A R M L Montana Water Pollution Control and Drinking Water ...leg.mt.gov/content/Publications/Audit/Report/15-25B.pdf · Anna Miller, Bureau Chief, Loan & Financial Management Bureau

A RepoRtto the

MontAnALegisLAtuRe

LegisLAtive Auditdivision

15-25B

FinAnciAL Audit

MARch 2017

Montana Water Pollution Control and Drinking Water State Revolving

Fund ProgramsDepartment of

Environmental Quality Department of Natural

Resources and Conservation For the Fiscal Year Ended

June 30, 2016

Financial AuditsFinancial audits are conducted by the Legislative Audit Division to determine if the financial statements included in this report are presented fairly and the agency has complied with laws and regulations having a direct and material effect on the financial statements. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States Government Accountability Office. Financial audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates.

Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A‑133 require the auditor to issue certain financial, internal control, and compliance reports. This individual agency audit report is not intended to comply with these requirements. The Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. The Single Audit Report for the two fiscal years ended June 30, 2015, was issued March 29, 2016. The Single Audit Report for the two fiscal years ended June 30, 2017, will be issued by March 31, 2018. Copies of the Single Audit Report can be obtained by contacting:

Single Audit Coordinator Legislative Audit DivisionOffice of Budget and Program Planning Room 160, State CapitolRoom 277, State Capitol P.O. Box 201705P.O. Box 200802 Helena, MT 59620‑1705Helena, MT 59620‑0802

Legislative AuditCommittee

RepresentativesRandy Brodehl, [email protected]

Kim [email protected]

[email protected]

Tom [email protected]

Virginia [email protected]

Denise [email protected]

SenatorsDee Brown

[email protected] [email protected]

Bob [email protected]

Mary McNally, Vice [email protected]

J.P. [email protected]

Gene [email protected]

Members serve until a member’s legislative term of office ends or until a successor is appointed,

whichever occurs first.

§5‑13‑202(2), MCA,

Fraud Hotline(Statewide)

1‑800‑222‑4446(in Helena)

444‑[email protected]

Audit StaffJeane Carstensen‑GarrettJessica Curtis

Mary CurrinNatalie Gibson

Reports can be found in electronic format at:http://leg.mt.gov/audit

LEGISLATIVE AUDIT DIVISION Angus Maciver, Legislative Auditor Deputy Legislative AuditorsDeborah F. Butler, Legal Counsel Cindy Jorgenson Joe Murray

Room 160 • State Capitol Building • PO Box 201705 • Helena, MT • 59620-1705Phone (406) 444-3122 • FAX (406) 444-9784 • E-Mail [email protected]

March 2017

The Legislative Audit Committeeof the Montana State Legislature:

This is our report resulting from the fiscal year 2016 financial audit of the Montana Water Pollution Control (WPCSRF) and Drinking Water State Revolving Fund (DWSRF) Programs. The Montana State Revolving Fund Programs provide low interest loans for the planning, design, and construction of water pollution control and drinking water projects for communities around the state.

An annual audit of these programs is required by the United States Environmental Protection Agency (EPA). We performed audit procedures to determine whether the financial statements present fairly, in all material respects, the fund balances of the WPCSRF and DWSRF Programs as of June 30, 2016, and changes in fund balances for the fiscal year then ended, in conformity with accounting principles generally accepted in the United States of America. We also performed procedures over the supplementary financial schedules, which are prepared on a regulatory basis as requested by the EPA.

Included in this report is one recommendation related to internal controls over the preparation of the financial statements and notes.

The department’s written response to the audit recommendation is included in the audit report at page C-1. We thank the directors and their staff for their cooperation and assistance throughout the audit.

Respectfully submitted,

/s/ Angus Maciver

Angus MaciverLegislative Auditor

Table of ContentsFigures and Tables .....................................................................................................................iiAppointed and Administrative Officials ..................................................................................iiiReport Summary ...................................................................................................................S-1

CHAPTER I – INTRODUCTION ��1Introduction ..............................................................................................................................1Background ...............................................................................................................................1

WPCSRF ..........................................................................................................................2DWSRF ............................................................................................................................2

CHAPTER II – FINDINGS AND RECOMMENDATIONS ��7Internal Controls Over Financial Reporting .............................................................................7

INDEPENDENT AUDITOR’S REPORT AND PROGRAM FINANCIAL STATEMENTSIndependent Auditor’s Report ............................................................................................... A-1Combined Balance Sheet ......................................................................................................A-5Combined Statement of Revenues, Expenditures, and Changes in Fund Balances ..............A-6Notes to the Financial Statements ......................................................................................... A-7Balance Sheet - Regulatory Basis......................................................................................... A-21Revenues, Expenditures, and Changes in Fund Balances - Regulatory Basis ......................A-22

REPORT ON INTERNAL CONTROL AND COMPLIANCEReport on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ................................................................................................................B-1

DEPARTMENTS RESPONSEDepartment of Environmental Quality Department of Natural Resources and Conservation ...........................................................C-1

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Figures and TablesTables

Table 1 Water Pollution Control State Revolving Fund Projects Closed as of June 30, 2016 ..............4

Table 2 Drinking Water State Revolving Fund Projects Closed as of June 30, 2016 .......................... 5

Montana Legislative Audit Divisionii

Appointed and Administrative Officials

Department of Environmental Quality

Tom Livers, Director

George Mathieus, Deputy Director

Todd Teegarden, Bureau Chief, Engineering Bureau

Department of Natural Resources and Conservation

John E. Tubbs, Director

Patricia Greiberis, Chief Financial Officer, Financial Services Office

Anna Miller, Bureau Chief, Loan & Financial Management Bureau

For additional information concerning the Montana Water Pollution Control and Drinking Water State Revolving Fund programs, contact:

Anna Miller, Bureau ChiefP.O. Box 201601Helena, MT 59620-1601e-mail: [email protected]

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15-25B

Montana LegisLative audit division

(continued on back)

Financial auditMontana Water Pollution Control and Drinking Water State Revolving Fund ProgramsFor the Fiscal Year Ended June 30, 2016

March 2017 15-25B report SuMMary

The Montana State Revolving Fund Programs provide low interest loans for the planning, design, and construction of water pollution control and drinking water projects for communities around the state. This report contains one recommendation related to improving controls over the preparation and fair presentation of the financial statements and notes.

