SUBJECT: FISCAL YEAR MUNICIPAL IMPROVEMENT CORPORATION (MIClA) FINANCIAL STATEMENTS AND MANAGEMENT DISCUSSION AND ANALYSIS REPORT

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1 RON GALPERIN CONTROLLER June 10, 2014 Honorable Members of the City Council City of Los Angeles, California Dear Honorable Members: SUBJECT: FISCAL YEAR MUNICIPAL IMPROVEMENT CORPORATION (MIClA) FINANCIAL STATEMENTS AND MANAGEMENT DISCUSSION AND ANALYSIS REPORT Under the City Charter, the City Council is responsible for the annual Citywide audit. Attached to this transmittal are four copies of the fiscal year MICLA Financial Statements and Management Discussion and Analysis Report. The report is based on the results of an audit conducted by Simpson & Simpson, a firm of independent certified public accountants. This is one of the audit reports that the City Council receives pursuant to the audit contract. If you have any questions, please contact Todd Bouey, Director of Financial Analysis and Reporting at (213) or Todd.Bouey@lacity.org. Sincerely, ~'6~ CLAIRE BARTELS Chief Deputy Controller Attachments 200 N. MAIN STREET, SUITE 300, LOS ANGELES, CA (213) 978~ CONTROLLER.LACITY.ORG AN EqUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

2 US, BANK TOWER 633 WEST STI'1 SlR.EEI; sunr 3320 LOS ANGEl.ES, CA (213) 73(y6664 lelei'iioni: (213) FAX SIMPSON & SIMPSON CERn!'lfJ) PUBLIC ACCOUNTANTS illl,jn!)inc I'ARTNt'Jl,S I\I\J\INAIU) C SIMPSON, CPA MHJ\A W. SIMPSON, CPA June 9, 2014 Audit and Governmental Efficiency Committee Los Angeles City Council C/o City Clerk City Hall, Room North Spring Street Los Angeles, California Enclosed are the financial statements with Independent Auditor's report and Management Discussion and Analysis for the Municipal Improvement Corporation of Los Angeles (MICLA), a component unit of the City of Los Angeles, for the fiscal years ended June 30,2013 and We performed a financial audit of the MICLA's basic financial statements in accordance with auditing standards generally accepted in the United States of America. As indicated in our report dated January 10, 2014, we expressed an unqualified opinion on the financial statements indicating that they present fairly, in all material respects, the financial position and changes in financial position and cash flows of the MICLA in conformity with accounting principles generally accepted in the United States of America. No matters relating to internal control and other operating and administrative matters were communicated to management. If you have any questions, please contact us at (213) Sincerely, Simpson & Simpson Enclosures Cc: Todd Bouey - Office of Controller with 1 enclosure Sally Rocio - Office of Controller with 22 enclosures Victoria Orellana - Office of Controller with 1 enclosure Natalie Brill- Office of City Administrative Officer with 1 enclosure Diana Mangioglu - Office of City Administrative Officer with 1 enclosure ( C PAj The CPA. Never Underestimate The value"

3 MUNICIPAL IMPROVEMENT CORPORATION OF LOS ANGELES Basic Financial Statements and Independent Auditor's Report For the Fiscal Years Ended June 30, 2013 aud 2012

4 Basic Financial Statements and Independent Auditor's Report For the Fiscal Years Ended June 30, 2013 and 2012 TABLE OF CONTENTS Independent Auditor's Report 3 Required Supplementary Information: Management's Discussion and Analysis 5 Basic Financial Statements: Statements of Net Position 10 Statements of Revenues, Expenses and Changes in Net Position 11 Statements of Cash Flows 12 Notes to the Basic Financial Statements 13 2

5 u.s. BANK TOWER 633 WEST 5TH STREET, SUITE 3320 LOS ANGELES, CA (213) TELEPHONE (213) FAX SIMPSON & SIMPSON CERTIRED PUBLIC ACCOUNTANTS FOUNDlNG PARTNERS BRAINARD C SIMPSON, CPA MELBA W, SIMPSON, CPA To the Board of Directors of the Municipal Improvement Corporation of Los Angeles Los Angeles, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of the Municipal Improvement Corporation of Los Angeles (MICLA), a component unit of the City of Los Angeles, California (City), as of and for the years ended June 30, 2013 and 2012, and the related notes to the financial statements, which collectively comprise the MICLA's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether dne to frand 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 3 (CPA) The CPA. Never Underestimate The Value~

6 Opinion In our opinion, the fiuancial statements referred to above present fairly, in all material respects, the financial position of the MICLA as of June 30, 2013 and 2012, and the respective changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1, the financial statements present only the MICLA and do not purport to, and do not, present fairly the financial position of the City, as of June 30, 2013 and 2012, the changes iu its financial position, or, where applicable, its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. As discussed in Note 1 to the basic financial statements, the MICLA implemented Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements and GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. As a result of the implementation of GASB Statement No. 62, the MICLA adjusted its beginning net position and unamortized premiums and discounts to reflect change from the straight-line to the effective yield method in the amortization of bond premiums and discounts. Our opinion is not modified with respect to this matter. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 5 to 9 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 reqnired snpplementary information in accordauce with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about 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. i!fjf- (rj'(~ Los Angeles, California January 10,2014 4

