SAN JOAQUIN REGIONAL RAIL COMMISSION ANNUAL FINANCIAL REPORT

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1 ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED June 30, 2016 Prepared by: Fiscal Department

2 TABLE OF CONTENTS JUNE 30, 2016 INTRODUCTORY SECTION Letter of Transmittal... 3 Organizational Chart... 9 List of Elected and Appointed Officials FINANCIAL SECTION Independent Auditors' Report 11 Management's Discussion and Analysis 13 Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Position Statement of Activities Fund Financial Statements: Balance Sheet Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position Statement of Revenues, Expenditures, and Changes in Fund Balance Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities Proprietary Fund: Statement of Net Position Statement of Revenues, Expenses, and Changes in Fund Net Position Statement of Cash Flows Notes to the Basic Financial Statements Required Supplementary Information: Schedule of Revenues, Expenditures, and Changes in Fund Balance Budget and Actual (GAAP Basis) Note to the Required Supplementary Information Other Reports: Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards... 62

3 TABLE OF CONTENTS JUNE 30, 2016 Single Audit Reports and Schedules: Independent Auditors' Report on Compliance For Each Major Federal Program and on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs I. Summary of Auditors' Results II. Financial Statement Findings III. Federal Award Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 72

4 January 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 3 Commissioner, Bob Johnson, Chair, City of Lodi Commissioner, Moses Zapien, San Joaquin County Commissioner, Christina Fugazi, City of Stockton Executive Director, Stacey Mortensen Commissioner, Mike Maciel, - Vice-Chair City of Tracy Commissioner, Vince Hernandez, City of Manteca Commissioner, Steve Dresser, City of Lathrop March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission It is with pleasure that we submit to you the San Joaquin Regional Rail Commission (Commission) Annual Financial Report for the fiscal year ending June 30, SJRRC is required to undergo an annual audit in conformity with the provisions of the Single Audit Act and U.S. Office of Management and Budget Circular A-133 as it pertains to audits of state and local governments, in conformity with generally accepted accounting principles (GAAP) and in accordance with generally accepted auditing standards, by a firm of certified public accountants licensed to practice in the State of California. Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Vavrinek, Trine, Day & Co., LLP, Certified Public Accountants, have issued an unmodified ( clean ) opinion on the San Joaquin Regional Rail Commission s financial statements for the year ended June 30, The independent auditor s report is located at the front of the financial section of this report. Management s Discussion and Analysis (MD&A) immediately follows the independent auditor s report and provides a narrative introduction, overview, and analysis of the basic financial statements. The MD&A complements this letter of transmittal and should be read in conjunction with it. Profile of the government The San Joaquin Regional Rail Commission (Commission) is a joint powers authority (JPA) established by San Joaquin County (County), and the cities of Lodi, Stockton, Escalon, Ripon, Manteca, Lathrop, and Tracy. The primary purpose of the Commission is to address the preservation and improvement of the rail infrastructure for passenger rail service, which will provide regional economic and environmental benefits, as well as, operating the Altamont Corridor Express (ACE) Service. The Commission was formally established on May 1, Effective July 1, 2003, the Commission became the designated owner, operator and policy-making body for the ACE Service in accordance with the Cooperative Services Agreement, which superseded and rescinded the prior Joint Powers Agreement of May 15, 1997, which created the Altamont Commuter Express Authority. As the designated owner of the ACE Service the Commission took title to all of the assets and assumption of the liabilities that were previously under ownership of the Altamont Commuter Express Joint Powers Authority, which has been dissolved. On October 23, 2003, a Special Voting Memorandum to the SJRRC JPA was approved which provides specifically for two special voting commissioners to be appointed by the Alameda County Transportation Commission (ACTC), who may participate and vote as a part of the Commission. 3

5 March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 4 Profile of the government (continued) The Commission receives its funding from Measure K, Transportation Development Act (TDA) and federal and state grants. The ACE Service receives its funding from Measure K, contributions from the Alameda County Transportation Commission (ACTC) and the Santa Clara Valley Transportation Authority (SCVTA) and passenger fares from the ACE Service. Measure K is the half-cent sales tax approved by San Joaquin County voters in 1990 and assessed in San Joaquin County to be used for the transportation improvement projects administered by the San Joaquin Council of Governments (SJCOG). TDA and STA funds are both Local Transportation Funds (LTF), onequarter cent of the State sales tax, allocated by the SJCOG for public transportation and local streets and roads, and State Transit Assistance, funds budgeted by the State for public transit purposes. The Commission also receives funding for various projects from Federal and State grants. The Commission does not exercise control over any other governmental agency or authority. SJRRC is considered a primary government since it has a separate governing body, is legally separate, and is fiscally independent of other State or local governments. The Commission prepares and legally adopts a budget on or before June 30, of each fiscal year for the General Fund. The Commission s operations, commencing July 1 st are governed by the proposed budget, adopted by the Commission Board in June of the prior fiscal year. All budget increases, amendments, or transfers between major budget categories are submitted to the Board for approval, and the Executive Director has the authority to transfer funds within a major budget category. The legal level of budgetary control for the Commission is total expenditures. 2015/2016 ACE Service Highlights In the past year, ACE ridership has continued unprecedented year over year growth and key efforts must be made in the upcoming year to provide adequate capacity. While some creative, short term solutions may tease out the final existing opportunities, mid and long term planning for new service, stations, parking, shuttles and partnerships is critical. The ACEforward work will continue the environmental, engineering and ridership work to improve the ACE service incrementally to 10 daily round trips, expand the ACE Corridor to serve Modesto, Turlock and Merced. The next several years will also involve increasing coordination with the host railroad and the contract operator for installation of Positive Train Control equipment on the ACE locomotives and cab cars and initial testing of the of PTC on the corridor. Some ACE Service highlights from this current year include: 91.7% On Time Performance 1.3 Million Annual Trips (estimated for June 30th) Average 5,016 Trips/Day Fare Revenue 5% Above Projections Projects and Programs The next phase of the Stockton Track Extension is ready to begin, which extends the safety and operational efficiencies near Cabral Station, demonstrated by the first two completed phases of the project. This phase of the project has the potential to leverage other funding to extend the track even further to the final connection and the Rail Maintenance Facility. The Commission also plays a pivotal role in nearly all rail planning discussions affecting the Central Valley, Sacramento and the East Bay, including the Central Valley Rail Working Group, Altamont (BART/ACE) Working Group, and the HSR project from Merced to Sacramento. 4

6 March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 5 Projects and Programs (Continued) The Commission was also recommended to continue on as the Managing Agency for the San Joaquin Intercity Rail Service for an addition three years. Under the direction of the San Joaquin Joint Powers Authority, a new 7th daily round trip will be introduced and the first Amtrak operating agreement will be executed, followed immediately by negotiations for the next October 1st operating agreement. An extensive, geographically targeted grass roots outreach effort will also be in full swing. Local economy The Commission is located in the County of San Joaquin, which is in the San Joaquin Valley, approximately 90 miles east of San Francisco and 45 miles south of Sacramento. Due to its location, San Joaquin County serves as a major transportation hub for warehousing and shipping. With the Port of Stockton, three rail lines and two interstate highways that crisscross the County and direct interstate access to the San Francisco Bay Area, several large multimodal facilities have opened to take advantage of this transportation network. With the economy stabilizing and starting to grow, ACE ridership and fare revenues have been steadily increasing. Traditional sources of state and federal capital funding have fluctuated and are at time subject to reductions or delays in funding. The Commission is dependent on Federal formula allocations as well as State and local grants and contributions from the Commission s partner agencies. These funds are a key annual revenue source. The Commission is working with the San Joaquin Council of Governments and other partners to address these issues and keep the projects on track. A modest improvement in the general economy is expected to continue over the next three years. This gradual improvement is expected to result in modest increases in employment and retail growth. These improvements are expected to result in gradual increases in local sales tax and gas tax revenues, which are sources of local revenues for the Commission. Long-term financial planning and major initiatives Altamont Corridor Rail Project ACEforward In fiscal year 2012/2013, $36.4 million of Proposition 1A funding was allocated in the state budget to the California High Speed Rail Authority (CHSRA) for planning for improvements in the Altamont Corridor. To expedite progress in the Altamont Corridor, in June 2013 the CHSRA turned the leadership and management of this Altamont Corridor planning effort to the Commission. The Commission s focus is on delivering near-term incremental improvements to the existing ACE service that can be achieved by the end of 2019 and by the end of This work includes planning to connect the ACE service to what will be the northern terminus of CHSRA s initial operating segment in Merced by the end of 2023 and to improve connectivity with BART (in the Tri-Valley and other potential locations) and other transit services. This program is called ACEforward. 5

7 March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 6 Long-term financial planning and major initiatives (continued) Positive Train Control Positive Train Control (PTC) is a federally mandated program put into effect as part of the Rail Safety Act of 2008 and implemented through the Federal Railroad Administration rule making process on January 15, PTC is a communication-based/processor-based train control technology designed to prevent train-to-train collisions, over speed derailments, incursions into established work zone limits, and the movement of a train through a main line switch in the improper position. PTC is required on all railroad mainlines hauling hazardous material, or having regularly scheduled passenger rail service. Union Pacific RailRoad (UPRR) Capitalized Maintenance Projects As part of the SJRRC/UPRR Trackage Rights Agreement ACE participates in capitalized maintenance projects with the UPRR to ensure service reliability and ride quality and improved operations along the ACE Corridor. ACE contributes $4M to projects annually for projects mutually agreed upon by ACE and UPRR. Cabral Station Track Extension This is a multi-year project to extend the existing station track north for a direct connection with the Rail Maintenance Facility. This is a multi-year project scheduled to be completed in the summer Rail Maintenance & Layover Facility Two important projects at the Rail Maintenance Facility are planned for the upcoming year: 1) Extending the ballast walkways throughout the yard. This facilitates safer, more productive employee movement between switches in the yard, particularly in the early morning and evening train. 2) Expand the wayside power to all Service & Inspection track. This project is for the design and construction of two wayside power panels to allow the train head end power engines to be shutdown at night saving on fuel, reducing emissions, and decreasing noise levels at the facility. E-Ticketing The development of E-ticketing apps and systems allows transit agencies a better way to manage operations more effectively and efficiently and making the ticketing process easier for customers. E-Ticketing goals for the Commission are as follows: The system must provide the passenger more convenience and time savings than the current method; The system must provide improved passenger data for safety and security purposes. 6