ContextThe State Revolving Fund Programs include the Water Pollution Control State Revolving Fund (WPCSRF) and the Drinking Water State Revolving Fund (DWSRF). The programs are jointly administered by the Department of Environmental Quality and the Department of Natural Resources and Conservation. An annual audit of these programs is required by the Environmental Protection Agency (EPA).

Loan agreements offered by the programs allow up to 30 years for repayment and all repayments of interest and principal must remain in the revolving funds. Therefore, as loans are repaid, funds are recycled to be made available for additional projects.

In addition to the recycled funds, the programs are funded by grants from the EPA which requires a state match of funds. The state match is provided by the issuance of debt in the form of General Obligation Bonds, Revenue Anticipation Notes, and Bond Anticipation Notes.

There is a loan forgiveness component to the EPA’s capitalization grant awards. During fiscal year 2016, the program forgave approximately $1 million in loans in the WPCSRF and approximately $2 million in loans for the

DWSRF Programs. A portion of the loans is forgiven when the public entity meets certain requirements.

Through June 30, 2016, the WPCSRF and the DWSRF Programs authorized loans to public entities, totaling approximately $498 million and $250 million, respectively. At June 30, 2016, the loans receivable balances were approximately $261 million in the WPCSRF and $132 million in the DWSRF. The associated state match requirement for the WPCSRF and DWSRF Programs are approximately $36 million and $49 million, respectively, and the state has voluntarily matched additional funds of approximately $61 million and over $6 million, respectively. These amounts are cumulative over the life of the programs.

ResultsThe EPA requires an annual financial audit of the programs. We reviewed the presentation of the financial statements and note disclosures to determine if the information was supported by the underlying accounting records. This process included comparing the financial statements to previous years and reviewing the notes for consistency with the financial

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statements and supporting documentation. We determined the accuracy of loan balances for selected loans receivable. We verified program financial information reconciled to statements provided by the programs’ trustee bank and determined program compliance with selected, applicable state and federal laws and regulations.

We noted over $47 million was misclassified as investments. The amount should have been classified as cash and cash equivalents. Program personnel corrected the misclassification but the error and additional errors found on the notes to the financial statements indicate improvements could be made in internal controls. The statements were corrected and the statements and notes now fairly present the programs’ activities.

Recommendation Concurrence

Concur 1

Partially Concur 0

Do Not Concur 0

Source: Agency audit response included in final report.

For a complete copy of the report (15-25B) or for further information, contact the Legislative Audit Division at 406-444-3122; e-mail to lad@mt�gov; or check the web site at

http://leg�mt�gov/auditReport Fraud, Waste, and Abuse to the Legislative Auditor’s FRAUD HOTLINE

Call toll-free 1-800-222-4446, or e-mail ladhotline@mt�gov�

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Chapter I – Introduction

IntroductionWe performed a financial audit of the Montana Water Pollution Control State Revolving Fund (WPCSRF) and Drinking Water State Revolving Fund (DWSRF) Programs. The objectives of the audit were to:

1. Determine whether the programs’ financial statements and related notes present fairly the fund balances and changes in fund balances for the fiscal year ended June 30, 2016.

2. Determine whether the programs complied with selected, applicable state and federal laws and regulations that are direct and material to the determination of financial statement amounts.

3. Obtain an understanding of the programs’ control systems to the extent necessary to support our audit of the programs’ financial statements and, if appropriate, make recommendations for improvements in management and internal controls of the programs.

4. Determine whether supplementary information is fairly stated, in all material respects, in relation to the financial statements taken as a whole.

We audited the financial statements and note disclosures to determine if the information was supported by the underlying accounting records. This included reviewing the financial statement preparation process, comparing the activity on the financial statements to previous years, and reviewing the notes for consistency with the financial statements and supporting documentation. We evaluated the accuracy of loan balances for selected loans receivable. We also verified program financial information reconciled to statements provided by the programs’ trustee bank and determined program compliance with selected, applicable state and federal laws and regulations.

The Environmental Protection Agency (EPA) requires us to conduct our audit in accordance with Government Auditing Standards, which includes issuance of our report on internal control over financial reporting and on compliance and other matters on page B-1.

BackgroundThe State Revolving Fund (SRF) Programs operate as direct loan programs. Loans made to communities through the WPCSRF and DWSRF Programs are funded by Federal EPA capitalization grants, state match, and state recycled funds. The programs are jointly administered by the Engineering Bureau of the Department of Environmental Quality (DEQ) and the Conservation and Resource Development Division of the Department of Natural Resources and Conservation (DNRC).

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WPCSRFThe WPCSRF Program provides a flexible financing source to loan money at reduced interest rates to finance the construction of publicly owned water pollution control facilities, projects, and plans. Water pollution control loans are comprised of federal grants and state match funds and may be financed up to 30 years.

Since inception, the SRF program has issued General Obligation (GO) bonds, Revenue Anticipation Notes (RANs), and Bond Anticipation Notes (BANs) for use as state matching funds for the WPCSRF Program. The cumulative state match requirement for the WPCSRF Program is approximately $36 million. In addition to the required match, the state has matched additional funds of approximately $61 million through the GO bonds. The additional funding was in response to the needs of public entities in Montana.

As of June 30, 2016, the loans receivable balance for the WPCSRF Program was approximately $261 million. The total amount distributed by the WPCSRF Program in fiscal year 2016 was approximately $76 million.

DEQ and DNRC are allowed to use a portion of the WPCSRF federal grant funds for program administration. In addition, federal law allows for a designated amount of the EPA capitalization grants to have a loan forgiveness component. If the public entity meets certain program requirements based on income and unemployment data, population trends, and other relevant data such as whether the project or activity is to be carried out in an economically distressed area, the program may forgive an amount not to exceed 30 percent of the amount of the federal grant received by the state for the year.

DWSRFThe DWSRF Program was established for states to provide low interest rate loans to finance the entire cost of qualified projects or to refinance debt obligation loans for community water systems and nonprofit noncommunity water systems. Drinking water loans are comprised of federal grants and state match funds and may be financed up to 30 years.