7 MUNICIPAL IMPROVEMENT CORPORA non OF LOS ANGELES MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis provides an overview of the financial activities of the Municipal Improvement Corporation of Los Angeles (MICLA) for the fiscal year ended June 30, The information presented should be considered in conjunction with MICLA's basic financial statements. Financial Highlights Cash receipts from leases during the year totaled $151,157,143 and were used to pay the debt service requirements... Cash and investments decreased by $16,803,943 from $216,875,785 at June 30, 2012 to $200,071,842 at June 30, 2013 due to decreased new debt issuance. As of June 30, 2013, MICLA's bonded debt and commercial paper notes before unamortized premium and deferred charges, totaled $1,606,022,000, a net decrease of $63,475,000 from the prior year's balance of $1,669,497,000. Financial Statements MICLA's financial statements are those of a special-purpose government engaged only in providing debt financing for capital improvements benefiting the City of Los Angeles (City). Under Governmental Accounting Standards Board (GASB) Statement No. 34, governments like MICLA that have only business-type activities may present only enterprise fund financial statements as follows: (1) statement of net position; (2) statement of revenues, expenses and changes in net position; and (3) statement of cash flows. MICLA's basic financial statements are prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. MICLA is structured as a single enterprise fund. 5

8 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) The following table presents MICLA's financial conditions as of June 30, 2013 and 2012: Current Assets Noncurrent Assets 2013 $ 286,277,075 1,605,781,613 June 30, Restated 2012 $ 265,029,971 1,706,614,863 Total Assets 1,892,058,688 1,971,644,834 Current Liabilities Noncurrent Liabilities l37,908,213 1,659,473, ,191,942 1,748,690,090 Total Liabilities 1,797,381,651 1,881,882,032 Net Position - Restricted for Debt Service :L34, $~ 7(i2,11m, The changes in net position for the fiscal years ended June 30, 2013 and 2012 are shown in the following table: June 30, Restated Base Rents from the City - Interest Portion $ 71,273,967 $ 71,801,689 Miscellaneous Revenue 4,456 21,659 Investment Income 1,895,499 3,077,456 Interest Subsidy from U.S. Treasury 3,033,033 2,456,724 Total Revenues General and Administrative Costs Interest Expense Amortization of Costs of Issnance Total Expenses Change in Net Position Net Position, July 1 76,206,955 77,357,528 4,016,383 3,164,060 66,361,357 65,943, ,980 3,096,817 71,292,720 72,204,132 4,914,235 5,153,396 89,762,802 84,609,406 Net Position, June 30 LJi4,6IZ,031 L8.2.1li;?",KQ2 In fiscal year , the MICLA implemented Governmental Accounting Standards Board Statement No. 62 and changed the amortization of bond and premiums from the straight-line to the effective yield method. The restatement increased interest expense in 2012 by $2.5 million and adjusted the beginning net position in 2012 by $6.4 million. 6

9 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Long-term Debt MICLA's long-term indebtedness at June 30, 2013 and 2012 are as follows: Certificates of Participation Lease Revenue Bonds Commercial Paper Notes Subtotal Net Unamortized Premiums/ (Discounts) and Deferred Charges 2013 $ 69,075,000 1,352,750, ,197,000 1,606,022,000 June 30, Restated 2012 $ 76,615,000 1,451,685, ,197,000 1,669,497,000 34,898,127 39,746,025 Total $ 1.640, $ 1.709,2.4: In April 2004, the Mayor and City Council approved a $200 million MICLA Commercial Paper Lease Financing Program, The Mayor and City Council increased the Program by $100 million in December 2009 and by an additional $35 million in June 2013 for a total of $335 million, This program allows MICLA to borrow only those amounts needed as invoices are received; to obtain flexible short-term maturities; and to borrow at more favorable rates, The notes mature between one and 270 days of issuance and are either re-sold in the open market or refinanced with longer-term bonds upon maturity, As security to the notes, the City and MICLA enter into an asset-transfer lease agreement on certain capital assets with an estimated fair value of $366 million, The notes are further secured by irrevocable letters of credit issued by four commercial banks, During the year, MICLA issued $43,000,000 commercial paper notes to finance and refinance costs associated with the acquisition of certain capital equipment and improvement of certain real properties, and to repay a portion of certain outstanding lease revenue bonds. All MICLA indebtedness will be repaid through lease agreements with the City that are structured to meet the debt service requirements when due. As of January 13,2014, the ratings of the MICLA's debts by Moody's Investors Service (Moody's), Standard & Poor's (S&P), and Fitch Ratings (Fitch) respectively, are as follows: MICLA Lease Revenue Obligations (Real Property) A2, A+, and A+; and MICLA Lease Revenue Obligations (Equipment) A3, A+, and A+. Additional information on MICLA's long-term debt can be found in Note 4 of this report, 7