8 March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 7 Long-term financial planning and major initiatives (continued) Wayside Horn Project (Sunol Crossings) This is the final year of a multi-year project to design, engineer and install a wayside horn system at two at-grade crossings in Sunol in Alameda County. The project will decrease the noise level at the Railroad Crossing by focusing the horn noise along the roadway corridor. The total project is estimated to cost $800,000. Because the project is tied into the Union Pacific Railroad (UPRR) signal system all the design, engineering and installation work will be completed by the UPRR. The project is estimated to be completed by December SJRRC's anticipated sources of funding are described below: A. Federal Funding Sources Federal Transit Administration (FTA) Funding: This federal agency is responsible for federal public transit investments. These funds, depending on availability, will be used to fund various capital projects including: Positive Train Control, Capital Maintenance Projects, Cabral Station Track Extension, Locomotive Overhauls and Preventative Maintenance. B. State Funding Sources Proposition 1B PTMISEA Funding: The Public Transportation Modernization, Improvement and Service Account Program (PTMISEA) funding account was created by Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security bond Act of Of the $ billion available to transportation, $3.6 billion dollars was allocated to PTMISEA to be available to transit operators. C. Local Funding Local Transportation Fund (LTF) Funds: LTF Funds are retail sales tax monies, ¼ cent, that are collected statewide under the Transportation Development Act. These funds are returned to San Joaquin County and distributed to eligible claimants to provide planning and program activities, pedestrian and bicycle facilities, community transit services, public transportation and bus and rail projects. LTF Funds for San Joaquin County are administered by the San Joaquin Council of Governments. State Transit Assistance (STA) Funds: STA Funds are diesel fuel sales tax monies, 1/8 cent, that are collected statewide under the Transportation Development Act. These funds are returned to San Joaquin County and distributed to eligible claimants to provide transit services. STA Funds for San Joaquin County are administered by the California State Controller s Office and the San Joaquin Council of Governments. Statute requires that 50% of STA funds be allocated according to population and 50% be allocated according to operator revenues from the prior fiscal year. STA funds can only be used for transportation planning and mass transportation purposes. Local Transportation Authority (Measure K): In November of 1990, San Joaquin County voters passed a ½ cent sales tax to fund specified transportation projects. In November 2006, San Joaquin County voters voted to extend the transportation sales tax until The Commission is allocated a portion of these funds to be used for administration, transit planning and operations and transit related capital projects. 7

9 March 20, 2017 To the Honorable Board of Commissioners San Joaquin Regional Rail Commission Page 8 Relevant financial policies The Commission has adopted a comprehensive set of financial policies. The Commission has a policy that requires the adoption of balanced annual operating and capital budgets. The Commission s FY and approved budgets both were adopted timely and met the balancing requirements. Acknowledgements The preparation of this report would not have been possible without the skill, effort, and dedication of the entire staff of the Fiscal Department. We wish to thank all Commission departments for their assistance in providing the data necessary to prepare this report. Credit also is due to the Chair and Commissioners for their unfailing support for maintaining the highest standards of professionalism in the management of the San Joaquin Regional Rail Commission's finances. Respectfully submitted, Stacey Mortensen Executive Director Nila Cordova Director of Fiscal Services and Administration 8

10 FY 15/16 SJRRC Organizational Chart San Joaquin Regional Rail Commission Executive Director Director of Operations Director of Fiscal Services & Administration Manager of Facilities and Equipment Manager of Operations Security Officer Executive Legislation Coordinator Manager of Community Engagement & Marketing Manager of Regional Initiatives Senior Grants Planner Controller Human Resources/ Payroll Coordinator Administrative Coordinator Maintenance Facility Superintendent Transportation Specialists (2) Customer Service, Safety & Security Coordinator Marketing Coordinator Senior Planner Staff Accountant Grants Contracts & Compliance Assistant (2) Senior Staff Accountant Office Manager Rail Maintenance Facility Maintenance Supervisor Onboard Passenger Service Agents (7) Facility Watchman Marketing Specialist (ACE) Planning Analyst Assistant Transit Analyst Staff Accountant Office Manager Agency HDQRTS Maintenance Assistants (4) Customer Service/Station Ticket Sales Representatives (6) Fiscal Assistant (3) Admin Assistant Ticketing Program (2) Special Groups Coordinator 9

11 San Joaquin Regional Rail Commission List of Elected and Appointed Officials June 30, 2016 Elected Officials Chair Bob Johnson City of Lodi Vice Chair Mike Maciel City of Tracy Commissioner Moses Zapien San Joaquin County Commissioner Steve Dresser City of Lathrop Commissioner Christina Fugazi City of Stockton Commissioner Vince Hernandez City of Manteca Commissioner Scott Haggerty Alameda County Commissioner Bill Harrison City of Fremont Appointed Officials Ex-Officio Dennis T. Ajar California Department of Transportation Ex-Officio Andrew Chesley San Joaquin Council of Governments Ex-Officio Donna DeMartino San Joaquin Regional Transit District Executive Director Stacey Mortensen San Joaquin Regional Rail Commission 10

12 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE INDEPENDENT AUDITORS REPORT Board of Commissioners San Joaquin Regional Rail Commission Stockton, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, and each major fund of the San Joaquin Regional Rail Commission (Commission) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Commission 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 due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, and each major fund of the Commission 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 River Plaza Drive, Suite 308 Sacramento, CA Tel: Fax:

13 Emphasis of Matter As described in Note 1 to the financial statements, the Authority adopted new accounting guidance, GASB Statement No. 72, Fair Value Measurement And Application, effective July 1, Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and budgetary comparison information on pages and 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 Commission s basic financial statements. The introductory section is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is also not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory has 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 it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 20, 2017, on our consideration of the Commission'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 Commission's internal control over financial reporting and compliance. Sacramento, California March 20,

14 MANAGEMENT'S DISCUSSION AND ANALYSIS

15 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 As management of the San Joaquin Regional Rail Commission (Commission), we offer readers of the Commission's financial statements this narrative overview and analysis of the financial activities of the Commission for the fiscal year ended June 30, The Commission is a joint powers authority (JPA) established by the County of San Joaquin (County), and the cities of Lodi, Stockton, Escalon, Ripon, Manteca, Lathrop, and Tracy. The primary mission of the Commission is to address the preservation and improvement of the rail infrastructure for passenger rail service, which will provide regional economic and environmental benefits, as well as operating the ACE Service. The Commission was formally established on May 1, Effective July 1, 2003, The Commission became the designated owner, operator and policy-making body for the ACE Service in accordance with the Cooperative Services Agreement, which superseded and rescinded the prior Joint Powers Agreement of May 15, 1997, which created the Altamont Commuter Express Authority. As the designated owner of the ACE Service the Commission took title to all of the assets and assumption of the liabilities that were previously under ownership of the Altamont Commuter Express Joint Powers Authority, which has been dissolved. On October 23, 2003, a Special Voting Memorandum to the SJRRC JPA was approved which provides specifically for two special voting commissioners to be appointed by the Alameda County Transportation Commission (ACTC), who may participate and vote as a part of SJRRC. This section of the Commission's basic financial statements presents a discussion and analysis of the Commission's financial performance during the fiscal year ended June 30, FINANCIAL HIGHLIGHTS The assets of the Commission exceeded liabilities at the close of FY by $141,553,462 (net position). Of the net position amount, $14,211,426 in unrestricted net position is available to meet ongoing obligations; and $6,365,628 in restricted net position must be used only for debt service, capital acquisitions, and transportation. The remaining amount of $120,976,408 is the net investment in capital assets. The Commission s charges for services increased by $578,036, due fare and ridership increases. Operating grant revenues increased by $906,904. Capital grants and contributions decreased by $6,993,775 because there were less capital additions in FY than the previous year. Expenses increased in FY by $1,422,588 primarily resulting from increases in, insurance, professional services, depreciation expense and extraordinary items, which were partially offset by reductions in costs for salaries and benefits, fuel and maintenance. The combined factors noted above resulted in an increase in the Commission's total net position of $3,266,610. OVERVIEW OF THE FINANCIAL STATEMENTS The discussion and analysis in this section is intended to serve as an introduction to the Commission's basic financial statements. The Commission's basic financial statements comprise three components: 1) governmentwide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements. Government-wide financial statements are designed to provide readers with a broad overview of the Commission's finances, using accounting methods similar to those of a private-sector business. These statements provide both long-term and short-term information about the Commission's overall financial status. 13

16 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 The Statement of Net Position presents information on all the Commission's assets and liabilities as of the end of the fiscal year, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the Commission is improving or deteriorating. The Statement of Activities presents information on how net position changed during the fiscal year, with revenues and expenses by major type or function. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods. Both of the government-wide financial statements distinguish functions of the Commission that are primarily financed with intergovernmental revenues (governmental activities) from other functions that are intended to recover a significant portion of the costs through user fees and charges (business-type activities). The governmental activities of the Commission include administration and project management. The ACE Service represents the only business-type activity of the Commission. The government-wide financial statements can be found on pages 21 and 22 of this report. Fund financial statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Commission, like other State and local governments, uses fund accounting to ensure and demonstrate compliance with financial related legal requirements. The Commission has governmental funds (special revenue funds) and an enterprise fund. Governmental fund Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, the governmental funds focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the Commission's near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the governmental near-term financing decisions. Both the governmental fund Balance Sheet and the governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balance, provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The Commission utilizes the General Fund (governmental fund) to account for the general and administrative functions of the Commission (e.g., administration and project management). The ACE Service is an enterprise fund and accounts for the activities associated with operating the ACE train. The Commission adopts an annual appropriated budget for the General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget. The basic governmental fund financial statements can be found on pages 23 through 26 of this report. Proprietary fund The Commission maintains the ACE Service enterprise fund to account for the activities associated with operating the ACE train. Enterprise funds are used to report the same functions presented as business type activities in the government-wide financial statements. The enterprise fund provides the same type of information as the government-wide financial statements, only in more detail. 14