Since inception, the SRF program has issued GO bonds, RANs, and BANs for use as state matching funds in the DWSRF Program. The total required match to date in the DWSRF Program is $49 million. In addition to the required match, the state has matched additional funds of over $6 million. The additional funding was in response to the needs of public entities in Montana. As of June 30, 2016, the net outstanding balance of loans receivable for the DWSRF Program was $132 million. The total

2 Montana Legislative Audit Division

amount distributed by the DWSRF Program in fiscal year 2016 was approximately $11 million.

Per federal regulations, DEQ and DNRC are given flexibility to set aside specified amounts of the DWSRF grant for specific purposes such as program administration, technical assistance to public water systems, capacity development, operator certification, and to assist in the development and implementation of local drinking water protection initiatives and other state programs. The goal of the set-asides is to enable states to improve water system management and operations.

Federal regulation allows the DWSRF program to have a loan forgiveness component. If the community meets certain program requirements, the DWSRF Program may forgive an amount not to exceed 30 percent of the amount of the grant received by the state for the year. The priority for the loan forgiveness should be given to communities that could not otherwise afford such projects.

In both programs, a special administration fee, in the form of a percentage of the loan amount, is added to the interest rate for each loan. This fee is used to fund administrative program costs not covered by the federal grant funds.

As of June 30, 2016, the programs had a combined total of approximately $38 million in GO bonds principle outstanding. This debt is the obligation of the state of Montana and is not reflected in the programs’ financial statements.

The Tables 1 and 2 (see pages 4 and 5) are provided for informational purposes. The tables contain information concerning the loans closed during fiscal year 2016 for the WPCSRF and DWSRF Programs. WPCSRF and DWSRF Programs personnel define a project as closed when the program has granted a loan and the recipient is drawing funds. The tables list the project sponsor, the county in which the project was undertaken, a description of the water project, the total cost of the project and additional funding sources other than the WPCSRF and DWSRF loans. Information specific to the WPCSRF and DWSRF Programs includes the amount of loan forgiveness by the respective programs and the amount available to loan for the project. The tables also include information pertaining to the other state administered programs for the projects. Highlighted columns represent the SRF funding.

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Table 1Water Pollution Control State Revolving Fund Projects Closed as of June 30, 2016

Project Sponsor Project Name County Total Project Cost

Renewable Resource

State Grant & Loan*

Treasure State Endowment

Program State Grant*

State Revolving Fund Loan Forgiven

Regular State Revolving Fund

Loan**

Rural Development

Grant*

Rural Development

Loan*

Federal Army Corp Water Resources Development Act*

Community Funds Local*

Coal Tax Loan Water

Development Loan*

US Federal Forest Legacy

Grant*

Habitat Conservation

Grant*

Choteau, City of Wastewater Collection Teton $2,728,000 $2,728,000

Columbus, City of Wastewater Lines Stillwater $1,965,644 $1,904,000 $61,644

Culbertson, Town of Wastewater Phase 2-Bond Anticipation Note

Roosevelt $6,793,515 $400,000 $2,847,000 $2,683,000 $674,000 $143,485

Eureka, Town of Extend Lines Lincoln $861,500 $215,500 $646,000

Flathead County/Big Lake Storm Sewer - Rural Special Improvement District

Flathead $1,316,860 $100,000 $1,203,860 $13,000

Four Corners County Water & Sewer District

Wastewater System Acquisition

Gallatin $23,081,000 $9,300,000 $10,640,000 $81,000 $3,060,000

Lockwood Water & Sewer District Ph II

Bond Anticipation Notes and Loan Waste Water Project

Yellowstone $11,649,151 $100,000 $750,000 $3,700,000 $1,890,380 $3,000,000 $2,208,771

Missoula, City of Dewatering Project Missoula $970,000 $970,000

Sidney, City of Wastewater Richland $2,438,019 $200,000 $832,000 $1,406,019

Ten Mile Estates/Pleasant Valley Sewer District

Wastewater Treatment Lewis & Clark $4,441,000 $125,000 $500,000 $400,000 $3,416,000

Whitefish, City of Sewer Lines Phase 2 Hwy 93 Flathead $1,408,050 $960,000 $448,050

Whitefish, City of Haskill Basin Conservation Flathead $17,219,500 $8,219,500 $7,000,000 $2,000,000

Totals $74,872,239 $325,000 $1,250,000 $1,215,500 $36,726,360 $4,573,380 $14,314,000 $0 $4,361,969 $3,060,000 $7,000,000 $2,000,000

SRF TOTAL $37,941,860

Source: Compiled by the Legislative Audit Division from information provided by program personnel.

*Indicates funding source other than Water Pollution Control State Revolving Fund Program Loan.

**The amounts in the Regular State Revolving Fund Loan column represent the amount available for the loan for the project from the Water Pollution Control State Revolving Fund Program. The project sponsor is not required to borrow the full amount.

4

Table 2Drinking Water State Revolving Fund Projects Closed as of June 30, 2016

Project Sponsor Water Project Description County Total Project

Cost

Renewable Resource

Grant & Loan State Grant*

Treasure State Endowment

Program State Grant*

Treasure State

Regional Water*

Community Development Block Grant*

State Revolving Fund Loan Regular**

State Revolving Fund Loan Forgiven

US Army Corp Water Resource

Development Act*

US Bureau of Reclamation*

Community Funds Local*

Belt, Town of Water Meter Installation Phase 2 Cascade $493,057 $122,000 $122,000 $245,000 $4,057

County Water District of Billings Heights

Water Transmission Main Extension

Yellowstone $3,391,844 $2,987,000 $404,844

Carter/Chouteau County Water & Sewer District

Drinking Water Improvements Chouteau $119,669 $59,000 $59,000 $1,669

Dry Prairie VII Nashua and Valley County Connection

Valley $4,623,185 $600,000 $1,727,000 $2,241,160 $55,025

Harlowton, City of Bond Anticipation Note

Drinking Water Improvements Wheatland $150,000 $150,000

Manhattan, Town of Drinking Water System Improvements

Gallatin $1,587,000 $100,000 $750,000 $281,000 $281,000 $175,000

Rexford, Town of Refinance Lincoln $236,000 $236,000

South Winds Water & Sewer District

Water System Improvements Cascade $1,581,960 $500,000 $500,000 $581,960

Thompson Falls, City of Water Mains/Meter Replacement Sanders $1,362,938 $499,000 $425,000 $425,000 $13,938

Whitefish, City of Water Lines Hwy 93, Phase 2 Flathead $580,515 $120,000 $460,515

Totals $14,126,168 $100,000 $1,249,000 $600,000 $0 $6,607,000 $1,387,000 $1,001,960 $2,241,160 $940,048

SRF TOTAL $7,994,000

Source: Compiled by the Legislative Audit Division from information provided by program personnel.

