Exhibit A.2- CAFR'16.pdf

CONSTITUTION

OF

COLORADO

GOVERNOR

JOHN W.

HICKENLOOPER

GENERAL

ASSEMBLY

SENATE HOUSE

SUPREME

COURT

CHIEF JUSTICE

NANCY E. RICE

TREASURER

WALKER STAPLETON

SECRETARY OF

STATE

WAYNE W. WILLIAMS

BOARD OF REGENTS

OF UNIVERSITY OF

COLORADO

DEPARTMENT OF

EDUCATION

BOARD OF

EDUCATION

22 JUDICIAL

DISTRICT COURTS

COURT OF APPEALS

STATE COURT

ADMINISTRATOR

LT. GOVERNOR

DONNA LYNNE

ATTORNEY

GENERAL

CYNTHIA H. COFFMAN

DEPARTMENT OF

PERSONNEL &

ADMINISTRATION

DEPARTMENT OF

AGRICULTURE

DEPARTMENT OF

HIGHER

EDUCATION

DEPARTMENT OF

REGULATORY

AGENCIES

DEPARTMENT OF

CORRECTIONS

DEPARTMENT OF

PUBLIC HEALTH &

ENVIRONMENT

DEPARTMENT OF

LOCAL AFFAIRS

DEPARTMENT OF

MILITARY &

VETERANS AFFAIRS

DEPARTMENT OF

TRANSPORTATION

DEPARTMENT OF

HUMAN SERVICES

DEPARTMENT OF

PUBLIC SAFETY

DEPARTMENT OF

REVENUE

DEPARTMENT OF

LABOR &

EMPLOYMENT

DEPARTMENT OF

NATURAL

RESOURCES

DEPARTMENT OF

HEALTH CARE

POLICY & FINANCING

SENATE PRESIDENT

BILL CADMAN

SPEAKER OF THE HOUSE

DICKEY LEE HULLINGHORST

PRINCIPAL ORGANIZATIONS

AND KEY OFFICIALS

Financial Section

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 2016

Office of the State Auditor

Dianne E. Ray, CPA

State Auditor

SA

WE SET THE STANDARD FOR GOOD GOVERNMENT

1525 SHERMAN STREET, 7TH FLOOR , DENVER, COLORADO 80203-1700

PHONE: 303.869.2800

INDEPENDENT AUDITOR'S REPORT

Members of the Legislative Audit Committee:

REPORT ON THE FINANCIAL STATEMENTS

We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the State of Colorado (the State), as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the State's basic financial statements as listed in the table of contents.

MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The State's 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.

AUDITOR'S RESPONSIBILITY

Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the discretely presented component units identified in Note 2, which represents 100 percent of the assets, net position, and revenues of the aggregate discretely presented component units. In addition, we did not audit the financial statements of University Physicians, Inc., a blended component unit, OFFICE OF THE STATE AUDITOR which represents approximately 4 percent of the total assets, 14 percent of the net position, and 12 percent of the total revenues of Higher Education Institutions, a major proprietary fund, and approximately 3 percent of the total assets, 9 percent of the net position, and 9 percent of the total revenues of business-type activities. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts and disclosures included for those discretely presented component units and for University Physicians, Inc., is based solely on the reports of the other auditors. 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. The financial statements of the University of Colorado Foundation, Colorado State University Foundation, Colorado School of Mines Foundation, the University of Northern Colorado Foundation, and the University of Colorado Real Estate Foundation, which are discretely presented component units, and University Physicians, Inc., a blended component unit, were audited in accordance with auditing standards generally accepted in the United States, but were not audited in accordance with Government Auditing Standards.

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 opinion.

OPINIONS

In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the State of Colorado, as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

OTHER MATTERS

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the required supplementary information, such as management's discussion and analysis, budget and actual schedules – budgetary basis, and notes to the required supplementary information that include the defined benefit pension plan and other postemployment benefit information listed in the table of contents, 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 Information

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the State's basic financial statements. The introductory section, combining and individual nonmajor fund financial statements, schedule of capital assets, schedule of other funds, non-appropriated budget and actual schedules, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The transmittal letter, introductory section, the non-appropriated budget and actual schedule, and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and, accordingly, we do not express an opinion or provide any assurance on them.

The combining and individual nonmajor fund financial statements, schedule of capital assets, and the schedule of other funds 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 by us and the other auditors. In our opinion, the combining and individual nonmajor fund financial statements, schedule of capital assets, and the schedule of other funds are fairly stated in all material respects in relation to the basic financial statements as a whole.

OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS

In accordance with Government Auditing Standards, we will issue a separate report dated February 27, 2017, on our consideration of the State's 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 compliance 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 State's internal control over financial reporting and compliance and should be read in conjunction with this report in considering the results of the audit.