10 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Economic Factors The MICLA was formed to render assistance to the City to finance the acquisition of capital assets. Since MICLA derives its operating revenues almost exclusively from rental income paid to it by the City, any economic impact on the City's operational budget could have potential effect on MICLA's revenues. The U.S. gross domestic product (GDP) seasonally adjusted annual growth rates for the third and fourth quarter of 2013 were 4.1 % and 3.2%, respectively, fueled by strong consumer and business spending, and also exports during the fourth quarter. This has spurred economists' expectations that the economic recovery is gaining traction after years of tepid growth. Economists surveyed by the Wall Street Journal in December 2013, forecast an average of between 2.5% to 3.0% growth in 2014 with some expecting a sustained economic upswing in the coming quarters. The Federal Reserve has forecasted economic growth between 2.8% to 3.2% in However, recent weakness in economic indicators and emerging economics may impact American exports and businesses and economic activity. Despite the positive outlook, the Federal Reserve expressed concern that the rate of inflation continues to run below the central bank's 2.0% target. It raises the risk of deflation, or generally falling prices, which may cause consumers to delay major purchases and further worsen an economic slowdown. Weak inflation may also be an indicator of weak demand that holds down wages, corporate profits and growth. The outlook for certain economic indicator has been mixed but in general, analysts have indicated that the economy appears to be headed in a positive direction. Recent data point to a modestly improving national labor market. However, initial claims for jobless benefits, a measure of layoffs, have fluctuated in recent weeks. While it rose to its highest level since March 2013 during the second week in December, the U.S. Labor Department reported a decline at the end of the third week of December. Analysts caution that volatility during the holiday season may skew seasonal adjustments. In November 2013, the California State Legislative Analyst Office (LAO) issued its Budget Fiscal Outlook report, and projected a State operating surplus each year from fiscal year 2014 through Its projections are based on the assumption of a steady, moderate economic growth. For 2014, it forecasts an increase of 5.4% for California personal income; a 2.2% increase for wage and salary employment rate; and a decline of unemployment rate from 8.9% in 2013 to 7.8%. The assumptions also include a significant increase in personal income tax due to higher capital gains attributable largely to higher-income tax filers, a result of strong stock market and real estate market; and, excluding the impact of Proposition 30, the State's temporary one quarter cent sales tax measure, a 6.9% increase projected for underlying taxable sales in fiscal year The LAO's Fiscal Outlook reflects positively for the City's economy sensitive revenues. 8

11 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) In January 2014, the Governor released the State of California budget. The proposed budget's economic outlook expects slow and steady growth over the next few years. Job growth will continue in the range of 2.0% through Yet, risks remain, such as slow income growth and wage pressures resulting from persistent unemployment that may negatively impact consumer spending; the likelihood of another recession; and potential impact of the Federal Reserve taper on the stock market and broader economy. The City's General Fund adopted budget for fiscal year provided enhancements to ongoing services such as Fire recruit training and upgrade of fire companies, systems and equipment investments, as well as long deferred capitaj improvements. The City addressed a projected $216 million General Fund deficit for fiscal year 2014 through increased ongoing, as well as one-time revenue, transfers and receipts, various efficiencies and expenditure reductions. Efficiencies and expenditure reductions programmed in the budget include elimination of vacancies; reorganization of departmentaj functions; expense account reductions; and funding realignment from General Fund to speciaj funds. The budget ajso assumed that savings would be reajized from employee concessions that would require a 10.0% employee contribution towards healthcare premiums; elimination of 5.5% sajary adjustments scheduled for January 1, 2014, for certain employee bargaining units representing over 60.0% of the civilian workforce; and pension contribution associated with such sajary adjustments. The fiscaj year 2014 budget set aside funding in the Unappropriated BaJance in the event employee concessions fail to materialize. The fiscal year budget fully funds the City's lease obligations to MICLA. The Mayor and City Council have committed to making debt obligations a priority by adopting a debt policy. The policy provides that non-voter approved debt service requirement must not exceed 6% of GeneraJ Fund receipts unless there is a guaranteed new revenue stream for the debt payments and the additional debt will not cause the debt service ratio to exceed 7.5%. Reqnest for Information This financial report is designed to provide our citizens, taxpayers, customers, creditors, and other users with a general overview of MICLA' s finances. Questions concerning any of the information provided in this report and request for additionaj financial information should be addressed to the Office of the Controller, 200 North Main Street, Room 300, Los Angeles, CA

