NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY -WATER PROJECT. Financial Statements, Independent Auditors' Report and Supplementary Information

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1 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY -WATER PROJECT Financial Statements, Independent Auditors' Report and Supplementary Information March 31, 2016 and 2015 CAMPBELl, RAPPOLD & YURASITS LLP

2 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY- WATER PROJECT TABLE OF CONTENTS Page(s) Independent Auditors' Report Management's Discussion & Analysis Financial Statements Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position Statements of Cash Flows Notes of Financial Statements Required Supplementary lnfonnation Schedule of Employer Contributions - Retirement Plans Schedule of Changes in Net Pension Asset and Related Ratios - Defined Benefit Pension Plan Schedule of Changes in Net Pension liability and Related Ratios - Defined Contribution Pension Plan Notes to Required Supplementary Schedules - Defined Benefit Pension Plan Schedule of Funding Progress - Postemployment Healthcare Plan Schedule of Employer Contributions - Postemployment Healthcare Plan and Notes to Required Supplementary Information Other Supplementary Information Schedules of Operations and Maintenance Expenses 39-40

3 CAMPBELL, RAPPO L D CERTIFIED PUBLIC ACCOUNTANTS & YURASITS LLP JAMES S. ANDERSON, CPA TARA L BENDER. CPA. CSEP JAMES F. BOVA, CPA MARC A. BRINKER. CPA MEUSSA A. GRUBE. CPA. CSEP DENNIS S. HELLER. CPA WARREN R. HENDERSON, CPA JOHN R. ZAYAITZ. CPA ASHLEY E. ANDERSON. CPA DAWN C. ANDERSON, CPA MICHELLE R. BITNER, CPA ROXANNA M. BRANDLE. CPA KYLES. CROUTHAMEL. CPA KYlE ELSENBAUMER. CPA PAUL G. MACK. CPA. CFE NICHOLAS A. OTIOLINI, CPA JASON L SERFASS, CPA HEIDI D. WOJCIECHOWSKI, CPJI CONSULTANT LUTHER R. CAMPBELL. JR INDEPENDENT AUDITORS' REPORT To the Board of Directors Northampton Borough Municipal Authority- Water Project Northampton, Pennsylvania Report on the Financial Statements We have audited the accompanying financial statements of the Northampton Borough Municipal Authority- Water Project ("the Authority"), Pennsylvania, as of and for the years ended March 31, 2016 and 2015, and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions South Cedar Crest Boulevard, Allentown. PA MEMBERS: American Institute of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants 1

4 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Northampton Borough Municipal Authority-Water Project, Pennsylvania, as of March 31, 2016 and 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Change in Accounting Principle As discussed in Note 1 of the financial statements, management has elected to change its policy for recording net pension liability, along with applicable deferred outflows and inflows of resources on all defined benefit and defined contribution pension plans. Our opinion is not modified with respect to the matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis on pages 3-5 and Schedules of Employer Contributions and Schedule of Changes in Net Pension Asset and Related Ratios for the Defined Benefit and Defined Contribution Pension Plans and Post Employment Healthcare Plans on pages be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Northampton Borough Municipal Authority-Water Project's basic financial statements. The Schedule of Operations and Maintenance Expenses is presented for purposes of additional analysis and are not a required part of the basic financial statements. The Schedule of Operations and Maintenance Expense is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of operation and maintenance expenses is fairly stated, in all material respects, in relation to the basic financial statements as a whole. June 15, 2016 &r;/41 ~ f y~ (_(fl Certified Public Accountants 2

5 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY (WATER DEPARTMENT} 1 CLEAR SPRINGS DRIVE P.O. BOX 156 N ORTHAMPTON, PA BOARD VlEMBERS Echn1rd D. Hozza, Chairman Charles B. l3odnar, Vice Chairman Gerald J. Deily Joseph Szerencsi ts i\nthony J. Winkclbaucr TELEPHONE AND EMERGENCY NUMBER: FAX: O F FICERS Stephen J. Kerbaehcr. General Manager Thomas P Haines. Assistant Manager 1 J\tlartin J. llozza. Gerald J. Deily. Oftiec Manager Assistant Manager! Plant Manager Secretary Northampton Borough Municipal Authority (NBMA) is pleased to present its Annual Financial Report for the fiscal year ending March 31, The Management's Discussion and Analysis (MDA) is intended to serve as an introduction to the Authority's basic financial statements. Information in this MDA is presented under the following headings: Authority Activities and Highlights Overview of Annual Financial Statements Financial Analysis o Economic Factors and Rates o Contacting the Authority's Financial Management Authority Activities and Highlights MANAGEMENT'S DISCUSSION AND ANALYSIS The Authority's Operating Revenues increased $337,124 in comparison to the prior fiscal year ending March 31, The Authority's Operating Expenses increased as follows: Operating expenses decreased $79,434 or 2.53%; Maintenance expenses increased $42,685 or 9. 78%; and an increase in Depreciation of $95,623 or 6.60% as compared to the fiscal year ending March 31, Developer contributions for fiscal year ending March 31, 2016 were $77,992 as compared to $89,731 in the previous fiscal year for a decrease of $11,739 or 13.08%. Water System Coverage Provision, in accordance with Article V. Section 5.01 of the Trust Indenture mandates that the Authority rates must be sufficient during each year to generate net income available for debt service that is at least 110% of the average annual debt service requirement on the outstanding 2012 and 2013 Series Bonds. Overview of Annual Financial Statements Northampton Borough Municipal Authority's basic financial statements include the statement of net position, statement of activities and notes to the financial statements. 3