Denver, Colorado February 27, 2017

COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT 23

MANAGEMENT’S DISCUSSION AND ANALYSIS

24 COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion and analysis is supplementary information required by the Governmental Accounting Standards Board (GASB), and is intended to provide an easily readable explanation of the information provided in the attached basic financial statements. It is by necessity highly summarized, and in order to gain a thorough understanding of the State’s financial condition, the attached financial statements and notes should be reviewed in their entirety.

FINANCIAL HIGHLIGHTS

Government-wide:

Assets of the State’s governmental activities exceeded liabilities by $10,589.3 million, a decrease in net position of $207.5 million as compared to the prior year amount of $10,796.8 million. Cash and restricted cash balances decreased by $210.3 million. Taxes Receivable, net of refunds payable, decreased by $187.8 million, while investments and restricted investments decreased by $89.2 million. Capital assets, net of accumulated depreciation, increased by $120.1 million, primarily due to infrastructure projects and the state’s contribution to public school construction.

Assets of the State’s business-type activities exceeded liabilities by $4,981.7 million, an increase in net position of $483.9 million as compared to the prior year amount of $4,497.8 million. The increase was partly attributable to increases in some current asset balances and additional infrastructure investments made by Higher Education Institutions. The Unemployment Insurance fund reported a $127.7 million, or 20.5 percent increase in net position due primarily to a reduction of $121.3 million in long-term liabilities. Additionally, the aggregated business-type activities reported in the Other Enterprises Fund reported a $209.6 million increase in net position attributable primarily to additional investments in capital assets. In total, considering both governmental and business-type activities, the net position of the State increased by $276.3 million to $15,570.9 million.

Fund Level:

Governmental fund assets exceeded liabilities resulting in total fund balance of $6,609.4 million (prior year $6,846.8 million). The fund balance for all governmental funds decreased by $295.5 million from the prior year which was comprised of decreases in the General Fund, Resource Extraction Fund, and the State Education Fund, which were partially offset by increases in the Highway Users Tax Fund (HUTF), Capital Projects Fund, and Other Governmental Funds. The fund balance of the General Fund decreased by $157.0 million compared to the prior fiscal year due primarily to a 12.5 percent increase in transfers-out to other funds. General Fund revenues increased by 6.5 percent and expenditures increased by 7.0 percent relative to the prior fiscal year resulting in $350.1 million excess of revenues over expenditures for fiscal year 2015-16. State law requires that the General Purpose Revenue Fund portion of the General Fund maintain a reserve of 6.5 percent of General Purpose Revenue Fund appropriations. House Bill 16-1419 was signed into law and temporarily reduced the reserve requirement from 6.5 percent to 5.6 percent for fiscal year 2015-16. Absent additional law changes, the reserve requirement will return to 6.5 percent for fiscal year 2016-17 and beyond. The General Purpose Revenue Fund had $386.5 million on a GAAP basis to fund this reserve for fiscal year 2015-16. The fund balance of the Resource Extraction Fund decreased by $56.3 million due to declines in revenues from severance taxes, mineral leasing, and fee revenue. The HUTF fund balance increased by $42.9 million due primarily to an increase for transfers-in from other funds. The Capital Projects Fund increased by $49.5 million due to an increase in funding (transfer-in) from the General Purpose Revenue Fund. The State Education Fund decreased by $381.8 million primarily due to a planned spend-down of fund balance to maintain funding levels for education. The fund balance of the State Education fund has decreased over the last three fiscal years following a one-time transfer of $1.1 billion from the General Fund Surplus Fund in fiscal year 2012-13. The Other Governmental Funds increased by $207.2 million, due primarily to revenue increases across all Special Revenue Funds combined with smaller relative increases in expenditures.

Total net position for business-type activities was $4,981.7 million, of which $5,051.3 million was restricted for investment in capital assets, and $1,664.4 million restricted for the purposes of various funds which resulted in an unrestricted deficit of $1,734.1 million.

COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT 25

Debt Issued and Outstanding:

Governmental activities’ liabilities for notes, bonds, and Certificates of Participation at June 30, 2016, were $1,346.3 million (prior year $1,532.9 million), which is 16.1 percent (prior year 17.6 percent) of financial assets (cash, receivables, and investments) and 6.4 percent (prior year 7.2 percent) of total assets of governmental activities. The governmental activities debt is primarily related to infrastructure, State buildings, and public school buildings. The infrastructure debt is secured by future federal revenues and State highway revenues, State building debt by gaming distributions and judicial fees, and public school buildings debt by School Trust Land revenues. The State’s Enterprise Funds have notes, bonds, and Certificates of Participation outstanding that total $4,747.2 million (prior year $4,670.3 million). The majority of the outstanding revenue bonds is related to Higher Education Institutions and is invested in capital assets that generate a future revenue stream to service the related debt. The Division of Unemployment Insurance also has bonds outstanding secured by future employer insurance premiums.