*Indicates funding source other than Drinking Water State Revolving Fund Program Loan.

**The amounts in the Regular State Revolving Fund Loan column represent the amount available for the loan for the project from the Drinking Water State Revolving Fund Program. The project sponsor is not required to borrow the full amount.

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6

Chapter II – Findings and Recommendations

Internal Controls Over Financial Reporting

The controls over financial reporting did not detect and prevent a misclassification on the balance sheet between Cash and Cash Equivalents and Investments�

State accounting policy requires management to establish internal control policies and procedures designed to ensure the accuracy and reliability of financial data such as the financial statements and note disclosures. Our audit work identified a misclassification on the programs’ financial statements and several misstatements in the notes to the financial statements indicating internal controls were not effective in ensuring complete and accurate financial reporting.

For fiscal year 2016, some Cash and Cash Equivalents on the Combined Balance Sheet were misclassified on the draft statement given to the auditors as investments. The amount of the misclassification was significant in size to the financial statements at over $47 million. The distinction between cash equivalents and investments is important. In the context of financial reporting requirements, “cash equivalents” communicate a different liquidity. Classifying them as investments could lead readers to think the programs did not have enough liquidity in the summer months when projects are most active. We consider the combination of the statement misclassification and misstatements in the notes described in the following paragraph to be a significant deficiency in internal controls over financial reporting as indicated on page B-1. The misclassification was on the financial statements only and did not indicate any internal control issues over the distribution of resources in the program activity or the underlying accounting records. We communicated the misclassification to program personnel and it was corrected. However, in order for controls to be in place and operating as intended, errors must be detected and corrected prior to the audit process. We believe adding a process to review the draft statements using a high level comparison between years to see if the activity has been recorded consistently would help prevent future misclassifications. Large changes between years could then be evaluated to determine if they are consistent with program activity.

In addition to the specific item above, we identified instances where activity in the notes was inaccurate and/or not completely supported. Multiple staff members contribute to the notes. For example, note 9 involved multiple calculations of the program activity. When staff provided support for the calculations upon our request, it was determined some of the original calculations were incorrect. Although the notes were corrected

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and support was provided, a more comprehensive compilation of support accumulated in one place would allow staff to confirm the accuracy of note items and detect and correct misstatements in the notes prior to the audit process.

Recommendation #1

We recommend the Departments of Natural Resources and Conservation and Environmental Quality strengthen controls related to the financial reporting of State Revolving Fund programs activities.

8 Montana Legislative Audit Division

Independent Auditor’s Report and Program Financial Statements

15-25B

Independent Auditor’s Report


IntroductionWe have audited the accompanying Combined Balance Sheet-Special Revenue and Debt Service Funds of the Montana Water Pollution Control and Drinking Water State Revolving Fund Programs, as of June 30, 2016, and the related Combined Statement of Revenues, Expenditures and Changes in Fund Balances-Special Revenue and Debt Service Funds, for the fiscal year then ended and the related notes which collectively comprise the programs’ financial statements.

Management’s Responsibility for the Financial StatementsManagement 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 responsibility includes designing, implementing, and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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 controls relevant to the programs’ 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 programs’ internal control, and accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness



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of significant accounting estimates made by management, as well as the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the fund balances of the Montana Water Pollution Control and Drinking Water State Revolving Fund Programs as of June 30, 2016, and the changes in fund balances for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America.

Emphasis of Matter As discussed in Note 2A, the financial statements of the Montana Water Pollution Control and Drinking Water State Revolving Fund Programs present the fund balances and changes in fund balances of only that portion of the reporting entity of the state of Montana that is attributable to the transactions of the programs’ special revenue and debt service funds. They do not purport to, and do not, present fairly the financial position of the state of Montana as of June 30, 2016, or the changes in its financial position for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

Other Matters Supplementary InformationOur audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Montana Water Pollution Control and Drinking Water Schedule of Revolving and Non-Revolving SRF Programs Balance Sheet-Special Revenue and Debt Service Funds-Regulatory Basis as of June 30, 2016, and the related Schedule of Revolving and Non-Revolving SRF Program Revenues, Expenditures, and Changes in Fund Balances-Special Revenue and Debt Service Funds-Regulatory Basis, for the fiscal year then ended are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.

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Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 23, 2017, on our consideration of the programs’ internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the programs’ internal control over financial reporting and compliance.


/s/ Cindy Jorgenson

Cindy Jorgenson, CPADeputy Legislative AuditorHelena, MT

February 23, 2017

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A-6

MONTANA STATE WATER POLLUTION CONTROL ANDDRINKING WATER STATE REVOLVING FUND PROGRAMS

NOTES TO FINANCIAL STATEMENTSFOR THE FISCAL YEAR ENDED JUNE 30, 2016

1. Organization of the Programs

The State of Montana Water Pollution Control State Revolving Fund (WPCSRF) program was established pursuant to Title VI of the Federal Water Quality Act of 1987. This federal act established the WPCSRF program to replace the construction grants program. It provides a flexible financing source to loan money at reduced interest rates to finance the construction of publicly owned water pollution control facilities, non-point source pollution control projects, and estuary management plans. Instead of making grants to communities that pay for a portion of building wastewater treatment facilities, the WPCSRF provides for low interest rate loans to finance the entire cost of qualified projects or to refinance debt obligations on projects. The State of Montana first incurred expenditures in the WPCSRF program in state fiscal year (SFY) 1992.

The State of Montana Drinking Water State Revolving Fund (DWSRF) program was established pursuant to the 1996 Amendments to the Federal Safe Drinking Water Act. This federal act established the DWSRF program for states to make loans to community water systems and non-profit non-community water systems. Instead of making grants to communities that pay for a portion of building drinking water treatment facilities, the DWSRF provides for low interest rate loans to finance the entire cost of qualified projects or to refinance debt obligations on projects that began after July 1, 1993. The State of Montana first incurred expenditures in the DWSRF program in SFY 1997.

