ATLANTA INDEPENDENT SCHOOL SYSTEM ATLANTA, GEORGIA REPORT ON AUDIT OF THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 STATE OF GEORGIA DEPARTMENT OF AUDITS AND ACCOUNTS Russell W. Hinton State Auditor ATLANTA INDEPENDENT SCHOOL SYSTEM - TABLE OF CONTENTS - SECTION I FINANCIAL INDEPENDENT AUDITOR'S REPORT REQUIRED SUPPLEMENTARY INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBITS BASIC FINANCIAL STATEMENTS DISTRICT-WIDE FINANCIAL STATEMENTS A STATEMENT OF NET ASSETS 1 B STATEMENT OF ACTIVITIES 2 FUND FINANCIAL STATEMENTS C BALANCE SHEET GOVERNMENTAL FUNDS 4 D RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS 7 E STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS 8 F RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES 10 G STATEMENT OF NET ASSETS PROPRIETARY FUNDS 11 H STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS PROPRIETARY FUNDS 12 I STATEMENT OF CASH FLOWS PROPRIETARY FUNDS 13 J STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS 15 K NOTES TO THE BASIC FINANCIAL STATEMENTS 16 ATLANTA INDEPENDENT SCHOOL SYSTEM - TABLE OF CONTENTS - SECTION I FINANCIAL SCHEDULES REQUIRED SUPPLEMENTARY INFORMATION 1 SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL GENERAL FUND 45 2 SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL TITLE I FUND 47 SUPPLEMENTARY INFORMATION 3 COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS 48 4 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS 50 5 COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS - CHARTER SCHOOLS 52 6 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS - CHARTER SCHOOLS 54 7 SCHEDULE OF STATE REVENUE 56 8 SCHEDULE OF APPROVED LOCAL OPTION SALES TAX PROJECTS 57 9 ALLOTMENTS AND EXPENDITURES GENERAL FUND - QUALITY BASIC EDUCATION PROGRAMS (QBE) BY PROGRAM 59 SECTION II FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS ATLANTA INDEPENDENT SCHOOL SYSTEM - TABLE OF CONTENTS - SECTION III MANAGEMENT'S RESPONSES SCHEDULE OF MANAGEMENT'S RESPONSES SECTION I FINANCIAL Russell W. Hinton STATE AUDITOR (404) 656-2174 DEPARTMENT OF AUDITS AND ACCOUNTS 270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400 August 2, 2007 Honorable Sonny Perdue, Governor Members of the General Assembly Members of the State Board of Education and Superintendent and Members of the Atlanta Independent School System INDEPENDENT AUDITOR'S REPORT Ladies and Gentlemen: We have audited the accompanying financial statements ofthe governmental activities, the businesstype activities, each major fund, and the aggregate remaining fund information (Exhibits A through K) ofthe Atlanta Independent School System (School System), as ofand for the year ended June 30, 2006, which collectively comprise the School District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the School System's management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the School System's discretely presented component unit. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for Atlanta Educational Telecommunications Collaborative, Inc., is based on the report of other auditors. In addition, we did not audit the financial statements ofthe School District's blended component units, which represent .4% and .5%, respectively, ofthe assets and revenues ofthe governmental activities and 22.2% and 8.8%, respectively, of the assets and revenues of the aggregate remaining fund information. The financial statements of these component units 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 those financial statements, is based solely upon the reports of the other auditors. Except as discussed in the following paragraph, we conducted our audit in accordance with auditing standards generally accepted in the United States ofAmerica. 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 disclosure 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 report ofother auditors provide a reasonable basis for our opinions. ARL-APS The School System did not provide sufficient documentary evidence to support the amounts reported as beginning net assets in the governmental activities, the business-type activities, and the discretely presented component unit, and beginning fund balances in each major fund and the aggregate remaining fund information, for fiscal year 2006, nor did the School System's records provide sufficient information for the application of other auditing procedures to reasonably determine whether beginning net assets in the governmental activities, the business-type activities, and the discretely presented component unit, and beginning fund balances in each major fund and the aggregate remaining fund information were fairly stated. In our opinion, based on our audit and the report of other auditors, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine documentation supporting beginning net assets in the governmental activities, the business-type activities, and the discretely presented component unit, and beginning fund balances in each major fund and the aggregate remaining fund information, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information ofthe Atlanta Independent School System, as ofJune 30, 2006, and the respective changes in financial position, and cash flows, where applicable, thereoffor the year then ended in conformity with accounting principles generally accepted in the United States of America. Management's Discussion and Analysis and the Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual, as presented on pages i through xii and pages 45 through 47, respectively, are not a required part of the basic financial statements but are supplementary information required by the accounting principles generally accepted in the United States of America. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries 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 School System's basic financial statements. The accompanying supplementary information which consist of Schedules 3 through 9 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied by us and the other auditors in the audit ofthe basic financial statements and, in our opinion, based on our audit and the report ofother auditors, are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. ARL-APS A copy of this report has been filed as a permanent record in the office of the State Auditor and made available to the press ofthe State, as provided by Official Code of Georgia Annotated 50-624. Respectfully submitted, RWH:gp ARL-APS ~W-~ Russell W. Hinton, CPA, CGFM State Auditor ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 The discussion and analysis of the Atlanta Independent School System (the "School System") financial performance provides an overview of the financial year ended June 30, 2006. The intent of this discussion and analysis is to examine the School System's financial performance as a whole, identify changes in financial position as well as to provide basic financial statements. The basic financial statements and notes to the financial statements should be reviewed by the readers to enhance their understanding of the School System's financial performance as a whole or as an entire operating entity. The basic financial statements contain the following components: 1) District-wide financial statements including the Statement ofNet Assets and the Statement ofActivities which provide a broad, long-term overview ofthe School System's finances, 2) Fund level financial statements provide a greater level of detail about the School System's major funds and focus on how well the School System has performed in the short-term in the most significant funds, and 3) Notes to the basic financial statements. This report also presents the highlights for the year ended June 30, 2006, and contains other supplementary information. Financial Highlights Overall, net assets in fiscal year 2006 increased by 6.8% over fiscal year 2005. This is evidence of management's ability to maintain a balanced budget and effectively control expenses, despite austerity reductions due to economic downturns affecting district revenues. The key financial highlights for fiscal year 2006, as represented are: District-wide financial statements Total net assets for the School System increased from $902.65 million in fiscal year 2005, to $963.78 in fiscal year 2006, an increase of approximately $61.13 million or 6.8%. Net assets increased by $60.73 million for Governmental Activities and increased by $0.4 million for Business-type Activities. Total revenues increased from $707.63 million in fiscal year 2005, to $732.91 million in fiscal year 2006, an increase of approximately $25.28 million or 3.6%. Revenue for Governmental Activities increased $26.09 million while revenue for Business-type activities decreased by $0.75 million. Total expenses increased $18.80 million or 2.9% from $651.24 million in fiscal year 2005, to $670.04 million in fiscal year 2006. Expenses increased in Governmental Activities by $22.86 million and decreased by $4.06 million in Business-type Activities. i ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Fund Financial Statements The School System has prepared its annual financial reports corresponding to the Governmental Accounting Standards Board No. 34 financial reporting model. The following graphic is provided to give the reader an overview of the new reporting model. Graph 1 OVERVIEW OF FINANCIAL STATEMENTS District-wide Financial Statements The District-wide financial statements are designed to provide the reader with a broad overview of the School System's finances in a manner similar to those used by private-sector businesses. The Statement of Net Assets and the Statement of Activities provide information about the activities of the whole School System, both an aggregate and long-term view of the finances. These statements include all assets and liabilities using the accrual basis of accounting. This basis of accounting includes all of the current year's revenues and expenses regardless of when cash is received or paid. o The Statement of Net Assets presents information on all of the School System's assets and liabilities, with the difference between the two reported as net assets. Increases or decreases in net assets may serve as a useful indicator of whether the financial position is improving or deteriorating. 11 ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 o The Statement of Activities presents information showing how net assets changed during the fiscal year. All changes in the net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in the statement for some items that will result in cash flows in future fiscal periods (for example, uncollected taxes and earned but unused vacation leave). Included in the Statement of Net Assets and Statement of Activities for the School System are two distinct kinds ofactivities: Governmental Activities - Most of the School System's programs and services are reported here including instruction, pupil services, improvement of instructional services, educational media, general administration, school administration, business administration, maintenance and operations of plant, student transportation, and central support. Business-type Activities - This service is provided on a charge for goods or services basis to recover all of the expenses of the goods or services provided. The Food Services proprietary fund is reported as a Business-type activity. Table 1 - Condensed Statement of Net Assets (in millions of dollars) Governmental Activities Business-tYml Activities 2006 2005 2006 2005 2006 Total School System Percentage Change 2005 Current and Other Assets Net Capital Assets $ 250.81 $ 223.10 $ -23.43 $ -25.06 $ 227.38 $ 198.04 854.96 814.41 ~ _2-QQ 860.74 819.47 14.8% 5.0% Total Assets $1,105.77 $1,037.51 $ -17.65 $ -20.00 $1,088.12 $1,017.51 6.9% Long-Tenn Debt Outstanding $ 35.22 $ 15.39 $ 35.22 $ 15.39 Other Liabilities 86.42 98.73 $_____l.1Q $ ~ 89.12 99.47 128.8% -10.4% Total Liabilities $ 121.64 $ 114.12 $_____l.1Q $ ~ $ 124.34 $ 114.86 8.3% Net Assets Invested in Capital Assets, Net of Related Debt Restricted Unrestricted . $ 832.04 22.22 129.87 $ 803.56 3.99 115.84 $ 5.78 -26.13 $ 5.06 -25.80 $ 837.82 22.22 103.74 $ 808.62 3.99 90.04 3.6% 456.9% 15.2% Total Net Assets $ 984,13 $ 923,39 $ -20.35 $ -20.74 $ 963.78 $ 902.65 6.8% Total assets increased $70.62 million or 6.9%. Current and other assets increased $29.35 million or 14.8 %. Capital assets, net of depreciation for all activities increased $41.27 million or 5.0%. For governmental activities the increase primarily represents additions of $32.34 million, retirements/transfers of$1.66 million. iii ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Long-Term debt outstanding increased $19.3 million or 128.8%. The additional increase was due to the intergovernmental agreement with the City of Atlanta for $18.7 million and the integration of charter schools (note payable) in the amount of $209 thousand. Table 2 - Condensed Changes in Net Assets (in millions of dollars) Governmental Activities Business-type Activities 2006 2005 2006 2005 2006 Total School System Percentage Change Revenues Program Revenues: Charges for Services $ 2.10 Operating Grants and Contributions 203.64 Capital Grants and Contributions 1.64 General Revenues: Taxes Property Taxes 365.95 SPWST and Other Sales Taxes 115.95 Investment Earnings 7.32 Grants and Contributions Not Restricted to Specific Programs 9.41 Other 6.07 $ 204.76 2.23 377.22 91.20 4.66 5.90 $ 2.58 18.27 0.06 $ 3.57 18.09 $ 4.68 221.91 1.64 365.95 115.95 7.32 9.41 _filJ $ 3.57 222.85 2.23 377.22 91.20 4.66 31.0"/o -0.04% -26.5% -3.0% 27.1% 57.1% 0.0"/o 2.3% Total Revenues $ 712.08 $ 685.97 $ 21.66 $ 732.99 3.6% Program Expenses: Instruction $ 389.45 Pupil Services 29.26 Improvement of Instructional Services 29.95 Educational Media 12.52 General Administration 25.65 School Administration 36.32 Business Administration 12.98 Maintenance and Operations of Plant 60.11 Student Transportation 22.59 Food Services Central Support 26.39 Other 1.25 Interest Expense 1.86 $ 435.35 24.01 20.01 7.09 18.91 23.25 6.69 48.32 14.68 26.20 0.42 0.54 $ 21.71 $ 25.77 $ 389.45 29.26 29.95 12.52 25.65 36.32 12.98 60.11 22.59 21.71 26.39 1.25 _.!.M $ 435.35 24.01 20.01 7.09 18.91 23.25 6.69 48.32 14.68 25.77 26.20 0.42 ~ -10.5% 21.9% 49.7% 76.6% 35.6% 56.2% 94.0"/o 24.4% 53.9% -15.8% -0.7% 197.6% 244.4% Total Expenses $ 648.33 $ 625.47 $ 670.04 $ 651.24 2.9% Special Items Gain on Sale of Capital Assets $ 2.75 0.0"/o Transfers In $ -1.04 $ -1.80 $_____1M $-1.:.fil! $____Q,QQ $____Q,QQ 0.0"/o Change in Net Assets $ 65.46 $ 58.70 $ 0.24 $ -2.31 $_65...70 $--5.6..32 16.5% IV ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Sources of Revenue Graph 2 Fiscal Year 2006 SPLOST 15.8% Investment Earnings 1.0% Grants and Contrib. Not Rest. 1.3% Other 0.9% Property Taxes 49 .9% Program Revenue 31 .1% Expenses Maintenance and Operations of Plant Food Services Business Administration School Administration 1.9% 9.0% . 3.2% Student Transportation 5.4% General Administration 3.8% Central Support 3.9% Other 0.2% Interest Expense 0.3% Educational Media 1.9% 4.5% Pupil Services 4.4% Instruction 58 .1% V ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Total revenues, overall, increased $25.36 million or 3.6%, from fiscal year 2005, to fiscal year 2006. Programs revenues are primarily grant related and they account for 32.0%, or $228.22 million, oftotal revenues received. General revenues represent the major revenue stream for the School System They account for 68.0%, or $504.76 million, of total revenues received in fiscal year 2006. Between fiscal year 2005 and 2006, a combined decrease of $11.27 million in property tax collections occurred with an increase in SPLOST and other sales tax collections of $24. 75 million. Total expenses also increased from 2005 to 2006 by 2.9 % or $18.80 million. Management continues to accurately forecast spending levels and manage spending throughout the year. Governmental activities account for 96.7%, or $648.33 million of total School System spending. Four activities account for 68.8%, or $461.18 million of governmental spending: instruction ($389.45 million or 58.1 %), pupil services ($29.26 million or 4.4%), improvement of instruction ($29.95 million or 4.5%), and educational media ($12.52 million or 1.8%). All other remaining expenditures account for $208.86 million or 31.2%. A moderate decrease of 10.5% in spending occurred in instruction as the School System continues to decrease in student enrollment. Business-activities revenues and expenditures decreased respectively, with revenue decreasing by $0.75 million or 3.5% and expenditures decreasing by $4.06 million or 15.7%. These improvements are a direct result of District-wide priorities to operate competitively and control costs. Table 3 - Net Cost of Governmental Activities (in millions of dollars) 2006 Total Cost of Services Percentage 2005 Change 2006 Net Cost of Services Percentage 2005 Chan~ Instruction Pupil Services Improvement of Instructional Services Educational Media General Administration School Administration Business Administration Maintenance and Operations of Plant Student Transportation Central Support Other Interest Expense $ 389.45 29.26 29.95 12.52 25.65 36.32 12.98 60.11 22.59 26.39 1.25 --1..M $ 435.35 24.01 20.01 7.09 18.91 23.25 6.69 48.32 14.68 26.20 0.42 0.54 -10.5% 21.9% 49.7% 76.6% 35.6% 56.2% 94.0% 24.4% 53.9% 0.7% 197.6% 244.4% $ 240.56 24.79 25.00 8.13 23.69 25.12 11.30 43.45 15.34 20.63 1.09 ~ $ 262.14 15.60 3.56 6.90 14.76 23.00 6.32 48.29 13.27 25.10 -0.47 8.2% -58.9% -607.2% -17.8% -60.5% -9.2% -87.7% 10.0% -15.6% -17.8% -331.9% 0.0% Total Expenses $~ $ 625.47 3.7% $ 440.95 $ 418.47 -5.4% vi ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 The Net Cost of Governmental Activities represents the cost of operating the School System to be covered by general revenues, including property taxes. The net cost of services increase is attributable to reduction in program revenues, primarily Quality Basic Education funds received from the State Department of Education and increases in expenditures as discussed above. Land Construction in Progress Buildings Building Improvements Land Improvements Furniture and Fixtures Equipment Vehicles Total Table 4 - Capital Assets (net of depreciation, in millions of dollars) Governmental Activities Business-ll'.ml Activities 2006 2005 2006 2005 2006 Total School S:Ytem Percentage Change 2005 $ 24.36 36.32 700.25 32.02 9.77 26.87 22.18 _ll2 $ 20.42 91.05 614.21 23.92 3.71 21.34 36.13 ----2:fil. $ 5.78 $ 5.06 $ 24.36 36.32 700.25 32.02 9.77 26.87 27.96 _ll2 $ 20.42 91.05 614.21 23.92 3.71 21.34 41.19 ----2:fil. 19.3% -60.1% 14.0% 33.9% 163.3% 25.9% -28.9% -12.1% $ 854.96 $ 814.41 $ 5.78 $ 5.06 $ 860.74 $ 819.47 5.2% Construction in Progress and Buildings The second term 5-year SPLOST construction program to renovate academic facilities is near completion. For more detailed information on the School System's capital assets, see Note 5 in the financial statements. Table 5 - Outstanding Long-Term Debt (in millions of dollars) 2006 Total School System Percentage Change 2005 Intergovernmental Agreement City ofAtlanta Compensated Absences Worker's Compensation Note Payable - Charter Schools Capital Leases $ 18.70 6.24 5.85 0.21 4.22 $ 6.12 2.94 6.86 0.0% 2.0% 99.0% 0.0% -38.5% $ 35.22 $ 15.92 121.2% City of Atlanta (COA) has issued various annual general obligation bonds. The Intergovernmental Agreement as of June 30, 2006 amounted to $18.7 million. Outstanding longterm debt increased due to COA bonds and charter schools for the current fiscal year. Compensated absences increased by 2.0%, and workers compensation increased by 99.0%. For more detailed information on the School System's long-term debt, see Note 10 in the financial statements. vii ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Fund Financial Statements Fund financial statements provide detailed information regarding the resources segregated for specific activities or objectives, not District-wide. Funds are used to track specific sources of revenue and expenditures for particular programs. The School System has three kinds of funds: Governmentalfunds include most of the School System's basic services and focus on providing cash flow available for spending. These funds include the General Fund, Capital Projects and Other Governmental Funds of lesser magnitude. Fund accounting statements use the modified accrual method ofaccounting, which measures cash and other financial assets that can be readily converted to cash. These statements present a short-term view ofthe School System's operations and services and do not include the long-term focus presented in the new District-wide financial statements. For an explanation of the differences see the reconciliations included with the Governmental Fund Statements. Proprietary funds consist of services provided by the School System for a fee and employ the full accrual method of accounting in the same manner as the District-wide statements. The School System has one proprietary fund, Food Service. This fund provides student meals at a cost based on the student's ability to pay, subsidized by Federal funds and the School System. Fiduciary funds account for assets not owned by the School System but for which the School System is responsible for ensuring that the assets in the funds are used for their designated purposes. These funds are not included in the District-wide financial statement because they cannot be used to finance the School System operations. The School System has one fiduciary fund-Agency Funds (Local Schooi Club and Class Funds). The following presents a summary of the General Fund, Capital Projects Fund and Other Governmental Funds by type of revenue for the fiscal year ended June 30, 2006 as compared to June 30, 2005. viii ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Table 6 - Revenues and Other Financing Sources - Fund Financial Statements (in millions of dollars) 2006 Governmental Funds Percentage 2005 Inc./(Dec.) Change Local Taxes Sales Taxes State Revenues Federal Revenues Investment Earnings Charges for Services Other $ 369.49 115.95 140.88 66.54 7.32 2.10 15.01 $ 370.26 91.20 137.31 65.12 4.66 10.47 $ -0.77 24.75 3.57 1.42 2.66 2.10 4.54 -0.2% 27.1% 2.6% 2.2% 57.1% 0.0% 43.4% Total Revenues $ 717.29 $ 679.02 $ 38.27 5.6% The following table presents a summary of the General Fund, Capital Projects Fund and Other Governmental Funds by type of expenditure for the fiscal year ended June 30, 2006, as compared to June 30, 2005. Table 7 - Expenditures and Other Financing Uses - Fund Financial Statements (in millions of dollars) 2006 Governmental Funds Percentage 2005 Inc./(Dec.) Change Instruction Pupil Services Improvement oflnstructional Services Educational Media General Administration School Administration Business Administration Maintenance and Operations o f Plant Student Transportation Central Support Other Capital Outlays Debt Services $ 358.02 $ 395.38 28.35 23.97 29.86 12.33 15.06 35.59 12.96 20.07 7.08 9.83 23.53 6.80 59.94 20.03 26.18 1.26 78.37 5.10 48.44 12.81 26.39 0.22 107.64 4.93 $ -37.36 4.38 9.79 5.25 5.23 12.06 6.16 11.50 7.22 -0.21 1.04 -29.27 .17 -9.4% 18.3% 48.8% 74.2% 53.2% 51.3% 90.6% 23.7% 56.4% -0.8% 472.7% -27.2% 3.4% Total Expenditures $ 683.05 $ 687.09 $ -4.04 -0.6% IX ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 Fluctuations in these accounts are consistent with those discussed in the Changes in Net Assets at the District-wide level. Analysis of Major Funds The School System has three major funds: the General Fund, the Capital Projects Fund, and the Title I Fund. The General Fund is the general operating fund ofthe School System and is used to account for all financial resources except those funds are accounted for in another fund. The Capital Projects fund is used for the acquisition or construction of major capital facilities and to account for the bond proceeds restricted to renovation and school construction. The Title I fund is a Federal grant used to supplement the general operating fund by ensuring students gain knowledge and skills, as well as upgrade the entire educational program for systemic reform. General Fund As of June 30, 2006, total fund balance in the General Fund was $87,028,576, reserved $9,291,804, designated unreserved $16,117,930 and undesignated unreserved $61,618,842. As a result of operations in fiscal year 2006, the fund balance increased by $11,604,317 due primarily to an increase in local property tax collections and investments. Capital Proiects Fund As of June 30, 2006, total fund balance in the Capital Projects Fund was $61,595,262, reserved $22,081,865 for Special Purpose Local Option Sales Tax (SPLOST) and undesignated unreserved $39,513,397 for Capital Projects. The fund balance increased by $31,465,019 due primarily to SPLOST investments and restricted cash. Title I Fund As of June 30, 2006, the Title I Funding sources had a zero fund balance. Revenue equaled expenditures. Other Governmental Funds As of June 30, 2006, total fund balance in Other Governmental Funds was $12,360,867, reserved $134,290, designated unreserved for special revenue fund $8,387,421, and undesignated unreserved for special revenue $3,839,156. This was a slight increase of $492,604, since revenue remained flat from fiscal year 2005. Maior Subsequent Events On March 20, 2007, SPLOST III was approved. The estimated SPLOST III will generate approximately $570.0 million for the School System that will fund numerous Capital Improvement projects. X ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 General Fund Budgetary Highlights The School System's budget is prepared by the Finance Division and is a collaborative effort between the School System and the Atlanta community. The basis for preparation utilizes a zero-based approach because it has systematically provided a more accurate account of anticipated spending levels for the year. On the statement of revenues, expenditures and changes in fund balance for general fund there were significant budget to actual variances noted: Local Tax revenue shows an under variance of $12.9 million due to budgeted charter school property taxes Sales Tax income presents an over variance of $14.7 million since sales taxes in previous fiscal years were budgeted with local taxes State revenues presents an over variance of $7.2 million since charter school state revenue was not included in budgeted amounts Instruction expenditures appear to be under budget by $50.7 million due to various expenditure reclassifications and the charter schools operating transfers out Improvement of instruction expenditures appear to be over budget by $15.3 million due to expenditure reclassifications from instruction Details of the original budget and the amended budget are presented on pages 45 and 47 in the Financial Section of this report. Current Issues Currently known facts, decisions or conditions that are expected to have a significant effect on the financial position or result of operations are as follows: Overall the School System's financial position for next year is expected to remain stable. The School System is currently working on the various options to fund the Food Service Nutrition Fund deficit and hopes to reduce this deficit significantly during the next fiscal year. The School System will try to extend the Special Option Local Sales Tax for educational purposes. Specific capital expenditures plans are formalized in conjunction with anticipated SPLOST receipts. The School System regularly monitors anticipated capital outlay needs. Despite the challenges, the School System is strong financially and we remain optimistic about the ability of the School System to maximize all of the financial resources to provide quality education to our students. Also, considering the following economic factors, the School System expects its student population to remain stable: XI ATLANTA INDEPENDENT SCHOOL SYSTEM MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 In 2007, Atlanta's economic outlook is expected to continue the positive trends and favorable performance observed in 2006. Unemployment has declined and inflation has held steady. Metro Atlanta's housing market is maintaining stable growth despite forecasts of a slowdown across the nation. The commercial rental market has shown indications of improvement. Hotel demand is rising due to increased business and leisure travel to Atlanta. However, mirroring national trends, Atlanta's economy will still be subject to the impact ofrising gas prices. Both property tax and sales tax are expected to continue steady upward trends. In addition, revenue from business licenses and permits are expected to continue to grow in line with increased in town development activity. Requests for Information This financial report is designed to provide a general overview of the School System's finances for all those with an interest in the School System's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the School System's Chief Financial Officer, 130 Trinity Street SW, Atlanta, Georgia 30303. Xll ATLANTA INDEPENDENT SCHOOL SYSTEM ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF NET ASSETS JUNE 30, 2006 EXHIBIT"A" ASSETS Cash and Cash Equivalents Investments Accounts Receivable, Net Taxes State Government Federal Government Other Due from City of Atlanta Prepaid Items Internal Balances Inventories Total Current Assets Capital Assets Land Construction in Progress Land Improvements Furniture and Fixtures Vehicles Buildings Building Improvements Equipment Charter Schools Less: Accumulated Depreciation Total Noncurrent Assets Total Assets Governmental Activities Business-Type Activities Total Comeonent Unit Atlanta Educational Telecommunications Collaborative, Inc. $ 14,617,681 $ 132,512,674 7,216,324 $ 21,834,005 $ 132,512,674 26,402,827 18,934,437 17,784,936 1,902,545 4,396,505 1,255,541 32,147,421 856,646 158,459 1,076,740 -32, 147,421 269,067 26,402,827 18,934,437 17,943,395 2,979,285 4,396,505 1,255,541 0 1,125,713 $ 250,811,213 $ -23,426,831 $ 227,384,382 $ $ 24,356,399 35,831,982 10,575,340 30,600,197 24,070,396 874,782,593 49,934,385 94,159,238 $ 2,507,865 -291,862,432 $ 854,955,963 $ $ 10,831,506 -5,055, 118 24,356,399 35,831,982 10,575,340 30,600,197 24,070,396 874,782,593 49,934,385 104,990,744 $ 2,507,865 -296,917,550 5,776,388 $ 860,732,351 $ 3,374,108 194,826 923,296 8,543 4 500 773 2,173,749 -1 725 954 447 795 $ 1,105,767,176 $ -17,650,443 $ 1,088,116,733 $ 4 948 568 LIABILITIES Accounts Payable Salaries Payable Due to Other Governments Contracts Payable Retainages Payable Deposits and Deferred Revenues Long-Term Liabilities Due Within One Year Due in More Than One Year Total Liabilities NET ASSETS Invested in Capital Assets, Net of Related Debt Restricted for Capital Projects Endowment Unrestricted (Deficit) Total Net Assets $ 38,578,857 $ 33,203,080 3,718,557 5,964,879 4,957,394 5,970,739 29,249,765 $ 121,643,271 $ 2,089,981 $ 311,400 293,429 2,694,810 $ 40,668,838 $ 33,514,480 3,718,557 5,964,879 4,957,394 293,429 5,970,739 29,249,765 124,338,081 $ $ 832,038,878 $ 5,776,388 $ 837,815,266 $ 22,216,155 22,216,155 129,868,872 -26, 121,641 103,747,231 $ 984,123,905 $ -20,345,253 $ 963,778,652 $ Total Liabilities and Net Assets $ 1,105,767,176 $ -17,6501443 $ 1,088,116,733 $ The notes to the basic financial statements are an integral part of this statement. - 1- 70,893 469,910 91,303 632106 447,795 184,020 3 684 647 4 316462 4,948,568 ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2006 Expenses Charges for Services Program Revenues Operating Grants and Contributions GOVERNMENTAL ACTIVITIES Instruction Support Services Pupil Services Improvement of Instructional Services Educational Media Services General Administration School Administration Business Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services Other Support Services Interest on Short-Term and Long-Term Debt $ 389,455,379 $ 29,260,081 29,956,194 12,525,249 25,647,833 36,318,561 12,977,846 60,113,313 22,585,137 26,386,066 1,257,641 1,852,129 1,071,582 $ 1,025,542 147,828,677 4,465,337 4,960,311 4,395,985 1,959,485 11,195,921 1,672,864 15,641,179 5,601,018 5,754,235 163,622 Total Governmental Activities $ 648,335,429 $ 2,097,124 $ 203,638,634 BUSINESS-TYPE ACTIVITIES Food Services 21 711 548 18,265,691 Total School System COMPONENT UNIT $ 670 046 977 $ 4677951 $===2=2=1~,9=04~,3=2=5= Public Broadcasting Services $ _ _.;_11'-'-1'""8=5'"'"7..:.;1o=- $ _ _....;.1-=-2'-=,0-=-29""'=-31'-"0'- General Revenues Taxes Property Taxes For Maintenance and Operations For Debt Service Sales Taxes Special Purpose Local Option Sales Tax For Capital Projects Intangible Recording Tax Real Estate Grants and Contributions not Restricted to Specific Programs Investment Earnings Miscellaneous Special Items Gain on Sale of Capital Assets Transfers Total General Revenues, Special Items and Transfers Change in Net Assets Net Assets - Beginning of Year (Restated) Net Assets - End of Year The notes to the basic financial statements are an integral part of this statement. -2- EXHIBIT"B" Capital Grants and Contributions Net {Exeenses} Governmental Activities Business-Type Activities TOTAL Comeonent Unit Atlanta Educational Telecommunications Collaborative, Inc. $ -240,555, 120 $ 1,640,644 -24,794,744 -24,995,883 -8,129,264 -23,688,348 -25, 122,640 -11,304,982 -43,446,592 -15,343,475 -20,631,831 -1,094,019 -1,852,129 $ 1,640,644 $ -440,959,027 $ -240,555,120 -24,794,744 -24,995,883 -8,129,264 -23,688,348 -25, 122,640 -11,304,982 -43,446,592 -15,343,475 -20,631,831 -1,094,019 -1,852,129 $ -440,959,027 - - - - - - $ _____-8__6__5__,.0.3."'-0-- -865,030 $ 1,640.644 $ -440,959,027 $ -865,030 $ -441,824,057 $ _ _ _ _84;:;..:.;::3.&.:6;;;00:.., $ 363,973,482 1,979,560 $ 363,973,482 1,979,560 101,224,651 10,394,260 4,334,876 9,411,373 7,314,985 6,073,779 $ 2,746,146 -1,036,966 $ 506,416,146 $ $ 65,457,119 $ 918,666,786 59,712 1,036,966 1,096,678 $ 231,648 $ -20,576,901 101,224,651 10,394,260 4,334,876 9,411,373 7,314,985 6,133,491 2,746,146 0 507,512,824 65,688,767 $ 898,089,885 $ 984, 123,905 $ -20,345.253 $ 963,778,652 $ 843,600 3,472,862 4316462 -3- ATLANTA INDEPENDENT SCHOOL SYSTEM BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2006 ASSETS Cash and Cash Equivalents Investments Accounts Receivable, Net Taxes State Government Federal Government Other Due From City of Atlanta Prepaid Items Due From Other Funds Inventories General Fund Districtwide Capital Projects Fund $ 7,118,940 $ 114,911,577 13,921,493 16,553,387 1,183,370 177,308 4,396,505 1,255,541 856,646 4,761,945 17,601,097 16,499,776 297,822 36,913,318 Total Assets $ 160,374,767 $ ==7=6=,0=7=3=,9=58= LIABILITIES AND FUND BALANCES LIABILITIES Accounts Payable Salaries Payable Due to Other Governments Contracts Payable Retainages Payable Due To Other Funds Deposits and Deferred Revenue Total Liabilities FUND BALANCES Reserved for: Encumbrances Inventories Capital Projects Unreserved Designated for: School Food Deficit Intergovernmental Agreements Nonmajor Governmental Funds Undesignated Reported in: General Fund Capital Projects Nonmajor Governmental Funds Total Fund Balances Total Liabilities and Fund Balances The notes to the basic financial statements are an integral part of this statement. -4- $ 30,903,781 $ 31,068,568 3,556,423 3,951,658 7,422,184 5,964,879 4,957,394 $ 73,346,191 $ 14,478,696 $ 8,435,158 856,646 $ 22,081,865 11,721,425 4,396,505 61,618,842 39,513,397 $ 87,028,576 $ 61,595,262 $ 160,374,767 $ ==7=6=,0=7=3,=9=58= EXHIBIT"C" Title I Fund Nonmajor Governmental Funds Total $ $ 14,929,147 5,384 2,736,796 $ 2,381,050 1,672,419 1,422,031 8,975,635 14,617,681 132,512,674 30,421,269 18,934,437 17,784,936 1,902,545 4,396,505 1,255,541 45,888,953 856 646 $ 14,934,531 $ 17,187,931 $ 268,571,187 $ 1,206,866 $ 1,088,280 2,849,512 9,789,873 $ 14,934,531 $ 2,911,787 $ 1,046,232 869,045 4,827,064 $ 38,578,857 33,203,080 3,718,557 5,964,879 4,957,394 13,741,531 7,422,184 107,586,482 $ 8,435,158 856,646 $ 134,290 22,216,155 8,387,421 11,721,425 4,396,505 8,387,421 61,618,842 39,513,397 $ 0 3,839,156 3,839,156 $ 0 $ 12,360,867 $ 160,984,705 $ 14,934,531 $ 17,187,931 $ 268,571,187 -5- (This page left intentionally blank) ATLANTA INDEPENDENT SCHOOL SYSTEM RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2006 EXHIBIT"D" Total Fund Balances - Governmental Funds (Exhibit "C") 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. These assets consist of: Land Construction in Progress Construction in Progress - Charter Schools Land Improvements Buildings Building Improvements Equipment Furniture and Fixtures Vehicles Charter Schools Accumulated Depreciation Total Capital Assets Accounts receivables used in Governmental Activities represents amounts that are not financial resources and not reported in the Governmental Funds: Taxes Receivables Allowance for Uncollectible Receivables Total Accounts Receivables Long-Term Liabilities, including Bonds Payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-Term Liabilities at year-end consist of: Capital Leases Compensated Absences Intergovernmental Agreements Notes Payable Workers' Compensation Total Long-Term Liabilities Net Assets of Governmental Activities (Exhibit "A") $ 160,984,705 $ 24,356,399 35,831,982 489,083 10,575,340 874,782,593 49,934,385 94,159,238 30,600,197 24,070,396 2,018,782 -291,862,433 854,955,962 $ 7,422,184 -4 018 442 3,403,742 $ -4,219,951 -6,244,104 -18,697,134 -209,220 -5,850,095 -35,220,504 $ 984,123,905 The notes to the basic financial statements are an integral part of this statement. -7- ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS YEAR ENDED JUNE 30, 2006 REVENUES Property Taxes Sales Taxes State Funds Federal Funds Charges for Services Investment Earnings Miscellaneous Total Revenues EXPENDITURES Current Instruction Support Services Pupil Services Improvement of Instructional Services Educational Media Services General Administration School Administration Business Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services Other Support Services Capital Outlay Debt Services Principal Interest Total Expenditures Excess of Revenues over (under) Expenditures OTHER FINANCING SOURCES (USES) Proceeds of Debt Proceeds of Long-Term Capital Related Debt Insurance Proceeds Transfers In Transfers Out Total Other Financing Sources (Uses) SPECIAL ITEMS Proceeds from Sale of Capital Assets Net Change in Fund Balances Fund Balances - Beginning (Restated) General Fund Districtwide