17 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 The proprietary fund financial statements can be found on pages 27 through 30 of this report. Notes to the basic financial statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 31 through 59 of this report. GOVERNMENT WIDE FINANCIAL ANALYSIS As noted earlier, net position may serve over time as a useful indicator of a government's financial position. In the case of the Commission, total net position of governmental and business-type activities (assets in excess of liabilities) were $141,553,462 at June 30, A summary of changes in net position from the prior year to the current year are as follows: San Joaquin Regional Rail Commission Net Position June 30, 2016 Governmental Activities Business-Type Activities Total Current and other assets $ 4,072,936 $ 4,133,032 $ 23,596,426 $ 20,449,324 $ 27,669,362 $ 24,582,356 Capital assets, net 12,510,348 12,877, ,933, ,571, ,444, ,449,200 Total assets 16,583,284 17,010, ,530, ,021, ,113, ,031,556 Current and other liabilities 716, ,302 6,925,552 7,761,606 7,642,177 8,480,908 Noncurrent liabilities 105,348 42,314 50,812,426 51,221,482 50,917,774 51,263,796 Total liabilities 821, ,616 57,737,978 58,983,088 58,559,951 59,744,704 Net position: Net investment in capital assets 12,510,348 12,877, ,466, ,775, ,976, ,652,998 Restricted - - 6,365,628 5,849,107 6,365,628 5,849,107 Unrestricted 3,250,963 3,371,416 10,960,463 7,413,331 14,211,426 10,784,747 Total Net Position $ 15,761,311 $ 16,248,875 $ 125,792,151 $ 122,037,977 $ 141,553,462 $ 138,286,852 Governmental Activities No capital acquisitions or capital asset related adjustments were made in the Governmental Activities during fiscal year The recording of depreciation expense was the only item affecting capital assets of Governmental Activities in fiscal year In FY SJRRC was contracted to serve as the managing agency for the San Joaquin Joint Powers Authority (SJJPA). The Authority is responsible for the administration and managing the operation of the existing rail service in the 365 mile San Joaquin Rail service route from Bakersfield to Oakland (San Joaquin Rail Service). Financial transactions related to management of SJJPA were recorded in the Governmental Activities in fiscal year These SJJPA related activities consisted in funds advanced and reimbursed from SJJPA that resulted in a total net cost of $10,380 for fiscal year

18 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Business-Type Activities Capital assets (net of accumulated depreciation) decreased $1,005,149 from the prior year primarily due to depreciation charges which exceeded total capital additions and an extraordinary charge for asset impairments in the amount of $875,675. This impairment adjustment to two damaged train cars was a result of a derailment accident that occurred in March Restricted net position increased by $516,521 over the prior year due primarily to reduced levels in capital spending that offset decreases in grant funding related to capital projects. Unrestricted net position increased by $3,547,132 from the previous year due to increased fare revenues, reduced operating expenses and increased operating contributions. These increases were partially offset by extraordinary charges related to the March 2016 derailment. San Joaquin Regional Rail Commission Changes in Net Position For the Year Ended June 30, 2016 Governmental Activities Business-Type Activities Total Revenues: Program revenues: Charges for services $ - $ - $ 8,644,871 $ 8,066,835 $ 8,644,871 $ 8,066,835 Operating grants and contributions 621, ,146 12,857,398 11,599,977 13,479,027 12,572,123 Capital grants and contributions ,458,667 17,452,442 10,458,667 17,452,442 General revenues: Unrestricted investments earnings 19,883 8,419 98,531 19, ,414 27,995 Other 7,210 7,363 1,352, ,338 1,359, ,701 Total revenues 648, ,928 33,412,225 38,039,168 34,060,947 39,027,096 Expenses: Administration and project management 1,136,279 1,342, ,136,279 1,342,517 ACE Service ,586,728 26,957,902 28,586,728 26,957,902 Total expenses 1,136,279 1,342,517 28,586,728 26,957,902 29,723,007 28,300,419 Changes in net position before transfers (487,557) (354,589) 4,825,497 11,081,266 4,337,940 10,726,677 Transfers (7) (87,682) 7 87, Extraordinary items - - (1,071,330) - (1,071,330) - Changes in net position (487,564) (442,271) 3,754,174 11,168,948 3,266,610 10,726,677 Net position beginning 16,248,875 16,691, ,037, ,869, ,286, ,560,175 Net position - ending $ 15,761,311 $ 16,248,875 $ 125,792,151 $ 122,037,977 $ 141,553,462 $ 138,286,852 16

19 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Governmental Activities A decrease in net position of $487,564 is mainly due to charges for depreciation expense in the amount of $376,111. The balance of the reduction in net position was from a modest decrease in operating grant revenues. Business-Type Activities Net position in the business-type activities of the Commission for FY increased by $3,754,174. The following are significant factors that affected net position: Charges for services increased by $578,036, due to fare and ridership increases. Operating grant revenues increased by $1,257,421 and other revenues increased by $452,420. Capital grants and contributions decreased by $6,993,775 because capital additions in FY were lower than the previous year. Expenses increased in FY by $1,628,588 primarily resulting from increases in insurance, professional services, depreciation expense and extraordinary items, which were partially offset by reductions in costs for fuel and maintenance. FINANCIAL ANALYSIS OF THE COMMISSION'S FUNDS As noted earlier, the Commission uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. Governmental Funds General Fund - The General Fund is the primary administrative fund of the Commission. At June 30, 2016, the unassigned fund balance was $3,355,807, while total fund balance was $3,414,645. The Commission's fund balance decreased by $27,796 for the fiscal year ended June 30, Administration and project management expenditures decreased by $312,605, primarily because a portion of salaries & benefits and administrative costs related to management of the SJJPA Amtrak Service were reimbursed by SJJPA. This caused corresponding reductions in General Fund expenditures and measure K revenues. Additionally, maintenance, legal and office expenditures were lower in FY In previously advanced funds in the amount of $7 were repaid to the ACE Enterprise Fund. There were no balances due between the ACE Enterprise Fund and the General Fund at June 30, Proprietary Fund ACE Enterprise Fund - The Commission's proprietary fund, the ACE Enterprise Fund, provides the same type of information found in the government-wide financial statements, except in more detail. In fiscal year , non-operating grants, contributions and other revenues decreased by $1,148,171. This net decrease came primarily from increased local operating assistance of $47,340 and other revenues of $452,420, which were offset by decreased sales tax of $1,101,272 and decreased intergovernmental revenues of $546,659. The decrease in sales tax came primarily from a $674,477 reduction in Measure K sales tax revenues and modest decreases in sales tax revenues from other contributing agencies. The decrease in intergovernmental revenues came primarily from lower grant revenues resulting from fewer capital expenditures being made in FY In fiscal year ACE Enterprise Fund operating expenses increased by $425,265. This amount represents increased costs for salaries and benefits, insurance, professional services and depreciation. These increases were partially offset by decreases in fuel, shuttle services, leases and rentals, parts purchases and contract services. Capital grants are lower than the prior fiscal year by $4,135,763 because there were fewer capital projects and capital expenses in FY Non-operating expenses also increased by $1,203,561; which consisted of increased interest charges in debt of $926,605 and increased contributions to other governments of $276,

20 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Charges related to the extraordinary items caused by the ACE 10 derailment totaled $1,071,330. When increased fare revenues of $567,019 are combined with other financial activity as highlighted above, the increased change in net position of the Proprietary Fund for FY was $3,754,174. GENERAL FUND BUDGETARY HIGHLIGHTS For the fiscal year ending June 30, 2016 there were no amendments made to the General Fund operating budget. Budgeted Measure K revenues exceeded actual revenues by $422,962 primarily due to budgeted expenditures being allocated directly to SJJPA management expenses, resulting in lower costs. When actual Measure K related expenditures are less than budgeted revenues and expenditures, the SJRRC General Fund returns any unspent Measure K operating funds to the San Joaquin Council of Governments (SJCOG). Total actual Measure K related expenditures did not exceed total Measure K revenues in FY Other expenditures related to management of SJJPA exceeded SJJPA reimbursements due to adjustments for unallowable costs. CAPITAL ASSETS The Commission's investment in capital assets for its governmental and business-type activities as of June 30, 2016, amounted to $172,444,052 (net of accumulated depreciation). This investment in capital assets consists primarily of Equipment, Vehicles, Cabral Station Neighborhood Revitalization Project, new Rail Maintenance Facility, Track Extension, Rolling Stock and Station Improvements. The total increase in the Commission's investment in capital assets, before depreciation, for the year ended June 30, 2016, was $5,196,906, or 1.8%. San Joaquin Regional Rail Commission Capital Assets June 30, 2016 Governmental activities Business-Type activites Total Non-depreciable: Construction-inprogress $ - $ - $ 23,480,958 $ 19,620,080 $ 23,480,958 $ 19,620,080 Land 2,820,449 2,820,449 9,199,194 9,199,194 12,019,643 12,019,643 Buildings not in service 45,340 45, ,340 45,340 Capital spares - - 1,434,340 1,087,613 1,434,340 1,087,613 Depreciable: Equipment, furnishings and vehicles 61,720 61,720 7,854,232 7,756,137 7,915,952 7,817,857 Buildings and layover facility 13,103,480 13,103,480 81,790,672 81,790,672 94,894,152 94,894,152 Rolling stock ,361,714 75,361,714 75,361,714 75,361,714 Trackage rights & improvements ,474,482 70,577,276 71,474,482 70,577,276 Multi-modal & ACE Stations - - 8,125,025 8,125,025 8,125,025 8,125,025 Software 40,000 40,000 37,656 37,656 77,656 77,656 Less: accumulated depreciation (3,560,641) (3,193,530) (118,824,569) (112,989,626) (122,385,210) (116,183,156) Total $ 12,510,348 $ 12,877,459 $ 159,933,704 $ 160,565,741 $ 172,444,052 $ 173,443,200 18