WPCSRF and DWSRF loan agreements allow up to 30 years for repayment. All repayments of interest and principal must remain in the revolving funds. Both programs are capitalized through EPA grants. States are required to provide at least 16.67 percent of the federal capitalization grant as matching funds for WPCSRF, and at least 20 percent for DWSRF, in order to receive a grant. The State of Montana issues General Obligation (GO) Bonds, Revenue Anticipation Notes (RANs), and Bond Anticipation Notes (BANs) to provide the required state matching funds. RANs and BANs are funded through INTERCAP Loans from the Montana Department of Commerce, Board of Investments.

The programs are jointly administered by the Engineering Bureau of the Department of Environmental Quality (DEQ) and the Conservation and Resource Development Division of the Department of Natural Resources and Conservation (DNRC). The SRF programs do not have any full time employees. Both funds are charged for time spent on SRF activities by department employees. The charges include salaries and benefits of the employees, operating expenses and indirect costs.

2. Summary of Significant Accounting Policies

A-7

A. SRF Program Fund Structure

Both programs use Special Revenue and Debt Service funds, as appropriate, to report the financial position and the results of operations. A Special Revenue Fund accounts for the proceeds of specific revenue sources that are restricted to expenditures for specified purposes. A Debt Service Fund accounts for resources accumulated for payment of principal and interest on general long-term obligation debt, BANs and RANs. Montana maintains State Special Revenue and Federal Special Revenue Funds. The SRF program revenues and expenses include transactions from each Special Revenue Fund. Special Revenue and Debt Service Funds are considered governmental funds.

A fund is a separate accounting entity with a self-balancing set of accounts. Fund accounting is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain government functions and activities.

The financial statements are intended to present the financial position and changes in financial position of only that portion of the financial reporting entity of the state of Montana that is attributed to the transactions of the program.

B. Basis of Accounting

The accompanying financial statements have been prepared in conformity with Generally Accepted Accounting Principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). Also exhibited are supplementary financial schedules prepared on a regulatory basis of presentation as requested by the EPA for the WPCSRF and DWSRF program.The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All governmental funds are accounted for using a current financial resources measurement focus. Current financial resources means that, generally, only assets and current liabilities are included on the balance sheet. Operating statements of governmental funds present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets.

Governmental funds use the modified accrual basis of accounting. The modified accrual basis is the accrual basis adapted to the governmental fund-type measurement focus. Under the modified accrual basis of accounting, revenues are recorded when received in cash unless susceptible to accrual. Revenues are susceptible to accrual if they are measurable and available and earned within sixty days after the end of the fiscal year to finance expenditures of the fiscal year. Revenues are unearned if material and received before the normal time of receipt or if received for a particular activity and the expense for that activity has not been incurred prior to fiscal year-end. Expenditures are recognized when the related fund liability is incurred, with the following exceptions:

1) principal and interest on long-term debt are recognized when due;2) prepayments are accounted for as expenditures in the period of acquisition; 3) inventory items are considered expenditures when purchased.

A-8

The Loans Receivable and Allowance for Loan Forgiveness balances reside in the Special Revenue funds for each program. The net of these balances represents the total amount considered collectible.

C. Valuation

The book value of bonds is the “amortized” cost, which represents the original cost, adjusted for premium and discount amortizations where applicable. If bonds are purchased at more than the par value, the difference is called a premium. If they are purchased for less than par value, then difference is called discount. Premiums and discounts are amortized/accreted using the straight-line or scientific method to the call, average life, or maturity date of the securities. If the same investment has been purchased several times, the average of the purchase prices is the book value. All investment portfolios presented on the Combined Balance Sheet are recorded at fair value based on quoted market price.

3. Cash/Cash Equivalents

Cash and cash equivalents consist of funds deposited with US Bank National Association (US Bank) as trustee, and the State of Montana Treasury and include investments categorized as cash equivalents. Cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less.

Disclosures Relating to Credit RiskGenerally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. In accordance with the permitted investments as defined in the Indenture of Trust, the cash equivalent funds, invested at the direction of the issuer and held by US Bank, as trustee, are held in a Treasury Obligations Money Market Fund that invests exclusively in short-term U.S. Treasury obligations and repurchase agreements secured by U.S. Treasury obligations. The U.S. Treasury obligations in which the fund invests include U.S. Treasury bonds, notes, and bills, and are backed by the full faith and credit of the United States government.

Disclosures Relating to Custodial Credit RiskCustodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The investment policy as defined in the Indenture of Trust, and contract with the trustee, does not require collateralization for cash and securities held by the trustee. Securities are registered with the Federal Reserve Bank under “U.S. Bank as trustee for the State of Montana Department of Natural Resources and Conservation.” As custodian for the First American money market mutual funds, US Bank holds collateral at 101% of cost. Deposits in a money market savings accounts are FDIC insured for up to the current limit of $250,000.

Disclosures Relating to Interest Rate Risk

A-9

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The investment definition for the programs, as specified in the Indenture of Trust, does not explicitly address interest rate risk. However, the investment definition implicitly limits interest rate risk for cash equivalents by emphasizing liquidity, holding investments to maturity, and narrowly defining the eligible investments. In general, a shorter average maturity for fixed-income securities held in the money market funds means less sensitivity to interest rate changes.The average maturity in the funds as of June 30, 2016, is twenty-six days.

Moody’sInvestment Type Fair Value Rating Held by trustee:

Money Market Funds $47,906,723 Aaa

4. Investments

Fair Value Measurement

Investments are measured and recorded using fair value measurement guidelines established by GAAP. These guidelines recognize a three-tier fair value hierarchy, as follows:

- Level 1: Quoted prices for identical investments in active markets;- Level 2: Prices determined using inputs, other than quoted prices included within Level

1, that are observable for an asset or liability, either directly or indirectly; and- Level 3: Unobservable inputs.

At June 30, 2016 SRF had the following recurring fair value measurements: (In Thousands)

Fair Value Measurements UsingQuoted Prices in Active Markets Significant Other Significant

For Identical Assets Observable Inputs

Unobservable Inputs

6/30/2016 (Level 1) (Level 2) (Level 3)

Investments by fair value level

US Treasury 2,951

2,951

US Agencies

7,945

7,945

Total Investments at Fair Value 10,896

2,951

7,945

Power to Invest and Investment PolicyAn Indenture of Trust specifies the eligible investments meeting defined rating and risk criteria in

A-10

which the state may invest. The state invests funds through its trustee bank, US Bank.