12 MUNICIPAL IMPROVEMENT CORPORA non OF LOS ANGELES STATEMENTS OF NET POSITION Restated ASSETS Current Assets: Cash and Pooled Investments Held by City Treasurer (Note 2) $ 78,118,348 $ 77,954,067 Cash and Temporary Investment with Fiscal Agents (Note 2) 1, ,539 Restricted Cash and Temporary Investments with Fiscal Agents (Note 2) 68,108,476 59,911,326 Advance to the City 10,784,644 Investment Income Receivable 416, ,667 Interest Subsidy Receivable from U.S. Treasury (Note 4) 524,913 2,103,290 Leases Receivable - Current (Note 3) 128,323, ,263,082 Total Current Assets 286,277, ,029,971 Noncurrent Assets: Restricted Other Investments with Fiscal Agents (Note 2) 53,843,759 78,625,853 Leases Receivable - Noncurrent (Note 3) 1,502,777,000 1,570,377,000 Construction in Progress (Note 6) 37,669,917 45,137,831 Prepaid Insurance 1,930,612 2,083,374 Deferred Costs of Issuance 9,560,325 10,390,805 Total Noncurrent Assets 1,605,781,613 1,706,614,863 Total Assets 1,892,058,688 1,971,644,834 LIABILITIES Current Liabilities: Accounts Payable 8,505,488 7,227,415 Interest Payable 25,078,370 25,143,082 Obligation Under Securities Lending Transactions (Note 2) 294,603 Other Liabilities 784,752 1,701,445 Certificates of Participation, Bonds and Notes Payable - Current (Note 4) 103,245,000 99,120,000 Total Current Liabilities 137,908, ,191,942 Noncurrent Liabilities: Deferred Revenue 121,798, ,567,065 Certificates of Participation, Bonds and Notes Payable - Noncurrent, Net (Note 4) 1,537,675,127 1,610,123,025 Total Noncurrent Liabilities 1,659,473,438 1,748,690,090 Total Liabilities 1,797,381,651 1,881,882,032 NET POSITION Net Position - Restricted for Debt Service $ 94,677,037 $ 89,762,802 The accompanying notes are an integral part of the basic financial statements. 10

13 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE FISCAL YEARS ENDED Restated Operating Revenues: Base Rents from the City - Interest Portion $ 71,273,967 $ 71,801,690 Miscellaneous Revenue 4,456 21,658 Total Operating Revenues 71,278,423 71,823,348 Operating Expenses: General and Administrative Expenses 4,016,383 3,164,060 Net Operating Income 67,262,040 68,659,288 Non-Operating Revenues (Expenses): Investment Income 1,895,499 3,077,456 Interest Subsidy from U.S. Treasury 3,033,033 2,456,724 Interest Expense (66,361,357) (65,943,255) Amortization of Cost of Issuance (914,980) (3,096,817) Net Non-Operating Expenses (62,347,805) (63,505,892) Changes in Net Position 4,914,235 5,153,396 Net Position, July 1 89,762,802 84,609,406 Net Position, June 30 $ 94,677,037 $ 89,762,802 The accompanying notes are an integral part of the basic financial statements. 11

14 STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED Cash Flows From Operating Activities: Payments Received From Leases $ 151,157,143 $ 170,084,189 Miscellaneous Revenue 4,456 21,658 Payments for General and Administrative Expenses (3,863,621) (3,011,298) Unexpended Funds Transferred to the City to Reduce Lease Payments (3,773,752) (15,007,798) Net Cash Provided by Operating Activities 143,524, ,086,751 Cash Flows From Capital and Related Financing Activities: Principal Paid on Bonds, Certificates of Participation, and Commercial Paper Notes (106,475,000) (222,711,000) Payments to Escrow for Refunded Certificates of Participation (121,628,952) Interest Paid on Bonds aod Certificates of Participation, aod Commercial Paper Notes (71,273,967) (71,801,690) Proceeds From Debt Issuance 43,000, ,561,291 Payments for Completed Projects (8,311,480) (65,691,477) Payments for Construction in Progress (10,199,056) (12,584,721) Debt Issuance Costs (84,500) (1,513,834) Arbitrage Payments to U.S. Treasury (1,883,914) Advance to the City (10,784,644) Payments to the City (2,081,944) (3,203,277) Interest Subsidy from U.S. Treasury 4,611, ,434 Net Cash Provided by (Used for) Capital and Related Financing Activities (161,599,180) (165,104,140) Cash Flows From Investing Activities: Cash Received from Earnings on Investments 976,408 4,570,314 Cash Received from Matured Investments 24,782,094 15,601,679 Purchase of Investments (24,976,346) Increase (Decrease) in Cash Collateral Received Under Securities Lending Transactions 294,603 (6,591,111) Net Cash Provided by (Used for) Investing Activities 26,053,105 (11,395,464) Net Increase (Decrease) in Cash and Cash Equivalents 7,978,151 (24,412,853) Cash and Cash Equivalents, July I 138,249, ,662,785 Cash and Cash Equivalents, June 30 $ 146,228,083 $ 138,249,932 Reconciliation of Operatiug Iucome to Net Cash Provided by Operating Activities Operating Income $ 67,262,040 $ 68,659,288 Add - Payments Received From Leases for Principal Portion 79,883,176 98,282,499 Chaoge in Prepaid Insurance 152, ,762 Unexpended Funds Transferred to the City to Reduce Lease Payments (3,773,752) (15,007,798) Net Cash Provided by Operating Activities $ 143,524,226 $ 152,086,751 The accompanying notes are an integral part of the basic financial statements. 12