6 Overview of Annual Financial Statements Northampton Borough Municipal Authority's basic financial statements include the statement of net position, statement of activities and notes to the fmancial statements. This report also includes fund statements and other supplementary information in addition to the basic financial statements themselves. The Authority's financial statements are prepared on the accrual basis in accordance with generally accepted accounting principles promulgated by the Governmental Accounting Standards Board (GASB). Statement of net position The statement of net position presents the financial position of the Authority. It presents information on the Authority's assets and liabilities, with the difference between the two reported as net position. Increases or decreases in net position may serve as a useful indicator of whether the financial position of the Authority is improving or deteriorating. Statement of activities The statement of revenues, expense and changes in net position presents information showing how the Authority's net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Revenues are recognized when earned, not when they are received. Expenses are recognized when incurred, not when they are paid. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods. Notes to the financial statements The notes provide additional information that is essential to a full understanding of the data provided in the Authority's financial statements. The notes to the financial statements are located after the statement of cash flow. Proprietary funds The Authority maintains a proprietary fund. The Authority's proprietary fund is an enterprise fund. The enterprise fund is used to report the same functions presented as business-type activities. The Authority uses its enterprise fund to account for its water operations. Other information In addition to the basic financial statements and accompanying notes, this report also presents supplementary information and certain required supplementary information concerning the Authority's progress in funding its obligation to provide pension benefits and postemployment health benefits to its employees. The Authority adopted the following two Governmental Accounting Standards (GASB Statement) No. 68, to record net pension liability and GASB Statement No. 71, to record applicable deferred outflows and deferred inflows of resources associated with defined benefit and defined contribution plans. Financial Analysis Net Position. As noted earlier, net position may serve over time as a useful indicator of a government's financial position. In the case of the Northampton Borough Municipal Authority, assets exceed liabilities by $32,320,279 and $31,796,269 as of March 31, 2016 and 2015 respectively. 4

7 The following is a condensed summary of key elements of the Authority's financial statements as ofmarch 31, 2016 and $ Increase/{Decrease) Utility Plant, Net Restricted Assets Long Term Debt Fund Equity Operating Revenues Operating Expenses Debt Service Expense Net Net Income $48,887,249 6,938,938 24,020,000 32,320,279 6,371,649 5,088, , ,010 $49,372,026 6,526,836 24,955,000 31,796,269 6,034,525 5,029, , ,399 $ (484,777) 412,102 (935,000) 524, ,124 58,874 (12,365) 280,611 Economic Factors and Rates The Northampton Borough Municipal Authority (NBMA) engaged the services of Keystone Alliance Group in 2014 to conduct a Water Rate Study Report. Based on the recommendation of the Keystone Alliance Group Report, as well as the recommendation of consulting engineers Gannett Fleming, NBMA adopted a rate increase effective October 1, 2014 and a second rate increase effective on October 1, The Keystone Alliance Group Report recommends an additional rate increase. The NBMA Board of Directors approved a third rate increase on March 2016 effective October 1, NBMA regularly monitors all revenue categories, reviews all budget items and expenditures with each department and continues to look at cost cutting measures. NBMA has taken advantage of electric power rates and rate reduction incentives, and continues to monitor health care cost controls through a group purchasing program. NBMA customer growth is projected to remain slow during the fiscal year beginning April 1, Contacting the Authority's Financial Management This financial report is designed to provide our customers, creditors and funding agencies with a general overview of the Authority's finances and to show the Authority's accountability for the money it receives. If you have any questions about this report or need additional financial information, please contact the Northampton Borough Municipal Authority, 1 Clear Springs Drive, Northampton, PA Respectfully submitted by, ~/~ Stephen J. Kerbacher, General Manager 5