Eligible investments are limited, generally, to obligations of, or guaranteed as to principal and interest by the United States of America, or by any agency or instrumentality thereof. A primary investment objective is to purchase investments that mature, or are subject to redemption, on or prior to the date or dates that the department anticipates that money will be required to make funds available for loans or to make bond payments.

Disclosures Relating to Credit RiskGenerally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The short- and long-term investments in the program are held in U.S. Treasury bills and notes and are not considered to have credit risk. U.S. Treasury bills have maturities of one year or less and U.S. Treasury notes have maturities greater than one year from the date of issuance.

Disclosures Relating to Custodial Credit RiskCustodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The permitted investment definition as defined in the Indenture of Trust, and contract with the trustee, does not require collateralization for cash and securities held by the trustee. Securities are registered with the Federal Reserve Bank under “U.S. Bank as trustee for the State of Montana Department of Natural Resources and Conservation.”

Disclosures Relating to Interest Rate RiskInterest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The permitted investments, as specified in the Indenture of Trust, do not explicitly address interest rate risk. However, the investment definition implicitly limits interest rate risk by emphasizing liquidity, holding investments to maturity, and narrowly defining the eligible investments.

5. Loans Receivable

Montana operates both SRF programs as direct loan programs. Most loans made to communities through the WPCSRF program are funded 83.33 percent by federal EPA capitalization grants, and 16.67 percent by state match. The WPCSRF program also made recycled loans that were disbursed from loan repayment funds. Most loans made by the DWSRF program are funded 80 percent by federal EPA capitalization grants, and 20 percent by state match. The DWSRF program also made recycled loans that were disbursed from loan repayment funds. Loan funds are disbursed to the local borrower agencies by the trustee bank as the local borrower agencies expend funds for the purposes of the loan and request reimbursement from the program. Interest is calculated from the date that funds are disbursed. Typically after the final disbursement has been made, the payment schedule is certified in the loan agreement and adjusted for the actual amounts disbursed. No provision for uncollectible accounts has been made as all loans are current in terms of compliance with the repayment schedules, and management believes that all loans will be repaid according to

A-11

the terms of the loan agreements.

The EPA federal funds for capitalization grant loans issued during SFY 2016 have a loan forgiveness component. If the community meets certain requirements, a portion of the loan is forgiven. The State of Montana recorded the forgivable loans in a federal special revenue fund as Loans Receivable with an offset to Allowance for Loan Forgiveness. When a community has met the requirements, the loan receivable and allowance balances are zeroed out. During SFY 2016, the program forgave $1,160,680 in loans in the WPCSRF and $2,146,627 in loans for the DWSRF programs.

The drawn and outstanding principal balance of all loans guaranteed by the WPCSRF program as of June 30, 2016, is $269,832,629 with an allowance for loan forgiveness of $2,563,230 resulting in a net loans outstanding balance of $267,269,399 which includes $6,105,605 presented as advances to other funds. The advances are inter-fund loans within the DNRC used for the non-point source private loans program.

The drawn and outstanding principal balance of all loans guaranteed by the DWSRF program as of June 30, 2016, is $135,596,810 with an allowance for loan forgiveness of $3,520,050 resulting in a net loans receivable balance of $132,076,760.

Loans mature at various intervals through July 1, 2044. The scheduled principal payments on loans and advances to other funds maturing in the years following SFY 2016 are as follows:

SFY ending June 30: WPCSRF Amount DWSRF Amount2017 $ 18,304,238 $ 8,646,2482018 35,041,258 9,718,5002019 21,060,345 9,897,6002020 18,186,900 9,838,0002021 and thereafter 174,676,658 93,976,412Total $ 267,269,399 $ 132,076,760

As of June 30, 2016, the WPCSRF and DWSRF programs had authorized loans to public entities of the State of Montana that in the aggregate exceeded $517.9 and $257.3 million, respectively. The outstanding balances of the largest loans in each portfolio are as follows:

Water Pollution Control State Revolving Fund

Local AgencyAuthorized

Loan AmountOutstanding

BalanceCity of Kalispell $ 14,470,000 $ 10,207,000City of Great Falls 11,295,267 3,835,000City of Havre* 10,870,000 9,359,601Butte-Silverbow County III* 10,268,000 5,509,128City of Glendive C BAN * 10,000,000 8,993,078Butte-Silverbow County I 10,000,000 9,559,000Butte-Silverbow County II 10,000,000 9,708,000

A-12

City of Bozeman 9,573,000 7,710,000City of Bozeman 9,500,000 7,298,000City of Helena 9,320,000 3,990,000Total $ 105,296,267 $ 76,168,807

Drinking Water State Revolving Fund

Local AgencyAuthorized

Loan AmountOutstanding

BalanceCity of Billings $ 17,300,000 $ 9,590,000City of Bozeman A 10,000,000 8,492,000City of Bozeman B 9,552,000 8,477,000City of Havre II 8,401,000 3,932,000City of Billings 6,759,215 4,973,000City of Billings* 6,100,000 5,758,000City of Whitefish II 5,839,000 1,151,000Big Sky WSD 5,000,000 3,261,000City of Great Falls 4,010,000 2,711,000Billings 3,700,000 3,181,329TOTAL $76,661,215 $51,526,329

* Still drawing funds.

6. Interest Receivable on Loans

The interest receivable on loans represents interest owed by borrowers as of June 30, 2016, for the July 1, 2016, payment. It represents the six months of interest accrued from the previous loan payment date of January 1, 2016. Interest receivable balances in the WPCSRF include $412,375 in the Special Administration fund and $1,257,107 in the Debt Service and Loan Loss Reserve funds. Interest receivable in the DWSRF includes $315,977 in the Special Administration fund and $902,353 in the Debt Service and Loan Loss Reserve funds. Interest receivable does not include interest payments received through June 30, 2016, that were due July 1, 2016. Interest payments received through June 30, 2016, amounted to $1,496,558 for the WPCSRF and $628,141for the DWSRF.