Revenue and Spending Limits:

The State Constitution indirectly limits the rate of spending increases and directly limits the State’s ability to retain revenue in excess of the limit. Any excess must be refunded to the taxpayers unless otherwise approved by the voters. Referendum C was approved by voters in November 2005 which allows the State to retain revenues in excess of the TABOR limit for fiscal years 2005-06 through 2009-10. The State was under the Referendum C Excess State Revenue Cap for fiscal year 2015-16 by $122.1 million. The $31.4 million TABOR Refund Liability reported on the financial statements is expected to be refunded during fiscal year 2016-17. Refer to page 31 for more information on the TABOR requirements and Referendum C.

OVERVIEW OF THE FINANCIAL STATEMENT PRESENTATION

There are three major parts to the basic financial statements – government-wide statements, fund-level statements, and notes to the financial statements. Certain required supplementary information (in addition to this MD&A), including budget-to-actual comparisons and funding progress for other post-employment benefits, is presented following the basic financial statements. Supplementary information, including combining fund statements and schedules, follows the required supplementary information.

Government-wide Statements The government-wide statements focus on the government as a whole. These statements are similar to those reported by businesses in the private sector, but they are not consolidated financial statements because certain intra-entity transactions have not been eliminated. Using the economic resources perspective and the accrual basis of accounting, these statements include all assets, liabilities, deferred inflows, and deferred outflows on the Statement of Net Position and all expenses and revenues on the Statement of Activities. These statements can be viewed as an aggregation of the governmental and proprietary fund-level statements along with certain perspective and accounting-basis adjustments discussed below. Fiduciary activities are excluded from the government-wide statements because those resources are not available to support the State’s programs.

The Statement of Net Position shows the financial position of the State at the end of the fiscal year. Net position measures the difference between assets and deferred outflows and liabilities and deferred inflows. Restrictions reported in net position indicate that certain assets, net of the related liabilities, can only be used for specified purposes. Increases in total net position from year to year indicate the State is better off financially, while decreases in total net position indicate the State is worse off.

The Statement of Activities shows how the financial position has changed since the beginning of the fiscal year.

The most significant financial measure of the government’s current activities is presented in the line item titled “Change in Net Position” at the bottom of the Statement of Activities. The statement is presented in a net program cost format, which shows the cost of programs to the government by offsetting revenues earned by the programs against expenses of the programs. Due to the large number of programs operated by the State, individual programs are aggregated into functional areas of government.

26 COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT

On the Statement of Net Position, columns are used to segregate the primary government, including governmental activities and business-type activities, from the discretely presented component units. On the Statement of Activities, both columns and rows are used for this segregation. The following bullets describe the segregation.

Governmental activities are the normal operations of the primary government that are not presented as business-type activities. Governmental activities include Internal Service Funds and are primarily funded through taxes, intergovernmental revenues, and other nonexchange revenues.

Business-type activities are primarily funded by charges to external parties for goods and services. These activities are generally reported in Enterprise Funds in the fund-level statements because the activity has revenue-backed debt or because legal requirements or management decisions mandate full cost recovery.

Discretely presented component units are legally separate entities for which the State is financially accountable. More information on the discretely presented component units can be found in Note 2 on page 71.

Fund-Level Statements The fund-level statements present additional detail about the State’s financial position and activities. However, some fund-level statements present information that is different from the government-wide statements due to the differing basis of accounting used in fund statements compared to the government-wide statements. Funds are balanced sets of accounts tracking activities that are legally defined or are prescribed by generally accepted accounting principles. Funds are reported on the fund-level statements as major or nonmajor based on criteria set by the Governmental Accounting Standards Board (GASB). There are three types of funds operated by the State

– governmental, proprietary, and fiduciary. In the fund statements, each fund type has a pair of statements that show financial position and activities of the fund; a statement showing cash flows is also presented for the proprietary fund type.

Governmental Funds – A large number of the State’s individual funds and activities fall in this fund type;

however, only some are reported as major – the remaining funds are aggregated into the nonmajor column with additional fund detail presented in the Supplementary section of this report. Governmental Funds are presented using the current financial resources perspective, which is essentially a short-term view that excludes capital assets, debt, and other long-term liabilities. The modified accrual basis of accounting is used.

Under modified accrual, certain revenues are deferred because they will not be collected within the next year, and certain expenditures are not recognized, even though they apply to the current period, because they will not be paid until later fiscal periods. This presentation focuses on when cash will be received or disbursed, and it is best suited to showing amounts available for appropriation. The governmental fund type includes the General Fund, Special Revenue Funds, Debt Service Fund, Capital Projects Fund, and Permanent Funds.