Capital Projects Fund $ 369,492,143 14,729,136 $ 101,224,651 133,943,879 3,870,754 2,097,124 7,023,909 291,076 5,596,862 $ 536,753,807 $ 101,515,727 $ 299,139,936 20,900,486 18,111,955 10,815,062 8,121,238 34,842,924 11,397,140 $ 58,605,254 16,466,753 26,046,658 301,334 1,806,527 104,129 74,003,753 3,200,356 1,758,269 $ 511,513,892 $ 74,107,882 $ 25,239,915 $ 27,407,845 $ $ 489,558 -19 874 172 $ -19 384 614 $ 3,907,884 3 907 884 $ 2,803,684 $ 568 273 $ 8,658,985 $ 31,884,002 78,369,591 29,711,260 Fund Balances - Ending The notes to the basic financial statements are an integral part of this statement. -8 - $ 87,028,576 $ 61,595,262 EXHIBIT"E" Title I Fund Nonmajor Governmental Funds Total $ $ 39,278,734 $ 39,278,734 $ $ 6,933,902 23,386,377 9,411,373 369,492,143 115,953,787 140,877,781 66,535,865 2,097,124 7,314,985 15,008,235 39,731,652 $ 717,279,920 $ 27,821,769 $ 915,859 6,629,096 19,045 1,759,207 172,730 11,296 1,257,521 95,101 543,297 53,813 $ 39,278,734 $ $ 0 $ 31,064,147 $ 358,025,852 6,535,069 5,114,753 1,492,351 5,180,629 568,527 1,460,899 1,326,176 2,303,682 37,396 413,010 2,506,931 28,351,414 29,855,804 12,326,458 15,061,074 35,584,181 12,962,168 59,942,726 20,027,956 26,179,155 1,257,641 78,371,024 51,042 93 860 3,251,398 1,852,129 58,148,472 $ 683,048,980 -18,416,820 $ 34,230,940 $ 30,000 $ 30,000 3,907,884 489,558 19,874,172 19,874,172 -19,874,172 $ 19,904,172 $ 4 427 442 $ $ _ _ _ _0__ $ _ _3-,3_7~1,_95_7_ 1,487,352 $ 42,030,339 10,873,515 118,954,366 $ 0 $ 12,360,867 $ 160,984,705 - 9- ATLANTA INDEPENDENT SCHOOL SYSTEM RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES JUNE 30, 2006 EXHIBIT"F" Total Net Change in Fund Balances - Governmental Funds (Exhibit "E") Amounts reported for Governmental Activities in the Statement of Activities are different because: Capital Outlays are reported as expenditures in Governmental Funds. However, in the Statement of Activities, the cost of Capital Assets is allocated over their estimated useful lives as depreciation expense. In the current period, these amounts are: Capital Outlay Charter School Depreciation Expense Excess of Capital Outlay over Depreciation Expense In the Statement of Activities, only the gain on the sale of the Capital Assets is reported, whereas in the Governmental Funds, the entire proceeds from the sale increase financial resources. Thus, the change in net assets differs from the change in fund balances by the cost carrying value of the Capital Assets sold. Transfer of assets lo Business-type activities. Revenues reported in the Statement of Activities that do not provide current financial resources and, therefore, are not reported as revenues in Governmental Funds. Repayment of Long-Term Debt is reported as an expenditure in Governmental Funds, but the repayment reduces Long-Term Liabilities in the Statement of Net Assets. In the current year, these amounts consist of: Capital Lease Payments Some items 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: Decrease in Notes Payable Increase in Compensated Absences Increase in Intergovernmental Agreement Increase in Workers' Compensation Total Additional Expenditures $ 42,030,339 $ 72,634,738 883,698 -41,175,664 32,342,772 -625,811 -1,036,966 -3,539,101 2,642,606 $ 28,062 -128,475 -3,350,134 -2,906,173 -6,356,720 Change in Net Assets of Governmental Activities (Exhibit "B") $ 65,457,119 The notes to the basic financial statements are an integral part of this statement. - 10 - ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF NET ASSETS PROPRIETARY FUNDS JUNE 30, 2006 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable, Net Federal Government Other Inventories Total Current Assets Noncurrent Assets Capital Assets Equipment Less: Accumulated Depreciation Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities Accounts Payable Salaries Payable Due To Other Funds Deposits and Deferred Revenues Total Current Liabilities NET ASSETS Invested in Capital Assets, Net of Related Debt Unrestricted (Deficit) Total Net Assets Total Liabilities and Net Assets EXHIBIT"G" School Food Service Fund $ 7,216,324 158,459 1,076,740 269,067 $ 8,720,590 $ 10,831,506 -5,055,118 $ 5,776,388 $ ===14=,4=9=6'=9=78= $ 2,089,981 311,400 32,147,421 293,429 $ 34,842,231 $ 5,776,388 -26,121,641 $ -20,345,253 $ ===14=,4=9=6'=97=8= The notes to the basic financial statements are an integral part of this statement. - 11 - ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS PROPRIETARY FUNDS YEAR ENDED JUNE 30, 2006 EXHIBIT"H" OPERATING REVENUES Charges for Services Miscellaneous Total Operating Revenues OPERATING EXPENSES Personnel Costs Contractual Services Supplies and Materials Other Operating Depreciation Total Operating Expenses Operating Income (Loss) NONOPERATING REVENUES (EXPENSES} Grants - Child Nutrition Cluster Income (Loss) CAPITAL CONTRIBUTIONS Transfer of Assets from Governmental Activities Change in Net Assets Total Net Assets - Beginning (Restated) Total Net Assets - Ending School Food Service Fund $ 2,580,827 59 712 $ 2,640,539 $ 4,552,006 8,346,283 8,283,150 23,155 506,954 $ 21,711,548 $ -19,071,009 $ 18,265,691 $ -805,318 1,036,966 $ 231,648 -20,576,901 $ ==-=2=0'=34=5=,2=53= The notes to the basic financial statements are an integral part of this statement. - 12 - ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF CASH FLOWS PROPRIETARY FUNDS YEAR ENDED JUNE 30, 2006 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from Customers Payments to Suppliers Payments to Employees Other Receipts (Payments) Net Cash Provided (Used) by Operating Activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Operating Subsidies and Transfers to Other Funds CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Purchases of Capital Assets Net Increase (Decrease) in Cash and Cash Equivalents Balances - Beginning of Year Balances - End of Year RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating Income (Loss) Adjustments to Reconcile Operating Income to Net Cash Provided (Used) by Operating Activities Depreciation Expense Donated Food Commodities Change in Assets and Liabilities Receivables, Net Inventories Accounts Payables Net Cash Provided (Used) By Operating Activities Non-Cash Non-Capital Financing Activities USDA Donated Food Commodities Non-Cash Capital Financing Activities Transfer of Capital Assets from Governmental Activities The notes to the basic financial statements are an integral part of this statement. - 13 - EXHIBIT"!" School Food Service Fund $ 2,618,671 -12,490,176 -4,672,910 59 711 $ -14,484,704 $ 17,414,425 $ -17 905 $ 2,911,816 4,304,508 $ ==7=,2=1=6=,3=24= $ -19,071,009 506,954 1,106,373 -224,057 812,900 2,384,135 $ -14,484,704 $ ==1='=10=6...,,3=7=3 $ ==1...0.=36...,,9=6=6 (This page left intentionally blank) ATLANTA INDEPENDENT SCHOOL SYSTEM STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS JUNE 30, 2006 ASSETS Cash and Cash Equivalents LIABILITIES Funds Held for Others EXHIBIT"J" Agency Funds $ 1,362,536 $ 1,362,536 The notes to the basic financial statements are an integral part of this statement. - 15 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 1: DESCRIPTION OF SCHOOL DISTRICT AND REPORTING ENTITY REPORTING ENTITY The Atlanta Independent School System (School District) was established under the laws ofthe State of Georgia and operates under the guidance of a school board elected by the voters and a Superintendent appointed by the Board. The Board is organized as a separate legal entity and has the power to levy taxes. The City of Atlanta issues and is responsible for servicing general obligation debt that benefits the School District. Its budget is not subject to approval by any other entity. Accordingly, the School District is a primary government and consists ofall the organizations that compose its legal entity. Blended Component Units Included within the School District are eight Charter Schools. Each Charter School is responsible for the public education of all students attending its school. The Charter Schools were created through a contract between the School District and each Charter School whereby all State funding associated with the students attending the Charter Schools and certain specified local funds are remitted to the Charter Schools to cover the cost oftheir operations. The financial statements ofthe Charter Schools have been blended with the School District's nonmajor governmental funds. A listing of the Charter Schools follows: School for Integrated Academics and Technologies at Georgia, Inc. 239 West Lake Avenue Atlanta, Georgia 30314 KIPP West Atlanta Young Scholars Academy, Inc. 80 Joseph E. Lowery Blvd. Atlanta, Georgia 30314 Achieve Academy of Atlanta, Inc. 1335 Kimberly Road SW Atlanta, Georgia 30331 University Community Academy, Inc. Tiger Flowers Drive NW Atlanta, Georgia 30314 Tech High School, Inc. 1043 Memorial Drive SE Atlanta, Georgia 30316 Drew Charter School, Inc. 301 East Lake Blvd. Atlanta, Georgia 30317 Southeast Atlanta Charter Middle School, Inc. 820 Essie Avenue SE Atlanta, Georgia 30316 Neighborhood Charter School, Inc. 688 Grant Street SE Atlanta, Georgia 30315 School Buildings, Inc. (SBI) (anon-profit corporation) was established by the School System for the purpose of providing financing for some of the School System's buildings and equipment. SBI is governed by a five member board appointed by the School System's Board. SBI has issued certificates ofparticipation (COPS) for the acquisition and construction offacilities and equipment used by the School System. The COPS are repayable solely from payments made by the School - 16 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 1: DESCRIPTION OF SCHOOL DISTRICT AND REPORTING ENTITY System to SBI under a lease agreement for the related facilities and equipment. Accordingly, the COPS and the related capital assets are reported in the District-wide financial statements. (See Note 10) Separate financial statements are not prepared for this component unit. Since the defeasance of the COPS debt in 2002, no activities have been recorded in SBI. Discretely Presented Component Unit Atlanta Educational Telecommunications Collaborative, Inc. (AETC) is a non-profit corporation established by the School System for the purpose of operating the Corporation for Public Broadcasting radio and television broadcast station licenses owned by the School System. The School System owns substantially all assets used to operate the stations and is providing support for capital improvements. Separate financial statements ofAETC are available from the School System. Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The School District's basic financial statements are collectively comprised of the District-wide financial statements, fund financial statements and notes to the basic financial statements of the Atlanta Independent School System. District-wide Statements: The Statement ofNet Assets and the Statement ofActivities display information about the financial activities ofthe overall School District, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. These statements distinguish between the governmental and business-type activities ofthe School District. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. Business-type activities are financed in whole or in part by fees charged to employees, students orto external parties. The Statement of Activities presents a comparison between direct expenses and program revenues for each different business-type activity of the School District and each function of the School District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Indirect expenses (expenses of the School District related to the administration and support ofthe School District's programs, such as office and maintenance personnel and accounting) are not allocated to programs. Program revenues include (a) charges paid by the recipients ofgoods or services offered by the programs and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. - 17 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fund Financial Statements: The fund financial statements provide information about the School District's funds, including fiduciary funds. Eliminations have been made to minimize the double counting ofinternal activities. Separate statements for each category (governmental, proprietary, and fiduciary) are presented. The emphasis offund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. The School District reports the following major governmental funds: General Fund is the School District's primary operating fund. It accounts for all financial resources ofthe School District, except those resources required to be accounted for in another fund. District-wide Capital Projects Fund accounts for financial resources including Special Purpose Local Option Sales Tax (SPLOST) and Intergovernmental Agreement with the City ofAtlanta to be used for the acquisition, construction or renovation of major capital facilities. Title I Fund was established to account for Federal grant funds passed through the Georgia Department of Education to provide remedial education in the areas of reading and math. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or from ancillary activities. Enterprise fund operating revenues are related to charges for food services. The primary nonoperating revenues are Child Nutrition grants. Principal operating expenses are the costs ofproviding goods or services and include depreciation of capital assets. The School District reports the following major proprietary fund: Food Service Funds - The primary purpose ofthe food service funds is to account for activities ofthe School System's school breakfast and lunch programs, which are funded primarily by the United States Department ofAgriculture, passed through the Georgia Department ofEducation. The School District reports the following fiduciary fund type: Agency funds account for assets held by the School District as an agent for various local school student club and class accounts. - 18 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The basis ofaccounting determines when transactions are reported on the financial statements. The District-wide governmental, proprietary fund, fiduciary fund and the discretely presented component unit financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the School District gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, sales taxes, grants and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from sales taxes is recognized in the fiscal year in which the underlying transaction (sale) takes place. Revenue from grants and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. The School District uses funds to report on its financial position and the results of its operations. Fund accounting is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain governmental functions or activities. A fund is a separate accounting entity with a self-balancing set of accounts. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis ofaccounting. Under this method, revenues are recognized when measurable and available. The School District considers all revenues reported in the governmental funds to be available if they are collected within sixty days after year-end. Property taxes, sales taxes and interest are considered to be susceptible to accrual. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt and compensated absences, which are recognized as expenditures to the extent they have matured. Capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of long-term liabilities and acquisitions under capital leases are reported as other financing sources. The School District funds certain programs by a combination ofspecific cost-reimbursement grants, categorical grants, and general revenues. Thus, when program costs are incurred, there are both restricted and unrestricted net assets available to finance the program. It is the School District's policy to first apply grant resources to such programs, followed by cost-reimbursement grants, then general revenues. All business-type activities and enterprise funds ofthe School District follow Financial Accounting Standards Board (FASB) Statements and Interpretations issued on or before November 30, 1989; Accounting Principles Board Opinions; and Accounting Research Bulletins, unless those pronouncements conflict with or contradict Governmental Accounting Standards Board pronouncements. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to the same limitations. The School District has elected not to follow subsequent private-sector guidance. - 19 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RESTATEMENT OF PRIOR YEAR NET ASSETS/FUND BALANCES Beginning net asset balances have been adjusted in the following statements pursuant to corrections of prior year errors: District-wide Statements: Governmental Activities: Net assets at the beginning of the year for governmental activities have been decreased by $4,191,047, as described in the following paragraphs. An adjustment for $9,861,633 was made to increase beginning net assets for governmental activities. These adjustments were made to correct the valuations ofvarious plots ofland and some other capital assets. Capital assets at the beginning of the year have been restated to properly reflect the understatement and the amount is reflected as a correction of prior year errors in the statement of activities. Net adjustments totaling $15,584,282 were made to decrease beginning net assets for governmental activities. These adjustments were made to correct the School System's future obligation resulting from the City ofAtlanta's annual bond issuances, net oftax collections, at June 30, 2005. The liability to other government at the beginning of the year has been restated to properly reflect the understatement and the amount is reflected as a correction of prior year errors in the statement of activities. Fund Financial Statements: General Fund Net adjustments totaling $2,945,332 were made to increase the beginning fund balance for the General Fund. These adjustments were made to write-off prior year balances for accruals related to accounts payable, activity related to charter schools, activity related to school activity accounts, debt issued by the City of Atlanta, and related taxes. Nonmajor Governmental Funds Net adjustments totaling $994,748 were made to decrease the beginning fund balance for the Nonmajor Governmental Funds. These adjustments were made to correct accounts receivable/revenue, accruals, related to accounts payable/expenditures, and to adjust for charter school activity. Capital Projects Funds Net adjustments totaling $418,982 were made to decrease the beginning fund balance for the Capital Projects Funds. These adjustments were made to correct prior year accruals. - 20 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business-Type Activities: Net adjustments totaling $172,508 were made to increase the beginning net assets for Business-Type Activities. These adjustments were made to correct prior year accruals. CASH AND CASH EQUIVALENTS COMPOSITION OF DEPOSITS Cash and cash equivalents consist ofcash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition in authorized financial institutions. Georgia Laws OCGA 45-8-14 authorize the School District to deposit its funds in one or more solvent banks or insured Federal savings and loan associations. INVESTMENTS COMPOSITION OF INVESTMENTS Investments made by the School District in nonparticipating interest-earning contracts (such as certificates ofdeposit) and repurchase agreements are reported at cost. Participating interest-earning contracts and money market investments with a maturity at purchase of one year or less are reported at amortized cost. Both participating interest-earning contracts and money market investments with a maturity at purchase greater than one year and equity investments are reported at fair value. The Official Code of Georgia Annotated Section 36-83-4 authorizes the School District to invest its funds. In selecting among options for investment or among institutional bids for deposits, the highest rate of return shall be the objective, given equivalent conditions of safety and liquidity. Funds may be invested in the following: (1) Obligations issued by the State of Georgia or by other states, (2) Obligations issued by the United States government, (3) Obligations fully insured or guaranteed by the United States government or a United States government agency, (4) Obligations of any corporation of the United States government, (5) Prime banker's acceptances, (6) The Local Government Investment Pool administered by the State of Georgia, Office of Treasury and Fiscal Services, (7) Repurchase agreements, and (8) Obligations of other political subdivisions of the State of Georgia. - 21 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The School District does not have a formal policy regarding investment policies that address interest rate risks and foreign currency risks. However, the School District does have a formal policy regarding investment policies that address (1) credit quality risks for repurchasing agreements and certificates ofdeposit which indicates that the financial institution must have at least a AA rating and (2) concentration of credit risks. RECEIVABLES Receivables consist of amounts due from property and sales taxes, grant reimbursements due on Federal, State or other grants for expenditures made but not reimbursed and other receivables disclosed from information available. Receivables are recorded when either the asset or revenue recognition criteria has been met. PROPERTY TAXES The DeKalb County Board ofCommissioners fixed the property tax levy for the 2005 tax digest year (calendar year) on June 23, 2005 (levy date). Taxes were due on September 15, 2005 (lien date). Taxes collected within the current fiscal year or within 60 days after year-end on the 2005 tax digest are reported as revenue in the governmental funds for fiscal year 2006. The DeKalb County Tax Commissioner bills and collects the property taxes for the School District and remits taxes collected to the School District. The tax millage rate levied for the 2005 tax year (calendar year) for Atlanta Public Schools (DeKalb County) was as follows (a mill equals $1 per thousand dollars of assessed value): School Operations 20.42 mills The Atlanta City Council fixed the property tax levy for the 2005 tax digest year (calendar year) on August 1, 2005 (levy date). Taxes were due on October 1, 2005 (lien date). Taxes collected within the current fiscal year or within 60 days after year-end on the 2005 tax digest are reported as revenue in the governmental funds for fiscal year 2006. The Atlanta City Clerk bills and collects the property taxes for the School District, withholds 1% oftaxes collected as a fee for tax collection and remits the balance of taxes collected to the School District. Tax millage rates levied for the 2005 tax year (calendar year) for Atlanta Public Schools (City of Atlanta) were as follows (a mill equals $1 per thousand dollars of assessed value): School Operations School Bonds 20.420 mills .104 mills 20.524 mills - 22 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property tax revenues, at the fund reporting level, during the fiscal year ended June 30, 2006, for maintenance and operations amounted to $367,512,583 and for school bonds amounted to $1,979,560. SALES TAXES Special Purpose Local Option Sales Tax, at the fund reporting level, during the year amounted to $101,224,651 and is to be used for capital outlay for educational purposes or debt service. This sales tax was authorized by local referendum and the sales tax must be re-authorized at least every five years. DUE FROM CITY OF ATLANTA The amount shown as due from City ofAtlanta represents balances ofproperty taxes collected by the City and held to fund future debt payments. INVENTORIES CONSUMABLE SUPPLIES On the basic financial statements, consumable supplies are reported at cost (first-in, first-out). The School District uses the purchase method to account for the consumable supplies inventory whereby an asset is recorded when supplies are purchased and expenses are recorded at the time the supplies are consumed. To conform to generally accepted accounting principles, all inventories should be accounted for using the consumption method whereby an asset is recorded when items are purchased/received and expenses are recorded at the time the items are consumed. The effect ofthis deviation is deemed immaterial to the fair presentation of the basic financial statements. FOOD INVENTORIES Inventories of donated food commodities used in the preparation of meals are reported at their Federally assigned value and purchased foods inventories are reported at cost (first-in, first-out). The School District uses the purchases method to account for inventories whereby expenditures are recorded at the time of purchase or when received. To conform to generally accepted accounting principles, all food inventories should be accounted for using the consumption method whereby an asset is recorded when foods are purchased/received and expenses are recorded at the time the food items are consumed. The effect ofthis deviation is deemed to be immaterial to the fair presentation of the basic financial statements. PREPAID ITEMS Payments made to vendors for services that will benefit periods subsequent to June 30, 2006, are recorded as prepaid items. - 23 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CAPITAL ASSETS Capital assets purchased, including capital outlay costs, are recorded as expenditures in the fund financial statements at the time of purchase (including ancillary charges). On the District-wide financial statements, all purchased capital assets are valued at cost where historical records are available and at estimated historical cost based on appraisals or deflated current replacement cost where no historical records exist. Donated capital assets are recorded at estimated fair market value on the date donated. Disposals are deleted at depreciated recorded cost. The cost of normal maintenance and repairs that do not add to the value ofassets or materially extend the useful lives of the assets is not capitalized. Depreciation is computed using the straight-line method. The School District does not capitalize book collections or works of art. Capitalization thresholds and estimated useful lives of capital assets reported in the District-wide statements and proprietary funds are as follows: Capitalization Policy Estimated Useful Life Land Land Improvements Buildings Building Improvements Furniture and Fixtures Vehicles Equipment All NIA $ 20,000 10 to 20 years $ 5,000 20 to 50 years $ 5,000 10 to 30 years $ 5,000 3 to 15 years $ 5,000 5 to 8 years $ 5,000 3 to 15 years Capital assets ofthe discretely presented component unit are recorded at cost. Capital assets donated to proprietary fund type operations are recorded at their estimated fair value at the date ofdonation. These capital assets are depreciated using the straight line method over their estimated useful lives of five to twenty years. Depreciation is used to allocate the actual or estimated historical cost of all capital assets over estimated useful lives. FUND BALANCES RESERVED For Inventories - This reserve constitutes resources of the School System in connection with inventory on hand at year end. For Encumbrances - This reserve constitutes the unperformed portion ofpurchase orders, contracts and other commitments for goods and services at year end. Encumbrances outstanding are reported as a reservation of fund balance and do not constitute expenditures or liabilities in the current year because the commitments will be honored during the subsequent year. - 24 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UNRESERVED - DESIGNATED Represents tentative management plans that are subject to change which include: Approved Board resolution for an operating transfer made on October 31, 2006, of $11,721,425 from General Fund to Nutrition Fund to partially cover the deficit. Amounts held by the City ofAtlanta related to property taxes collected to fund future debt payments totaling $4,396,505. Balances related to Nonmajor Governmental funds related to special projects totaling $8,387,421. New Accounting Pronouncement The School System will adopt the following new accounting pronouncement in future years: GASB Statement No. 45 -Accounting and Financial Reporting by Employers for Postretirement Benefits Other Than Pensions, effective for fiscal year ended June 30, 2008. The impact of this pronouncement on the School System's financial statements has not been assessed. Use of Estimates The preparation offinancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differ from those estimates. DEFICIT FUND BALANCES The fund reporting a deficit fund balance and deficit net assets at June 30, 2006, is as follows: Fund Type/Fund Name Proprietary Fund School Food Service Fund Deficit Balance $ 26,121.641 In October 2006, $11.7 million was transferred from the General Fund to the School Food Service Fund to reduce the fund deficit. A three year plan to eliminate the remaining deficit will be implemented in fiscal year 2007. The Food Services Fund had an unrestricted fund deficit of $26,121,641 at year-end. The management of the School System will take the following actions to stop the annual deficit: - 25 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Transferred $11,721,425 from General Fund to reduce the deficit, in October of 2006. (See Note 15) 2. Prepared a three year plan to eliminate the remaining deficit. 3. Entered into management contract which requires vendor penalties for selected areas of non-performance. 4. Replaced program management personnel. 5. Installed Point of Sale technology to provide expanded and more accurate cost data for management decision-making. 6. Initiated actions to adjust staffing levels to better match meal demands. 7. Placed greater emphasis on government commodity utilized to reduce food cost. 8. Developed protocols to focus local school nutrition managers' attention on profitability. 9. Refined outreach and processing for free and reduced-cost meal eligible students. Note 3: DEPOSITS AND INVESTMENTS COLLATERALIZATION OF DEPOSITS Official Code of Georgia Annotated (OCGA) Section 45-8-12 provides that there shall not be on deposit at any time in any depository for a time longer than ten days a sum of money which has not been secured by surety bond, by guarantee of insurance, or by collateral. The aggregate ofthe face value of such surety bond and the market value of securities pledged shall be equal to not less than 110 percent ofthe public funds being secured after the deduction ofthe amount ofdeposit insurance. Ifa depository elects the pooled method (OCGA 45-8-13 .1) the aggregate ofthe market value ofthe securities pledged to secure a pool ofpublic funds shall be not less than 110 percent ofthe daily pool balance. Acceptable security for deposits consists of any one of or any combination of the following: (1) Surety bond signed by a surety company duly qualified and authorized to transact business within the State of Georgia, (2) Insurance on accounts provided by the Federal Deposit Insurance Corporation, (3) Bonds, bills, notes, certificates of indebtedness or other direct obligations of the United States or of the State of Georgia, -26- ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 3: DEPOSITS AND INVESTMENTS (4) Bonds, bills, notes, certificates of indebtedness or other obligations of the counties or municipalities of the State of Georgia, (5) Bonds of any public authority created by the laws of the State of Georgia, providing that the statute that created the authority authorized the use of the bonds for this purpose, (6) Industrial revenue bonds and bonds of development authorities created by the laws of the State of Georgia, and (7) Bonds, bills, notes, certificates of indebtedness, or other obligations of a subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest or debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association, and the Federal National Mortgage Association. CATEGORIZATION OF DEPOSITS At June 30, 2006, the bank balances were $35,973,100. The amounts of the total bank balances are classified into four categories of custodial credit risk: Category 1 - Cash that is insured (e.g., Federal Deposit Insurance) or collateralized with securities held by the School District or by the School District's agent in the School District's name. Category 2 - Cash collateralized with securities held by the pledging financial institution's trust department or agent in the School District's name. Category 3 - Cash collateralized with securities held by the pledging financial institution, or by its trust department or agent but not in the School District's name. Category 4 - Uncollateralized. The School District's deposits are classified by custodial credit risk category at June 30, 2006, as follows: Custodial Credit Risk Category Bank Balance 1 $ 362,678 2 15,473,801 3 20,136,621 4 0 Total $ 35,973,100 - 27 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 3: DEPOSITS AND INVESTMENTS At June 30, 2006, the carrying amount of deposits for AETC, the discretely presented component unit, was $3,374,108 and the bank balance was $3,508,164. Of the bank balance, $3,305,738 was uninsured and uncollateralized. CATEGORIZATION OF INVESTMENTS Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of a failure ofthe counterparty to a transaction, the School District will not be able to recover the value ofthe investment or collateral securities that are in the possession of an outside party. The School District's policy for managing custodial credit risk for investments specifies the School System as purchaser or owner. Investments are classified as to custodial credit risk by the categories described below: Category 1 - Insured or registered, or securities held by the School District or the School District's agent in the School District's name. Category 2 - Uninsured or unregistered, with securities held by the counterparty's trust department or agent in the School District's name. Category 3 - Uninsured or unregistered, with securities held by the counterparty's trust department or agent, but not in the School District's name. Funds invested in U. S. Treasury Money Market Mutual Funds (open-end mutual funds) are not required to be classified by categories of custodial credit risk. At June 30, 2006, the carrying value ofthe School District's investments was $121,230,596 which is materially the same as fair value. Fair value is based on quoted market prices, unless otherwise noted. The investments are classified as to custodial credit risk categories as follows: Type oflnvestment Risk Categories 2 3 Carrying Amount Fair Value Debt Securities U. S. Agencies Repurchase Agreements $ 78,551,857 $ 15,600,000 0 $ 0 $ 78,551,857 $ 78,551,857 15,600,000 15,600,000 $ 94151 857 $ $ 0 Other Investments U.S. Treasury Money Market Mutual Funds (Open-End) 27,078,739 27,078,739 Total Investments $ 121 230 596 $ 121,230,596 Interest Rate Risk Interest rate risk is the risk that changes in interest rates of debt investment will adversely affect the fair value ofan investment. The School District does not have a formal policy for managing interest rate risk. Investments are classified as to investment maturity as follows: - 28 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 3: DEPOSITS AND INVESTMENTS Investment Type Debt Securities U.S. Agencies Repurchase Agreements Total by Maturity Fair Value Investment Maturity Less Than 1 Year $ 78,551,857 $ 78,551,857 15,600,000 15,600,000 $ 94,151,857 $ 94,151,857 Credit Quality Risk Credit quality risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The School District's policy for managing credit quality risk related to certificates of deposit and repurchase agreements states such investments will only be purchased through banks having at least an AA rating. The School District does not have a formal policy for other investments not mentioned in previous sentence. Investments are classified as to quality ratings as follows: Rated Debt Investments Fair Value Quality Ratings AAA Al U.S. Agencies Repurchase Agreements - Underlying: U. S. Agency Securities $ 78,551,857 $ 78,551,857 15,600,000 $ 15,600,000 Totals by Quality Ratings $ 94,151,857 $ 78,551,857 $ 15i!:iQ02000 Concentration of Credit Risk Concentration of credit risk is the risk of loss that may be attributed to the magnitude of a government's investment in a single issuer. The School System does have a policy concerning the composition of its investment portfolio and is in compliance with its investment policy. The investment policy establishes the following eligible investments individually are not to exceed the following composition in the portfolios of the General and SPLOST funds: U. S. Treasury Bills Federal Agencies (No more than 40% per issuer) Certificates of Deposit Commercial Paper Repurchase Agreements State of Georgia - Georgia Fund 1 Bank Special Purpose Money Market Funds 100% 65% 10% 20% 30% 25% 25% - 29 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 3: DEPOSITS AND INVESTMENTS Investments in any one issuer that represents 5% or more ofthe total investments were as follows as of June 30, 2006: Issuer Investment Type % of Total Investments Federal National Mortgage Association Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal Agency Security Federal Agency Security Federal Agency Security 46.64% 26.61% 10.76% Note 4: NON-MONETARY TRANSACTIONS The School District receives food commodities from the United States Department of Agriculture (USDA) for school breakfast and lunch programs. These commodities are recorded at their Federally assigned value. See Note 2 - Inventories Note 5: CAPITAL ASSETS The following is a summary of changes in the Capital Assets during the fiscal year: - 30 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 5: CAPITAL ASSETS Beginning Balance as Restated (Note 2) Governmental Activities: Land Construction in Progress Construction in Progress Charter Schools $ 24,609,538 84,925,320 Total Non-Depreciable Assets $ I09,534,858 Additions Retirements/ Reclassifications $ $ 63,125,825 489,083 $ 63,614,908 $ -253,139 -253,139 Transfers $ -112,219,163 $ -112,219,163 Ending Balance $ 24,356,399 35,831,982 489,083 $ 60,677,464 Buildings Building Improvements Land Improvements Equipment Furniture and