15 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Organization The Municipal Improvement Corporation of Los Angeles (MICLA) is a California nonprofit corporation formed in 1984 for the purpose of rendering assistance to the City of Los Angeles (City) for financing the acquisition of properties and equipment, and the construction of buildings and other improvements, for the benefit of the City residents, through the issuance of revenue bonds, certificates of participation (COP) and commercial paper notes (CP Notes). Properties or equipment acquired or constructed by MICLA are leased to the City under long-term lease agreements. The minimum annual lease payments must be sufficient to cover MICLA's debt service payments. The Articles of Incorporation prevent any part of MICLA's net earnings or assets, either during its existence or at the time of dissolution, from inuring to the benefit of any private member or individual. The assets, profits, and net revenues of MICLA are irrevocably dedicated to the City. MICLA is a nonprofit entity exempt from the payment of federal income and California franchise taxes. MICLA, however, is subject to the arbitrage restrictions under the U.S. Treasury Regulations Section 1.103, which may result in rebates of excess earnings to the U.S. Treasury Department. MICLA has no employees. The City performs the accounting and administrative functions on its behalf without charge. Component Unit of the City MICLA is a component unit of the City because the City confirms the governing board and services are performed exclusively for the benefit of the City. The financial statements presented in this report cover only the operations of MICLA, which is only a portion of the City (Primary Government). MICLA's financial information is included in the City's basic financial statements. 13

16 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Basis of Accounting and Financial Statement Presentation MICLA's basic financial statements are presented using the accrual basis of accounting. MICLA has elected to apply all applicable Governmental Accounting Standards Board (GASB) pronouncements as well as any applicable private sector standards of accounting and reporting issued prior to December 1, 1989, unless such private sector standards conflict with or contradict GASB pronouncements. All activities of MICLA are accounted for within a single enterprise fund. An enterprise fund is used because MICLA's activities are financed with debt that is secured solely by a pledge of lease revenue. The accounting and financial reporting treatment applied to MICLA is determined by its measurement focus. The transactions of MICLA are accounted for using the flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operations are included on the Statement of Net Position. Net position (i.e., total assets net of total liabilities) is shown as amounts restricted for debt service. Cash and Investments Cash deposits and short-term investments that are both readily convertible to known amounts of cash, and have maturities of three months or less, are considered to be cash and cash equivalents. MICLA records investment transactions on the trade date. Investments in nonparticipating interest earning investment contracts (guaranteed investment contracts) are reported at cost, and all other investments are at fair value. Fair value is defined as the amount that MICLA could reasonably expect to receive for an investment in a current sale between a willing buyer and a seller and is generally measured by quoted market prices. Portions of MICLA's restricted cash and investments at June 30, 2013 and 2012 were held in trust with fiscal agents. 14

17 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Leases Receivable As described in Note 3, debt service on the outstanding debt is funded from rents paid by the City to MICLA for the use of equipment and facilities acquired by MICLA. In the debt agreements, the City has covenanted to make rental payments in amounts corresponding to MICLA's debt service requirements and related costs. Leases receivable consist of amounts owed to MICLA from the City for costs incurred by MICLA in acquiring equipment and facilities for the City. To the extent that funds are unexpended upon completion of all projects, such funds will be used to retire outstanding debt and the rental payments required from the City will be reduced accordingly. Title to the equipment and facilities will transfer to the City at the end of the respective lease terms. Accordingly, leases are "direct financing leases." Prepaid Insurance Prepaid insurance consists of surety bond insurance that are paid in advance and expensed when the benefit is received. Debt Issuance Costs, Premiums and Gains/Losses on Refundings Underwriting and other issuance costs associated with the issuance of debt as well as premiums and gains/losses on refundings have been deferred and are amortized to income/expense on the effective interest basis over the lives of the bonds. Construction in Progress Construction in progress represents costs accumulated for building construction and improvements and land improvements that are not completed at year-end. Deferred Revenue Deferred revenue represents leases receivable not yet earned. The balance in deferred revenue will be recognized in subsequent years when it is earned. Net Position Net position comprise of various net earnings from operating and non-operating and expenses. Net position is classified into the following component: revenues Restricted for debt service, which consists of funds held by the City Treasurer and fiscal agents for the repayment of debt principal or interest or as reserves. 15

18 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Operating and Non-Operating Revenues and Expenses MICLA's sole operational purpose is to issue debt to acquire equipment and facilities and lease such property to the City, as well as make debt service payments. As such, MICLA derives its operating revenues primarily from rental income (interest portion) paid by the City, and its operational expenses which include general and administrative expenses paid by MICLA on behalf of and for which will be reimbursed by the City. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Use of Estimates The preparation of the basic financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, the actual results could differ from the estimates. Reclassification Certain 2012 amounts have been reclassified presentation. to conform to the 2013 financial statements Adoption of New GASB Pronouncements GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. Issued in December 2010, this statement aims to improve financial reporting by contributing to the GASB's effort to codify all generally accepted accounting principles for state and local governments so that they may derive from a single source. The MICLA implemented this statement in fiscal year The beginning net position and unamortized premiums/discounts were restated to reflect the change. Please refer to Restatement below for related discussion on this matter. GASB Statement No. 63. Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. Issued in June 2011, the statement provides guidance for reporting deferred outflows of resources, deferred inflows of resources, and their effects on a government's net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. The MICLA implemented this statement in fiscal year 2013 and the primary change to the financial statements was changing references from net assets to net position. 16

19 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restatement In the implementation of GASB Statement No. 62, MICLA changed the amortization of the bond premiums/discounts from the straight-line to the effective yield method. The restatement increased interest expense in 2012 by $2.5 million and adjusted the beginning net position in 2012 by $6.4 million. 17