Proprietary Funds – Proprietary fund type accounting is similar to that used by businesses in the private sector. It is used for the State’s Enterprise Funds and Internal Service Funds. Enterprise Funds generally sell to external customers while Internal Service Funds generally charge other State agencies for goods or services. These funds are presented under the economic resources measurement focus, which reports all assets and liabilities. Accrual accounting is used, which results in revenues recognized when they are earned and expenses reported when the related liability is incurred. Because this is the same perspective and basis of accounting used on the government-wide statements, Enterprise Fund information flows directly to the business-type activities column on the government-wide statements without adjustment. Internal Service Fund assets and liabilities are reported in the governmental activities on the government-wide Statement of Net Position because Internal Service Funds primarily serve governmental funds. The net revenue or net expense of Internal Service Funds is reported as an increase or reduction to program expenses on the government-wide Statement of Activities. On the fund-level statements, nonmajor Enterprise Funds are aggregated in a single column, as are all Internal Service Funds.

Fiduciary Funds – These funds report resources held under trust agreements for other individuals, organizations, or governments. The assets reported are not available to finance the State’s programs, and therefore, these funds are not included in the government-wide statements. The State’s fiduciary funds include Pension and Other Employee Benefits Trust Funds, several Private-Purpose Trust Funds, and several

COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT 27

Agency Funds. Agency Funds track only assets and liabilities and do not report revenues and expenses on a statement of operations. All Fiduciary Funds are reported using the accrual basis of accounting.

The State has elected to present combining financial statements for its component units. In the report, the component unit financial statements follow the fund-level financial statements discussed above.

Notes to Basic Financial Statements The notes to the financial statements are an integral part of the basic financial statements. They explain amounts shown in the financial statements and provide additional information that is essential to fair presentation.

Required Supplementary Information (RSI) Generally accepted accounting principles require certain supplementary information to be presented in this Management’s Discussion and Analysis and following the notes to the financial statements. Required supplementary information differs from the basic financial statements in that the auditor applies certain limited procedures in reviewing the information. In this report, RSI includes budgetary comparison schedules, defined benefit pension plan schedules, and a schedule of funding progress for other post-employment benefits.

The chart on the following page is a graphic representation of how the State’s funds are organized in this report.

Fiduciary Funds are not shown in the chart; they occur only in fund-level statements.

28 COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT

GOVERNMENT-WIDE LEVEL

BUSINESS TYPE ACTIVITIES

FUND LEVEL

Component Units Major Nonmajor

CWRPDA

Foundations:

CU

CSU

CSM

UNC

Governmental Funds Enterprise Funds Internal Nonmajor Major Nonmajor Service

Funds

Higher Education General Fund Other Institutions Other

Unemployment Highway Users Tax Insurance

Capital Projects Lottery

COMBINING LEVEL

Financial Information

Special Revenue Debt Service

Permanent Parks and Wildlife

State Lands Other State Fair

Correctional Industries Nursing Homes Prison Canteens

Petroleum Storage Transportation Enterprise

Other

Public Safety Public School

CU Real Estate Foundation

GOVERNMENTAL ACTIVITIES COMPONENT UNITS

Modified to Full Accrual Conversion

Information Tech.

Capitol Complex

Highways

Other

General Purpose Revenue

Other

Central Services

Proprietary Fund Types

Admin Courts

Tobacco Impact Resource Management

Other

Major

Labor Gaming

College Assist

Resource Extraction

Legal ServicesRisk Management

DMMLBSD

Special Purpose

HLC @ Metro, Inc.

Colorado Venture Capital

State Education

Other

Regular Special

Unclaimed Property Environ. & Health Protection

COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT 29

OVERALL FINANCIAL POSITION AND RESULTS OF OPERATIONS

The following table was derived from the current and prior year government-wide Statement of Net Position.

The amount of total net position is one measure of the health of the State’s finances. However, this measure must be used with care because large portions of the balances related to capital assets or restricted assets may be unavailable to meet the day-to-day payments of the State.

The State’s net investment in capital assets of $16,381.8 million for governmental and business-type activities combined represents an increase of $1,309.2 million compared to the prior fiscal year. Governmental activities had an increase of $675.8 million in net investment in capital assets attributable primarily to transportation projects, public school construction, and purchases of vehicles and equipment. Business-type activities reported a $633.4 million increase in net investment in capital assets primarily due to continued capital investments being made by Higher Education Institutions and the Other Enterprise Funds. Net investment in capital assets is a noncurrent asset and therefore not available to meet related debt service requirements which must be paid from current revenues or available liquid assets.