21 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Major capital asset events during the current year included the following: $3,854,878 increase to Construction-in-Progress due to costs related to improvements at the new Rail Maintenance Facility (RMF) and related Track Extension, Security Camera Project, E-Ticketing Project, Positive Train Control Project, Wayside Horn Project, wireless communications and train cars. $76,008 increases to Equipment and Furnishings. $9,421 for rebuilding of vehicles. $85,744 - of asset impairment adjustments for the ACE 10 derailment. $897,206 of fencing construction in progress reclassified to Track Improvements $346,727 - of net increases to capital spares after assets placed in service. LONG-TERM DEBT Certificates of Participation - At the end of the current fiscal year, the Commission had total Certificate of Participation Debt outstanding of $30,859,011. The 2010 Series A-1 Certificates of Participation and 2010 Taxable Series A-2 Recovery Zone Economic Development Bonds are secured by a pledge of measure K and farebox revenues. Consolidated Note Payable At the end of the current fiscal year, the Commission had an outstanding balance of $20,608,631 due to the San Joaquin Council of Governments (SJCOG). This note, which constitutes an advance of Measure-K funds for capital projects, is secured by the Commission s apportionment of future Measure K revenues. San Joaquin Regional Rail Commission s Outstanding Debt: Balance at Balance at Business-Type Activities June 30, 2015 Additions Deletions June 30, 2016 Certificates of Participation 2010 A-1 $ 4,046,529 $ - $ 779,846 $ 3,266,683 Certificates of Participation 2010 A-2 27,576,054 16,274-27,592,328 Consolidated Note Payable 20,173, , ,140 20,608,631 Total $ 51,796,203 $ 961,425 $ 1,289,986 $ 51,467,642 The Commission s total debt decreased by $328,561, (.6 percent) during the current fiscal year. The reasons for the decrease were principal payments in the amount of $1,285,140, which were offset by net amortization of premiums and discounts of $11,428 and $945,151 of accrued interest on the consolidated note payable. The Commission issued no new debt in the current fiscal year. 19

22 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND ACTIVITIES The Commission is experiencing the same economic factors as the rest of California. Sales tax revenues generated by Measure K and LTF are gradually improving as the general economy begins showing signs of recovery. Federal and other grants continue to provide significant fiscal support for the Commission and ACE train operations. Other future economic factors expected to affect the Commission and the ACE operations include increased costs for track improvements, insurance and debt service. A fare increase was implemented on October 3, This fare increase is expected to help defray the increased costs of operations, including costs related to operation of the new maintenance facility. In June 2016, the San Joaquin Council of Governments (SJCOG) Board approved a restructuring of the consolidated loan that was made to the Commission on July 1, This restructuring of the loan to principal only payments, extended over a term of 20 years was arranged in conjunction with a funding compromise that was enacted to assist the Commission with additional trackage rights and other operational cost increases. A component of this arrangement was an increase in LTF funding for the Commission. Economic factors will likely continue to present challenges, however, the Commission will continue to be able to perform its responsibilities and provide safe and reliable transportation for its riders. The work effort in will focus on the continuation of major, multi-year capital projects and planning work for near-term improvements on the Altamont and Merced to Sacramento Corridors. On July 1, 2015, the Commission began acting as managing agency for the San Joaquin Joint Powers Authority (SJJPA) to support the SJJPA and the day-to-day oversight of the Amtrak San Joaquin passenger train and related bus services. The FY budget for marketing and administration services of the SJJPA is $2,730,160. The total Capital Program for , approved by the Commission Board on June 3, 2016, is $42,661,203. Approximately $9.9 million is for ACEforward Altamont Corridor HSR/Regional Rail Project pass-through funding, $10.6 million is for trackage rights, debt service and small capital projects and approximately 22.2 million is for multi-year carryover projects, including UPRR Capitalized Maintenance Projects, completion of the Cabral Station Track Extension, Positive Train Control and E-Ticketing Project. The operating budget approved by the Commission Board on June 3, 2016 is $22,683,597. This operating budget reflects a net anticipated cost increase of approximately 4.8%, with an estimated 40% farebox recovery. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the Commission's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Controller, San Joaquin Regional Rail Commission, 949 East Channel Street, Stockton, California

23 BASIC FINANCIAL STATEMENTS

24 STATEMENT OF NET POSITION JUNE 30, 2016 ASSETS Current Assets: Cash and investments 3,934,746 Primary Government Governmental Business-Type Activities Activities Total $ $ 9,697,877 $ 13,632,623 Receivables 5, , ,084 Intergovernmental receivable 74,157 6,063,937 6,138,094 Prepaid expense 56,987 2,873,437 2,930,424 Inventory - 1,690,513 1,690,513 Deposit 1,851 8,435 10,286 Total Current Assets 4,072,936 20,750,088 24,823,024 Noncurrent Assets: Restricted assets - cash and investments - 2,842,740 2,842,740 Restricted assets - interest receivable - 3,598 3,598 Capital assets, non-depreciable 2,865,789 34,114,492 36,980,281 Capital assets, net of accumulated depreciation 9,644, ,819, ,463,771 Total Noncurrent Assets 12,510, ,780, ,290,390 Total Assets 16,583, ,530, ,113,414 LIABILITIES Current Liabilities: Accounts payable 108,151 3,974,864 4,083,015 Accrued payroll and benefits 14, , ,117 Intergovernmental payable 449, , ,709 Insurance payable 38, , ,794 Deposits payable 4, ,461 Retention payable - 53,510 53,510 Unearned revenue 43,066 81, ,581 Accrued interest payable - 373, ,256 Current portion of long term obligations 58,334 1,190,413 1,248,747 Total Current Liabilities 716,625 7,243,565 7,960,190 Noncurrent Liabilities: Certificates of participation payable - 30,064,011 30,064,011 Note payable - 20,290,619 20,290,619 Compensated absences 105, , ,132 Total Noncurrent Liabilities 105,348 50,494,414 50,599,762 Total Liabilities 821,973 57,737,979 58,559,952 NET POSITION Net investment in capital assets 12,510, ,466, ,976,408 Restricted for: Debt service - 2,789,298 2,789,298 Capital projects - 1,239,772 1,239,772 Transportation - 2,336,558 2,336,558 Unrestricted 3,250,963 10,960,463 14,211,426 Total Net Position $ 15,761,311 $ 125,792,151 $ 141,553,462 The notes to the financial statements are an integral part of this statement. 21

25 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 Net (Expense) Revenue and Program Revenues Changes in Net Position Operating Capital Primary Government Charges for Grants and Grants and Governmental Business-Type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Primary Government: Governmental activities: Administration and project management $ 1,136,279 $ - $ 621,629 $ - $ (514,650) $ - $ (514,650) Total Governmental Activities 1,136, ,629 - (514,650) - (514,650) - Business-Type Activities: ACE Service 28,586,728 8,644,871 12,857,398 10,458,667-3,374,208 3,374,208 Total Business-Type Activities 28,586,728 8,644,871 12,857,398 10,458,667-3,374,208 3,374,208 Total Primary Government $ 29,723,007 $ 8,644,871 $ 13,479,027 $ 10,458,667 (514,650) 3,374,208 2,859,558 General Revenues: Investment earnings 19,883 98, ,414 Other 7,210 1,352,758 1,359,968 Transfers (7) 7 - Extraordinary item - (1,071,330) (1,071,330) Total General Revenues and Transfers 27, , ,052 Change in Net Position (487,564) 3,754,174 3,266,610 Net position - beginning 16,248, ,037, ,286,852 Net position - ending $ 15,761,311 $ 125,792,151 $ 141,553,462 The notes to the financial statements are an integral part of this statement. 22

26 BALANCE SHEET GOVERNMENTAL FUND JUNE 30, 2016 General Fund ASSETS Cash and cash equivalents $ 3,934,746 Receivables 5,195 Intergovernmental Receivable 74,157 Prepaid expenses 56,987 Deposit 1,851 Total Assets $ 4,072,936 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $ 108,151 Accrued payroll 14,330 Insurance loan payable 38,512 Intergovernmental payable 449,522 Deposits 4,710 Unearned revenue 43,066 Total Liabilities 658,291 Fund Balance: Nonspendable: Prepaid items 56,987 Deposit 1,851 Unassigned 3,355,807 Total Fund Balance 3,414,645 Total Liabilities and Fund Balance $ 4,072,936 The notes to the financial statements are an integral part of this statement. 23

27 RECONCILIATION OF THE BALANCE SHEET OF THE GOVERNMENTAL FUND TO THE STATEMENT OF NET POSITION JUNE 30, 2016 Fund balance of governmental funds $ 3,414,645 Amounts reported for governmental activities in the Statement of Net Position (page 10) are different because: Capital assets, net of depreciation, used in governmental activities are not financial resources and, therefore, are not reported in the funds. 12,510,348 Compensated absences are not due and payable in the current period and, therefore, are not reported in the funds. (163,682) Net position of governmental activities (page 20) $ 15,761,311 The notes to the financial statements are an integral part of this statement. 24

28 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUND FOR THE YEAR ENDED JUNE 30, 2016 General Fund REVENUES Sales and use taxes $ 621,629 Investment earnings 19,883 Other 7,210 Total Revenues 648,722 EXPENDITURES Current: Administration and project management: Salaries and benefits 290,149 Services and supplies 132,690 Maintenance and security 243,292 Other expense 10,380 Total Expenditures 676,511 Excess of revenues over expenditures (27,789) OTHER FINANCING SOURCES (USES) Transfers - out (7) Net change in fund balance (27,796) Fund balance - beginning 3,442,441 Fund balance - ending $ 3,414,645 The notes to the financial statements are an integral part of this statement. 25

29 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 Net change in fund balance - total governmental funds $ (27,796) Amounts reported for governmental activities in the Statement of Activities (page 21) are different because: Capital outlays are reported as expenditures in governmental funds. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of current year depreciation and other capital asset activities in the current period. Less current year depreciation (367,111) Some expenses reported in the Statement of Activities do not require the use of current financial resources and, therefore, are not reported as expenditures in the funds. Compensated absences (92,657) Change in net position of governmental activities (page 21) $ (487,564) The notes to the financial statements are an integral part of this statement. 26