Fixtures Vehicles Charter Schools $ 780,849,879 $ 37,792,658 6,091,873 89,447,435 28,197,607 22,729,857 1,636,809 3,208,565 $ 2,564,308 2,395,501 1,340,539 394 614 Total Depreciable Assets $ 966,746,118 $ 9,903,527 $ Totals at Historical Cost $ 1,076,280,976 $ 73,518,435 $ Less: Accumulated Depreciation Buildings $ 159,454,634 $ 16,291,953 $ Building Improvements 14,374,744 3,487,414 Land Improvements 288,923 517,882 Equipment 51,453,295 15,898,187 Furniture and Fixtures 6,896,166 2,936,435 Vehicles 19,135,575 1,745,137 Charter Schools 401,671 298,656 Total Accumulated Depreciation $ 252,005,008 $ 41,175,664 $ Governmental Activities Capital Assets, Net $ 824 215,268 $ 32,342,111 $ Business-Type Activities: Equipment $ 11,846,600 $ 17,905 $ Less: Accumulated Depreciation Equipment 4,711,537 506,954 Business-Type Activities Capital Assets, Net $ 1,135,063 $ -482,049 $ -5,969,971 $ 96,694,120 $ 874,782,593 3,876,526 5,700,893 49,934,385 4,483,467 10,575,340 689,697 1,626,605 94,159,238 -274,522 2,677,112 30,600,197 24,070,396 -12 641 2,018,782 -1,690,911 $ 111,182,197 $1,086,140,931 -1,944,050 $ -1,036,966 $ 1,146,818,395 -1,213,185 $ 54,024 -62,995 -96,083 0 $ 174,533,402 17,916,182 806,805 67,288,487 9,736,518 20,880,712 700,327 -1,318,239 $ 0 $ 291,862,433 -625,811 $ -1,036,266 $ 854,255,262 -2,069,964 $ 1,036,966 $ 10,831,507 -163,372 5,055,119 -1,906,592 $ 1,036,266 $ 5,116,388 Capital assets being acquired under capital leases as of June 30, 2006, are as follows: Equipment Vehicles Less: Accumulated Depreciation Governmental Funds $ 4,056,106 163,845 421.995 $ 3,797.956 - 31 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 5: CAPITAL ASSETS Current year depreciation expense by function is as follows: Instruction Pupil Services Improvement of Instructional Services Educational Media Services General Administration Business Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services $ 30,165,566 21,922 7,674 6,944 9,149,210 13,761 97,788 1,645,457 67,342 Total $ 41,175,664 Depreciation expense was charged to business-type activities as follows: Food Service $===='=5==06-,9~5==4 Component Unit Fixed asset balances of AETC (component unit) as of June 30, 2006, are as follows: Equipment and Furniture Equipment Purchased under Capital Leases Leasehold Improvements $ 1,969,898 186,416 17,435 $ 2,173,749 Less: Accumulated Depreciation -1,725,954 Net Fixed Assets $ 447,795 Depreciation expense of AETC for the year ended June 30, 2006 was $134,901. As part ofthe operation agreement with the School System for the radio and television stations, all real and personal property comprising the physical facilities ofthe stations remains the property of the School System. The School System is responsible for routine maintenance and insurance ofthe facilities. AETC, in tum, leases the facilities from the School System for $10 a year. Note 6: RESTRICTED ASSETS Special Purpose Local Option Sales Tax (SPLOST) is reported as restricted assets in the Statement ofNet Assets because its use is limited by statutory provisions. Restricted assets at June 30, 2006, were as follows: - 32 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 6: RESTRICTED ASSETS District-wide Capital Projects SPLOST Restricted Cash and Cash Equivalents: Capital Acquisitions Restricted Investments: Capital Acquisitions $ 4,761,945 $ 17,601,097 Note 7: INTERFUND ASSETS AND LIABILITIES Due to and due from other funds are recorded for interfund receivables and payables which arise from interfund transactions. Interfund balances at June 30, 2006, consisted of the following: Due From Other Funds Due To Other Funds General Fund District-wide Capital Projects Title I Fund Nonmajor Governmental Funds Business-Type Activities $ 36,913,318 8,975,635 $ 3,951,658 9,789,873 32,147,421 $ 45.888.953 $ 45.888,952 Transfers are used to provide funding ofoperations ofvarious funds. The Balance ofBusiness-Type Activities is not expected to be repaid within 1 year. Note 8: INTERFUND TRANSFERS Interfund transfers for the year ended June 30, 2006, consisted of the following: Transfer to Transfers From General Governmental Fund Activities Nonmajor Governmental Funds Business-Type Activities $ 19,874,172 $ 1,036,966 Total $ 19,874.172 $ 1,036.966 - 33 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 8: INTERFUND TRANSFERS Transfers are used to (1) transfer State revenue and allocable property taxes to the individual charter schools to fund their operations and (2) move capital assets purchased with governmental activities to business-type activities for use by School Food Services. Note 9: RISK MANAGEMENT The School District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors or omissions; job related illness or injuries to employees and acts of God. The School District has obtained commercial insurance for risk ofloss associated with torts, assets, errors or omissions and acts ofGod. However, the errors or omissions policy excludes coverage for sexual harassment and discrimination. The School District has neither significantly reduced coverage for these risks nor incurred losses (settlements) which exceeded the School District's insurance coverage in any of the past three years. The School District has established a limited risk management program for workers' compensation claims. The School District accounts for claims within the General Fund with expenses/expenditures and liability being reported when it is probable that a loss has occurred, and the amount ofthat loss can be reasonably estimated. Changes in the workers' compensation claims liability during the last two fiscal years are as follows: 2005 2006 Beginning of Year Liability Claims and Changes in Estimates $ 2,950,438 $ 2,976,551 $ $ 2,943,922 $ 5,580,917 $ Claims Paid EndofYear Liability 2,983,067 $ 2,674,744 $ 2,943,922 5,850,095 The School District has purchased surety bonds to provide additional insurance coverage as follows: Position Covered Superintendent Employee Theft Employee Forgery and Alteration Amount $ 50,000 $ 2,500,000 $ 50,000 Note 10: LONG-TERM DEBT CAPITAL LEASES The Atlanta Independent School System has entered into various lease agreements as lessee for purchases of equipment. These lease agreements qualify as capital leases for accounting purposes and, therefore, have been recorded at the present value ofthe future minimum lease payments as of the date of their inception. - 34 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 10: LONG-TERM DEBT COMPENSATED ABSENCES Compensated absences represent obligations of the School District relating to employees' rights to receive compensation for future absences based upon service already rendered. This obligation relates only to vesting accumulating leave in which payment is probable and can be reasonably estimated. Typically, the General Fund is the fund used to liquidate this long-term debt. The School District uses the vesting method to compute compensated absences. INTERGOVERNMENTAL AGREEMENT Over the years, the City of Atlanta has issued various annual general obligation bonds, general obligation refundtng bonds on behalf of the School System. During the current fiscal year, $4,000,000 was issued on behalf of the School System. The Intergovernmental Agreement as of June 30, 2006, amounted to $18.7 million. The debt service for the bonds has been funded through the School System's bonded debt portion of the annual tax levy. The bonded debt portion of property taxes collected by the City on behalfofthe School System are retained by the City and used to pay the annual debt service on the outstanding bonds. As of June 30, 2006, approximately $134 thousand is available in the bond sinking fund held by the City. GENERAL OBLIGATION DEBT OUTSTANDING The changes in Long-Term Debt during the fiscal year ended June 30, 2006, were as follows: Governmental Activities Capital Leases Compensated Workers Intergovernmental Absences Com12ensation Agreements Total Balance July 1, 2005 $ 6,862,557 $ 6,115,629 $ 2,943,922 $ 15,922,108 Retroactive Restatement of Prior Year Balances $ 15,347,000 15,347,000 Balance July 1, 2005 Restated $ 6,862,557 $ 6,115,629 $ 2,943,922 $ 15,347,000 $31,269,108 Additions Annual Leave Earned Workers Compensation Intergovernmental Agreements 2,473,228 5,580,917 3,907,884 2,473,228 5,580,917 3,907,884 Deductions Annual Leave Utilized Debt Retired Intergovernmental Agreements 2,642,606 2,344,753 2,674,744 557,750 2,344,753 5,317,350 557,750 Balance June 30, 2006 $ 4,212,251 $ 6,244,104 $ 5,850,025 $ 18,622,134 $35,011,284 Portion of Long-Term Debt Due within One Year $ 1,581,703 $ 2,394,265 $ 1,317,896 $ 676,875 $ 5,970,739 At June 30, 2006, payments due by fiscal year which includes principal and interest for these items are as follows: - 35 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 10: LONG-TERM DEBT Fiscal Year Ended June 30 2007 2008 2009 2010 2011 2012 - 2016 2017 - 2021 2022 - 2026 Total Principal and Interest CaQital Leases Princi11al Interest Intergovernmental Agreements Citt of Atlanta Princi11al Interest $ 1,581,703 $ 1,290,097 1,348,151 185,905 $ 118,721 60,667 676,875 $ 696,875 781,750 904,375 892,875 4,751,625 5,521,250 4,471,509 781,763 756,535 729,448 697,338 662,666 2,751,465 1,673,189 381,447 $ 4,212,251 $ 365,223 $ 18,621,134 $ 8,433,851 Note: Charter Schools' Notes Payable of $209,220 is not included in the above schedules. These balances have been determined to be immaterial for Note disclosure. Note 11: ON-BEHALF PAYMENTS The School District has recognized revenues and costs in the amount of $6,821,545 for health insurance and retirement contributions paid on the School District's behalf by the following State Agencies. Georgia Department of Education Paid to the Georgia Department of Community Health For Health Insurance of Non-Certified Personnel In the amount of $6,821,545 Note 12: SPECIAL ITEMS In fiscal year 2006, Atlanta Independent School System sold several pieces ofCapital Assets. A net gain of $2,746,146 from the sale is reported as a special item on the Statement of Activities. Note 13: SIGNIFICANT COMMITMENTS The following is an analysis ofsignificant outstanding construction or renovation contracts executed by the School District as of June 30, 2006: - 36 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 13: SIGNIFICANT COMMITMENTS Project Unearned Executed Contracts Long Middle School Arkwright/Ragsdale Elementary Carver High School Sutton Middle School Washington High School $ 6,735,507 2,709,970 6,138,783 1,004,928 251,791 $ 16,840,979 The amounts described in this note are not reflected in the basic financial statements. Note 14: SIGNIFICANT CONTINGENT LIABILITIES Amounts received or receivable principally from the Federal government are subject to audit and review by grantor agencies. This could result in requests for reimbursement to the grantor agency for any costs which are disallowed under grant terms. The School District believes that such disallowances, if any, will be immaterial to its overall financial position. The School District is a defendant in various legal proceedings pertaining to matters incidental to the performance ofroutine School District operations. The ultimate disposition ofthese proceedings is not presently determinable, but is not believed to be material to the basic financial statements. In 1997, the U.S. Federal Communications Commission adopted the Schools and Libraries Support Mechanism ofthe Universal Service Fund (USF) (referred to herein as "E-rate program"). Under the E-rate program, eligible schools can receive discounts from the USF on eligible telecommunications equipment and services. Amounts provided by USF ranges from 20 to 90 percent ofthe cost ofthe equipment or services, based on the economic need within the demographics of a particular school system. The program is administered by the Universal Service Administrative Company. During fiscal years 1998, and through 2001, the School System applied for approximately $82.0 million from the USF. According to USF records, $58.8 million ofE-rate funds were disbursed on behalfofthe School System with the large portion ofthe funds remitted to and disbursed directly by vendors under contract with the School System. The School System has been unable to provide documentation as to the nature of items purchased directly by the outside vendors with the E-rate funds. In the absence of documentation to support the nature of the items purchased, the School System is unable to substantiate the propriety of items purchased in accordance with USF rules and regulations. Purchases outside the guidelines of the E-rate program could result in the School System or its vendors having to return funds to the E-rate program. The possible outcome ofthese matters is uncertain at this time. Accordingly, no provision for any liability has been made in the financial statements for possible refunds of E-rate funds. - 37 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 14: SIGNIFICANT CONTINGENT LIABILITIES The School System is currently in discussion with the Georgia Department of Community Health relating to the cost of group insurance which may result in an additional liability. Note 15: SUBSEQUENT EVENTS In October, 2006, the School System transferred $11.7 million from the General Fund to the Food Service - Nutrition Fund to reduce the accumulated fund deficit. As of November 2006, the remaining accumulated deficit fund balance for the Nutrition Fund was $14.1 million. A plan has been prepared to eliminate the remaining fund deficit over a three year period, beginning with fiscal year 2007. On March 20, 2007, the voters of Fulton County voted in favor of a Special Purpose Local Option Sales Tax Referendum. The imposition ofthe tax approved by the voters, as stated on the Official Ballot of Fulton County, is as follows: "Shall the special one percent sales and use tax for educational purposes currently imposed in Fulton County be reimposed on July 1, 2007, upon the expiration ofthe current version, for not longer than 20 consecutive calendar quarters, to raise not more than $1,445,206,111.85 to be used for the following educational purposes: ...For the Atlanta Independent School System: For capital outlay projects, including new schools, land, additions, renovations, equipment, and technology systems, at a maximum cost of$552,357,775.95 for the Atlanta Independent School System as described in the Notice of Election." On March 20, 2007, the voters ofDeKalb County voted in favor ofa Special Purpose Local Option Sales Tax Referendum. The imposition ofthe tax approved by the voters, as stated on the Official Ballot of DeKalb County, is as follows: "Shall a special one percent sales and use tax for educational purposes continue to be imposed in DeKalb County for not longer than 20 quarters, beginning July 1, 2007, to raise not more than $645,000,000 in the aggregate for the purpose of (A) acquiring new sites for the construction ofnew schools, support facilities and athletic facilities and the expansion of existing schools and support facilities; (B) developing sites for constructing and equipping new schools, support facilities and athletic facilities; (C) making additions to, acquiring or renovating and equipping existing schools, support facilities and athletic facilities, and demolishing portions ofexisting structures in connection therewith; (D) making system-wide renovations, additions, and improvements to bus and parent pick-up driveways and facility parking lots and purchasing school buses; (E) making existing lease/purchase payments with respect to the acquisition of new and existing school and support facilities; and (F) modernizing technology and making system-wide technology improvements; not to exceed... $20,511,000 for the Atlanta Independent School System, all as more fully described in the Notice of Election." - 38 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 16: RETIREMENT PLANS TEACHERS RETIREMENT SYSTEM OF GEORGIA (TRS) Plan Description Substantially all teachers, administrative and clerical personnel employed by local school systems of the State of Georgia are covered by the Teachers Retirement System of Georgia (TRS), which is a cost-sharing multiple employer public employee retirement system sponsored by the State of Georgia. Most School Systems' employees participate in TRS. TRS provides service retirement, disability retirement and survivor's benefits for its members. A member is eligible for service retirement after 30 years of creditable service, regardless of age, or after 10 years ofservice and attainment ofage 60. A member is eligible for early retirement after 25 years ofcreditable service. Early retirement benefits are reduced by the lesser of 1/12 of7% ofeach month the member is below age 60, or by 7% ofeach year or fraction thereofby which the member has less than 30 years of service. Normal retirement benefits paid to members are equal to 2% of the average of the member's two consecutive highest paid years ofservice multiplied by the number ofyears ofcreditable service up to 40 years. The normal retirement pension is payable monthly for life. Options are available for distribution of the member's monthly pension at a reduced rate to a designated beneficiary on the member's death. Retirement benefits also include death and disability benefits whereby the disabled member or surviving spouse is entitled to receive annually an amount equal to the member's service retirement benefit or disability retirement, whichever is greater. The benefit is based on member's creditable service (minimum of 10 years) and compensation up to the date of death. TRS issues a publicly available financial report that includes financial statements and required supplementary information for the Plan. That report may be obtained by calling 404-352-6500, or by accessing their website at www.trsga.com. Funding Policy Employees of the School System who are covered by TRS are required to pay 5% of their gross earnings to TRS. The School System makes monthly employer contributions to TRS at rates adopted by the TRS Board of Trustees as advised by their independent actuary. The employer contribution rate is 9.24% at June 30, 2006. Total actual and required contributions were as follows: School System Employees 2006 $27,154,487 14,691,312 $41,845.799 2005 $26,202,224 14,180,084 $40,382,308 2004 $27,687,064 14,990,114 $42,677,178 - 39 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT"K" Note 16: RETIREMENT PLANS CITY OF ATLANTA GENERAL EMPLOYEES PENSION PLAN Plan Description All permanent employees of the School System who are not covered under the TRS are eligible to participate in the City ofAtlanta General Employees' Pension Plan (the "Plan"). In addition, certain School System employees employed prior to July 1, 1979, also participate in the Plan. The Plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. The Plan is an agent multiple-employer pension plan administered by a Board ofTrustees, which includes the Mayor ofthe City of Atlanta or designee, the City's ChiefFinancial Officer, one member ofCity Council, one member ofthe Atlanta Board of Education, (the "Board"), one member elected by eligible employees of the City, one member elected by eligible employees ofthe School System, one member elected by retired employees ofthe School System and one member elected by retired employees of the City. The Board of Trustees has the authority to establish and amend the benefit provisions ofthe Plan. On December 12, 2005, the Board adopted the following changes to the Plan: 1. 