Assets restricted by the State Constitution or external parties account for another $4.9 billion, or 31.5 percent of net position. Restricted assets decreased by $103.8 million relative to the prior year while total net position increased by $276.3 million. In general, these restrictions dictate how the related assets must be used by the State, and therefore, may not be available for use by any of the State’s programs. Examples of restrictions on the use of fund balance include the constitutionally mandated State Education Fund, the Highway Users Tax Fund, and resources pledged to debt service. Restricted net position for governmental activities decreased by $271.8 million while business-type activities reported an increase in restricted net position of $168.0 million.

The unrestricted component of total net position is a negative $5.7 billion for the fiscal year ended June 30, 2016.

The state reports a negative or deficit amount for the unrestricted component only on a government-wide basis, not at the level of any fund. This is primarily due to a $10.3 billion net pension liability which is reported only at the government-wide level for which the state does not have any related assets. Other long-term liabilities, such as bonds and certificates of participation payable, have related capital assets while the net pension liability does not. The State’s current liabilities reported on the Statement of Net Position decreased by $185.7 million and noncurrent liabilities increased by $983.1 million from the prior fiscal year.

Total Governmental Business-Type Primary

Activities Activities Government

2015-16 2014-15 2015-16 2014-15 2015-16 2014-15

Noncapital Assets 9,179,140$ 9,519,728$ 6,585,468$ 6,486,424$ 15,764,608$ 16,006,152$ Capital Assets 11,860,988 11,740,878 8,702,667 7,978,950 20,563,655 19,719,828 Total Assets 21,040,128 21,260,606 15,288,135 14,465,374 36,328,263 35,725,980 Deferred Outflow of Resources 818,761 350,796 649,853 348,635 1,468,614 699,431 Current Liabilities 2,698,094 2,851,809 1,555,522 1,587,527 4,253,616 4,439,336 Noncurrent Liabilities 8,438,154 7,915,537 9,150,755 8,690,274 17,588,909 16,605,811 Total Liabilities 11,136,248 10,767,346 10,706,277 10,277,801 21,842,525 21,045,147

Deferred Inflow of Resources 133,375 47,262 250,058 38,380 383,433 85,642

Net Investment in Capital Assets 11,330,474 10,654,690 5,051,345 4,417,947 16,381,819 15,072,637 Restricted 3,236,095 3,507,907 1,664,396 1,496,411 4,900,491 5,004,318 Unrestricted (3,977,303) (3,365,803) (1,734,088) (1,416,530) (5,711,391) (4,782,333) Total Net Position 10,589,266$ 10,796,794$ 4,981,653$ 4,497,828$ 15,570,919$ 15,294,622$

(Amounts in Thousands)

30 COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT

The change in net position from the prior fiscal year is another important measure of the State’s financial health.

The following condensed statement of activities shows that for governmental activities, expenses and transfers-out were greater than revenues and transfers-in which resulted in a decrease to net position of $265.7 million.

Program revenues for governmental activities increased by $1,082.2 million (10.3 percent). General revenues for governmental activities increased by $143.3 million (1.3 percent) due to increased tax collections. Expenses for governmental activities increased by $1,634.6 million (7.6 percent) from the prior year. The following table was derived from the current and prior year government-wide Statement of Activities.

Business-type activities’ revenues and net transfers-in, in the preceding table, exceeded expenses by $489.1 million resulting in an increase in net position. From the prior year to the current year, program revenue from business-type activities increased by $378.9 million and expenses increased by $546.3 million.

When looking at the total change in net position from the prior year, including all prior period adjustments, the net position from the prior year increased $276.3 million, or 1.8 percent.

Programs/Functions 2015-16 2014-15 2015-16 2014-15 2015-16 2014-15 Program Revenues:Charges for Services 2,173,376$ 1,944,468$ 5,937,454$ 5,690,437$ 8,110,830$ 7,634,905$

Operating Grants and Contributions 8,578,146 7,726,668 2,449,163 2,281,931 11,027,309 10,008,599 Capital Grants and Contributions 819,321 817,469 42,996 78,304 862,317 895,773

General Revenues:

Taxes 10,346,832 10,163,812 - 7 10,346,832 10,163,819 Restricted Taxes 1,132,687 1,186,515 - - 1,132,687 1,186,515 Unrestricted Investment Earnings 15,705 11,992 - - 15,705 11,992 Other General Revenues 107,005 96,613 - - 107,005 96,613

Total Revenues 23,173,072 21,947,537 8,429,613 8,050,679 31,602,685 29,998,216 Expenses:

General Government 485,611 449,261 - - 485,611 449,261 Business, Community, and Consumer Affairs 777,458 711,558 - - 777,458 711,558 Education 5,859,964 5,687,573 - - 5,859,964 5,687,573 Health and Rehabilitation 2,898,841 822,556 - - 2,898,841 822,556 Justice 2,209,158 2,075,534 - - 2,209,158 2,075,534 Natural Resources 135,491 120,374 - - 135,491 120,374 Social Assistance 8,825,599 9,627,104 - - 8,825,599 9,627,104 Transportation 1,830,368 1,896,904 - - 1,830,368 1,896,904 Interest on Debt 62,021 59,078 - - 62,021 59,078 Higher Education Institutions - - 6,446,902 6,004,484 6,446,902 6,004,484 Unemployment Insurance - - 531,607 530,130 531,607 530,130 Lottery - - 517,847 474,578 517,847 474,578 Parks and Wildlife - - 203,794 191,426 203,794 191,426 College Assist - - 320,774 338,631 320,774 338,631 Other Business-Type Activities - - 282,471 217,838 282,471 217,838

Total Expenses 23,084,511 21,449,942 8,303,395 7,757,087 31,387,906 29,207,029 Excess (Deficiency) Before Contributions, Transfers, and Other Items 88,561 497,595 126,218 293,592 214,779 791,187 Contributions, Transfers, and Other Items:

Transfers (Out) In (352,733) (256,738) 352,733 256,738 - - Internal Capital Contributions (1,583) - 10,183 - 8,600 - Permanent Fund Additions 80 401 - - 80 401

Total Contributions, Transfers, and Other Items (354,236) (256,337) 362,916 256,738 8,680 401

Total Changes in Net Position (265,675) 241,258 489,134 550,330 223,459 791,588

Net Position - Beginning 10,796,794 10,562,162 4,497,828 3,947,498 15,294,622 14,509,660 Prior Period Adjustment (See Note 29A) 58,147 (6,626) (5,309) - 52,838 (6,626)

Net Position - Ending 10,589,266$ 10,796,794$ 4,981,653$ 4,497,828$ 15,570,919$ 15,294,622$

Activities Activities Government

(Amounts in Thousands) Total

Governmental Business-Type Primary

COLORADO COMPREHENSIVE ANNUAL FINANCIAL REPORT 31

TABOR Revenue, Debt, and Tax-Increase Limits

Background and Current Condition Fiscal year 2015-16 is the twenty third year of State operations under Article X, Section 20 of the State Constitution revenue limitations, also known as the Taxpayer Bill of Rights or TABOR. With certain exceptions, the rate of growth of State revenues is limited to the combination of the percentage change in the State’s population and inflation based on the Denver-Boulder CPI-Urban index. The exceptions include revenues from federal funds, gifts, property sales, refunds, damage recoveries, transfers, voter-approved revenue changes, and qualified enterprise fund revenues.

Revenues collected in excess of the limitation must be returned to the citizens unless a vote at the annual election in November allows the State to retain the surplus. In November 2005 voters approved a measure, commonly known as Referendum C, which was referred to the ballot by the Legislature. Referendum C authorized the State to retain all revenues in excess of the TABOR limit for the five-year period from fiscal year 2005-06 through fiscal year 2009-10. Referendum C had additional provisions and effects that are discussed below.

TABOR also limits the General Assembly’s ability to raise taxes, to borrow money, and to increase spending limits. With the exception of a declared emergency, taxes can only be raised by a vote of the people at the annual election. Multiple year borrowings can only be undertaken after approval by a similar vote.

The TABOR limits are calculated and applied at the statewide level. However, refunds to taxpayers related to TABOR have historically been paid from the General Fund. Therefore, the TABOR revenue, expenditure, debt, and tax-increase limitations have historically been significant factors in the changing fiscal status of the State’s General Fund. The original decision to pay TABOR refunds out of the general fund continues to be important under Referendum C because revenues in excess of the TABOR limit that are recorded by cash funds remain in those funds (barring Legislative action) but are required to be budgeted and expended from the General Fund Exempt Account created in the General Fund by Referendum C.

In years when Referendum C was not in effect, the State’s ability to retain revenues was also affected by a requirement in TABOR commonly referred to as the ratchet down effect. The ratchet down occurs because each year’s revenue retention limit is calculated based on the lesser of the prior year’s revenues or the prior year’s limit. When revenues are below the limit, it results in a permanent loss of the State’s ability to retain current and future revenues collected. Referendum C effectively suspended the ratchet down effect during the five-year refund hiatus by authorizing the State to retain and spend any amount in excess of the TABOR limit.

In the first three years of operations under TABOR, the State did not exceed the revenue limitation. In fiscal years 1996-97 through 2000-01, State revenues exceeded the TABOR limitation by $139.0 million, $563.2 million, $679.6 million, $941.1 million, and $927.2 million, respectively. The economic downturn in fiscal years 2001-02 and 2002-03 and adjustments for inaccurate population estimates applied in fiscal year 2003-04 precluded TABOR refunds in those years. The State was required to refund $41.1 million in fiscal year 2004-05.

After the Referendum C five-year excess revenue retention period that encompassed fiscal year 2005-06 through fiscal year 2009-10, the State is subject to an Excess State Revenue Cap (ESRC) starting in fiscal year 2010-11.

