed tests of compliance:

Code of Virginia State Agency Requirements

Budget and Appropriation Laws Procurement Comprehensive Services Act Cash and Investments Unclaimed Property Social Services Conflicts of Interest Enhanced 911 Service Taxes Highway Maintenance Funds Debt Provisions Personal Property Tax Relief Act Retirement Systems

The results of our tests disclosed no instances of noncompliance with the provisions referred to in the preceding paragraph.

This report is intended solely for the information of City Council, management, the Auditor of Public Accounts and applicable state agencies, and is not intended to be and should not be used by anyone other than these specified parties.

Richmond, Virginia February 17, 2006

C-5 CITY OF NEWPORT NEWS, VIRGINIA Schedule of Expenditures of Federal Awards Year ended June 30, 2005 CFDA Federal Federal Granting Agency/Recipient State Agency number expenditures

Department of Homeland Security: Direct payments - Cooperating Technical Partners 97.045 $ 13,193 Pass-through payments - Department of Emergency Services- State Domestic Preparedness Equip. Support Program 97.004 866,335 Public Assistance Grants 97.036 1,511,373 Hazard Mitigation Grant 97.039 127,376 Emergency Management Performance Grants 97.042 75,809 Assistance to Firefighters Grant 97.044 239,917 State and Local All Hazards Emegency Operations Planning 97.051 8,568

Social Security Administration - Direct payments - Social Security Incentive Program 96.006 6,600

Department of Health and Human Services: Pass-through payments - Department of Social Services: Medical Assistance Program - Title XIX 93.778 2,227,468 Independent Living 93.674 154,962 Social Services Block Grant 93.667 1,576,069 Adoption Assistance 93.659 1,030,764 Foster Care - Title IV-E 93.658 2,964,913 Developmental Disabilities Basic Support 93.630 1,353 Child Care and Development Mandatory Matching Funds 93.596 2,996,024 Refugee and Entrant Assistance - Discretionary Grants 93.576 30,149 Child Care and Development Block Grant of 1990 93.575 1,918,942 Low-Income Home Energy Assistance 93.568 51,282 Refugee and Entrant Assistance - State Administered Programs 93.566 48,952 Temporary Assistance for Needy Families 93.558 2,761,696 Promoting Safe and Stable Families 93.556 141,846 Department of Health- Preventative Health Service Block Grant 93.991 19,184

Department of Education: Direct payments - School Assistance in Federally Affected Areas 84.041 3,173,415 Pass-through payments - Education Consolidation and Improvement Act of 1981 - Adult Education - State Administered Program 84.002 212,676 Title I Grants to Local Educational Agencies 84.010 7,723,396 Comprehensive School Reform Demonstrations 84.332 14,352 Reading First State Grants 84.357 664,036 Teacher Quality Enhancement Grants 84.336 14,333 Improving Teacher Quality State Grants 84.367 1,851,547 Transition to Teaching 84.350A 398,224 Technology Literacy Challenge Fund Grants 84.318 290,534 Community Technology Centers 84.341 16,279 English Language Acquisition Grants 84.365 32,106 Gaining Early Awareness and Readiness for Undergraduate Programs 84.334 556,596 Twenty-first Century Community Learning Centers 84.287 90,914 State Grants for Innovative Programs 84.298 212,890 Grants for State Assessments 84.369 103,418 Assistance to States for Handicapped Children 84.027 6,034,942 Vocational Education - Basic Grants to States 84.048 854,302 Fund for the Improvement of Education 84.215 490,808 Special Education Preschool Grants 84.173 237,592 Drug-Free Schools and Communities 84.186 226,346 Other state agencies - Indirect costs 84.000 383,702

C-6 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Schedule of Expenditures of Federal Awards Year ended June 30, 2005 CFDA Federal Federal Granting Agency/Recipient State Agency number expenditures

Environmental Protection Agency, Office of Water - Pass-through payments - Virginia Revolving Loan Fund - Capitalization Grants for Clean Water 66.456 $ 1,294,161

National Science Foundation - Pass-through payments - Department of Education - Education and Human Resources 47.076 612,778

National Foundation for the Arts and Humanities - Pass-through payments - Library of Virginia- State Library Program 45.310 19,390

Department of Transportation - Pass-through payments - Department of Transportation - Highway Planning and Construction 20.205 995,191 Department of Motor Vehicles: State and Community Highway Safety 20.600 20,939