8 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY - WATER PROJECT STATEMENTS OF NET POSITION AS OF MARCH 31,2016 AND ASSETS Utility Plant In Service Less: Accumulated Depreciation Utility Plant, Net Restricted Assets Construction Fund Debt Service Reserve Fund Debt Service Fund Bond Redemption Fund Emergency Repair Fund Total Restricted Assets (Note 2) Current Assets Cash & Cash Equivalents Accounts Receivable - Customers (net of allowance for uncollectible accounts of $7,889 in 2015 and 2014) Unbilled Water Service Inventory- Materials and Supplies Other Receivables Total Current Assets Deferred Outflows of Resources Prepaid Expenses Unamortized Discount Net Difference Between Projected and Actual Earnings On Pension Plan Investments (Note 5) Total Deferred Outflows of Resources Net Pension Asset (Note 6) Total Assets $ 74,157,668 (25,270,419) 48,887,249 74,882 1,917, ,785 3,374, ,705 6,938, , , , ,333 29,979 2,446,375 96, , ,103 62,940 $ 58,713,605 $ 73,131,554 (23, 759,528) 49,372,026 82,414 1,912, ,376 3,643, ,000 6,526, , , , ,846 2,323 2,250,451 9, , ,648 62,940 $ 58,520,901 The accompanying notes are an integral part of these financial statements. 6

9 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY- WATER PROJECT STATEMENTS OF NET POSITION AS OF MARCH 31, 2016 AND LIABILITIES AND FUND EQUITY Liabilities Long-Term Debt, net of current portion Current Liabilities Current Portion of Long-Term Debt (Note 4) Accounts Payable Accrued Payroll Accrued Interest Expense Accrued Vacation Pay Accrued Sick Pay Other 24,020, , ,479 25, , , ,946 29,018 24,955, ,000 21,993 72, , , ,512 14,898 Total Current Liabilities 1,81 4,588 1,211,939 Deferred Inflows of Resources Differences Between Expected and Actual Experience (Note 6) Net Difference Between Projected and Actual Earnings On Pension Plan Investments (Note 6) Total Deferred Inflows of Resources Net Pension Liability (Note 5) Net OPES Obligation (Note 8) Net Position Total Liabilities 93,118 17, ,342 1, ,120 26,393, ,158 22, , 124 1, ,293 26, Contributions in Aid of Construction Reserved for Construction Reserved for Water Revenue Bond Retirement Reserved for Emergency Repairs Unreserved 11,187,927 74,882 6,488, ,705 14,193,414 11,187,927 82,414 6,069, ,000 14,081,506 Total Net Position 32,320,279 31,796,269 Total Liabilities and Net Position $ 58,713,605 $ 58,520,901 The accompanying notes are an integral part of these financial statements. 7

10 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY - WATER PROJECT STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEARS ENDED MARCH 31, 2016 AND 2015 OPERATING REVENUES Total for the Year Total for the Year Ended March, 31 Ended March, Metered Sales $ 5,995,358 $ 5,682,223 Tapping, Capacity and Meter Sales 64,520 53,470 Public Fire Protection 127, ,219 Customers' Penalties 93,780 80,176 Rental Income 20,309 19,445 Miscellaneous 70,432 71,992 Total Operating Revenues 6,371,649 6,034,525 OPERATING EXPENSES Operation 3,063,863 3,143,297 Maintenance 479, ,662 Depreciation 1,545,250 1,449,627 Total Operating Expenses 5,088,460 5,029,586 OPERATING INCOME 1,283,189 1,004,939 NONOPERATI NG INCOME Developer Contributions 77,992 89,731 Earnings on Investments and Cash Equivalents 26,719 24,984 Total Nonoperating Income, Net ,715 INCOME BEFORE DEBT SERVICE EXPENSE 1,387,900 1,119,654 Debt Service Expense Interest on Term Debt, Net 847, ,871 Amortization of Debt Expense, Bond Discount 16,768 18,384 Total Debt Service Expense 863, ,255 NET INCOME 524, ,399 NET POSITION, BEGINNING OF YEAR 31,796,269 31,552,870 NET POSITION, END OF YEAR $ 32,320,279 $ 31,796,269 The accompanying notes are an integral part of these financial statements. 8