Calculation of the TABOR retention limit continues to apply, but the ESRC replaces it as the limit that triggers tax payer refunds.

The basis for the ESRC is the highest adjusted TABOR revenue during the five-year excess revenue retention period; the highest adjusted TABOR revenue occurred in fiscal year 2007-08, and the ratchet down provision does not apply to the ESRC.

For fiscal year 2015-16, unaudited State revenues subject to TABOR were $12,824.4 million, which was $122.1 million under the ESRC, and $2,396.8 million over the retention limit. Absent Referendum C, the State would have been required to refund the amount exceeding the retention limit. At the end of fiscal year 2015-16 total refunds were $3,450.6 million since the inception of TABOR. At June 30, 2016 the State reported total TABOR refunds payable of $31.4 million.

During fiscal year 2015-16, Fort Lewis College and Western State Colorado University disqualified as TABOR-exempt enterprises, which resulted in an increase of $59.3 million of newly qualified TABOR revenue. Adams State University re-qualified as a TABOR-exempt enterprise, which resulted in a TABOR revenue decrease of

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$16.9 million. As required by TABOR, the State Controller makes the qualification of new enterprises and disqualification of existing TABOR enterprises neutral in the excess revenue calculation. In fiscal year 2015-16, the TABOR limit was increased by total of $42.4 million related to these changes in the TABOR district.

Referendum C Referendum C, approved by the voters in the November 2005 election, contained the following provisions:

The State shall be authorized to retain and spend all revenues in excess of the limit on spending after July 1, 2005, and before July 1, 2010 (five fiscal years). The authorization constitutes a voter approved revenue change.

After July 1, 2010, the limit on fiscal year spending is effectively raised to the highest population and inflation adjusted nonexempt revenue amount in the period from July 1, 2005, and before July 1, 2010. This provision disables the ratchet down provision during the five-year period.

A General Fund Exempt Account is created within the General Fund to consist of the retained revenues for each fiscal year. The Legislature shall appropriate the moneys in the account for health care, education (including related capital projects), firefighter and police pension funding, and strategic transportation projects. Spending from the General Fund Exempt Account is limited to five percent of personal income, with certain adjustments.

The Director of Research of the Legislative Council shall report the amount of revenues retained with a description of how the retained revenues were expended.

The State retained $3,593.6 million during the five-year refund time-out period (fiscal year 2005-06 through 2009-10) authorized by Referendum C, and $11,179.8 million from fiscal year 2010-11 through 2015-16 due to the increasing ESRC as compared to TABOR limit, for a total of $14,773.4 million of retained Referendum C revenue.

INDIVIDUAL FUND ANALYSIS

General Fund The General Fund is the focal point in determining the State’s ability to maintain or improve its financial position.

The General Fund includes all funds that do not have sufficient original source revenue streams to qualify as special revenue funds. As a result, the Public School Fund, Risk Management, and Other Special Purpose Funds reside in the General Fund. These funds are referred to as Special Purpose General Funds, while the General Purpose Revenue Fund comprises general activities of the State. Revenues of the General Purpose Revenue Fund consist of two broad categories – general-purpose revenues and augmenting revenues. General-purpose revenues are taxes, fines, and other similar sources that are collected without regard to how they will be spent. Augmenting revenues include federal funds, transfers-in, fees and charges, or specific user taxes. Augmenting revenues are usually limited as to how they can be spent. Even though significant federal grant revenues are accounted for in the General Purpose Revenue Fund, they have little impact on fund balance because most federal revenues are earned on a reimbursement basis and are closely matched with federal expenditures.

The ending total fund balance of the General Fund, as measured by generally accepted accounting principles (GAAP), was $1,076.6 million, $451.4 million of which was attributable to the General Purpose Revenue Fund, including non-spendable, restricted, committed, and assigned amounts. The General Purpose Revenue Fund decreased by $202.2 million from the prior fiscal year attributable to activities of fiscal year 2015-16. In fiscal year 2015-16, the State was able to fund the General Fund Statutory Reserve of $466.0 million on a budgetary basis, but was only able to reserve $386.5 million on a GAAP basis. The shortfall of $79.5 million in meeting the reserve on a GAAP basis was greater than the $52.6 million shortfall in the prior year, despite the reserve requirement decreasing by $110.5 million. The General Purpose Revenue Fund’s $124.6 million year-end unrestricted cash and pooled cash balance decreased by $73.2 million from the prior year.

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General Purpose revenues for fiscal years 2015-16 and 2014-15 were $17,973.0 million and $16,869.9 million, respectively – an increase of $1,103.0 million, or 6.5 percent. The largest contributor to the increase in general-purpose revenue was from federal grants and contracts which increased by $803.2 million or 11.3 percent ($736.1 million from the Title XIX Medicaid Program). Sales and use taxes also increased by $187.0 million or 6.9 percent over the prior year generally due to improving economic conditions. The only significant decline occurred with corporate income taxes which decreased $28.7 million, or 4.5 percent.

