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Employee Benefits Plan Financial Statements June 30, 2003 & 2002 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS VILLAGE OF NORTH PALM BEACH - EMPLOYEE BENEFITS PLAN June 30, 2003 and 2002 CONTENTS Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS STATEMENTS OF FINANCIAL POSITION 2 STATEMENTS OF REVENUES AND EXPENSES 3 STATEMENTS OF CASH FLOWS 4 NOTES TO FINANCIAL STATEMENTS 5 - 8 SUPPLEMENTARY INFORMATION REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON COMPLIANCE AND INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS. PERFORMED IN ACCORDANCE WITH GOVERNMENTAUDITING STANDARDS 10 - 11 Grant Thornton T Accountants and Business Advisors REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Honorable Mayor Village of North Palm Beach We have audited the accompanying statement of financial position of Village of North Palm Beach - Employee Benefits Plan for the year ended June 30, 2003 and the related statement of revenues and expenses and statement of cash flows for the year then ended. These financial statements are the responsibility of management. 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 standardsrequi_re that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The 2002 financial statements were compiled by us and our report thereon, dated October 23, 2002 stated that we did not audit or review those financial statements, and accordingly, express no opinion or other form of assurance on them. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Village of North Palm Beach -Employee Benefits Plan, as of June 30, 2003, and the changes in financial position thereof, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated October 3 1, 2003 on our consideration of Village of North Palm Beach -Employee Benefits Plan's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, and contracts. ~ ~ North Palm Beach, Florida October 31, 2003 2700 South Commerce Parkway 777 Brickell Avenue 11300 US Highway One Suite 300 Suite 1100 Suite 400 Weston, FL 33331-3630 Miami, FL 33131-2867 North Palm Beach, FL 33408-3229 T 954.768.9900 T 305.341.8040 T 561.684.9496 F 954.768.9908 F 305.341.8099 F 561.684.9476 W www.grantthornton.com W www.grantthornton.com W www.grantthornton.com Grant Thornton LLP Grant Thornton LLP Grant Thornton LLP US Member of Grant Thornton International US Member of Grant Thornton International US Member of Grant Thornton International Village of North Palm Beach - Employee Benefits Plan STATEMENTS OF FINANCIAL POSITION June 30, ASSETS (Unaudited) 2003 2002 Cash and cash equivalents $ 37,279 $ 1,225 Due from Village of North Palm Beach (Note E) 209,477 188,857 Total assets 246.756 $ 190,082 LIABILITIES Unpaid claims liabilities $ 233,756 $ 176,224 Bank overdraft - 7,298 Accrued expenses 13,000 6,560 Total liabilities $ 246,756 $ 190.082 The accompanying notes are an integral part of these statements. 2 Village of North Palm Beach - Employee Benefits Plan STATEMENTS OF REVENUES AND EXPENSES For the Years Ended June 30, (Unaudited) 2003 2002 Revenues Claims funding provided by Village of North Palm Beach $ 1,375,500 $ 1,413,605 Reinsurance recoveries 194,536 107,203 Interest and other income 13,720 13,928 Total revenues 1,583,756 1,534,736 Expenses Claims expense 1,131,511 1,117,065 Reinsurance premiums 405,565 375,325 Claims administration and management fees 29,865 27,901 Professional fees 14,542 13,718 Administrative and general 2,273 727 Total expenses 1,583,756 1,534,736 NET INCOME $ - $ The accompanying notes are an integral part of these statements. 3 Village of North Palm Beach - Employee Benefits Plan STATEMENTS OF CASH FLOWS For the Years Ended June 30, (Unaudited) 2003 2002 Cash flows from operating activities: Cash received from Village of North Palm Beach $ 1,354,880 $ 1,283,836 Cash received from participants 13,661 12,952 Interest received 59 976 Cash received from reinsurance recoveries 194,536 107,203 Cash payments on claims (1,073,979) (1,039,586) Cash payments for claims administration, insurance, and other administrative expenses (453,103) _409,813) Net cash provided by (used in) operating activities 36,054 (44,432) Cash and cash equivalents at beginning of year 1,225 45,657 Cash and cash equivalents at end of year $ 37.279 $ 1,225 Reconciliation of net income to net. cash (used in) net activities: Net income $ - $ - Adjustments to reconcile net income to net cash (used in) provided by operating activities: Increase in claims payable 57,532 77,479 Increase in accrued expenses 6,440 560 (Decrease) increase in bank overdraft (7,298) 7,298 (Increase) in due from Village of North Palm Beach (20,620) X129,769) Net cash provided by (used in) operating activities $ 36.054 (44.432) The accompanying notes are an integral part of these statements. 