10 year vesting 2. 2.5% benefit multiplier (capped at 80%) 3. Unreduced retirement at 30 years of service regardless of age The Plan issues a publicly available financial report that includes financial statements and required supplementary information for the Plan. The report may be obtained by writing or by calling the Plan at: City ofAtlanta General Employees Pension Plan 68 Mitchell Street Atlanta, GA Telephone Number: (404) 330-6000 The Plan provides retirement benefits that, initially, are 2% of the employee's highest average monthly base compensation over any 36-month period. A participant may retire at age 65 or, after 15 years ofservice, at age 60. Cost-of-living increases are awarded annually, up to a 3% maximum increase. Partial vesting percentages based on years of creditable service and provisions for early retirement, are included in the Plan. Benefits also may be payable at termination, death, or disability. The School System's membership in the Plan as of January 1, 2006, is as follows: -40- ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 16: RETIREMENT PLANS Active Employees Inactive Members Retirees and Beneficiaries 974 154 2,546 Total membership Method Used to Value Investments Investments are stated at fair value. Fair value ofPlan assets at January 1, 2006, was $146,082,584. Funding Policy and Annual Pension Cost The School System's funding policy is to contribute a percentage of covered employee payroll as developed in the actuarial valuation for the Plan. Obligations to contribute to the Plan are established by the Board, subject to minimum financing standards established by the State of Georgia. Active participants are required to contribute 7% ofpay (8% ifparticipant has a covered beneficiary or is married). The School System's contribution percentage is the actuarial determined amount necessary to fund Plan benefits after consideration of employee contributions. The actuarial determined contribution amount is the sum of the annual normal cost (determined under the entry age normal actuarial cost method) and the amortization of the unfunded actuarial accrued liability as a level percentage of future payrolls (over 40 years from January 1, 1979). The Plan's annual pension cost for the current year, based on actuarial valuations performed as of January 1, 2006 and related information for the Plan is as follows: - 41 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 16: RETIREMENT PLANS Contribution rates as a percent of covered payroll: Employee Employer 7.0% or8.0% 8.0% Annual pension cost Employer contributions made $47,925,431 $46,898,770 Actuarial valuation date 1/1/06 Actuarial cost method Entry age normal Amortization method Level% of pay, closed Actuarial assumptions: Investment rate of return Projected salary increases: Inflation Merit or seniority and productivity Post retirement benefit increases 8.0% per year 3.0% per year 4.5% per year NIA The asset valuation method used is the actuarial value from the prior year plus net new money plus 20% of the asset appreciation/(depreciation) for the current year and each of the prior four years. Six Year Trend Information as of January 1 is as follows: Year Annual Pension Cost {APC) %of APC Contributed Net Pension Obligation 2001 2002 2003 2004 2005 2006 $35,168,700 $36,321,730 $36,862,022 $39,153,620 $45,245,762 $47,925,431 100% $ 100% $ 100% $ 100% $ 100% $ 100% $ - 42 - ATLANTA INDEPENDENT SCHOOL SYSTEM NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2006 EXHIBIT "K" Note 16: RETIREMENT PLANS Actuarial Valuation Date 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 Actuarial Value of Assets* (a) $ 120,809,700 $ 117,546,260 $ 109,367,500 $ 107,323,985 $ 102,301,954 $ 116,866,067 Actuarial Accrued Liability (AAL) Entry Age (b) $ 566,340,700 $ 563,396,789 $ 579,890,481 $ 581,451,634 $ 580,470,790 $ 600,055,443 Unfunded AAL (UAAL) (b-a) $ 445,531,000 $ 445,850,529 $ 470,522,981 $ 474,127,649 $ 478,168,836 $ 483,189,376 Funded Ratio (alb) 21.3% 20.9% 18.9% 18.5% 17.6% 19.5% Covered Payroll (c) $ 39,299,400 $ 40,666,479 $ 47,042,418 $ 45,898,463 $ 40,366,756 $ 26,185,568 UAAL as a Percentage of Covered Payroll ((b-a)/c) 1133.7% 1096.4% 1000.3% 1033.0% 1184.6% 1845.3% -43 - (This page left intentionally blank) ATLANTA INDEPENDENT SCHOOL SYSTEM GENERAL FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL YEAR ENDED JUNE 30, 2006 SCHEDULE "1" REVENUES Property Taxes Sales Taxes State Funds Federal Funds Charges for Services Investment Earnings Miscellaneous Total Revenues EXPENDITURES Current Instruction Support Services Pupil Services Improvement of Instructional Services Educational Media Services General Administration School Administration Business Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services Other Support Services Capital Outlay Debt Service Total Expenditures Excess of Revenues over (under) Expenditures OTHER FINANCING SOURCES {USES) Other Sources Other Uses Total Other Financing Sources (Uses) SPECIAL ITEMS Proceeds from Sale of Capital Assets Net Change in Fund Balances Fund Balances - Beginning (Restated) Nonaeeroeriated Budgets Original (1 l Final (1) Actual Amounts (2) $ 382,400,000 $ 382,400,000 $ 369,492,143 14,729,136 126,687,000 126,687,000 133,943,879 2,750,000 2,750,000 3,870,754 2,097,124 7,023,909 6,850,000 6,850,000 5,596,862 $ 518,687,000 $ 518,687,000 $ 536,753,807 $ 349,501,440 $ 349,849,723 $ 299,139,936 19,320,681 2,712,643 8,977,086 7,135,576 27,434,089 8,690,636 59,657,289 14,360,215 28,992,115 19,429,918 2,776,325 9,043,190 7,394,635 27,536,160 11,225,717 60,523,571 14,940,367 31,723,671 20,900,486 18,111,955 10,815,062 8,121,238 34,842,924 11,397,140 58,605,254 16,466,753 26,046,658 301,334 1,806,527 4,958,625 $ 526,781,770 $ 534,443,277 $ 511,513,892 $ -8,094,770 $ -15,756,277 $ 25,239,915 $ 8,094,767 $ 8,094,767 $ 489,558 -19 874 172 $ 8 094 767 $ 8,094,767 $ -19,384,614 $ 0 $ 0 $ 2,803,684 $ -3 $ -7,661,510 $ 8,658,985 63,361,849 21,648,732 78,369,591 Fund Balances - Ending $ 63,361,846 $ 13,987,222 $ 87,028,576 Notes to the Schedule of Revenues. Expenditures and Changes in Fund Balances Budget and Actual (1) Original and Final Budget amounts do not include budgeted revenues or expenditures of the various principal accounts. (2) Property taxes and State fund revenues related to Charter Schools are not budgeted for, these amounts are shown as Other Uses (transfer) in the actual column. The accompanying schedule of revenues, expenditures and changes in fund balances budget and actual is presented on the modified accrual basis of accounting which is the basis of accounting used in the presentation of the fund financial statements. See notes to the basic financial statements. -45 - (This page left intentionally blank) ATLANTA INDEPENDENT SCHOOL SYSTEM TITLE I FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL YEAR ENDED JUNE 30, 2006 SCHEDULE "2" REVENUES Federal Funds EXPENDITURES Current Instruction Support Services Pupil Services Improvement of Instructional Services Educational Media Services General Administration School Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services Other Support Services Food Services Operation Capital Outlay Total Expenditures Net Change in Fund Balances Fund Balances - Beginning Nonaeeroeriated Budgets Original Final Actual Amounts $ 40,622,198 $ 48,138,909 $ 39,278,734 $ 37,276, 132 $ 43,678,806 $ 27,821,769 1,002,990 2,343,076 650 1,717,473 1,964,615 18,687 5,839 666,412 84,707 1,720 915,859 6,629,096 19,045 1,759,207 172,730 11,296 1,257,521 95,101 495,027 48,270 53 813 $ 40,622,198 $ 48,138,909 $ 39,278,734 $ 0 $ 0 $ 0 0 0 0 Fund Balances - Ending $========0$========0$=====0= The accompanying schedule of revenues, expenditures and changes in fund balances budget and actual is presented on the modified accrual basis of accounting which is the basis of accounting used in the presentation of the fund financial statements. See notes to the basic financial statements. -47 - ATLANTA INDEPENDENT SCHOOL SYSTEM COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS JUNE 30, 2006 ASSETS Cash and Cash Equivalents Accounts Receivable State Government Federal Government Other Due from Other Funds Total Assets LIABILITIES AND FUND BALANCES LIABILITIES Accounts Payable Salaries and Benefits Payable Due to Other Governments Total Liabilities FUND BALANCES Reserved for: Capital Projects Unreserved Designated for: Nonmajor Governmental Funds Undesignated Reported in: Nonmajor Governmental Funds Total Fund Balances Total Liabilities and Fund Balances Title II TitleVI-B Lottery Grants $ 192,465 $ 300,867 389,499 576,280 $ 183,884 $ 581,964 $ 877 147 $ ===18=3,=88=4 $ 119,832 $ 44,608 $ 1,152 296,761 316,444 182,463 165 371 516,095 269 $ 581,964 $ 877147 $ 183,884 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 581,964 $ 877147 $=====1=83=,8=8=4 See notes to the basic financial statements. -48- SCHEDULE "3" Special Revenue Funds Other Other Special Federal Funds Projects Charter Schools Total $ 2,736,796 $ 2,736,796 $ 186,203 $ 2,194,847 2,381,050 1,138,249 40,838 1,672,419 36,460 1,385,571 1,422,031 500 142 7,325,830 8,975,635 $ 1824594 $ 9,597,975 $ 4,122,367 $ 17,187,931 $ 549,519 $ 1,064,686 $ 1,131,990 $ 2,911,787 212,716 36,107 1,741 1,046,232 77 549 109 761 869,045 $ 839784 $ _ _1~ ,210,554 $ 1,133,731 $ 4,827,064 $ 134,290 $ 134,290 $ $- - - -984-,81-0 $ 984 810 $ 8,387,421 2,854,346 8,387,421 3,839,156 8,387A21 $ 2,988,636 $ 121360,867 $ 1,824,594 $ 9,597,975 $ 4,122,367 $ 17,187,931 -49- ATLANTA INDEPENDENT SCHOOL SYSTEM COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2006 REVENUES State Funds Federal Funds Other Funds Total Revenues EXPENDITURES Current Instruction Support Services Pupil Services Improvement of Instructional Services Educational Media Services General Administration School Administration Business Administration Maintenance and Operation of Plant Student Transportation Services Central Support Services Other Support Services Capital Outlay Debt Services Principal Interest Total Expenditures Excess of Revenues over (under) Expenditures OTHER FINANCING SOURCES (USES) Proceeds of Debt Transfers In Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning (Restated) Fund Balances - Ending Title II TitleVI-B Lottery Grants $ 997,978 $ $ 5,132,372 9,846,898 2,327,623 $ 5,132,372 $ 10,844,876 $ 2,327,623 $ 3,783,149 $ 3,164,719 $ 1,819,382 14,760 1,270,327 6,179,223 169,876 505,506 292,888 131 2,683 3,207 60,929 1,022,751 12,736 2,604 $ 5,132,372 $ 10,844,876 $ 2,327,623 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0 0 0 $ ====0 $ =====0 $=====0 See notes to the basic financial statements. - 50- SCHEDULE "4" Special Revenue Funds Other Federal Other Special Funds Projects Charter Schools Total $ 3,608,301 $ 6,933,902 $ 7,377,309 70,000 $ 959,798 6,858,119 2,553,254 23,386,377 9,411,373 $ 7,377,309 $ 10,536.420 $ 3,513,052 $ 39,731,652 $ 5,112,195 $ 3,686,220 $ 13,498,482 $ 31,064,147 244,887 1,832,495 1,000 506,613 2,220 50,794 113,960 55,298 1,336,549 1,407,464 1,371,501 87,653 993,934 104 1,230,137 195 18,840 1,509,274 40,901 83,887 3,009,496 478,191 466,965 1,323,852 33,994 317,901 883,697 6,535,069 5,114,753 1,492,351 5,180,629 568,527 1,460,899 1,326,176 2,303,682 37,396 413,010 2,506,931 51,042 93,860 51,042 93,860 $ 7,864,164 $ 11,697,169 $ 20,282,268 $ 58,148,472 $ -486,855 $ -1,160,749 $ -16,769,216 $ -18,416,820 $ 0 $ $ 30,000 $ 30,000 19,874,172 19,874,172 0 $ 19,904,172 $ 19,904,172 $ -486,855 $ -1,160,749 $ 3,134,956 $ 1,487,352 1,471,665 9,548,170 -146,320 10,873,515 $ 984,810 $ 8,387,421 $ 2,988,636 $ 12,360,867 - 51 - ATLANTA INDEPENDENT SCHOOL SYSTEM COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS-CHARTER SCHOOLS JUNE 30, 2006 ASSETS Cash and Cash Equivalents Accounts Receivable Other Total Assets LIABILITIES AND FUND BALANCES LIABILITIES Accounts Payable Salaries and Benefits Payable Total Liabilities FUND BALANCES Reserved for: Capital Projects Unreserved Undesignated Reported in: Nonmajor Governmental Funds Total Fund Balances Total Liabilities and Fund Balances School for Integrated Academics and Technologies at Georgia, Inc. KIPP West Atlanta Young Scholars Academy, Inc. Achieve Academy of Atlanta, Inc. $ 445,564 $ 474,854 $ 210,448 1 911 576,272 100,000 $ 447,475 $ 1,051,126 $ 310,448 ===== $ 114,964 $ 341,472 $ 29,018 1 741 $ 116,705 $ 341,472 $ 29,018 $ 113,290 $ 330,770 596,364 $ 281,430 $ 330,770 $ 709,654 $ 281,430 $ 447,475 $ 1,051,126 $ 310,448 ===== See notes to the basic financial statements. - 52 - SCHEDULE "5" Special Revenue Funds University Community Academy, Inc. Tech High School, Inc. Drew Charter School, Inc. Southeast Atlanta Charter Middle School, Inc. Neighborhood Charter School, Inc. Total $ 513,437 $ 78,844 $ 524,044 $ 97 025 19 267 461 480 $ 610,462 $ 98,111 $ 985,524 $ 268,758 $ 220,847 $ 2,736,796 129 616 1,385,571 268,758 $ 350,463 $ 4,122,367 ====== $ 204,060 $ 32,214 $ 308,490 $ $ 204,060 $ 32,214 $ 308,490 $ 15,322 $ 86,450 $ 15,322 $ - - - -86-,45-0 $ 1,131,990 1 741 1,133,731 $ 21,000 $ 134,290 $ 406,402 $ 65,897 $ 677,034 $ - - - - -253-,43-6 - - - -243-,01-3 2,854,346 $ 406,402 $ 65,897 $ 677,034 $ - - - - - - 253,436 $ 264,013 $ 2,988,636 $ 610,462 $ 98,111 $ 985,524 $ 268,758 $ 350,463 $ 4,122,367 ====== - 53 - ATLANTA INDEPENDENT SCHOOL SYSTEM COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS-CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2006 REVENUES Federal Funds Other Funds Total Revenues EXPENDITURES Current Instruction Support Services Improvement of Instructional Services Educational Media Services General Administration School Administration Business Administration Maintenance and Operation of Plant Central Support Services Other Support Services Capital Outlay Debt Services Principal Interest Total Expenditures Excess of Revenues over (under) Expenditures OTHER FINANCING SOURCES (USES) Proceeds of Debt Transfers In Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - Beginning (Restated) Fund Balances - Ending School for Integrated Academics and Technologies at Geor1:iia, Inc. KIPP West Atlanta Young Scholars Academ~. Inc. Achieve Academy of Atlanta, Inc. $ 336,946 $ 16,727 827,405 $ 232,475 $ 16 727 $ 1,164,351 $ 232,475 $ 611,648 $ 1,883,783 $ 1,323,765 38,840 5,585 36,420 230,558 29,579 28,971 33,994 5,342 2,523 71,241 285,820 46,423 489,083 17,107 21,869 30,264 $ 1,023,460 $ 2,520,794 $ 1,648,561 $ -1,006,733 $ -1,356,443 $ -1,416,086 $ 1,563,426 $ 1,945,882 $ 1,797,035 $ 1,563,426 $ 1,945,882 $ 1,797,035 $ 556,693 $ 589,439 $ 380,949 -225,923 120,215 -99,519 $ 330,770 $ 709,654 $ 281,430 See notes to the basic financial statements. - 54- SCHEDULE "6" Special Revenue Funds University Community Academy, Inc. Tech High School, Inc. Drew Charter School, Inc. Southeast Atlanta Charter Middle School, Inc. Neighborhood Charter School, Inc. Total $ 57,144 $ - - - - - 38,671 $ 1,039,316 $ _ _ _9_5~,8_1"'-5 $ 1,039,316 $ 460,980 $ 1,000 461,980 $ 104,728 34,695 $ 139 423 $ $ 959,798 362,965 2,553,254 362,965 $ 3,513,052 $ 1,682,901 $ 1,742,433 $ 3,958,049 $ 426,287 247,633 305,074 169,251 154,970 267,559 1,939,741 282,416 526,517 16,477 48,518 79,235 263,355 26,876 4,054 23,987 $ 2,754,931 $ 2,676,803 $ 6,733,599 $ $ -2,659,116 $ -1,637,487 $ -6,271,619 $ $ $ 3,112,035 $ 1,350,792 $ 6,819,659 $ 3,112,035 $ 1,350,792 $ 6,819,659 $ $ 452,919 $ -286,695 $ 548,040 $ -46 517 352,592 128,994 $ 406,402 $ 65,897 $ 677,034 $ 210,697 $ 2,061 23,612 32,225 22,144 38,269 32,885 5,500 671 368,064 $ -228,641 $ 2,085,206 $ 13,498,482 54,690 48,511 173,587 88,172 25,464 40,901 83,887 3,009,496 478,191 466,965 1,323,852 33,994 317,901 883,697 11,224 69,202 51,042 93,860 2,556,056 $ 20,282,268 -2,193,091 $ -16,769,216 30,000 452077 $ 482,077 $ 253,436 $ 0 $ 30,000 2,833,266 19,874,172 2,833,266 $ 19,904,172 640,175 $ 3,134,956 -376,162 -146,320 253,436 $ 264,013 $ 2,988,636 - 55- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF STATE REVENUE YEAR ENDED JUNE 30, 2006 SCHEDULE "7" AGENCY/FUNDING GRANTS Bright from the Start: Georgia Department of Early Care and Learning Pre-Kindergarten Program Education, Georgia Department of Quality Basic Education Direct Instructional Cost Kindergarten Program Kindergarten Program - Early Intervention Program Primary Grades (1-3) Program Primary Grades - Early Intervention (1-3) Program Upper Elementary Grades (4-5) Program Upper Elementary Grades - Early Intervention (4-5) Program Middle Grades (6-8) Program Middle School (6-8) Program High School General Education (9-12) Program Vocational Laboratory (9-12) Program Students with Disabilities Category I Category II Category Ill Category IV Category V Gifted Student - Category VI Remedial Education Program Alternative Education Program English Speakers of Other Languages (ESOL) Media Center Program 20 Days Additional Instruction Staff and Professional Development Indirect Cost Central Administration School Administration Facility Maintenance and Operations Categorical Grants Pupil Transportation Regular Bus Replacement Nursing Services Principal Supplements Mid-term Adjustment Hold-Harmless Food Services Vocational Education Austerity Reduction Other State Programs 4-8 Statewide After School Program Career, Technical and Agriculture Charter Schools Elementary School Foreign Languages Model Program Health Insurance K-8 Statewide Reading and Mathematics Program National Teacher Certification Preschool Handicapped Program Technology Career Education Health and Human Services, Georgia Department of Environment Protection Division Bus Emission Retrofit Governmental Fund T~E!es Other General Governmental Fund Funds BusinessType Activities Total $ 2,327,892 $ 2,327,892 $ 9,166,450 3,839,928 20,459,789 7,874,487 8,685,123 5,675,565 1,444,171 16,336,131 14,131,519 3,446,028 1,652,471 2,739,611 7,277,934 967,837 375,110 3,945,573 395,710 1,304,521 1,331,742 3,079,839 963,796 635,310 2,590,089 7,242,546 8,650,115 3,303,796 580,204 856,735 172,946 916,744 -12,919,486 6,821,545 9,166,450 3,839,928 20,459,789 7,874,487 8,685,123 5,675,565 1,444,171 16,336,131 14,131,519 3,446,028 1,652,471 2,739,611 7,277,934 967,837 375,110 3,945,573 395,710 1,304,521 1,331,742 3,079,839 963,796 635,310 2,590,089 7,242,546 8,650,115 $ 1,236,010 452,414 203,430 318,848 70,000 166,927 1,041,393 240,030 997,979 54,549 3,303,796 580,204 856,735 172,946 916,744 1,236,010 452,414 -12,919,486 203,430 318,848 70,000 166,927 6,821,545 1,041,393 240,030 997,979 54,549 1,060,440 1,060,440 See notes to the basic financial statements. $ 133,943,879 $ 6,933,902 $ 1.236,010 $ 142,113,791 -56- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF APPROVED LOCAL OPTION SALES TAX PROJECTS YEAR ENDED JUNE 30, 2006 SCHEDULE "8" PROJECT 1997 SPLOST DeKalb County Renovations, modifications, additions and equipment for the following facilities: Crim High School, Coan Middle School, Marshall Middle School, Burgess Elementary School, Drew Elementary School, East Lake Elementary School, Lin Elementary School, Peterson