11 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY - WATER PROJECT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2016 AND 2015 Total for the Year Ended March, CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 6,101,662 $ 5,921,214 Cash Payment to Suppliers for Goods & Services (1,564,894) (1,992,515) Cash Payments to Employees for Services ( 1 '772, 770) (1,525,636) Other Operating Receipts 63, ,920 Net Cash Provided by Operating Activities 2,827,083 2,584,983 CASH FLOWS FROM NONCAPITAL ACTIVITIES Increase in restricted assets {412,102) {736,033) Cash Used by Noncapital Activities {412,102) {736,033) CASH FLOWS FROM FINANCING ACTIVITIES Acquisition and construction of utility plant. and dispositions, net (1,060,473) (650,933) Developer contributions 77,992 89,731 Principal paid on term debt (536,768) (514,834) Interest paid on term debt, net {847,122) {857,871) Cash Used by Financing Activities {2.366,371) (1,933,907) CASH FLOWS FROM INVESTING ACTIVITIES Eaming on investments and cash and cash equivalents Cash Provided by Investing Activities 26,719 24,984 Increase (Decrease) in Cash and Cash Equivalents 75,329 (59,973) Cash and Cash Equivalents, April Cash and Cash Equivalents, March 31 $ 773,663 $ 698,334 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING INCOME Operating income $ 1,283,189 $ 1,004,939 Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities: Depreciation 1,545,250 1,449,627 Amortization and change in unamortized debt expense 16,768 18,384 Pension Expense (36,698) Changes in assets and liabilities: Increase in accounts receivable - customers (11,452) (11,319) Increase in unbilled water service (30,000) (30,000) (Increase} Decrease in materials and supplies (51,487) 65,276 (Increase) Decrease in prepaid expenses (86,307) 85,785 (Increase) Decrease in other receivables (27,656) 3,040 Increase (Decrease) in accounts payable 230,486 (26,185) Increase (Decrease) in accrued payroll (46,871) 1,613 Decrease in accrued interest expense (6,540} (4,340) Increase (Decrease) in accrued vacation pay 2,020 (8,675) Decrease in accrued sick pay (5,566) (5,621) Increase in other liabilities 14,120 7,059 Increase in OPES obligation Cash Provided by Operating Activities $ 2,827,083 $ 2,597,892 The accompanying notes are an integral part of these financial statements. 9

12 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY - WATER PROJECT NOTES TO FINANCIAL STATEMENTS MARCH 31,2016 AND Summary of Significant Accounting Policies The Northampton Borough Municipal Authority-Water Project (the "Authority"), through its Water Project, supplies water to residential, commercial, and industrial; customers in Northampton County (Borough of Northampton, North Catasauqua Borough and Allen Township) and Lehigh County (Coplay Borough, Whitehall Township and North Whitehall Township). The accompanying financial statements include the accounts and funds of all Authority operations based on Governmental Accounting Standards Board (GASB) criteria for determining the scope of the reporting entity as presented below. The accounting policies and accompanying financial statements of the Authority conform to Generally Accepted Accounting Principles (GAAP) as applicable to governmental units. The GASB is the accepted standard-setting body establishing governmental accounting and financial reporting principles. Proprietary funds apply Financial Accounting Standards Board (FASB) pronouncements, unless those pronouncements conflict with or contradict GASB pronouncements, in which case, GASB prevails Principles Determining the Scope of the Reporting Entity In evaluating how to define the Authority, for financial reporting purposes, management has considered all potential component units. The decision to include a potential component unit in the financial reporting entity was made by applying the criteria as set forth in GASB. The basis, but not the only criteria for including a potential component unit within the financial reporting entity is the significance of the potential component unit's operational or financial relationship with the Authority. The Authority's basic financial statements do not include any component units since the criteria for inclusion as set forth in GASB has not been met. However, the financial statements of the Authority have been included in a separate reportofthe Borough of Northampton in accordance with criteria specified by GASB. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The 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 when a liability is incurred, regardless of the timing of related cash flows. All activities of the Authority are accounted for within a single proprietary fund which accounts for all revenues, and expenses related to treatment, transportation and distribution of water to its customers. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods. The principal operating revenue of the Authority is the charge of fees for water consumption in the service area of the Authority. Operating expenses include the cost of sales and services, administrative expense, and depreciation on capital assets. Revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. 10

13 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31,2016 AND Summary of Significant Accounting Policies (Continued) Utility Plant Costs of additions to the utility plant and replacement of property are capitalized. The Authority defines capital assets as assets with an individual or aggregate cost of more than $1,000, estimated useful life in excess of one year, or repairing or renovating the asset is $1,000 or more and prolongs the life of the asset. Costs of depreciable property retired or replaced are removed from utility plant accounts and such costs, plus removal costs, less salvage, are charged to accumulated depreciation. All expenditures for maintenance and repairs of property are charged to operations as incurred. The utility plant asset activity for the fiscal year ended March 31, 2016 were as follows: Beginning Ending Balance Additions Retirements Balance Utility Plant Assets not Being Depreciated Land $ 769,980 $ $ $ 769,980 Total Utility Plant Assets not being Depreciated 769, ,980 Utility Plant Assets Being Depreciated Storage and distribution system 42,999, ,514 {34,359) 43,887,377 Operating plant and equipment 23,637,941 44,126 23,682,067 General structures and equipment 5,724,411 93,833 5,818,244 Total Utility Plant Assets Being Depreciated 72,361,574 1,060,473 (34,359) 73,387,688 Less Accumulated Depreciation (23, 759,528) (1,545,250) (25,270,419) Utility Plant Assets, Net $ 49,372,026 $ {484,777) $ $ 48,887,249 Depreciation of the utility plant is calculated on the straight-line method using a half year convention over the following estimated useful lives of the asset: Storage and distribution system Operating plant and equipment General structures and equipment 17 to 110 years 60 to 125 years 1 0 to 45 years Depreciation charged to expense was $1,545,250 and $1,449,627 in the years ended March 31, 2016 and 2015, respectively. Contributions in Aid of Construction. Tapping Fees. and Developers Contributions The Authority is recording tapping fees paid by customers as operating revenues and connection and extension fees as non operating revenue. 11