On the budgetary basis, total expenditures and transfers-out (excluding transfers not appropriated by department) funded from general-purpose revenues during fiscal years 2015-16 and 2014-15 were $9,637.7 million (see page 167) and $9,053.2 million, respectively. For fiscal year 2015-16, the total annual increase in general-funded appropriations was limited to 5.6 percent of personal income with certain adjustments. The primary adjustments are for changes in federal mandates, lawsuits against the State, and most transfers not appropriated by department. The limit is controlled through the legislative budget process.

The special purpose portion of the General Fund’s fund balance totaled $625.2 million at June 30, 2016. This comprises the State Public School Fund, Risk Management activities and Other Special Purpose Funds.

With expenditures reported using generally accepted accounting principles, the Departments of Education, Health Care Policy and Financing, Higher Education, and Human Services accounted for approximately 79.2 percent of all fiscal year 2015-16 general-funded expenditures, which was consistent with the prior year.

The largest increases were in the Departments of Health Care Policy and Financing, Education, Higher Education, Revenue, Human Services, and Corrections.

The Department of Health Care Policy and Financing’s expenditures increased by $167.6 million, or 7.2 percent, due to eligibility and funding changes that are occurring with the national Medicaid modernization efforts and growth in Medicaid populations. The Department of Education’s expenditures increased by $120.7 million, or 3.6 percent, due to increased enrollment, required annual increases in funding, and provisions of the School Finance Act. The Department of Higher Education’s expenditures increased by $95.5 million, or 12.6 percent, related to the restoration of state funding to public institutions of higher education (an increase of $70.0 million) as well as student financial aid (an increase of $18.4 million). The Department of Revenue’s expenditures increased by $61.2 million, or 28.8 percent. The Department of Human Services’ expenditures increased by $45.2 million, or 5.8 percent, primarily due to increases in mental health programs, information technology projects, child welfare and abuse prevention, and children and youth programs.

Finally, the Department of Correction’s expenditures increased by $40.5 million, or 5.6 percent. There were two significant decreases in departmental expenditures compared to the prior fiscal year. The Department of Public Health and Environment’s expenditures decreased by $10.2 million, or 16.9 percent, and the Department of Public Safety’s expenditures decreased by $12.5 million, or 9.9 percent.

As required by Senate Bills 03-196 and 03-197, the State converted to cash basis accounting for certain expenditures in fiscal year 2002-03 and subsequent years. House Bill 09-1367 also deferred certain Office of Information Technology (OIT) expenditures into the subsequent year. These changes result in an ongoing difference between the GAAP fund balance and the budgetary basis fund balance of the General Fund. During fiscal year 2015-16, the State met the statutory required reserve on a budgetary basis but not a GAAP basis. The statutorily required process of

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1 Beginning in Fiscal year 2010-11, the implementation of GASB Statement No. 54 modified the required fund balance classifications. As a result, Risk Management and other Special Purpose Funds became part of General Fund fund balance. The General Purpose Revenue portion of the General Fund primarily comprises the Statutory Reserve and Unassigned balances, and the Special Purpose Revenue portion of the General Fund the remaining balances.

deferring expenditures moved $98.9 million of payroll, $90.5 million of Medicaid, and $0.6 million of OIT expenditures into fiscal year 2016-17. Revenues related to the deferral of the Medicaid expenditures were also deferred in the amount of $59.1 million. In total, $12.8 million more (net expenditure and revenue deferrals) was deferred into fiscal year 2015-16 compared to fiscal year 2014-15.

The chart shows the changes in the major classifications of fund balance for the General Fund in accordance with generally accepted accounting principles (GAAP). Statutes in effect for fiscal year 2015-16 require a 5.6 percent fund balance reserve of $466.0 million. Statutory compliance was achieved on budgetary basis, but not on a GAAP basis by $79.5 million. On a budgetary basis, there were deferrals of $130.9 million of payroll, Medicaid, and other costs into fiscal year 2016-17. The deferrals and transfers-in have prevented shortfalls on a GAAP basis in each year except fiscal years 2005-06, 2006-07, 2008-09, and 2011-12 when adequate resources were available for a positive statutory reserve.

Resource Extraction Fund The fund balance of the Resource Extraction Fund decreased by $56.3 million, or 4.1 percent, from the prior fiscal year. Revenues of the fund, including severance taxes, mineral leasing, and fees associated with regulation of mining activities, decreased by $252.6 million, or 54.9 percent. Severance taxes decreased $204.4 million as a surplus in supply of oil and natural gas resulted in a decline in exploration and production.