Department of Labor - Pass-through payments - Virginia Employment Commission - Workforce Investment Act - Youth Activities 17.259 124,378

Department of Justice: Direct payments: Office of Juvenile and Delinquency Prevention - Drug-Free Communities Support Program Grants 16.729 71,049 Office of Community Oriented Policing Services - Public Safety Partnership and Community Policing Grants 16.710 418,916 Office of Justice Programs: Bulletproof Vest Partnership Program 16.607 9,925 Community Capacity Development Office 16.595 70,875 Local Law Enforcement Block Grants Program 16.592 244,951 State Domestic Preparedness Equipment Support Program 16.007 121,803 Pass-through payments: Department of Criminal Justice Service: Violence Against Women Formula Grants 16.588 24,338 Byrne Formula Grant Program 16.579 847,134 Crime Victims Assistance (VOCA) 16.575 222,811 Juvenile Justice and Delinquency Prevention - Juvenile Accountability Incentive Block Grants 16.523 181,421 Juvenile Justice and Delinquency Prevention Allocation 16.540 60,489 Title V Delinquency Prevention Program 16.548 38,449

Department of Housing and Urban Development: Direct payments - Community Development Block Grants/Entitlement Grants 14.218 1,943,114 Brownsfield Economic Development Initiative 14.246 2,541,547 Department of Housing and Community Development: HOME Investment Partnerships Program 14.239 2,123,944 Department of Defense - Pass-through payments - State Department of Education: ROTC 12.000 238,905 Impact Aid 12.000 441,561

C-7 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Schedule of Expenditures of Federal Awards Year ended June 30, 2005 CFDA Federal Federal Granting Agency/Recipient State Agency number expenditures

Department of Agriculture - Pass-through payments: State Department of Agriculture: Food Distribution - Food Commodities 10.550 8,568 School Lunch Program - Food Commodities 10.555 950,754 Department of Social Services - State Administrative Matching Grants for Food Stamp Program 10.561 2,318,271 Department of Youth and Family Services - School Breakfast Program 10.553 40,130 Department of Education: School Breakfast Program 10.553 1,501,226 National School Lunch Program 10.555 5,541,527 Total $ 65,383,728

See accompanying notes to schedule of expenditures of federal awards.

C-8 (Continued) CITY OF NEWPORT NEWS, VIRGINIA Schedule of Findings and Questioned Costs Year ended June 30, 2002

(1) Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of the City of Newport News, Virginia (the City), except the Peninsula Airport Commission, which has a separate Single Audit Report, and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements.

(2) Relationship to Basic Financial Statements Federal expenditures are reported in the City’s basic financial statements as follows: Federal expenditures General Fund $ 43,857,445 Special Revenue Funds 10,749,105 Component Unit - Public Schools 5,235,651 Subtotal 59,842,201

Food commodities 5,541,527 Total expenditures $ 65,383,728

C-9 CITY OF NEWPORT NEWS, VIRGINIA

Schedule of Findings and Questioned Costs

Year ended June 30, 2005

A. Summary of Auditors’ Results

1. The type of report issued on the basic financial statements: Unqualified opinions

2. Reportable conditions in internal control disclosed by the audit of the financial statements: No

3. Noncompliance, which is material to the financial statements: No

4. Reportable conditions in internal control over major programs: No

Material weaknesses: No

5. The type of report issued on compliance for major programs: Unqualified opinion

6. Any audit findings which are required to be reported under Section 510(1) of OMB Circular A- 133: Yes

7. The programs tested as major programs were:

Name of Program CFDA #

School Nutrition Cluster 10.553/10.555 HOME Investment Program 14.239 Brownsfield Economic Development Initiative 14.246 Special Education Cluster 84.027/84.173 Temporary Assistance to Needy Families 93.558 Title IV-E Foster Care 93.658 Social Services Block Grant 93.667 Title XIX – Medical Assistance Program 93.778

8. Dollar threshold to distinguish between Type A and Type B Programs: $1,961,337

9. The City of Newport News was determined to be a low risk auditee.

B. Findings Relating to the Financial Statements Reported in Accordance with Government Auditing Standards: None

C. Findings and Questioned Costs Relating to Federal Awards:

Foster Care – Title IV-E; CFDA 93.658

2005-1: Eligibility documentation

Criteria: The Foster Care Service Program Manual states that there must be an annual judicial determination that reasonable efforts have been made to either reunite the child with their family or achieve the permanency plan selected. Failure to have the judicial determination documented causes the child to become ineligible for Title IV-E benefits until the required action is taken.