20 NOTE 2 CASH AND INVESTMENTS At June 30, 2013 and 2012, MICLA had the following cash and investments: Fair Value Investment Type Cash and Pooled Investments Held by City Treasurer $ 78,118,348 $ 77,954,067 Cash and Investments with Fiscal Agents: U.S. Treasury Notes 2,225,220 Investment Agreements 3,612,702 8,845,202 U.S. Sponsored Agency Issues 50,231,057 67,555,431 Mutual Funds 68,109,735 60,295,865 Subtotal 121,953, ,921,718 Total $ 200,071,842 $ 216,875,785 Cash and Pooled Investments Held by City Treasury The cash balances of substantially all funds on deposit in the City Treasury are pooled and invested by the City Treasurer for the purpose of maximizing interest earnings through pooled investment activities but safety and liquidity still take precedence over return. Interest earned on pooled investments is allocated to the participating funds based on each fund's average daily cash balance during the allocation period with all remaining interest allocated to the General Fund. Investments in the City Treasury are stated at fair value based on quoted market prices except for money market investments that have remaining maturities of one year or less at time of purchase, which are reported at amortized cost. Pursuant to California Government Code Section and the Los Angeles City Council File No , the City Treasury shall render to the City Council a statement of investment policy (the Policy) annually. City Council File No was adopted on October 23, 2012, as the City's investment policy. This Policy shall remain in effect until the Los Angeles City Council and the Mayor approve a subsequent revision. The Policy governs the City's pooled investment practices. The Policy addresses soundness of financial institutions in which the Treasurer will deposit funds and types of investment instruments permitted by California Government Code Sections and

21 NOTE 2 CASH AND INVESTMENTS (Continued) Examples of investments permitted by the Policy are obligations of the U.S. Treasury and government agencies, local agency bonds, commercial paper notes, certificates of deposit (CD) placement service, bankers' acceptances, medium term notes, repurchase agreement, mutual funds, money market mutual funds, and the State of California Local Agency Investment Fund. At June 30, 2013 and 2012, MICLA's cash and pooled investments held by the City Treasury were $78,118,348 and $77,954,067, which represent approximately 0.92% and 0.98% of the City's investment pools, respectively. At June 30, 2013, the investments held in the City's investment pools and their maturities are as follows: Investment Maturities 1 to 31 to 61 to 366 Days Over TYEe of Investments Amount 30 Days 60 Days 365 Days to 5 Years U.S. Treasury Notes $ 3,705,029,782 $ -- $ -- $ -- $ 3,687,736,237 s 17,293,545 U.S. Treasury Bills 184,539,504 20,998, ,540,703 u.s. Sponsored Agency Issues 1,980,333, ,075, ,941, ,318,321 1,060,251,625 13,746,113 Medium Term Notes 1,467,555,595 8,913,261 32,360, ,291,887 1,224,989,948 Commercial Paper 1,071,320, ,230,763 33,998,921 75,091,265 Municipal Bonds 9,774,175 9,774,175 Certificates of Deposit 7,000,000 7,000,000 Short Term Investment 22,261,396 22,261,396 Funds Securities Lending Short- Term Collateral 31,659,069 31,659,069 Investment Pool Total Investment Pools $ 8,479,474,338 $1,199,139,135 $ 307,301,384 $ 959,242,176 $ 5,982,751,985 $ 31,039,658 At June 30, 2012, the investments are as follows: held in the City's investment pools and their maturities Investment Maturities 1 to 31 to 61 to 366 Days Over Type of Investments Amount 30 Days 60 Days 365 Days to 5 Years 5 :years U.S. Treasury Notes $ 3,773,466,471 $ 1,987,775 $ $ 62,617,054 $ 3,689,504,220 $ 19,357,422 U.S. Treasury Bills 37,003,728 28,035,268 6,008,994 2,959,466 U.S. Sponsored Agency Issues 2.018,681, ,006, ,587, ,749,256 1,073,234,640 11,104,784 Medium Term Notes 1,318,929,409 14,500, ,071,945 1,109,357,464 Commercial Paper 829,789, ,152,081 88,637,349 Certificates of Deposit 6,000,000 6,000,000 Short Term Investment Funds 4,447,184 4,447,184 Total Investment Pools $ 7,988,318,089 $ 954,128,471 $ 657,233,367 $ 474,397,721 $ 5,872,096,324 $ 30,462,206 19