7. Bonds Payable

WPCSRF general obligation bonds payable at June 30, 2016, were as follows:

Series 2010C Payable during the year Interest ending June 30, Range (%) Principal Interest Total2017 2% - 4% $350,000 $37,773 $387,773

A-13

2018 340,000 28,375 368,3752019 410,000 9,800 419,800Total Cash Requirements $1,100,000 $75,948 $1,175,948

Series 2013E Payable during the year Interest ending June 30, Range (%) Principal Interest Total2017 2% - 4% 480,000 105,900 585,9002018 490,000 96,200 586,2002019 500,000 86,300 586,3002020 510,000 73,650 583,6502021 525,000 58,125 583,1252022-2024 1,675,000 76,425 1,751,425Total Cash Requirements $4,180,000 $496,600 $4,676,600

Series 2015C Payable during the year Interest ending June 30, Range (%) Principal Interest Total2017 3% - 5% 670,000 1,160,650 1,830,6502018 805,000 1,134,500 1,939,5002019 835,000 1,101,700 1,936,7002020 870,000 1,067,600 1,937,6002021 905,000 1,032,100 1,937,1002022-2026 5,190,000 4,446,500 9,636,5002027-2031 6,630,000 2,976,250 9,606,2502032-2036 8,460 ,000 1,098,500 9,558,500Total Cash Requirements $24,365,000 $14,017,800 $38,382,800

TOTAL GENERAL OBLIGATION DEBT - WPCSRF Payable during the year ending June 30, Principal Interest Total2017 1,500,000 1,304,323 2,804,3232018 1,635,000 1,259,075 2,894,0752019 1,745,000 1,197,800 2,942,8002020 1,380,000 1,141,250 2,521,2502021 1,430,000 1,090,225 2,520,2252022-2026 6,865,000 4,522,925 11,387,9252027-2031 6,630,000 2,976,250 9,606,2502032-2036 8,460,000 1,098,500 9,558,500Total Cash Requirements $29,645,000 $14,590,348 $44,235,348

DWSRF general obligation bonds payable at June 30, 2016, were as follows:

A-14

Series 2005F Payable during the year Interest ending June 30, Range (%) Principal Interest Total2017 4.00 – 4.75 $290,000 $45,838 $335,8382018 305,000 31,706 336,7062019 315,000 16,981 331,9812020 200,000 4,750 204,750

Total Cash Requirements $1,110,000 $99,275 $1,209,275

Series 2010B Payable during the year Interest ending June 30, Range (%) Principal Interest Total2017 2.00-4.00 460,000 105,050 565,0502018 475,000 90,431 565,4312019 495,000 74,050 569,0502020 510,000 56,463 566,4632021 530,000 37,600 567,6002022-2026 710,000 56,031 766,031


Series 2014A BANPayable during the year Interest ending June 30, Range (%) Principal Interest Total2017 1.25% 410,000 7,835 417,8352018 variable 655,000 8,203 663,203Total Cash Requirements $1,065,000 $16,038 $1,081,038

Series 2015B BANPayable during the year Interest ending June 30, Range (%) Principal Interest Total2019 1.25% 3,000,000 37,500 3,037,500

variableTotal Cash Requirements $3,000,000 $37,500 $3,037,500

TOTAL GENERAL OBLIGATION DEBT - DWSRF Payable during the year ending June 30, Principal Interest Total2017 1,160,000 158,723 1,318,7232018 1,435,000 130,340 1,565,340

A-15

2019 3,810,000 128,531 3,938,5312020 710,000 61,213 771,2132021 530,000 37,600 567,6002022-2026 710,000 56,031 766,031


8. Fund Balance

All of the fund balances in the WPCSRF and DWSRF programs are restricted. The classification of Fund Balance Restricted is used in the SRF program because the use of resources is restricted by parties outside the state, such as EPA and the bond holders.

9. Program Capitalization

The WPCSRF and DWSRF programs are capitalized by grants from the EPA and matching funds from the State of Montana. All grant funds drawn are recorded as revenue. As of June 30, 2016,the EPA has awarded to the State of Montana capitalization grants of $194,005,665 for the WPCSRF program and $19,239,100 for the WPCSRF-ARRA program. The state match requirement in the WPCSRF program is approximately $36,200,000, but the state has matched additional funds of approximately $61,000,000. In the WPCSRF program, $510,517,936 has been drawn from federal and state funds for loans and administrative expenses. As of June 30, 2016,the EPA has awarded to the State of Montana capitalization grants of $183,241,788 for the DWSRF program and $19,500,000 for the DWSRF-ARRA program. The state match requirement in the DWSRF program is approximately $49,000,000, but the state has matched additional funds of approximately $6,600,000. In the DWSRF program, $257,755,962 has been drawn from federal and state funds for loans and administrative expenses. Montana has issued GO bonds, RANs, and BANs totaling $64,955,000 for use as state matching funds for the WPCSRF program and $35,336,758 use as state matching funds in the DWSRF program.

10. Federal Capitalization Grant Revenue

Actual draws of federal funds can differ from the amount of federal capitalization grant revenue reported on the Combined Statement of Revenues, Expenditures and Changes in Fund Balances. This occurs because state accounting policy requires federal special revenue funds reflect a zero fund balance at fiscal year-end (with the exception of “A” accruals). Consequently, at fiscal year-end, if a positive fund balance exists, unearned revenue is recorded and if a negative fund balance exists, an accounts receivable is established and revenue is recorded to zero the fund balance.

The following is a reconciliation of federal revenues reported on the financial statements to federal cash actually drawn during the state fiscal year:

WPCSRFFederal Revenue - Combined Statement $6,923,036Adjustment Due From Federal Govt SFY 2015 5,409

A-16

Adjustment Due From Federal Govt SFY 2016 (5,080)Other Adjustments -Total Federal Draws $6,923,365

DWSRFFederal Revenue - Combined Statement $6,546,720Adjustment Due From Federal Govt SFY 2015 84,402Adjustment Due From Federal Govt SFY 2016 (81,732)Other Adjustments -Total Federal Draws $6,549,390

11. Interest Income on Investments

This revenue represents interest earnings on investments within the funds. All assets of the funds are fully invested by the trustee, to the degree possible, in investment vehicles. The investments range from U.S. Treasury obligation money market funds to long-term government securities. In some funds, interest income is earned in one fund but transferred to another fund in accordance with terms of the bond indenture.

12. Investment Gains/ (Losses)

This revenue represents amortized (premiums) and accreted discounts recognized monthly and at the disposal of government securities.