Elementary School, Toomer Elementary School and Whitefoord Elementary School. Fulton County New schools and facilities, school renovations and additions, building upgrades and critical infrastructure improvements, technology, lease purchase payments and land acquisition; and for the retirement of previously incurred debt. 2003 SPLOST DeKalb County Renovations, modifications, additions and equipment for the following facilities: Crim High School, Coan Middle School, Burgess/Peterson Elementary School, East Lake Elementary School, Lin Elementary School, Toomer Elementary School and Whitefoord Elementary School; and acquisition and installation of information systems, hardware and infrastructure at the above schools and related facilities. Fulton County New school construction, classroom additions, renovations, infrastructure improvements, security system improvements, technology improvements, land acquisition, site preparation, new staff development and instructional support facilities, new maintenance facility, new stadium, new school buses and new support vehicles. Original Estimated Cost (1) Current Estimated Costs (2) Amount Expended In Current Year (3) Amount Expended In Prior Years (3) Project Status (4) (4) (4) (4) $ 548,954,454 $ 547,973,546 $ 1,895,165 $ 532,848,307 Ongoing (4) (4) (4) (4) 502,893,616 450,311,822 63,581.671 293,100,895 Ongoing $ 1,051,848,070 $ 998,285,368 $ 65.476,836 $ 825,949,202 (1) The School District's original cost estimate as specified in the resolution calling for the imposition of the Local Option Sales Tax. (2) The School District's current estimate of total cost for the projects. Includes all cost from project inception to completion. (3) The voters of Fulton and DeKalb Counties approved the imposition of a 1% sales tax to fund the above projects and retire associated debt. Amounts expended for these projects may include sales tax proceeds, state, local property taxes and/or other funds over the life of the projects. (4) Atlanta Public Schools did not provide expenditures related to DeKalb Projects. Theses balances are included within the Fulton County SPLOST. See notes to the basic financial statements. - 57- (This page left intentionally blank) ATLANTA INDEPENDENT SCHOOL SYSTEM GENERAL FUND - QUALITY BASIC EDUCATION PROGRAM (QBE) ALLOTMENTS AND EXPENDITURES - BY PROGRAM YEAR ENDED JUNE 30, 2006 SCHEDULE "9" DESCRIPTION Direct Instructional Programs Kindergarten Program Kindergarten Program-Early Intervention Program Primary Grades (1-3) Program Primary Grades-Early Intervention (1-3) Program Upper Elementary Grades (4-5) Program Upper Elementary Grades-Early Intervention (4-5) Program Middle Grades (6-8) Program Middle School (6-8) Program High School General Education (9-12) Program Vocational Laboratory (9-12) Program Students with Disabilities Category I Category II Category Ill Category IV Gifted Student - Category VI Remedial Education Program Altemative Education Program English Speakers of Other Languages (ESOL) TOTAL DIRECT INSTRUCTIONAL PROGRAMS Media Center Program Staff and Professional Development Allotments From Georgia Department of Education {1} {2} Eligible QBE Pr29ram Costs Salaries OE!erations Total $ 15,283,380 $ 15,656,451 $ 6 $ 15,656,457 6,812,672 5,923,881 10,245 5,934,126 34,475,507 54,397,857 14,070,724 68,468,581 13,976,134 26,325,797 -10,309 26,315,488 14,718,474 17,118,602 2,848,076 19,966,678 9,974,348 2,400,191 27,936,892 24,014,533 5,949,244 22,128,115 6,661,964 792,360 2,225,461 2,239,396 8,329,492 35,781,838 36,865,540 5,247,875 39,236 28,274,895 2,268,335 3,544,397 117,155 5,741,150 743,985 917,314 3,416,943 1,172,799 4,558,323 710,688 713,757 40,091 543,465 7,518,161 126 644 8,329,492 36,954,637 41,423,863 5,958,563 39,236 28,988,652 2,268,335 3,544,397 117,155 5,781,241 1,287,450 8,435,475 3,543,587 $ 189,588,671 $ 250,710,743 $ 32,302,670 $ 283,013,413 5,250,767 1,088,119 7,931,408 3,116,696 602,107 741 085 8,533,515 3,857,781 TOTAL QBE FORMULA FUNDS $ 195,927,557 $ 261,758,847 $ 33,645,862 $ 295,404,709 (1) Comprised of State Funds plus Local Five Mill Share. (2) Allotments do not include the impact of the State budget austerity reduction. See notes to the basic financial statements. - 59- SECTION II FINDINGS AND QUESTIONED COSTS ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS ACCOUNTING CONTROLS (OVERALL) Inadequate Access Controls Reportable Condition Finding Control Number: FS-7611-06-01 Condition: This is a repeat finding (FS-7611-05-01 and FS-7611-04-01) from the years ended June 30, 2005, and June 30, 2004, respectively. The accounting procedures ofthe Atlanta Independent School System (APS) did not maintain adequate separation of duties in the Financial Accounting System. Criteria: Separation of duties involving key accounting functions, both manual and automated, is the basis for achieving an adequate system of internal control. Questioned Cost: NIA Information: Access controls in the Financial Accounting System do not prevent users from accessing accounting functions that are outside of their area of responsibility. Cause: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that restrict access to programs or data. Management has not limited the access rights ofusers of the Financial Accounting System. Effect: Errors and/or irregularities may not be detected in a timely manner. Recommendation: Management, specifically the Chieflnformation Officer (CIO), should ensure that the access controls in the accounting information system should complement the system ofinternal control by limiting an employee's access to only the accounting functions necessary for the performance of the employee's duties. BUDGET PREPARATION/EXECUTION Deficit Fund Balance Reportable Condition Finding Control Number: FS-7611-06-02 Condition: This is a repeat finding (FS-7611-05-02 and FS-7611-04-02) from the years ended June 30, 2005, and June 30, 2004, respectively. The Proprietary Fund - Food Service Fund ofthe Atlanta Independent School System (APS) reported a deficit fund balance. - 1- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS BUDGET PREPARATION/EXECUTION Deficit Fund Balance Reportable Condition Finding Control Number: FS-7611-06-02 Criteria: Chapter 25 Reportingfor L UAs with General Fund Deficit Balances of the Financial Management for Georgia Local Units of Administration states in part: "The seriousness of fund balance deficits cannot be overstated. The Georgia Department ofEducation requires those LUAs with deficit balances to meet certain reporting requirements". Questioned Cost: NIA Information: The Atlanta Independent School System's Proprietary Fund reported a deficit fund balance in the amount of $26,121,641. Cause: The Atlanta Independent School System (APS) was carrying a deficit from prior year and incurred expenditures in excess of revenues during the year under review in the Proprietary Fund. Effect: A financial statement irregularity in accordance with O.C.G.A. 20-2-67. Recommendation: The Atlanta Independent School System (APS) should establish policies and procedures designed to ensure that in future periods the School District does not report a deficit fund balance. CASH AND CASH EQUIVALENTS Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-03 Condition: This is a repeat finding (FS-7611-05-03 and FS-7611-04-03) from the years ended June 30, 2005, and June 30, 2004, respectively. The accounting procedures of the Atlanta Independent School System (APS) were insufficient to provide for adequate internal controls over cash and cash equivalents. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures. -2 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS CASH AND CASH EQUIVALENTS Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-03 O.C.G.A. 44-12-190 through 44-12-235 provide for procedures to be followed for disposition of unclaimed property. Outstanding checks to both individuals and vendors are defined by the Act as an example of the type of property to which this Act applies. Questioned Cost: NIA Information: The following deficiencies were identified: (1) Interfund cash balances related to the pooled cash account, included uncorrected errors/variances at year end. These accounts are not reconciled and cleared on a timely basis. Significant adjustments were required to adjust due to/from account balances. (2) Outstanding payroll checks over a year old, totaling $254,652 were not remitted to the Department of Revenue in accordance with O.C.G.A. 44-12, etal. (3) An audit adjustment was proposed and made in the amount of $759,217 to related capital projects funds. Cause: These deficiencies were a result of management's failure to ensure that internal controls were established, implemented and functioning. Effect: Errors and/or irregularities may not be detected in a timely manner. Recommendation: Management should revise and monitor controls to provide reasonable assurance that transactions are processed according to established procedures. -3- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS INVENTORIES Inadequate Accounting Procedures Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-04 Condition: This is a repeat finding (FS-7611-04-04) from the year ended June 30, 2004. Accounting procedures of the Atlanta Independent School System (APS) were insufficient to provide adequate control over food service and supply inventories. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures and subsidiary detailed records are maintained and reconciled in a timely manner. Questioned Cost: NIA Information: The following deficiencies were identified: (1) Subsidiary detailed records supporting Food Inventories did not agree to amounts reflected in the general ledger. (2) Adjustments were proposed and made in the amount of $707,558 (netted) to expense the School Food Fund Inventory balances for both purchased food and donated commodities to ensure these balances were materially correct for financial reporting. (3) Adjustments were proposed and made to the general ledger at closing to correct year end balances for General Fund consumable supplies inventories. These adjustments were required due to lack of controls over accounting and reconciliation of inventory balances. Cause: These deficiencies occurred because management failed to ensure that adequate accounting procedures and appropriately trained staffwere in place to manage inventories and its subsidiary reports. Effect: Errors and/or irregularities may not be detected in a timely manner. -4- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS INVENTORIES Inadequate Accounting Procedures Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-04 Recommendation: The Atlanta Independent School System (APS) should establish accounting procedures to ensure that inventories are accurately reported within the basic financial statements and subsidiary detail records should be maintained which support financial statement amounts. REVENUES/RECEIVABLES/RECEIPTS Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-05 Condition: This is a repeat finding (FS-7611-05-04 and FS-7611-04-05) from the years ended June 30, 2005, and June 30, 2004, respectively. The accounting procedures of the Atlanta Independent School System (APS) were insufficient to ensure proper accounting and reporting for revenues, receivables and receipts activities. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures. Questioned Cost: NIA Information: A review of revenues and receivables revealed the Atlanta Independent School System (APS) did not have proper internal controls to detect significant errors in a timely manner. Numerous audit adjustments were proposed and made to adjust general ledger balances for both Accounts Receivables and Revenue accounts to ensure these balances were materially correct for financial reporting. Cause: These deficiencies were a result ofmanagement's failure to ensure adequate accounting policies and procedures were in place to properly account for revenues, receivables and receipts. Effect: Errors and/or irregularities may not be detected in a timely manner. -5- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS REVENUES/RECEIVABLES/RECEIPTS Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-05 Recommendation: The Atlanta Independent School System (APS) should establish accounting procedures adequate to ensure grant revenues and related receivables are accurately reported within the financial statements and subsidiary detail records should be maintained to ensure proper reporting to Georgia Department of Education and other grantors as required. CASH AND CASH EQUIVALENTS EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Internal Controls over School Activity Accounts Reportable Condition Finding Control Number: FS-7611-06-06 Condition: The accounting procedures ofthe Atlanta Independent School System (APS) were insufficient to provide for adequate internal controls over the school activity accounts. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures and provide assurance ofproper separation ofduties, which would limit any one individual's access to both physical assets and the related accounting records. Questioned Cost: NIA Information: Tests performed on 48 expenditure transactions revealed two invoices could not be located and two payments did not match the underlying invoices. Cause: The deficiencies were a result of school level administrators lack of compliance with established policies and procedures in processing and paying invoices. Management must ensure that established internal controls are implemented and functioning at the school level. Effect: Errors and/or irregularities may not be detected in a timely manner. -6 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS CASH AND CASH EQUIVALENTS EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Internal Controls over School Activity Accounts Reportable Condition Finding Control Number: PS-7611-06-06 Recommendation: Management should revise and monitor controls to provide reasonable assurance that transactions are processed according to established procedures and supporting documentation is available for review. PROCUREMENT EXPENDITURES/LIABILITIES/DISBURSEMENTS Undocumented/Improper Debit/Procurement Card Expenditures Reportable Condition Finding Control Number: PS-7611-06-07 Condition: School District personnel did not ensure that purchases made with the Board's debit/procurement card were properly documented and/or authorized. Criteria: The School District's management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures. Questioned Cost: NIA Information: Weaknesses in internal controls related to the debit/procurement card were noted: Payments were made for undocumented charges. Numerous transactions were determined to be splitting of payments to circumvent the single transaction limit. Several employee agreements requested could not be located. In one instance, the agreement was signed just prior to the date ofthe audit test. Cause: These deficiencies were a result of management's failure to ensure that internal controls were established, implemented and functioning with regard to the debit/procurement cards. Effect: Errors and/or irregularities may not be detected in a timely manner. -7- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS PROCUREMENT EXPENDITURES/LIABILITIES/DISBURSEMENTS Undocumented/Improper Debit/Procurement Card Expenditures Reportable Condition Finding Control Number: FS-7611-06-07 Recommendation: The School District should establish policies and procedures to monitor procurement card (P-Card) transactions and to ensure that expenditures are utilized only for educational purposes, and properly documented. In addition, the School District should review all P-Card transactions and identify any questioned costs and determine the amount of reimbursement due from individuals involved and take any other action deemed appropriate. EXPENDITURES/PAYABLES/DISBURSEMENTS GENERAL LEDGER Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-08 Condition: This is a repeat finding (FS-7611-05-05 and FS-7611-04-06) from the years ended June 30, 2005, and June 30, 2004, respectively. The accounting procedures of the Atlanta Independent School System (APS) were insufficient to ensure proper accounting and reporting for expenditures, payables and disbursements activity. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures. Questioned Cost: NIA Information: A review of expenditures and payables revealed the Atlanta Independent School System (APS) did not have proper internal controls to detect significant errors in a timely manner. Numerous audit adjustments were proposed and made to adjust general ledger balances for both Accounts Payables and Expenditures accounts to ensure these balances were materially correct for financial reporting. - 8- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS EXPENDITURES/PAYABLES/DISBURSEMENTS GENERAL LEDGER Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-08 Cause: These deficiencies were a result of management's failure to ensure adequate accounting policies and procedures were in place to properly account for expenditures, payables and disbursements. Effect: Errors and/or irregularities may not be detected in a timely manner. Recommendation: The Atlanta Independent School System (APS) should establish accounting procedures necessary to ensure that expenditures and related payables are accurately reported within the financial statements and subsidiary detail records should be maintained to ensure proper reporting to Georgia Department of Education and other grantors as required. EMPLOYEE COMPENSATION GENERAL LEDGER Inaccurate Reporting of Compensation Nonmaterial Noncompliance Finding Control Number: FS-7611-06-09 Condition: The detailed listing of salary and travel made to employees as submitted to the Georgia Department of Audits and Accounts was not reconciled to the general ledger as presented for audit. Criteria: O.C.G.A. 50-6-27 states in part: "Each ... local board of education is required and directed to submit to the state auditor, in a format prescribed by the state auditor, a listing ofall personnel ofsuch ... local board ofeducation showing name, title or functional area, salary and travel expense for each individual". Federal Law requires employers to report payroll and related tax information through Form 941 to Internal Revenue Service. The amounts reported on this Form should be reconcilable to General Ledger and detailed listings. Questioned Cost: NIA -9- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS EMPLOYEE COMPENSATION GENERAL LEDGER Inaccurate Reporting of Compensation Nonmaterial Noncompliance Finding Control Number: FS-7611-06-09 Information: An unidentifiable variance of $30,210 for salaries remained between the detail listing and the general ledger. In addition, an unidentifiable variance of $1,045,951 for salaries remained between the detail listing and the Form 941 reconciliation. Cause: Management failed to implement procedures to ensure that all employee compensation is reported as salary to the Department of Audits and Accounts. Effect: The failure ofthe Atlanta Independent School System (APS) to submit total compensation paid to employees leads to inaccurate external reporting. Recommendation: Administrative procedures should be implemented by the human resources department to ensure that the detailed listing of salaries and travel is complete and accurate prior to submission to the Georgia Department of Audits and Accounts. EMPLOYEE COMPENSATION Payroll Sample Exceptions Reportable Condition Finding Control Number: FS-7611-06-10 Condition: This is a repeat finding (FS-7611-04-10) from the year ended June 30, 2004. The accounting procedures ofthe School District were insufficient to provide for adequate internal controls over employee compensation. Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are processed according to established procedures. Questioned Cost: NIA Information: Tests performed on employee compensation revealed errors which calculated to a projected misstatement of $590,728 for employee compensation. - 10 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS EMPLOYEE COMPENSATION Payroll Sample Exceptions Reportable Condition Finding Control Number: FS-7611-06-10 Cause: Management failed to adequately monitor and implement procedures to ensure that payments made to employees are based on an approved rate of pay that is adequately documented in the employee's personnel file. Effect: Errors and/or irregularities may not be detected in a timely manner. Recommendation: The Atlanta Independent School System (APS) should establish policies and procedures to ensure that all payments to employees are based on an approved rate of pay and that personnel files are properly maintained. CAPITAL ASSETS Failure to Adequately Maintain Capital Assets Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-11 Condition: This is a repeat finding (FS-7611-05-06 and FS-7611-04-13) from the years ended June 30, 2005, and June 30, 2004, respectively. The School District failed to adequately maintain internal controls to ensure accurate and proper reporting of financial data to the users such information. Criteria: Chapter 37 Fixed Assets of the Financial Management for Georgia Local Units of Administration indicates that School Districts must establish fixed asset policies, define system requirements, implement a fixed asset system and maintain fixed asset inventory records. Questioned Cost: NIA Information: A review of capital assets revealed the Atlanta Independent School System (APS) lacked proper internal controls to detect significant errors in a timely manner. Numerous audit adjustments were proposed and made to adjust general ledger balances for capital assets accounts to ensure these balances were materially correct for financial reporting. Tests performed on equipment and machinery revealed numerous errors which calculated to a projected misstatement of $2,521,333 for equipment and machinery. - 11 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS CAPITAL ASSETS Failure to Adequately Maintain Capital Assets Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-11 A complete physical inventory of the Atlanta Independent School System's (APS) capital assets was not performed during the year under review, as required by the Atlanta Independent School System's (APS) policies. Adjustments were proposed and made to record Proprietary Funds capital assets since they were removed from the general ledger in error. Cause: The Atlanta Independent School System (APS) failed to ensure adequate accounting procedures were in place to process, record and report capital assets and related activity. Due to problems with the initial set-up of the Asset Module system in the financial accounting system, it did not allow for adequate reporting for APS. Effect: The failure of the Atlanta Independent School System (APS) to maintain a complete and accurate capital assets listing can lead to inaccurate internal and external reporting, as well as noncompliance with generally accepted accounting principles. Recommendation: The Atlanta Independent School System (APS) should review its capital assets records and make appropriate adjustments to ensure that the capital assets records conform to the Atlanta Independent School System's (APS) approved capital assets policy and generally accepted accounting principles. FINANCIAL REPORTING GENERAL LEDGER Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-12 Condition: This is a repeat finding (FS-7611-05-07 and FS-7611-04-14) from the years ended June 30, 2005, and June 30, 2004, respectively. The accounting procedures of the Atlanta Independent School System (APS) were insufficient to ensure proper accounting and reporting of financial information. - 12 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2006 I FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS FINANCIAL REPORTING GENERAL LEDGER Inadequate Internal Controls Reportable Condition - Material Weakness Finding Control Number: FS-7611-06-12 Criteria: The Atlanta Independent School System's (APS) management is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are recorded, processed and reported according to established procedures. Questioned Cost: NIA Information: A review of internal controls revealed the Atlanta Independent School System (APS) did not have proper internal controls to detect significant errors in reporting of financial data in a timely manner. Numerous audit adjustments were proposed and made to adjust general ledger balances for various accounts to ensure these balances were materially correct for financial reporting. Proper accountability was not maintained over revenues/receipts of funds related to capital projects. Balances related to collections from City of Atlanta for Bonds issued on behalf of Atlanta Public Schools were not maintained separately. Significant errors were noted in the financial reporting of information to the Georgia Department ofEducation as part ofvarious reports, including but not limited to DE046. Cause: These deficiencies were a result ofmanagement's failure to ensure adequate accounting policies and procedures were in place to ensure that transactions are recorded, processed and reported according to established procedures. Effect: Errors and/or irregularities may not be detected in a timely manner. Recommendation: The Atlanta Independent School System (APS) should establish accounting procedures adequate to ensure financial information is accurately reported within the financial statements and subsidiary detail records should be maintained to ensure proper reporting to Georgia Department ofEducation. Atlanta Independent School System (APS) should adopt the state chart of accounts to simplify the financial reporting process. - 13 - SECTION III MANAGEMENT'S RESPONSES ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF MANAGEMENT'S RESPONSES YEAR ENDED JUNE 30, 2006 Finding Control Number: FS-7611-06-01 We concur. By July 30, 2007, the Information Security (InfoSec) Department will generate user access reports for the Financial Accounting System (Lawson Enterprise) on a monthly basis and forward copies ofthese reports to functional managers and to the sub-system process owners. These reports will be distributed on the last Monday of each month. A letter will be forwarded to the managers requesting that they review and recommend by the 7th day of the following month the removal of users who have unauthorized access to sensitive information. Copies of these reports will also be forwarded to the manager's supervisor to ensure that they are aware ofwho has access to sensitive personnel information. Finally, InfoSec will also review the list and make recommendations for those employees that should have their access restricted. InfoSec will restrict unauthorized access on the 15th day of each month or based on specific ad-hoc requests from functional managers. Finding Control Number: FS-7611-06-02 We concur. To eliminate the current deficit balance and to prevent any future growth, APS has taken and will take the following steps: 1) To reduce the current deficit APS transferred $11.7 million from the General Fund to the Food Service Fund, in October 2006. In June 2007, an additional $4.7 million will be transferred from the General Fund. The remaining deficit at the end of fiscal year 2007 will be approximately $9.7 million. These payments are part of the repayment plan that was approved by the APS Board in October 2006. Under the approved plan, the remaining deficit will be repaid by 2009. 2) To eliminate the reoccurrence of an operating deficit on an annual basis APS has made changes with its food service vendor (Sodexho), primarily in labor hour adjustments, to make the program self-supporting. These adjustments will ensure that the vendor operates at a profit, or break-even, every month of the fiscal year. Finding Control Number: FS-7611-06-03 We concur. To ensure transactions are processed according to established procedures and internal controls, APS will take the following steps: 1) For fiscal year 2006 the inter-fund accounts related to the pooled cash account were not reconciled until year-end; beginning in fiscal year 2007 these accounts are reconciled each month, thus eliminating the need for significant correcting entries. - 1- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF MANAGEMENT'S RESPONSES YEAR ENDED JUNE 30, 2006 Finding Control Number: FS-7611-06-03 2) The payroll checks over a year old, for fiscal year 2006, will be submitted to the Georgia Department ofRevenue before June 30, 2007. APS will also review its outstanding check list for fiscal year 2007 to determine if any old checks exist. The expectation is that none will be found since APS no longer issues payroll checks. However, if any are found they will be submitted to the Georgia Department of Revenue before June 30, 2007. 3) This check was originally issued in February, 2006. It was issued to settle a claim for a vendor. However, when it was presented the vendor refused the settlement and did not accept the check. Legal counsel advised Finance to hold the check. The claim went to litigation. The final settlement was reached in September, 2006. The original check was voided when the final settlement was reached. Going forward Finance will meet with the Legal Department to discuss any outstanding checks that are being held. The purpose will be to determine ifthe checks need to continue to be held or ifthey can be voided and a new check issued upon final settlement. Finding Control Number: FS-7611-06-04 We concur. To prevent inventory subsidiary detail records from not agreeing to the general ledger APS will take the following steps: 1) For fiscal year 2008, all activities for the commodities inventory will be maintained in the Inventory Control (IC) module. Manual adjustments to correct inventory levels will no longer be posted to the general ledger. All donations, monthly physical inventory adjustments and usages by the schools will be tracked in the IC module. The general ledger will be updated each month. APS will no longer wait until year-end to post inventory usage. Again, activity will be captured in the month that it occurs. 2) At the end of fiscal year 2006, APS started to utilize the IC module to track its supplies inventory. Prior to June 2006, the supplies inventory was maintained manually through the general ledger. The IC module was being utilized in a limited manner but it had not been reconciled to the general ledger. The large adjustment posted in fiscal year 2006 was necessary to reconcile IC to the general ledger. Thus, starting with fiscal year 2007, significant correcting entries will not be necessary to reconcile IC to the general ledger. Finding Control Number: FS-7611-06-05 We concur. APS will begin in fiscal year 2007 to closely monitor and review all revenue and receivable balances to ensure that the underlying transactions are properly recorded. This will eliminate the need to move revenue and related transactions between funds. The Finance Division will ensure that State and Federal guidelines for revenue recognition are followed for all grants. -2 - ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF MANAGEMENT'S RESPONSES YEAR ENDED JUNE 30, 2006 Finding Control Number: FS-7611-06-06 We concur. We have reviewed our policy as it relates to payment of invoices from school activity funds for goods and services. The School District will enforce processes in place to ensure that all invoices are approved by responsible personnel in accordance with established guidelines and all proper documentation is properly maintained. Finding Control Number: FS-7611-06-07 We concur. To strengthen the controls for P-card purchases the following steps have been taken: 1) For fiscal year 2007, APS has implemented a process to ensure that all receipts are collected and submitted with purchase card statements. Reconciliations received from the cardholders that are not properly supported with receipts will be returned to the cardholder and the P-card will be suspended. The P-card will not be re-instated until the reconciliation for the month in question is fully supported. This change in procedure will eliminate the risk of undocumented charges being recorded in the general ledger. 2) The School District has increased the charge limit on the purchase cards to minimize the need to split payments. The Accounting Department will scrutinize all purchase card purchases that appear to suspicious. A query will be sent to the purchaser asking for an explanation of each purchase suspected of having been split. If it is determined that the purchase has been split a written warning will be sent to the cardholder stating that splitting purchases is against Board policy. At the next offense the P-card will be suspended for one month. On the third offense the P-card will be suspended for the remainder of the year. 3) A policy will be put in place to ensure that no purchase cards are released to cardholders without a signed agreement. Accounting will randomly request copies of the signed agreement from Purchasing for new cardholders to help ensure that all cardholders have signed agreements on file. Finding Control Number: FS-7611-06-08 We concur. To improve its ability to detect significant errors in a timely manner APS will take the following steps: 1) To improve the reliability of expenditure entries posted to the accounts payable system throughout the year the Accounts Payable administration will ask all schools and departments to review and verify their fiscal year 2006 and fiscal year 2007 outstanding purchase orders to determine which ones are valid and should remain open. All purchase orders deemed to be invalid will be deleted. A Lawson system analysis will delete all ofthe old erroneous purchase orders for fiscal year 2003 through fiscal year 2005. -3- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF MANAGEMENT'S RESPONSES YEAR ENDED JUNE 30, 2006 Finding Control Number: FS-7611-06-08 2) The Accounts Payable Department is in the process of clearing travel advances for all completed travel. There are other administrative steps to be taken that will enhance the management of travel expenditures. One example is the booking and payment of airfares, hotel stays and registration fees through a managed travel agency to minimize the need for issuing travel advances. 3) Purchasing administration will review operating procedures with all accounts payable clerks to help ensure that appropriate year-end closing procedures are followed. 4) A delayed closing of the Accounts Payable module until July 15, 2007 will ensure the majority of fiscal year 2007 purchase orders and the related invoices are processed in the appropriate year. 5) By adopting a new process to account for managed travel expenditures and advances the accounts payable system will improve its ability to track prepaid expenditures for travel and keep them separate from all types of expenditures. 6) Implement and enforce a process beginning in fiscal year 2009 to require vendors to submit all invoices directly to accounts payable. This will help minimize the need for a 60 day accrual at year-end. The year-end accrual will be reduced to 30 days. Finding Control Number: FS-7611-06-09 We concur. Beginning with fiscal year 2007, procedures have been implemented to reconcile wages from Payroll reports to General Ledger each month. Finding Control Number: FS-7611-06-10 We concur. Upon review ofthe seven (7) employees in question for overpayment during the 20052006 school year, it was found upon research that the employees were placed in one higher step for the 2005-2006 school year. This has been corrected as of August 10, 2006. Additionally, Human Resources is in the process of initiating a process to recapture the overpayment from each of the employees for the period that they were over paid. Finding Control Number: FS-7611-06-11 We concur. The Atlanta Public Schools System will be implementing new processes to eliminate this finding. -4- ATLANTA INDEPENDENT SCHOOL SYSTEM SCHEDULE OF MANAGEMENT'S RESPONSES YEAR ENDED JUNE 30, 2006 Finding Control Number: FS-7611-06-11 1) The Asset Management system is being re-designed and re-implemented to better identify and capitalize assets from the time ofpurchase. All capitalization entries will be processed in the sub-system. This will eliminate the need for numerous manual adjustments in the general ledger. 2) APS has hired a consulting firm to perform an annual inventory of the School District's assets. This process will improve the accuracy of its property records. The tracking of assets will also be improved. These new procedures are intended to eliminate general ledger adjustments at year-end. Finding Control Number: FS-7611-06-12 We concur. The Atlanta Independent School System will be implementing a new design and structure to its Accounting system to eliminate this finding. There are two primary contributors that drive the numerous correcting entries posted to the general ledger: 1) The primary contributor to the numerous general entries posted each month and at year-end was the practice ofmaking corrections to the data through the general ledger. This practice will be changed starting in fiscal year 2007. All adjustments impacting a sub-system will be made through the sub-system. The adjustment will then be passed directly from the subsystem to the general ledger. Thus, keeping the sub-system and the general ledger in balance and eliminating the need for manual correcting. 2) The other contributor is that APS has not fully adopted the State Chart of Accounts. APS will kick-off a project, no later than August 2007, to fully adopt the State Chart of Accounts. For reporting purposes, this will eliminate the need for numerous re-class entries in the general ledger that map the APS trial balance to the State Chart of Accounts. In prior years, the School District did not recognize the City of Atlanta bonds in its financial statements; however, in the future the School District will be including this liability in its financials. The Atlanta Independent School System's Accounting Department along with the Nutrition Department will be reconciling the DE046 and DE 106 before submission to the Georgia Department of Education. Contact Person: Edward Holloway, Executive Director of Accounting Phone: (404) 802-2453 E-mail Address: edholloway@atlanta.kl2.ga.us -5-