30 STATEMENT OF NET POSITION PROPRIETARY FUND JUNE 30, 2016 ASSETS ACE Enterprise Current Assets: Fund Cash and cash equivalents $ 9,697,877 Accounts receivable 415,889 Intergovernmental receivable 6,063,937 Prepaid expenses 2,873,437 Inventory 1,690,513 Deposit 8,435 Total Current Assets 20,750,088 Noncurrent Assets: Restricted cash and investments 2,842,740 Restricted interest receivable 3,598 Capital assets, non-depreciable 34,114,492 Depreciable capital assets, net of accumulated depreciation 125,819,212 Total Noncurrent Assets 162,780,042 Total Assets 183,530,130 LIABILITIES Current Liabilities: Accounts payable 3,974,864 Due to other governments 512,187 Accrued payroll 132,787 Deposits payable 751 Insurance premium payable 924,282 Retention payable 53,510 Accrued interest payable 373,256 Unearned revenue 81,515 Current portion of long-term obligations 1,190,413 Total Current Liabilities 7,243,565 Noncurrent Liabilities: Certificates of participation 30,064,011 Note payable 20,290,619 Compensated absences 139,784 Total Noncurrent Liabilities 50,494,414 Total Liabilities 57,737,979 NET POSITION Net investment in capital assets 108,466,060 Restricted for: Debt service 2,789,298 Capital projects 1,239,772 Transportation 2,336,558 Unrestricted 10,960,463 Total Net Position $ 125,792,151 The notes to the financial statements are an integral part of this statement. 27

31 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION PROPRIETARY FUND FOR THE YEAR ENDED JUNE 30, 2016 ACE Enterprise Fund Operating revenues: Charges for services: Passenger fares $ 8,557,783 Operating expenses: Contract services 6,424,972 Salaries and benefits 2,986,108 Insurance 1,852,780 Depreciation and amortization 4,970,698 Shuttle service 1,126,670 Professional services 421,171 Fuel 889,828 Facility maintenance 718,957 Ticket programs 344,765 Safety programs 145,829 Lease and rentals 66,123 Capital access fee 3,242,517 Equipment and parts 468,001 Advertising, printing, and programs 162,423 Office expenses, communications and travel 404,905 Other expense 1,447 Total Operating expenses 24,227,194 Operating income (loss) (15,669,411) Nonoperating Revenues (Expenses): Nonoperating grants and contributions: Local operating assistance 3,221,948 Sales and use taxes 10,066,013 Intergovernmental revenue 113,955 Investment earnings 98,531 Ticket sales for others 87,088 Other revenue 1,352,758 Interest expense (3,208,599) Contributions to other governments (1,150,935) Total Nonoperating Revenues (Expenses) 10,580,759 Income (Loss) before capital contributions, transfers and extraordinary item (5,088,652) Capital contributions 9,914,149 Transfers - in 7 Extraordinary item (1,071,330) Change in Net Position 3,754,174 Net Position - Beginning 122,037,977 Net Position - Ending $ 125,792,151 The notes to the financial statements are an integral part of this statement. 28

32 STATEMENT OF CASH FLOWS PROPRIETARY FUND FOR THE YEAR ENDED JUNE 30, 2016 ACE Enterprise Fund CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers $ 8,407,131 Cash paid for employee services (2,991,869) Cash paid to suppliers for goods and services (17,735,965) Net Cash Used by Operating Activities (12,320,703) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Local operating assistance received 3,221,948 Sale and use taxes received 10,066,013 Intergovernmental receipts (799,745) Interfund payments 7 Short term loan 62,481 Other nonoperating revenues 1,352,758 Ticket sales for others 87,088 Contributions to other governments (1,150,935) Extraordinary item (195,655) Net Cash Provided by Noncapital Financing Activities 12,643,960 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital contributions 9,914,149 Bond principal paid (775,000) Consolidated loan proceeds 435,011 Interest paid on debt (3,212,474) Purchase of capital assets (5,196,908) Net Cash Provided by Capital and Related Financing Activities 1,164,778 CASH FLOWS FROM INVESTING ACTIVITES Sale of investments 442,306 Investment earnings 95,058 Net Cash Provided by Investing Activities 537,364 Net Increase (Decrease) in Cash and Cash Equivalents 2,025,399 Cash and cash equivalents - beginning of year 7,672,478 Cash and cash equivalents - end of year $ 9,697,877 The notes to the financial statements are an integral part of this statement. 29

33 STATEMENT OF CASH FLOWS, (Continued) PROPRIETARY FUND FOR THE YEAR ENDED JUNE 30, 2016 Reconcilliation of operating income (loss) to net cash provided (used) by operating activities: Operating income (loss) $ (15,669,411) Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation and amortization 4,970,698 Changes in assets and liabilities (increase) decrease in Receivables (384,085) Inventory (182,123) Prepaid expenses (80,628) Increase (decrease) in Accounts payable and accrued expenses (1,083,522) Accrured payroll and benefits 113,226 Unearned revenue 434 Compensated absences (118,987) Deposit payable (499) Intergovernmental payable 233,498 Retention payable (119,304) Net cash used by operating activities $ (12,320,703) The notes to the financial statements are an integral part of this statement. 30

34 NOTES TO THE BASIC FINANCIAL STATEMENTS

35 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. The Reporting Entity The San Joaquin Regional Rail Commission (Commission) is a joint powers authority established by San Joaquin County (County), and the cities of Lodi, Stockton, Escalon, Ripon, Manteca, Lathrop, and Tracy. The primary purpose of the Commission is to address the preservation and improvement of the rail infrastructure for passenger rail service, which will provide regional economic and environmental benefits, as well as, operating the Altamont Corridor Express (ACE) Service. On November 2, 2012, the Board of Commissioners of the San Joaquin Regional Rail Commission approved a resolution adopting a new ACE acronym - Altamont Corridor Express and new ACE logo. The ACE Service had previously been called the Altamont Commuter Express. The Commission was formally established on May 1, The Commission receives its funding from Measure K, Transportation Development Act (TDA) and federal and state grants. The ACE Service receives its funding from Measure K, contributions from the Alameda County Transportation Commission (ACTC) and the Santa Clara Transportation Authority (SCVTA) and passenger fares from the ACE Service. Measure K is the half-cent sales tax approved by San Joaquin County voters in 1990 and assessed in San Joaquin County to be used for the transportation improvement projects administered by the San Joaquin Council of Governments (SJCOG). TDA and STA funds are both Local Transportation Funds, one-quarter cent of the State sales tax, allocated by the SJCOG for public transportation and local streets and roads, and State Transit Assistance, funds budgeted by the State for public transit purposes. The Commission also receives funding for various projects from Federal and State grants. The Commission does not exercise control over any other governmental agency or authority. The Commission is considered a primary government since it has a separate governing body, is legally separate, and is fiscally independent of other State or local governments. Effective July 1, 2003, the Commission became the designated owner, operator, and policy making body for the ACE Service in accordance with the Cooperative Services Agreement, which superseded and rescinded the prior Joint Exercise of Powers Agreement of May 15, 1997, which created the Altamont Commuter Express Authority. As a designated owner of the ACE Service the Commission took title to all of the assets and assumption of the liabilities that were previously under ownership of the Altamont Commuter Express Joint Powers Authority, which has been dissolved. The ACE Service is reported as an enterprise fund in the Commission's basic financial statements. B. Government-Wide Financial Statements The government-wide financial statements report information on all of the non-fiduciary activities of the Commission. Governmental activities, which are normally supported by taxes and intergovernmental revenues, are reported separately from the business-type activities, which rely to a significant extent on fees and charges for support. The Commission's governmental activities include administration and project management. The Commission's business-type activities include the ACE rail service. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are proprietary funds. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. 31

36 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Statement of Activities presents a comparison between direct expenses and program revenues for each function of the Commissions' governmental and business-type activities. Direct expenses are those that are specifically associated with a program or function and, therefore are clearly identifiable to a specific function. Program revenues include 1) charges to customers who purchase or use the services provided by the ACE Service, and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular segment or function. Investment earnings and other items not properly included among program revenues are reported instead as general revenues. C. Measurement Focus, Basis of Accounting and Fund Financial Statement Presentation Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Commission considers revenues to be available if they are collected within 90 days of the end of the current fiscal period. Revenues considered susceptible to accrual primarily include sales tax revenues, State funds, Federal revenues, and interest. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, expenditures related to compensated absences and long-term debt are recorded only when payment is due. The Commission reports the following major governmental funds: The General Fund is used to account for all financial resources necessary to carry out basic governmental activities of the Commission that are not accounted for in the ACE Enterprise Fund. The Commission reports the following major enterprise fund: The ACE Service Enterprise Fund accounts for the activities of the ACE commuter rail service. The commuter rail service was established between the cities of Stockton and San Jose to serve the residents and businesses of the surrounding area, contribute to improved air quality and reduce congestion within the Interstate 205, 580, 680, and 880 corridors. Proprietary funds distinguish between operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with its principal ongoing operations. The principal operating revenue of the ACE Service is passenger fares. Operating expenses include the cost of services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the Commission's policy to use restricted resources first, then unrestricted resources as they are needed. 32

37 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Cash and Cash Equivalents and Investments For purposes of the accompanying Statement of Cash Flows, the enterprise fund considers all highly liquid investments with a maturity of three months or less when purchased, and their equity in the San Joaquin County Treasurer's investment pool, to be cash equivalents. The Commission participates in the common investment pool of San Joaquin County. Investments are recorded at fair value. E. Interfund Transactions In the fund financial statements, transactions that constitute reimbursements to a fund for expenditures/ expenses initially made from it that are properly applicable to another fund are recorded as transfers out in the reimbursing fund and as transfers in the fund that is reimbursed. Nonrecurring or non-routine permanent transfers of equity are also reported as transfers. For internal accounting purposes, the Commission utilizes numerous funds, of which some are consolidated into a single reporting fund in the financial statements. Internal transfers and balances between such funds within the same reporting fund are eliminated for financial reporting purposes. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government-wide presentation. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as "internal balances". F. Inventory Inventory consists principally of tools and spare parts consumed in the normal transit operations of the ACE Enterprise Fund and are recorded at the lower of cost or market. Inventory is valued using the average cost method and is recorded as an expense at the time the inventory item is consumed. G. Deferred Outflows/Inflows of Resources and Unearned Revenues In addition to assets, the Statement of Net Position and/or the balance sheet will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of resources that applies to a future period (s) and therefore will not be recognized as an outflow of resources (expense/expenditure) until then. The Commission did not have any items that qualified for reporting in this category for the year ended June 30, In addition to liabilities, the Statement of Net Position and/or the balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of resources that applies to a future period (s) and therefore will not be recognized as an inflow of resources (revenue) until that time. The Commission did not have any items that qualified for reporting in this category for the year ended June 30, Unearned revenues in the Governmental Fund and Proprietary Fund financial statements represent receipts collected by the Commission for which sufficient services have not been provided to meet revenue recognition criteria. These items are also presented as unearned revenue on the Statement of Net Position. 33