14 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Summary of Significant Accounting Policies (Continued) Deferred Charges Debt expense incurred in connection with the issuance of the W ater Revenue Bonds is amortized over the term of the bonds, based on the principal amounts of the bonds outstanding. Cash Flows For the purposes of the statement of cash flows, the Authority considers all highly liquid unrestricted investments with a maturity of three months or less when purchased to be cash equivalents. Cash and Investments Statutes allow the Authority to invest in direct obligations of the U.S. Government, obligations of the Commonwealth of Pennsylvania, savings accounts or time deposits of institutions insured by the Federal Deposit Insurance Corporation (FDIC) and deposits in excess of FDIC amounts if collateralized by the depository. Management Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from those estimated. Deferred Compensation Plan The Authority offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The Plan, available to all Authority employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. The Authority does not record the value of plan assets and the related trust liability on its balance sheet because, under currently enacted Jaw, the Authority has no ownership of the amounts deferred by employees or related income on those amounts. Inventory Inventory consists of materials and supplies held for the Authority's use in relation to treatment, transportation and distribution of water and are carried at weighted average, cost on a first-in first-out basis. Changes in Accounting Principles During the fiscal year the Authority Implemented GASB Statement No. 68 (Accounting and Financial Reporting for Pensions). which requires all governments to record the net pension liability on all defined benefit and defined contribution plans, as amended by GASB Statement No. 71 (Pension Transition for Contributions Made Subsequent to the Measurement Date). In addition, GASB Statement No. 68 requires recording applicable deferred outflows of resources and deferred inflows of resources required under the guidance found in the accounting standard. 12

15 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Summary of Significant Accounting Policies (Continued) New Accounting Standards In June 2012, the GASB issued Statement No. 68 -Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. The provisions of Statement 68 are effective for fiscal years beginning after June 15, In November 2013, the GASB issued Statement No. 71 -Pension Transition for Contributions made Subsequent to the Measurement Date - an Amendment of GASB No. 68. Statement 71 eliminates a potential source of understatement of restated beginning net position and expense in a government's first year of implementing Statement 68, which was issued in June To correct this potential understatement, Statement 71 requires that when a state or local government is transitioning to the new pension standards, that it "recognize a beginning deferred outflow or resources for its pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation. This amount will be recognized regardless of whether it is practical to determine the beginning amounts of all other deferred outflows of resources and deferred inflows of resources related to pensions." Statement 71 is effective concurrent with Statement 68 for fiscal year beginning after June 15, Restricted Assets Under the terms of the Trust Indenture entered into in connection with the issuance of Water Revenue Bonds, and the Supplemental Trust Indentures entered into in connection with the subsequent issuance of Water Revenue Bonds, the Authority is required to maintain a Debt Service Reserve Fund, a Debt Service Fund, and an Emergency Repair Fund. The Trust Indenture specifies, among other things, the manner in which moneys shall flow between such funds and the procedures to be utilized in making disbursements there from. The Authority is required to maintain a minimum amount of $1,917,362 in the Debt Service Reserve Fund. The assets of the Debt Service Reserve Fund and the Debt Service Fund are restricted for the payment of principal and interest on the bonds. The assets of the Emergency Repair Fund are restricted for the payment of expenses incurred as a result of unforeseen events. The assets of the Construction Fund are restricted for the payment of capital improvements. The balances of these funds are shown as reservations of fund equity/retained earnings in the accompanying financial statements. 13