13. Interest Income from Loans

This revenue represents interest earnings from loan repayments made by borrowers. In SFY 2016,the SRF programs offered borrowers who issued revenue and general obligation bonds the chance to restructure their interest rates. Depending upon the term remaining to repay their loans, the new interest rates are between 1.25% and 3% as compared to current rates of 3.75% to 4%. Loans must be in compliance with the program and bond requirements. The total interest rate can be comprised of a percentage for loan interest rate, Loan Loss Reserve surcharge and Special Administration surcharge. For FY 2016, the interest incomes for each of these components were as follows:

WPCSRF DWSRF Loan Interest $ 4,068,181 $ 2,237,022Loan Loss Reserve 627,321 286,941Special Administration 1,451,087 881,669Total Interest Income $ 6,146,589 $ 3,405,632

14. Program Administration and Set-Aside Funds

This expenditure represents costs incurred by DEQ and DNRC to administer the SRF programs. They are reflected in special revenue funds (both federal grant funds and state funds are used). Program Administration appears under the Resource/recreation/environment function in the State of Montana Comprehensive Annual Financial Report (CAFR).

A-17

The DWSRF program includes program administration as well as several “sub-programs”, called set-asides, which states can elect. The following details what percentage of capitalization grants a State may use for administration and set-asides:

• up to 4 percent of its capitalization grants to administer the DWSRF and provide technical assistance to public water systems;

• up to 2 percent of its grants to provide assistance to small public water systems;• up to 10 percent of its grants for state program management activities, including

administration of the state public water system supervision program, administration of the source water protection program, development and implementation of the capacity development and operator certification programs;

• up to 15 percent of its grants to assist in the development and implementation of local drinking water protection initiatives and other State programs.

DWSRF Program Administration/Set-Asides Detail:Administration - EPA Grants $345,605Administration - State Funds 600,613Technical Assistance 53,522State Program Management 1,030,638Local Assistance 242,473Total Administration and Set-Asides $2,272,851

In the WPCSRF program, there are no set-aside funds available.

WPCSRF Program Administration Detail:Administration - EPA Grants $262,161Administration - State Funds 1,094,959Total Administration $1,357,120

15. Other Financing Sources and Uses

The Loan Loss Reserve Sweep represents cash in excess of the reserve requirement that is transferred from the Loan Loss Reserve accounts to the Principal and Debt Service accounts per the trust indentures. The Loan Loss Reserve funds are not required by the SRF program, but the state elected to have these funds to account for these transactions separately.

The Special Administration Account Transfer represents the transfer of funds from the Special Administration accounts to the Principal accounts per the trust indenture. This transfer is only visible on the Regulatory Basis Financial Statements. The entries are eliminated on the GAAP Financial Statements.

The Federal Capitalization Grant Transfer represents the transfer of EPA grant funds from federal special revenue funds to the Loan Accounts in state special revenue fund to fund loans that will be repaid. This transfer is only visible on the GAAP Financial Statements. The entries are eliminated on the Regulatory Basis Financial Statements.

A-18

The Investment Earnings Transfers represent the transfers of the balances of earnings to various accounts within each SRF program per the trust indenture.

The Investment Account Transfers represent the transfers of funds from the Investment accounts to the Principal and Debt Service accounts as needed within each SRF program per the trust indenture.

16. Related Party Transaction

Per Title 85, Chapter 1, part 6, MCA, Renewable Resource Grant and Loan Program, the department is eligible to issue GO bonds for the purpose of making private sale loans. DNRC has applied and received “recycled loan funds” from the SRF program for the non-point source private loan program. The loans are GO private sale bonds. The current loans in repayment have a balance of $6,105,605, have interest rates ranging from 3% to 4.3% and are repaid over 15 years. These loans are presented as Advances to Other Funds on the balance sheets.

17. Prior Period Adjustment

A prior year adjustment of $100 was made in the WPCSRF program Debt Service. The adjustment is a correction of an overstatement to SFY 2015 Interest Income from Loans.

18. Subsequent Events

In SFY 2017, $5,000 was drawn for a General Obligation Bond Anticipation Note (BAN), Taxable Series 2016C for the Drinking Water State Revolving Fund Program. The BAN was issued on March 16, 2016 for $3,000,000. The Board of Investments has approved the loan. No funds hadbeen drawn as of fiscal year end June 30, 2016 and therefore bond proceeds are not reflected onthe financial statements.

A General Obligation Bond Anticipation Note (BAN), Taxable Series 2016D for the Drinking Water State Revolving Fund Program was issued on March 16, 2016 for $2,500,000. The Board of Investments has approved the loan. No funds had been drawn as of fiscal year end June 30, 2016 and therefore bond proceeds are not reflected on the financial statements.

A-19

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A-22

Report on Internal Control and Compliance

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit

of Financial Statements Performed in Accordance with Government AuditinG StAndArdS


We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to the financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Montana Water Pollution Control and Drinking Water State Revolving Fund Programs (programs) as of and for the year ended June 30, 2016, and the related notes to the financial statements, and have issued our report thereon dated February 23, 2017.

Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the programs’ internal control over financial reporting to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the programs’ internal control. Accordingly, we do not express an opinion on the effectiveness of the programs’ internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in



B-1

internal control that we consider to be material weakness. However, as described below, we identified a deficiency in internal control that we consider to be a significant deficiency.

The controls over financial reporting did not detect and prevent a misclassification on the balance sheet between Cash and Cash Equivalents and Investments, and misstatements in the notes to the financial statements.

Compliance and Other MattersAs part of obtaining reasonable assurance about whether the programs’ financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination on financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Response to FindingsThe programs’ response to the findings identified in our audit are described on page C-1 of this report. The programs’ response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it.

Purpose of this ReportThe purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the programs’ internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the programs’ internal control and compliance. Accordingly, this communication is not suitable for any other purpose.


/s/ Cindy Jorgenson

Cindy Jorgenson, CPADeputy Legislative AuditorHelena, MT

February 23, 2017

B-2

Department ofenvironmental Quality

Department ofnatural resources anD conservation

Departments response

C-1

Documents

A R M L Montana Water Pollution Control and Drinking Water ...leg.mt.gov/content/Publications/Audit/Report/15-25B.pdf · Anna Miller, Bureau Chief, Loan & Financial Management Bureau