4 Village of North Palm Beach - Employee Benefits Plan NOTES TO FINANCIAL STATEMENTS June 30, 2003 and 2002 (ITnaudited) NOTE A -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by the Village of North Palm Beach -Employee Benefits Plan are summarized below. General Information The Village of North Palm Beach Employee Benefit Plan (the "Plan") is a health and welfare plan that serves to provide health benefits to the employees and family of employees of the Village of North Palm Beach, a municipality located in Palm Beach County, Florida. The Plan is a component of the Village of North Palm Beach, and as such, the actual losses and any deficiencies of the Plan are funded by the Village. The administrative and claim se' ~.ces concerning the Plan are provided by Employer's Mutual, Inc. ("EMI") under an administrative agreement. EMI acts as an administrator to receive, disburse and manage all funds due to or payable from the Benefits Plan. Basis of Accounting The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting practices applicable to governmental units. Accounting for this fund follows those principles specified by the Government Accounting Standards Board ("GASB") as it pertains to a proprietary fund. Under the accounting hierarchy specified by Statement of Auditing Standards No. 69, the Benefits Plan follows all GASB pronouncements and Financial Accounting Standards Board statements and interpretations issued before November 30, 1989, except those that conflict with a GASB pronouncement. The amounts collected from the Village of North Palm Beach, after adjusting for claims paid or to be paid, has been reported as a net receivable or liability. Funds received from the municipality to pay administrative costs of the Plan have been reflected as claims funding provided by municipality. Additional details of these funds are reflected in (Note E). Revenue Reco ign tion Claims funding is recognized when received by EMI from the Village of North Palm Beach. Reinsurance recovery revenue is recognized when the recovery amount is known and reasonably assured. (continued) 5 Village of North Palm Beach - Employee Benefits Plan NOTES TO FINANCIAL STATEMENTS -CONTINUED June 30, 2003 and 2002 (Unaudited) NOTE A - STJNIlVIARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued Cash and Cash Equivalents Cash and cash equivalents consists of demand deposits at commercial banks and investments held by the State Board of Administration. All demand deposits were held in institutions designated by the Treasurer of the State of Florida as "qualified public depositories" under Chapter 280.04, Florida Statutes, and were accordingly collateralized as required by that Statute. For purposes of the statement of cash flows, cash and cash equivalents are defined as short- term highly liquid investments and include both cash and investments. Unpaid Claims Liabilities The Plan establishes claims liabilities based on estimates of the ultimate cost of claims (including future claim adjustment expenses) that have been reported but not settled, and of claims that have been incurred but not reported. The length of time for which such costs must be estimated varies depending on the coverage involved. Estimated amounts of salvage and subrogation and reinsurance recoverable on unpaid claims are deducted from the liability for unpaid claims. Because actual claims costs depend on such complex factors as inflation, changes in doctrines of legal liability, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount, particularly for coverages such as general liability. Claims liabilities are recomputed periodically using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflect past inflation and on other factors that are considered to be appropriate modifiers of past experience. Adjustments to claims liabilities are charged or credited to expense in the periods in which they are made. Reinsurance The Plan uses reinsurance agreements to reduce its exposure to large losses on all types of insured events, Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Village as direct insurer of the risks reinsured. The Village does not report reinsured risks as liabilities unless it is probable that those risks will not be covered by reinsurers. Estimated amounts of reinsurance recoverable on unpaid employee benefits are deducted from