38 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. Intergovernmental Receivables These amounts represent receivables with other Federal, State, and local governments. I. Capital Assets The Commission defines capital assets, as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. All capital assets are valued at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are valued at their estimated acquisition value on the date of donation. Assets contributed or transferred from other funds are valued at cost. On May 1, 2015, the SJRRC Board of Commissioners approved an expanded schedule of useful lives and depreciation terms in order to include the new Rail Maintenance Facility assets. Capital assets are depreciated over the following estimated useful lives on the straight-line basis: Office equipment 3 to 5 years Vehicles 5 years Shop equipment 5 15 years Rolling stock 26 to 29 years Track improvements 10 years Software 5 years ACE stations 10 years Maintenance and layover facilities years Buildings years J. Compensated Absences It is the Commission's policy to permit employees to accumulate earned, but unused vacation and sick leave benefits. Upon separation from service with the Commission, it is the Commission's policy to pay employees for all unused accumulated vacation, floating holidays and compensatory time off. All vacation, floating holidays and compensatory time off is accrued and incurred in the government-wide financial statements. Compensated absences does not include accrued sick leave for employees who have not met the ten (10) years continuous service with SJRRC requirement, as referenced in Note 8. A liability for this amount is reported in the General Fund only if the obligations have matured, for example, as a result of employee resignations, retirements, or terminations. The General Fund and ACE Enterprise Fund have been used to liquidate the compensated absences liability. K. Prepaid Expenses Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government wide and fund financial statements. 34

39 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. Claims and Judgments The Commission records a liability for litigation, judgments, and claims when it is probable that an asset has been impaired or a liability (including incurred but not reported) has been incurred prior to year-end and the probable amount of loss (net of any insurance coverage) can be reasonably estimated. In the fund financial statements, these liabilities, if any, are recorded in the ACE Service Enterprise Fund. M. Net Position/Fund Balance The government-wide financial statements utilize a net position presentation. Net Position is categorized as follows: Net Investment in capital assets This category groups all capital assets, into one component of net position. Accumulated depreciation and the outstanding balances of debt that are attributable to the acquisition, construction, or improvement of these assets reduce the net position balance. Restricted This category represents external restrictions imposed by creditors, grantors, contributors, or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. Unrestricted This category represents net position of the Commission, not restricted for any project or other purpose. The Commission has implemented Government Accounting Standards Board Statement No. 54 "Fund Balance Reporting and Governmental Fund Type Definition". This Statement provides more clearly defined fund balance categories to make the nature and extent of the constraints placed on a government's fund balances more transparent. The following classifications describe the relative strength of the spending constraints: Nonspendable Fund Balance consists of funds that cannot be spent due to their form (e.g., inventories and prepaids) or funds that legally or contractually must be maintained intact. Restricted Fund Balance consists of funds that are mandated for a specific purpose as required by external parties, constitutional provisions, or enabling legislation. Committed Fund Balance consists of funds that are set aside for a specific purpose by the Commission's highest level of decision making authority (governing board). Formal action must be taken prior to the end of the fiscal year. The same formal action must be taken to remove or change the limitations placed on the funds. Assigned Fund Balance consists of funds that are set aside with the intent to be used for a specific purpose by the Commission's highest level of decision making authority (governing board) or a body or official that has been given the authority to assign funds. Assigned funds cannot cause a deficit in unassigned fund balance. 35

40 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) M. Net Position/Fund Balance (Continued) Unassigned Fund Balance consists of excess funds that have not been classified in the previous four categories. All funds in this category are considered spendable resources. This category also provides the resources necessary to meet unexpected expenditures and revenue shortfalls. Authority to Commit Funds The Commission's governing board serves as the Commission's highest level of decision making authority and will have sole authority for establishing constraints on the use of governmental fund balances classified as committed. Formal board action to establish, modify, or rescind fund balance commitments will require either board approved policy designations or a majority approved resolution acted on before June 30 of each fiscal year. Committed funds cannot be used for any other purpose unless likewise modified by formal action of the board. The committed amount subject to the constraint may be determined after June 30. Authority to Assign Funds The Commission's governing board has authority to set aside or designate authority to set aside funds as assigned for an intended purpose. The Board authorized the Executive Director as designee of the Board in identifying intended uses of funds and assigning residual balances. Any such assignments will be presented at regular financial and budget reporting periods. Board action to approve such financial and budget reports will represent ratification of any such assignments. Order of Expenditure of Funds When expenditures are incurred for purposes for which both restricted and unrestricted fund balances are available, restricted fund balance will be considered to have been spent first. When expenditures are incurred for purposes for which amounts in any of the unrestricted fund balance classifications can be used, committed amounts should be reduced first, followed by assigned amounts and then unassigned amounts. N. Local Operating Assistance Amounts received from ACTC and SCVTA to fund the operations of the ACE Service. 36

41 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) O. Grants and Contributions From time to time, the Commission receives Federal grants as well as contributions from individuals and private organizations. Revenues from grants and contributions (including contributions of capital assets) are recognized when all eligibility requirements, including time requirements are met. Grants and contributions may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenues. Amounts restricted to capital acquisitions are reported after nonoperating revenues and expenses. Grant revenue on cost-reimbursement grants or contracts is recognized when the Commission requests reimbursement from granting agencies after the program expenditures have been incurred. As such, the Commission recognizes revenue and records a receivable for the reimbursement amount from the granting agency. Such grant programs are subject to independent audit under the Office of Management and Budget Circular A-133 and review by grantor agencies. Such review could result in the disallowance of expenditures under the terms of the grant or reductions of future grant funds. P. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Q. Accounting Pronouncements Implemented The Governmental Accounting Standards Board (GASB) releases new accounting and financial reporting standards which may have a significant impact on the Commission's financial reporting process. The following pronouncements were implemented for the year ended June 30, 2016: Governmental Accounting Standards Board No. 72 In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement requires disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. These disclosures should be organized by type of asset or liability reported at fair value. It also requires additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). The requirements of this statement are effective for financial statements for periods beginning after June 15, The Commission implemented the standard effective July 1,

42 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Q. Accounting Pronouncements Implemented (Continued) Governmental Accounting Standards Board No. 73 In June 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. The objective of this Statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement no. 68. It also amends certain provisions of Statement No. 67, and Statement No. 68 for pension plans and pensions that are within their respective scopes. The requirements of this statement are effective for reporting periods beginning after June 15, For the applicable provisions effective this year, the Commission has determined that this statement did not have a material effect on the financial statements. Governmental Accounting Standards Board No. 76 In June 2015 GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify in the context of the current governmental financial reporting environment the hierarchy of generally accepted accounting principles (GAAP). The GAAP hierarchy consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for a transaction or other event is not specified within a source of authoritative GAAP. This Statement supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2015 and should be applied retroactively. The Commission has determined that this statement did not have a material effect on the Commission s financial statements. Governmental Accounting Standards Board No. 79 In December 2015, GASB issued Statement No. 79, Certain External Investment Pools and Pool Participants. This Statement addresses accounting and financial reporting for certain external investment pools and pool participants. Specifically, it establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. The requirements of this Statement are effective for reporting periods beginning after June 15, 2015, except for the provisions in paragraphs 18, 19, 23-26, and 40, which are effective for reporting periods beginning after December 15, The Commission has determined that this statement did not have a material effect on the Commission s financial statements. 38

43 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. Future Accounting Pronouncements Governmental Accounting Standards Board No. 73 In March 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Certain provisions of this statement are effective for periods beginning after June 15, The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 74 In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans other than Pension Plans. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This statement is effective for periods beginning after June 15, The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 75 In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension Plans. The objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). It also improves information provided by state and local governmental employers about financial support for OPEB that is provided by other entities. This statement is effective for periods beginning after June 15, The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 77 In August 2015, GASB issued Statement No. 77, Tax Abatement Disclosures. This statement requires governments that enter into tax abatement agreements to disclose certain information about the agreements. The requirements of this statement are effective for reporting periods beginning after December 15, The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 78 In December 2015, GASB issued Statement No. 78, Pensions Provided Through Certain Multiple- Employer Defined Benefit Pension Plans. The object of this Statement is to address a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. This issue is associated with pensions provided through certain multi-employer defined benefit pension plans and to state or local governmental employers whose employees are provided with such pensions. The requirements of this statement are effective for reporting periods beginning after December 15, The Commission has not determined the effect, if any, on the financial statements. 39

44 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. Future Accounting Pronouncements (Continued) Governmental Accounting Standards Board No. 80 In January 2016, GASB issued Statement No. 80, Blending Requirements for Certain Component Units - An Amendment of GASB Statement No. 14. The objective of this Statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This Statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. The requirements of this statement are effective for reporting periods beginning after June 15, The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 81 In March 2016, GASB issued Statement No. 81, Irrevocable Split Interest Agreements. The objective of this Statement is to improve accounting and financial reporting for irrevocable split-interest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of an agreement. The requirements of this statement are effective for financial statements for periods beginning after December 15, 2016 and should be applied retroactively. The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 82 In March 2016, GASB issued Statement No. 82, Pension Issues An Amendment of GASB Statements No. 67 and No. 73. The objective of this Statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Specifically, this statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer s pension liability is measured as of a date other than the employer s most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, The Commission has not determined the effect, if any, on the financial statements. 40