C-10 CITY OF NEWPORT NEWS, VIRGINIA

Schedule of Findings and Questioned Costs

Year ended June 30, 2005

Condition: One of the twenty-five case files selected had inadequate documentation to support the eligibility of Title IV-E benefits. The child’s annual Permanency Planning Court Order did not have “reasonable efforts” checked by the judge on December 12, 2003 causing the child to become ineligible for benefits until the next Permanency Planning Court Order was completed by the judge on November 23, 2004. This error caused potential questioned costs of $15,022.

Cause: The requirements of Title IV-E program are subject to frequent changes in placement and eligibility criteria. Understaffing and turnover in the eligibility function at the Newport News Department of Social Services further complicated monitoring these changes to ensure all documentation supporting eligibility is complete.

Recommendation: The Department should continue with its efforts to review all active Title IV-E cases to best meet the needs of its clients and comply with the requirements of the program.

Management Response: In the case cited, the child was incorrectly determined as reimbursable, when in fact, the court order language disqualified the child. Upon discovering the error, the eligibility worker re-determined the child to be IV-E non reimbursable until the next court hearing and the submission of the correct court order.

Corrective Action Plan: The Agency is initiating a new process for receiving court orders from the Court in a more timely manner. The court orders, instead of being sent directly to the social workers, are now being sent to the Sr. Social Work Supervisor, who reviews them, and then sends directly to the supervisor for further review and documentation of future court dates. A copy of the court order is also sent immediately to the eligibility worker rather than only at eligibility review and so is reviewed more timely. Eligibility Notices of Action are now being sent directly to the social work supervisor who has responsibility for ensuring that payments are made out of the appropriate category.

2005-2: Controls Over Issuance & Re-issuance of Warrant Register Payments

Criteria: Only employees who understand the regulations governing the use of Title IV-E funds and who have been trained on the warrant register system should have the authority to issue payments without supervisory review. Regular review is necessary to ensure the Department complies with the requirements of the Title IV-E program.

Condition: Our sample of twenty-five disbursements yielded a duplicate payment for Therapeutic Foster Parenting services in the amount of $1,240. The duplicate payment has been turned over the Department’s Fraud Unit to attempt recovery.

Cause: As similar concerns have been noted in prior year findings, it appears that the Department should continue with its efforts to provide training to its employees and supervisory review to reduce the

C-11 CITY OF NEWPORT NEWS, VIRGINIA

Schedule of Findings and Questioned Costs

Year ended June 30, 2005 number of errors in processing cash disbursements. Controls over the warrant register system are either inadequate or not working effectively.

Recommendation: The Department should ensure that employees receive adequate training on the warrant register system to minimize the risk of a duplicate payment. The Department should give top priority to implementing the planned supervisory review of warrant register payments.

Condition: Two identical payments were issued to a therapeutic foster parent for the same entitlement month. When the error was discovered during audit, the foster parent and the therapeutic foster care agency were contacted and a fraud overpayment form was completed to recoup the funds.

Management Response: Corrective Action Plan: Administrative Assistants (Unit Clerks) have now been placed in the foster care units and perform most of the data entry functions for the units. Because the social workers are required to fill out ‘batch’ sheets for each payment submission, duplications are more easily detected and intercepted.

Several changes have occurred during the past year to minimize payment errors and increase quality controls in IV-E cases.

1. Administrative Assistants have been placed in the foster care units to process payments. 2. A foster care Supervisor has begun the in depth regular review of IV-E cases. Cases will be reviewed at least twice a year for payment and documentation accuracy. 3. The Agency is exploring the feasibility of developing a foster care finance unit, which would assume all responsibility for eligibility and payment issues and include some CSA, eligibility and clerical staff. Due to pending architectural changes in the workspace, the co-location of these individuals may be delayed until building renovations are complete. 4. As previously mentioned, a new process has been established to obtain court orders more timely and to ensure the appropriate language is present on all orders. There remains open communication between Social Services and the Court to work out any issues in this process.

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