16 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31,2016 AND Restricted Assets (Continued) Restricted assets are stated at fair value, with unrealized gains and losses recorded as earnings on investments on the Authority's statements of revenues, expenses and changes in retained earnings. Restricted assets are comprised of the following at March 31, 2014: Construction Fund: Money market, etc. Cost $ 74,882 Market $ 74,882 Debt Service Reserve Fund: Money market, etc. $ 1,917,362 $ 1,917,362 Debt Service Fund: Money market, etc. Bond Redemption Fund Money market, etc. Emergency Repair Fund: Money market, etc. $ 1,196,785 $ 3,374,204 $ 375,705 $ 1,196,785 $ 3,374,204 $ 375,705 A portion of the Water Revenue Bonds, Series of 2004, was advance-refunded (defeased) through the use of proceeds from the 2013 Bonds. These proceeds were deposited in an irrevocable escrow fund. The escrow agent transfers funds from the Escrow Fund to the Debt Service Fund for interest and principal payments. 3. Cash and Investments The Pennsylvania Legislature enacted a specific provision of the Municipal Authorities Act (the "Act") to cover the investment of authorities' funds. The Act authorizes specific types of investments for authorities, including U.S. Government securities and bank accounts such as savings accounts, time deposits, or shared accounts. Bank accounts must, however, either be insured by the Federal Deposit Insurance Corporation (FDIC), or, any balances exceeding the FDIC's coverage amount must be collateralized by the Authority and depository institutions. Shares of an investment company can also be purchased provided that the only investments of that company are those specifically mentioned in 53 P.S. Section D (U.S. Government securities, Treasury bills, FDIC-insured bank accounts, Commonwealth of Pennsylvania obligations and other obligations of political subdivisions of the Commonwealth of Pennsylvania). 14

17 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Cash and Investments (Continued) The deposit and investment policy of the Authority adheres to state statutes. Deposits by the Authority are either maintained in demand deposits or invested in certificates of deposit. The Authority invests in two basic types of federal securities: Obligations backed by the full faith and credit of the United States Government; and, short-term obligations of the United States Government or its agencies or instrumentalities (which may or may not be backed by the full faith and credit of the United States Government). At March 31, 2016, the carrying amount of the Authority's bank deposits totaled $7,712,601 and the corresponding bank balances were $7,831,287, of which $5,533,067 was insured by the Federal Deposit Insurance Corporation ("FDIC"); the uninsured bank balance was $2,298,220 of which $1,655,878 is not collateralized and $642,342 is collateralized as described below. The uninsured and uncollateralized bank deposits in the amount of $1,655,878 are invested in a Federated Treasury Obligations Fund. Under Act No. 72 of the 1972 Session of the Pennsylvania General Assembly (the "Act of 72"), financial institutions were granted the authority to secure the deposits of the public bodies by pledging a pool of assets, as defined in the Act of 72, to cover all public funds deposited in excess of the FDIC limits. The uninsured bank balances (as defined by Statement No. 3 of the GASB) of the Authority in the amount of $642,342, were collateralized by this pool of assets maintained by the Authority's depository institutions. 4. Long-term Debt During May, 2012, the Authority authorized the issuance of $9,995,000 of Water Revenue Bonds (the "2012 Bonds") bearing interest at rates ranging from 1.625% to 3.800% per year. The purpose of the bonds was to advance refund a portion of the 2004 Water Revenue Bonds. During January, 2013, the Authority authorized the issuance of $16,385,000 of Water Revenue Bonds (the "2013 Bonds") bearing interest at rates ranging from 0.60% to 4.00% per year. The purpose of the Bonds was to refund the remaining balances of the 2003, 2004, and 2007 Water Revenue Bonds. Liabilities under these term debt instruments are as follows: Total Principal Unamortized Cu rrent Long-term Outstanding Discount Portion Debt 2012 Bonds $ 9,995,000 $ (186,391} $ $ 9,808, Bonds 14,960,000 (95,289) (935,000) $13,929,711 Total $ 24,955,000 $ {281,680} $ {935,000} $23,738,320 15

18 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Long-term Debt (Continued) Scheduled principal maturities over the next five fiscal years and thereafter, without regard to bond discount amortization and deferred refunding charges, are as follows: March 31, 2017 March 31, 2018 March 31, 2019 March 31, 2020 March 31, 2021 March 31, March 3 1, March 31, Total $ 935,000 1,010,000 1,055,000 1,095,000 1,135,000 6,450,000 7,855,000 5,420,000 $ 24,955,000 The following is the debt service requirement through maturity for each of the above issues for principal, interest and total principal and interest as of March 31, 2015: 2012 Bonds Principal Interest Total March 31, 2017 $ $ 358,533 $ 358,533 March31, , , ,167 March 31, , , ,408 March 31, , , ,564 March 31, , , ,608 March 31, , , ,359 March 31, , , ,791 March 31, , ' ,141 March 31, , , ,491 March 31, , , ,759 March 31, , , ,944 March 31, , , ,129 March 31, , ,818 1,065,818 March 31, ,620, ,065 1,910,065 March 31, ,680, ,315 1,912,315 March 31, ,740, ,377 1,911,377 March 31, ,805, ,545 1,910,545 March 31, ,875,000 35,625 1,910,625 Total $ 9,995,000 $ 5,397,639 $ 15,392,639 16