45 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. Future Accounting Pronouncements (Continued) Governmental Accounting Standards Board No. 83 In November 2016, GASB issued Statement No. 83, Certain Asset Retirement Obligations The objective of this Statement is to address accounting and financial reporting for certain asset retirement obligations(aro s). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this Statement. This Statement establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for ARO s. This Statement requires that recognition occur when the liability os both incurred and reasonably estimable. The determination of when the liability is incurred should be based on the occurrence of external laws, regulations, contracts, or court judgments, together with the occurrence of an internal event that obligates a government to perform asset retirement activities. This Statement requires the measurement of an ARO to be based on the best estimate of the current value of outlays expected to be incurred. The best estimate should include probability weighting of all potential outcomes, when such information is available or can be obtained at a reasonable cost. If probability weighting is not feasible at reasonable cost, the most likely amount should be used. This Statement requires that a deferred outflow of resources associated with an ARO be measured at the amount of the corresponding liability upon initial measurement. This Statement also requires disclosure of information about the nature of a government s ARO s, the methods and assumptions used for the estimates of the liabilities, and the estimated remaining useful life of the associated tangible capital assets. The requirements of this Statement are effective for reporting periods beginning after June 15, Earlier application is encouraged. The Commission has not determined the effect, if any, on the financial statements. Governmental Accounting Standards Board No. 84 In January 2017, GASB issued Statement No. 84, Fiduciary Activities The object of this Statement is to improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. This Statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities. An activity meeting the criteria should be reported in a fiduciary fund in the basic financial statements. Governments with activities meeting the criteria should present a statement of net position and a statement of changes in net position. An exception for that requirement is provided for a business-type activity that normally expects to hold custodial assets for three months or less. 41

46 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. Future Accounting Pronouncements (Continued) Governmental Accounting Standards Board No. 84 (Continued) This Statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources. Events that compel a government to disburse fiduciary resources occur when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets. The requirements of this Statement are effective for reporting periods beginning after December 15, Early application is encouraged. The Commission has not determined the effect, if any, on the financial statements. NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS The Commission follows the practice of pooling cash and investments of all funds except for those required to be held by outside fiscal agents under the provisions of bond indentures. Interest income earned on the pooled cash and investments is allocated monthly to the various funds based on monthly cash balances. Cash and investments as of June 30, 2016, are reported in the accompanying financial statements as follows: Statement of net position: Cash and investments $ 13,632,623 Restricted cash and investments 2,842,740 Total cash and investments $ 16,475,363 Cash and investments as of June 30, 2016 consist of the following: Cash Cash in banks and on hand $ 303,785 Investments Cash and investments held in San Joaquin County Pool 13,328,730 Restricted cash and investments with County Pool 194,672 Restricted cash and investments with fiscal agent 2,648,176 16,171,578 Total Cash and Investments $ 16,475,363 Investments Authorized by the California Government Code The table below identifies the investment types that are authorized for the Commission by the California Government Code. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the Commission, rather than the general provisions of the California Government Code. 42

47 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED) Maximum Maximum Investment Types Maximum Percentage Investment Authorized by State Law Maturity of Portfolio* in One Issuer Local Agency Bonds 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Bankers' Acceptances 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements N/A None None Reverse Repurchase Agreements N/A None None Medium-Term Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass-Through Securities 5 years None None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Supranationals 5 years 30% 5% *Excluding amounts held by bond trustee that are not subject to California Government Code restrictions. Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees is governed by provisions of the debt agreements, rather than the general provisions of the California Government Code. The table below identifies the investment types that are authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreement that address interest rate risk, credit risk, and concentration of credit risk. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value will be to changes in market interest rates. One of the ways the Commission manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. The Commission's investment policy, which conforms to the San Joaquin County investment policy, states that investment decisions are made with the intention of retaining the investment until maturity, thereby negating the ill effects of market interest rate fluctuations. Information about the sensitivity of the fair values of the Commission's investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the Commission's investments by maturity: 43

48 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED) Remaining maturity (in months) 12 months or Investment type Total less months months Held by fiscal agent: San Joaquin County Investment Pool $ 13,523,402 $ 13,523,402 $ - $ - Held by bond trustee: US Government Securities 2,180,387 1,196, ,451 CAMP Investment Pool 467, , Total $ 16,171,578 $ 13,991,191 $ 1,196,936 $ 983,451 Disclosure Related to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by the California Government Code, the Commission's investment policy, or debt agreements, and the actual rating as of June 30, 2016, for each investment type: Standard & Poor's Rating Investment Type AA+ AAAm Not Rated Total Held by fiscal agent: San Joaquin County Investment Pool $ - $ - $ 13,523,402 $ 13,523,402 Held by bond trustee: US Government Securities 2,180,387 2,180,387 CAMP Investment Pool - 467, ,789 Grand Total $ 2,180,387 $ 467,789 $ 13,523,402 $ 16,171,578 Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the Commission's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: 44

49 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED) Custodial Credit Risk (Continued) The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure Commission deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. All deposits in financial institutions are fully collateralized in accordance with Section of the California Government Code. The California Government Code requires California banks and savings and loan associations to secure the Commission's deposits by pledging government securities as collateral. The Commission had a total of $300,609 deposited in financial institutions at year end. As of June 30, 2016, the Commission held no deposits with financial institutions with a balance that exceeded Federal depository insurance limits. Deposits are fully collateralized in accordance with Section of the California Government Code. Investment in San Joaquin County Pool The Commission maintains cash balances in the San Joaquin County Treasury Investment Pool. The pool is non- SEC registered and is invested in accordance with California State Government Code and the San Joaquin County Treasurer's Investment Policy. California State Government Code requires the formation of an Investment Oversight Committee, which is charged with overseeing activity in the pool for compliance to policy and code requirements. To this end, the Oversight Committee reviews the monthly investment report prior to presentation to the County Board of Supervisors and causes an audit of investments to occur annually. The fair value of the Commission's shares in the San Joaquin County Pool is the same as the value of the pool shares. The Commission had a total of $13,523,402 invested in the San Joaquin County Investment Pool at June 30, Investments in California Asset Management Program (CAMP) The California Asset Management Program (CAMP) manages a significant portion of the Commission's investments. CAMP investment include Federal agency bonds/notes and the CAMP Pool money market fund. CAMP is a Joint Powers Authority formed to provide professional investment management services and allows the participants to combine the use of a money market portfolio with an individually managed portfolio. The money market portfolio offers daily liquidity and is rated AAAm by Standard and Poor's. To maintain the AAAm rating, the portfolio weighted average maturity may not exceed 60 days. The CAMP Pool money market fund invests in short-term debt obligations issued or guaranteed by the U. S. government, its agencies, or instrumentalities, some of which may be subject to repurchase agreements. The Pool may also invest in commercial bank bills of exchange or time drafts, certificates of deposit and commercial paper. Funds in the Pool are invested in accordance with the prudent investor standard set forth in Section of the California Government Code. 45

50 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED) Investments in California Asset Management Program (CAMP)- (Continued) Investments for the Commission are reported at fair value as determined by quoted market prices. Changes in the fair value of investments are included with all other investment income. Cash on deposit with the San Joaquin County Treasurer is invested as authorized by statutes. Fair Value Measurements The Commission categorizes the fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Commission has the ability to access. Level 2 Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Commission s own assumptions about the inputs market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the Commission's own data. Deposits and withdrawals in governmental investment pools are made on the basis of $1 and not fair value. Accordingly, the Commission s proportionate share in these types of investments is an uncategorized input not defined as a Level 1, Level 2, or level 3 input. 46

51 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 2 CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED) Fair Value Measurements (Continued) As of June 30, 2016, the commission has the following recurring fair value measurements: Quoted Prices in Active Significant Markets for Other Significant Fair Value Measurements Identical Observable Unobservable Assets Inputs Inputs Investments by fair value level Fair Value (Level 1) (Level 2) (Level 3) Debt securities US Treasury Notes $ 2,180,387 $ - $ 2,180,387 $ - Total investments measured at fair value 2,180,387 $ - $ 2,180,387 $ - Investments measured at fair value not subject to fair value hierarchy San Joaquin County Investment Pool 13,523,402 CAMP Investment Pool 467,789 $ 16,171,578 47

52 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 3 CAPITAL ASSETS Capital asset activity for the governmental activities for the year ended June 30, 2016, was as follows: Balance Balance June 30, 2015 Additions Retirements June 30, 2016 Governmental Activities: Capital assets not being depreciated Land $ 2,820,449 $ - $ - $ 2,820,449 Buildings not in service 45, ,340 Total, capital assets not being depreciated 2,865, ,865,789 Capital assets being depreciated Equipment and vehicles 61, ,720 Buildings 13,103, ,103,480 Software 40, ,000 Total, capital assets being depreciated 13,205, ,205,200 Accumulated depreciation Equipment and vehicles (52,616) (1,071) - (53,687) Building and layover facility (3,100,913) (366,040) - (3,466,953) Software (40,001) - - (40,001) Total accumulated depreciation (3,193,530) (367,111) - (3,560,641) Total capital assets being depreciated, net 10,011,670 (367,111) - 9,644,559 Governmental Activities Capital Assets, net 12,877,459 (367,111) - 12,510,348 Depreciation expense totaling $367,111 was charged to administration and project management in the governmental activities. 48