the liability for unpaid claims. It is the Benefits Plan's policy to reinsure for employee benefit claims in excess of $50,000. (continued) 6 Village of North Palm Beach - Employee Benefits Plan NOTES TO FINANCIAL STATEMENTS -CONTINUED June 30, 2003 and 2002 (Inaudited) NOTE A -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued Use of Estimates in Financial Statements In preparing fmancial statements in conformity with generally accepted accounting principles, the Benefits Plan is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B -CLAIMS ADMINISTRATION Since January 1, 1988, claims administration has been handled by EMI. The amount of fees paid to EMI for claims administration was $29,865 and $27,901 in 2003 and 2002, respectively. NOTE C -UNPAID CLAIMS LIABILITIES The Benefits Plan establishes a liability for both reported and unreported insured events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following table represents changes in those aggregate liabilities for the Benefits Plan during the past two periods. (Unaudited) 2003 2002 Unpaid claims and claim adjustment expenses at beginning of year $ 176,224 $ 98,745 Incurred claims and claim adjustment expenses - provision for insured events of the current and prior years 1,131,511 1,117,065 Less: Payments against claims and claim adjustment expenses attributable to insured events of the current and prior year (1 073,979) (1,039,586) Total unpaid claims and claim adjustment expenses $ 233,756 $ 176,224 At June 30, 2003 and 2002, the liability for incurred but not reported claims of $218,752 and $176,224 are based on historical claim experience. There is no discount applied to these amounts due to the short-term nature of the claim liabilities. 7 Village of North Palm Beach - Employee Benefits Plan NOTES TO FINANCIAL STATEMENTS -CONTINUED June 30, 2003 and 2002 ([Tnaudited) NOTE D -FUNDS RECENED FROM VILLAGE OF NORTH PALM BEACH The funds advanced by the Village of North Palm Beach totaled $1,354,880 and $1,283,836 in 2003 and 2002, respectively. NOTE E -DUE FROM VILLAGE OF NORTH PALM BEACH The amounts collected from the Village of North Palm Beach, after adjusting for claims paid or to be paid is reported as a net receivable or liability. The following table represents changes in these balances for the year ended June 30, 2003. (Unaudited) 2003 2002 Beginning balance $ (188,857) $ (59,089) Funds advanced by the Village of North Palm Beach 1,354,880 1,283,836 Insurance claims of participants paid or accrued, net of reinsurance recovery (936,975) (1,009,861) Re-insurance policies purchased (405,565) (375,325) Claims administration expenses (29,865) (27,901) Interest income 59 976 Other income 13,661 12,952 Other expenses (16,815) (14,445) Ending balance (209.477) $ (188.857) 8 SUPPLEMENTARY INFORMATION REPORT OF DEPENDENT CERTIFiFD PUBLIC ACCOUNTANTS ON COMPLIANCE AND INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENTAUDITING STANDARDS Honorable Mayor Village of North Palm Beach We have audited the financial statements of Village of North Palm Beach -Employee Benefits Plan, as of and for the years ended June 30, 2003 and 2002, and have issued our report thereon dated October 31, 2003. 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. Compliance As part of obtaining reasonable assurance about whether Village of North Palm Beach -Employee Benefits Plan's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an object of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered Village of North Palm Beach -Employee Benefits Plan's internal control over financial reporting in order to determine our auditing procedures for the purposes of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control would not necessarily disclose all matters in the internal control over financial reporting that might be a material weakness. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a . relatively low level the risk that misstatements in amount that would be material in relation to the financial statements being audited may occur and not be detected within a timely period be employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we considered to be a material weakness. 10 This report is intended solely for the information and use of the Board of Directors of Village of North Palm Beach e Employee Benefits Plan, management and appropriate governmental agencies and should not be used by anyone other than those specified parties. However, this report is a matter of public record and its distribution is not limited. North Palm Beach, Florida October 31, 2003 11