19 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Long-term Debt (Continued) Bonds Principal Interest Total March 31, 2017 $ 935,000 $ 475,879 March 31, , ,529 March 31, ,010, ,579 March 31, ,050, ,379 March 31, ,090, ,579 March 31, ,135, ,079 March 31, ,185, ,679 March 31, ,255, ,154 March 31, ,290, ,881 March 31, ,335, ,912 March 31, ,420,000 84,220 March 31, ,460,000 44,975 March 31, , Total $ 14,960!000 $ 3,142,295 $ 1,410,879 1,414,529 1,417,579 1,416,379 1,413,579 1,414,079 1,417,679 1,445,154 1,444,881 1,455,912 1,504,220 1,504, ,450 $ 18, 1 02, Defined Contribution Pension Plan (Cash Balance Plan) Plan Description The Northampton Borough Municipal Authority (CB Plan) pension plan is a single-employer cash balance pension plan controlled by the provisions of Resolution No. 2 adopted pursuant to Act 15 of The plan participates in the Pennsylvania Municipal Retirement System (PMRS), which is an agent multiple-employer public employment retirement system that acts as a common investment and administrative agent for participating municipal pension plans. PMRS issue a separate Comprehensive Annual Financial Report (CAFR). The CAFR is available on the PMRS website. A copy can be obtained by contacting the PMRS accounting office. The plan provides retirement, disability and death benefits for all new eligible full-time employees hired after April 1, 2006 and their beneficiaries. Cost-of-living allowances are provided at the discretion of the plan. All new full time employees are eligible to participate. Employees hired prior to adoption of the CB Plan are covered under the Defined Benefit Pension Plan. At December 31, 2014, the date of the most recent Statement of Plan Net Asset, participants in the Plan were as follows: Active Plan Members Retirees and Beneficiaries Currently Receiving Benefits Terminated Plan Members Entitled to but not yet Receiving Benefits

20 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Defined Contribution Pension Plan (Cash Balance Plan) (Continued) Funding Policy The plan requires contributions by the Authority in an amount equal to 4% of the employee's compensation as defined by the plan. The Authority will match one-half of the employee contribution, not to exceed a total contribution by the Authority of 6%. Net Pension Liability The Authority's net pension liability was measured as of December 31, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of the date. The total pension liability in the December 31, 2014 actuarial valuation was determined using the following actuarial assumptions, applied to all periods in the measurement: Inflation- 3.0% Salary Increases -Age related scale with merit and inflation component COLA Increases- 3.0% for those eligible for a COLA Investment Return- 5.50% compounded annually, net of expenses The actuarial assumptions used in this report are as follows. These assumptions are based on the PMRS Experience Study for the period covering January 1, 2005 through December 31, 2008 issued by the actuary in July 2010 as well as subsequent Board approved assumption changes, such as the decrease in the regular interest to 5.50% for the January 1, 2013 actuarial valuation. In addition, mortality rates were based on males with the RP 2000 with 1 year set back and females with the RP 2000 with 5 year set back. The PMRS System's long-term expected rate of return on pension investments was determined using a building-block method in which best estimates of expected future real rates of return are developed for each major asset class, for the portfolio as a whole and at levels of probability or confidence. There are four steps to the method: 1) Expected future real rates are based primarily on the 20 year historic nominal rates of return as reflected by applicable return indexes and may be adjusted for specific asset classes, 2) The nominal rates of return by asset class are adjusted by a constant rate of expected future annual inflation rate of 3% to produce real rates of return, 3) The real rates of return are further adjusted by weighting each asset class using the PMRS portfolio target asset allocations, 4) These weighted real rates of return are then subjected to a probability simulation to understand the likelihood of success in achieving various portfolio return levels. Based on the most recent asset allocation study conducted by Dahab Associates, the minimum acceptable confidence level for the Board has been determined to be 70%. Based on the four part analysis, the Board established the System's Long-Term Expected Rate of Return at 7.5%. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan's target asset allocation as of December 31, 2014 are summarized in the following table: 18