22 MUNICIPAL IMPROVEMENT CORPORA non OF LOS ANGELES NOTE 2 CASH AND INVESTMENTS (Continued) Interest Rate Risk The Policy limits the maturity of its investments to five years for the U.S. Treasury and government agency securities, medium term notes, CD placement service, negotiable certificate of deposits, collateralized bank deposits, mortgage pass-through securities, and bank/time deposits; one year for repurchase agreements; 270 days for commercial paper; 180 days for bankers' acceptances, and 92 days for reverse repurchase agreements. The Policy also allows City funds with longer-term investments horizons, to be invested in securities that at the time of the investment have a term remaining to maturity in excess of five years, but with a maximum final maturity of thirty years. Credit Risk The Policy establishes minimum credit ratings requirement for investments. There is no credit quality requirement for local agency bonds, U.S. Treasury Obligations, State of California Obligations, California Local Agency Obligations, and U.S. Sponsored Agencies (U.S. government sponsored enterprises) securities. At June 30, 2013 The City'S $2.0 billion investments in U.S. government sponsored enterprises consist of securities issued by the Federal Home Loan Bank - $292.5 million, Federal National Mortgage Association - $880.9 million, Federal Home Loan Mortgage Corporation - $617.1 million, Federal Farm Credit Bank - $121.7 million, Tennessee Valley Authority- $62.0 million and Farmer Mac Discount Note - $6.1 million. Of the City's $2.0 billion investments in U.S. Sponsored Agencies securities, $1,281.6 million are rated "AA+" by S&P and "Aaa" by Moody's; $698.7 million were not rated individually by S&P nor Moody's (issuers of these securities are rated "A-l +" by S&P and "P-l" by Moody's). Medium term notes must be issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Medium term notes must have at least an "A" rating. The City'S $1.5 billion investments in medium term notes consist of securities issued by banks and corporations that comply with these requirements and were rated "A" or better by S&P and "A3" or better by Moody's. Subsequent to purchase, one issuer of $12.0 million medium term notes were downgraded to "BBB" by S&P and "Baal" by Moody's. 20

23 NOTE 2 - CASH AND INVESTMENTS (Continued) Commercial paper issues must have a minimum of "A-I" or equivalent rating. If the issuer has issued long term debt, it must be rated" A" without regard to modifiers. Issuing corporation must be organized and operating within the United States and have assets in excess of $500.0 million. Of the City's $1.1 billion investments in commercial paper, $971.0 million were rated A-I +/A-I by S&P and Pvl by Moody's; $33.0 million were rated Pvl by Moody's and not rated by S&P; and $67.3 million were not rated individually by S&P nor Moody's. The issuers of the certificates of deposit and municipal bonds were not rated. At June 30, 2012 The City'S $2.0 billion investments in U.S. government sponsored enterprises consist of securities issued by the Federal Home Loan Bank - $581.8 million, Federal National Mortgage Association - $602.4 million, Federal Home Loan Mortgage Corporation - $646.1 million, Federal Farm Credit Bank - $124.0 million, Tennessee Valley Authority- $64.4 million. Of the City's $2.0 billion investments in U.S. Sponsored Agencies securities, $1,253.9 million are rated "AA+" by S&P and "Aaa" by Moody's; $764.8 million were not rated individually by S&P nor Moody's (issuers of these securities are rated "A-l +" by S&P and "P>l" by Moody's). Medium term notes must be issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Medium term notes must have at least an "A" rating. The City's $1.3 billion investments in medium term notes consist of securities issued by banks and corporations that comply with these requirements and were rated "A" or better by S&P and "A3" or better by Moody's. Subsequent to purchase, two issuers of $27.5 million medium term notes were downgraded to "BBB+" by S&P. Commercial paper issues must have a minimum of "A-I" or equivalent rating. If the issuer has issued long term debt, it must be rated "A" without regard to modifiers. Issuing corporation must be organized and operating within the United States and have assets in excess of $500.0 million. Of the City's $829.8 million investments in commercial paper, $709.8 million were rated A-l+/A-l by S&P and P-l by Moody's; and $120.0 million were not rated individually by S&P nor Moody's. The issuers of the certificates of deposit were not rated. 21

24 NOTE 2 - CASH AND INVESTMENTS (Continued) Concentration of Credit Risk The Policy does not allow more than 40% of its investment portfolio be invested in commercial paper and bankers' acceptances, 30% in certificates of deposit and medium term notes, 20% in mutual funds, money market mutual funds and mortgage pass-through securities. The Policy further provides for a maximum concentration limit of 10% in any one issuer of commercial paper as well as in anyone mutual fund, and 30% in bankers' acceptances of anyone commercial bank. There is no percentage limitation on the amount that can be invested in the U.S. government agencies. The City'S pooled investments comply with these requirements. GAAP requires disclosure of certain investments in anyone issuer that represent 5% or more of total investments. Of the City's total pooled investments as of June 30, 2013, $617.1 million (7%) was invested in securities issued by Federal Home Loan Mortgage Corporation, and $880.9 million (10%) was invested in securities issued by Federal National Mortgage Association. Of the City's total pooled investments as of June 30, 2012, $581.8 million (7%) was invested in securities issued by the Federal Home Loan Bank, $646.1 million (8%) was invested in securities issued by Federal Home Loan Mortgage Corporation, and $602.4 million (8%) was invested in securities issued by Federal National Mortgage Association. 22

25 NOTE 2 - CASH AND INVESTMENTS (Continued) Cash and Investments with Fiscal Agents At June 30, 2013, MICLA's cash and investments with fiscal agents consisted of the following investments and maturities: Investment Maturities More Than Investment TYEe Fair Value 1-30 Da~s Days 60 Days Investment Agreements $ 3,612,702 $ $ $ 3,612,702 U.S. Sponsored Agency Issues 50,231,057 50,231,057 Mutual Funds 68,109,735 68,109,735 Total $ 121,953,494 $ 68,109,735 $ 53,843,759 As of June 30, 2012, MICLA's cash and investments with fiscal agents consisted of the following investments and maturities: Investment Maturities Investment Type Fair Value U.S. Treasury Notes Investment Agreements U.S. Sponsored Agency Issues Mutual Funds Total Interest Rate Risk $ 2,225,220 8,845,202 67,555,431 60,295,865 More Than 1-30 Days Days 60 Days $ $ $ 2,225,220 8,845,202 60,295,865 67,555,431 $ 60,295,865 $ 78,625,853 Cash and investments with fiscal agents are invested in accordance with trustee agreements. Maturity of investments is governed by trustee agreements with the fiscal agents. Credit Risk State law limits investments in commercial paper, corporate bonds, and mutual bond funds to the top two ratings issued by nationally recognized statistical rating organizations (NRSROs). At June 30, 2013 and 2012, MICLA's investments in mntual funds in the amounts of $68,109,735 and $60,295,865, respectively, were rated AAA by Standard & Poor's and Aaa by Moody's Investor Service; investments in U.S. sponsored agency issues in the amounts of $50,231,057 and $67,555,431, respectively, were rated AAA by Standard & Poor's and Aaa by Moody's Investor Service; investments in investment agreements with various companies in the amounts of $3,612,702 and $8,845,202, respectively, were rated AAA by Standard & Poor's and Aaa by Moody's Investor Service; and investments in U.S. Treasury Notes in the amounts of $0 and $2,225,220, respectively, were rated AA+ by S&P and Aaa by Moody's. 23

26 NOTE 2 CASH AND INVESTMENTS (Continued) Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, MICLA will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. Investment securities are exposed to custodial credit risk if the securities are not insured, or are. not registered in MICLA's name, and held by the counterparty. MICLA's investments with fiscal agents are not exposed to custodial credit risk since they are held by custodial banks in MICLA's name. Concentration of Credit Risk According to the Policy, no more than 10% of the portfolio, except U.S. Treasuries and Agencies, may be invested in securities of a single issuer including its related entities. There is no specific requirement in the agreements with fiscal agents that limits the amount fiscal agents may invest in anyone issuer. At June 30, 2013 and 2012, MICLA had no investment holdings of more than 10% in anyone issuer except for the investments issued or guaranteed by the U.S. government. Restricted Assets Certain investments with fiscal agents are restricted pursuant to restrictions arising from various revenue bonds, commercial paper notes and certificates of participation (COP) indenture agreements for the redemption of bonds, commercial paper notes and COP. As of June 30, 2013 and 2012, MICLA's restricted cash and temporary investments with fiscal agent in the amounts of $68,108,476 and $59,911,326, respectively, were invested in cash deposit and short-term investment accounts. As of June 30, 2013, restricted other investments with fiscal agent in the amount of $53,843,759 were invested primarily in U.S. sponsored agency issues and investment agreements with maturities of more than three months. As of June 30, 2012, restricted other investments with fiscal agent in the amount of $78,625,853 were invested primarily in U.S. Treasury Notes, U.S. sponsored agency issues, and investment agreements with maturities of more than three months. General Investment Pool Securities Lending Program MICLA participates in the City Treasurer's General Investment Pool (Pool), which enters into securities lending transactions. 24

27 NOTE 2 - CASH AND INVESTMENTS (Continued) Securities lending is permitted and limited under provisions of California Government Code Section The City Council approved the Securities Lending Program (the SLP) on October 22, 1991 under Council File No , which complies with the California Government Code. The objectives of the SLP in priority order are; safety of loaned securities; and prudent investment of cash collateral to enhance revenue from the investment program. The SLP is governed by a separate policy and guidelines. The City's custodial bank acts as the securities lending agent. In the event a counterparty defaults by reason of an act of insolvency, the bank shall take all actions which it deems necessary or appropriate to liquidate permitted investment and collateral in connection with such transaction and shall make a reasonable effort for two business days (Replacement Period) to apply the proceeds thereof to the purchase of securities identical to the loaned securities not returned. If during the Replacement Period the collateral liquidation proceeds are insufficient to replace any of the loaned securities not returned, the bank shall, subject to payment by the City of the amount of any losses on any permitted investments, pay such additional amounts as necessary to make such replacement. Under the provisions of the SLP, and in accordance with the California Government Code, no more than 20% of the market value of the General Investment Pool (the Pool) is available for lending. The City receives cash as collateral on loaned securities, which is reinvested in securities permitted under the Policy. In accordance with the California Government Code, the securities lending agent marks to market the value of both the collateral and the reinvestments daily. Except for open loans where either party can terminate a lending contract on demand, term loans have a maximum life of 60 days. Earnings from securities lending accrue to the Pool and are allocated on a pro-rata basis to all Pool participants. During the fiscal years 2013 and 2012, collateralizations on all loaned securities were compliant with the required 102% of the market value. The City can sell collateral securities only in the event of borrower default. The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during the fiscal years 2013 and There were no credit risk exposures to the City because the amounts owed to the borrowers exceeded the amounts borrowed. Loaned securities are held by the City's agents in the City's name and are not subject to custodial credit risk. 25