21 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Defined Contribution Pension Plan (Cash Balance Plan) (Continued) Net Pension Liability (Continued) Discount Rate Target Nominal Long-Term Asset Rate of Expected Real Asset Class Allocation Return Rate of Return Domestic Equity Large Cap 25% 11.7% 8.7% Small Cap 15% 11.4% 8.4% International Equity Developed Markets 15% 7.6% 4.6% Emerging Markets 10% 11.1% 8.1 o/o Real Estate 20% 9.7% 6.7% Fixed Income 15% 2.0% -1.0% The discount rate used to measure the total pension asset was 5.50%. PMRS assumed that the employees will continue to contribute to the Plan at the current rates and the employers will continue the historical and legally required practice of contributing to the Plan based on an Actuarially Determined Contribution, reflecting a payment equal to annual normal cost, the expected administrative expenses, and an amount necessary to amortize the remaining unfunded actuarial liability as a level dollar amount over a closed period. Based on the adherence to the actuarial funding policy described above will result in the pension plan's projected Fiduciary Net Pension being less than or equal to the benefit payments projected for each future period. Therefore, the long-term expected rate of return on Plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Changes in Net Position Liability The following table shows the changes in net pension liability recognized over the measurement period: I ncrease/(decrease) Total Pension Plan Liability Fiduciary Net (a} Position (b) Net Pension Liability (a)-(b) Balance at December 31, 2013 Changes for the year: Service Cost Interest Changes in Benefit Terms Differences Between Expected and Actual Experience Changes in Assumptions Contributions - Employer Contributions - Member PMRS Investment Income Market Value Investment Income Benefit Payments PMRS Administrative Expense Additional Administrative Expenses $ 69,400 15,381 4,109 (1) $ 68,704 9,318 6,152 4,096 (420) (80) (157) $ ,381 4,109 (1) (9,318) (6, 152) (4,096) Balance at December 31, 2014 $ 88,889 $ 87,613 $ 1,276 19

22 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Defined Contribution Pension Plan (Cash Balance Plan) (Continued} Sensitivity of the Net Pension (Asset) Liability to Changes in the Discount Rate The following presents the net pension liability calculated using the discount rate of 5.50%, as well as what the net pension (asset) liability would be if it were calculated using a discount rate that is 1 percentage point lower (4.50%) or 1 percentage point higher (6.50%) than the current rate: Current 1% Decrease Discount Rate 1% Increase 4.50% 5.50% 6.50% Net Pension (Asset) Liability $ 19,054 $ 1,276 $ (16,501) Plan Fiduciary Net Position Detailed information about the Plan's fiduciary net position is available in the separately issued Northampton Borough Municipal Authority financial report. Pension Expense. Deferred Outflows of Resources. and Deferred Inflows of Resources For the year end December 31, 2015, the Authority recognized pension expense of $11,932. At December 31, 2015, the Authority reported deferred outflows of resources and deferred inflows of resources related to pension from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Differences Between Expected and Actual Experience $ $ Changes in Assumptions Net Difference Between Projected and Actual Earnings on Pension Plan Investments Total 252 $ 252 $ Amounts reported as deferred outflows of resources and deferred inflows of resources will be recognized in pension expense as follows: Years Ended December 31, $

23 NORTHAMPTON BOROUGH MUNICIPAL AUTHORITY NOTES TO FINANCIAL STATEMENTS MARCH 31, 2016 AND Defined Benefit Pension Plan Plan Description The Northampton Borough Municipal Authority pension plan is a single-employer defined benefit pension plan controlled by the provisions of Resolution No. 2 adopted pursuant to Act 15 of The plan provides retirement, disability and death benefits to plan members and their beneficiaries. Cost of living allowances are provided at the discretion of the plan. The plan participates in the Pennsylvania Municipal Retirement System (PMRS), which is an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for participating municipal pension plans. PMRS issues a separate Comprehensive Annual Financial Report (CAFR). The CAFR is available on the PMRS Website. A copy can be obtained by contacting the PMRS accounting office. At December 31, 2014, the date of the most recent Statement of Plan Net Asset, participants in the Plan were as follows: Active Plan Members Retirees and Beneficiaries Currently Receiving Benefits Terminated Plan Members Entitled to but not yet Receiving Benefits Funding Policy Act 205, of the Commonwealth of Pennsylvania, requires that annual contributions be based upon the plan's minimum municipal obligation (MMO). The MMO is based upon the plan's biennial actuarial valuation. The most recent actuarial valuation was performed January 1, In accordance with the plan's governing resolution, members are not required to contribute any of their compensation to the plan. The plan did not receive an allocation of state aid from the General Municipal Pension System Aid Program which must be used for pension funding, for the plan year ended December 31, Any funding requirements established by the MMO in excess of aid must be paid by the municipality in accordance with Act 205. Administrative Costs, including the investment manager, custodial trustee, and actuarial services are charged to the plan and funded through investment earnings. Net Pension Asset The Authority's net pension asset was measured as of December 31, 2014, and the total pension asset used to calculate the net pension asset was determined by an actuarial valuation as of the date. The total pension asset in the December 31, 2014 actuarial valuation was determined using the following actuarial assumptions, applied to all periods in the measurement: Inflation - 3.0% Salary Increases -Age related scale with merit and inflation component COLA Increases- 3.0% for those eligible for a COLA Investment Return % compounded annually, net of expenses 21