53 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 3 CAPITAL ASSETS (CONTINUED) Capital asset activity for the business-type activities for the year ended June 30, 2016, was as follows: Balance Balance June 30, 2015 Additions Retirements Transfers June 30, 2016 Business-type Activities: Capital assets not being depreciated Land $ 9,199,194 $ - $ - $ - $ 9,199,194 Capital spares 1,087, ,722 (7,329) (12,666) 1,434,340 Construction in progress 19,626,080 4,752,084 - (897,206) 23,480,958 Total, capital assets not being depreciated 29,912,887 5,118,806 (7,329) (909,872) 34,114,492 Capital assets being depreciated Equipment, Furnishings and vehicles 7,756,137 85,429-12,666 7,854,232 Rolling stock 75,361, ,361,714 Trackage rights and improvements 70,577, ,206 71,474,482 Software 37, ,656 Maintenance & layover facilities 81,790, ,790,672 Demonstration platforms 3,514, ,514,682 Multi-modal and ACE stations 4,610, ,610,343 Total, capital assets being depreciated 243,648,480 85, , ,643,781 Accumulated depreciation Equipment, furnsihings and vehicles (1,464,597) (525,158) - - (1,989,755) Rolling stock (32,012,049) (3,489,853) - - (35,501,902) Trackage rights and improvements (70,577,273) (105,554) - - (70,682,827) Software (32,156) (1,500) - - (33,656) Maintenance & layover facilities (972,029) (1,636,457) - - (2,608,486) Demonstration platforms (3,514,682) (3,514,682) Multi-modal and ACE stations (4,416,840) (76,421) - - (4,493,261) Total accumulated depreciation (112,989,626) (5,834,943) - - (118,824,569) Total capital assets being depreciated, net 130,658,854 (5,749,514) - 909, ,819,212 Business-type Activities Capital Assets, net 160,571,741 (630,708) (7,329) - 159,933,704 Depreciation expense totaling $4,959,268 and $875,675 of impairment charges related to the ACE 10 derailment were recorded as additions to accumulated depreciation for ACE services in the business-type activities. All assets summarized above are the property of the Commission, except track improvements that are owned by the Union Pacific Railroad (Railroad). However, in the event that the Commission and the Railroad mutually agree in the future to a purchase by the Commission of the tracks and/or operating land, the Commission is entitled to a credit against the purchase price for the property. The amount credited to the Commission is equal to the amortized cost of the track improvements paid for by the Commission as described in the trackage rights agreement. Trackage improvements are amortized over the trackage rights agreement period. 49

54 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 4 LONG-TERM LIABILITIES Summary of Long-Term Liabilities: A summary of changes in long-term liabilities for the fiscal year ended June 30, 2016, is as follows: Balance at Balance at Due within Governmental Activities June 30, 2015 Additions Deletions June 30, 2016 one year Compensated Absences $ 71,025 $ 93,904 $ 1,247 $ 163,682 $ 58,334 Total Governmental Activities 71,025 93,904 1, ,682 58,334 Business-Type Activities Certificates of Participation 2010 A-1 4,020, ,000 3,245, ,000 Certificates of Participation 2010 A-2 27,990, ,990,000 - Deferred Issuance (Discounts)/Premiums (387,417) - 11,428 (375,989) - Consolidated Note Payable 20,173, , ,140 20,608, ,012 Compensated Absences 336,172 18, , ,185 77,401 Total Business-type Activities 52,132, ,085 1,434,489 51,684,827 1,190,413 Total $ 52,203,400 $ 1,057,989 $ 1,435,736 $ 51,848,509 $ 1,248,747 Compensated Absences As of June 30, 2016, the total compensated absences liability for the Commission's governmental activities and business-type activities is $163,682 and $217,185, respectively. Compensated absences of the governmental activities will be liquidated by the General Fund whereas compensated absences of the business-type activities will be liquidated by the ACE Enterprise Fund. Consolidated Note Payable On June 6, 2014 the SJRRC Board approved an agreement with the San Joaquin Council of Governments (SJCOG) to consolidate two existing loans. At July 1, 2014, principal and accrued interest on both loans was combined to establish a new beginning balance of $22,090,100. The new consolidated loan had a term of fifteen (15) years and an interest rate of 4.771%. On July 1, 2014, the first annual principal and interest payment in the amount of $1,916,480 was made. In the fiscal year, SJCOG postponed SJRRC s scheduled annual payment due on July 1, 2015 as a component of an interim funding plan to assist SJCOG with improved cash flow. The consolidated note payable balance at June 30, 2015 was $20,173,620. On July 16, 2015, SJRRC returned unused loan proceeds in the amount of $510,140. In June 2016, SJCOG amended the loan terms to create a 20 year non-interest bearing note with a balance including accrued interest of $20,608,631 at June 30, The first principal only payment in the amount of $318,012 was due on July 1, 2016, with principal only payments of $1,118,012 due on July 1 of each year thereafter. 50

55 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 4 LONG-TERM LIABILITIES (CONTINUED) Consolidated Note Payable (Continued) Below is a schedule of the debt service on the Consolidated Loan with SJCOG: Year Ending Consolidated Note Payable June 30: Principal Interest 2017 $ 318,012 $ ,118, ,118, ,118, ,118, ,590, ,590, ,638,451 - Total $ 20,608,631 $ - Certificates of Participation On November 4, 2010, the Commission issued 2010 Certificates of Participation (COPS) Series A-1 in the amount of $7,535,000 for the ACE Maintenance Facility Project. The Commission also issued 2010 Taxable Series A-2 in the amount of $27,990,000 for the Recovery Zone Economic Development. The series A-2 certificates provide for a federal subsidy of 45% of the interest paid on the Bond to the issuer. To obtain the subsidy, the Commission must file a claim to the Internal Revenue Service (IRS) when an interest payment on the Bond is made. The total certificate issued was $35,525,000. The interest rates range from 2.50% to 4.00% for the Series A-1 and 7.54% to 7.64% for Series A-2. The Series A-1 certificate matures on May 1, 2020, and the Series A-2 will mature on May 1, The certificates were issued by the Commission to fund a portion of the construction of a new equipment maintenance and layover facility in Stockton, California. As of June 30, 2016, the Commission owed $31,235,000 on the COPS. The 2010 Series A-1 Certificates of Participation and 2010 Taxable Series A-2 Recovery Zone Economic Development Bonds are secured by a pledge of Measure K and farebox revenues. Farebox revenues are collected by the Commission in connection with the operation of commuter rail services of the ACE Enterprise Fund. The Commission has granted to the bond trustee a lien on and security interest in all right, title, and interest of the Commission in and to the farebox revenues and Measure K revenues allocated to and received by the Commission and provides that such lien and security interest will be prior in right to any other pledge, lien or security interest created by the Commission in the farebox revenues and Measure K revenues allocated to and received by the Commission. Debt service payments (principal and interest) made in the fiscal year totaled $3,038,013. Total Measure K and farebox revenues for fiscal year were $3,849,919 and $8,557,783, respectively. 51

56 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 4 LONG-TERM LIABILITIES (CONTINUED) Below is schedule of the remaining debt service for the Certificates of Participation Series A-1: Year Ending 2010 A-1 Series COPs June 30: Principal Interest 2017 $ 795,000 $ 117, ,000 93, ,000 65, ,000 31,200 Total $ 3,245,000 $ 308,050 Below is schedule of the remaining debt service for the Certificates of Participation Series A-2: Year Ending 2010 A-2 Series COPs June 30: Principal Interest 2017 $ - $ 2,122, ,122, ,122, ,000 2,122, ,000 2,113, ,200,000 9,456, ,390,000 7,294, ,845,000 4,661, ,530,000 1,448,434 Total $ 27,990,000 $ 33,462,970 NOTE 5 INTERFUND TRANSFERS Transfers from the General Fund to the ACE Enterprise Fund totaled $7 during the year ended June 30, 2016 and reflect a correcting entry to reclassify a liability from the ACE Enterprise Fund to the General Fund. NOTE 6 OPERATING LEASES Parking Lot Lease The Commission leases industrial property in Stockton, California for the purpose and use as a parking lot. The annual lease payment for the Anita Merlo property was originally $110,500 and adjusts annually by the consumer price index, until the lease expiration date of June 30, Rental expenditures for the fiscal year ended June 30, 2016, were $15,

57 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 6 OPERATING LEASES (CONTINUED) CalTrain Lease The Commission has entered into an operating lease with CalTrain to use a yard maintenance facility in San Jose, California. The current eighth amendment of the lease became effective July 1, The annual lease payment for use of the yard maintenance facility (Peninsula Corridor) is $118,715, and recalculates annually to reflect actual costs until such time CalTrain cancels the lease on a 30 days' notice to the Commission, or the Commission successfully finds an alternative storage site. The current amended agreement expires June 30, The facility is strictly for layover purposes and paid by the ACE Service Altamont Pass Trackage Rights On June 6, 2014, the Commission Board adopted the fourth amendment to the Altamont Pass Trackage Rights Agreement. The term of the agreement was extended from January 1, 2014 until December 31, Annual payments in the amount of $3,242,516 are be due by January 31. The Commission paid $3,242,516 for trackage rights to Union Pacific Railroad (UPRR) in the fiscal year ended June 30, Office Equipment In addition, the Commission leases office copiers and other equipment. The costs for such leases were $34,574 for the year ended June 30, Future Minimum Lease Payments Future minimum lease payments required for these operating leases are as follows: Years Ending June 30, Anita Merlo Parking Lot CalTrain Storage & Trackage Altamont Pass Trackage Rights Office Equipment 2017 $ 15,530 $ 118,715 $ 3,242,516 $ 36,297 $ 3,413, , ,715 3,242,516 33,276 3,410, ,530 3,242,516 2,738 3,260, ,530 3,242,516 2,738 3,260, ,530 3,242,516 2,738 3,260, ,650 8,106,290 8,183, ,650 77, ,060 31,060 Total future minimum lease payments $ 264,010 $ 237,430 $ 24,318,870 $ 77,787 $ 24,898,097 Total 53

58 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 7 RISK MANAGEMENT The Commission is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets, errors and omissions, and natural disasters. The Commission purchases commercial insurance through an insurance agent, who obtains the appropriate insurance coverage needed by the Commission from insurance companies. Coverage provided by commercial insurance and excess coverage at June 30, 2016, is as follows: Excess or Additional Commercial Insurance Coverage Type of Coverage (in aggregate) (in aggregate) Deductible Railroad Liability Up to $200,000,000 per $1,000,000 per occurrence; occurrence $3,500,000 aggregate Property Damage Up to $50,000,000 per Also includes earthquake $200,000 per occurrence (real and personal occurrence and flood with aggregate except $250,000 Flood and property including limit of $5,000,000 Earthquake, 5% of total railroad rolling stock insured value, min. of $250,000 ea IOC-EQ Automobile Up to $1,000,000 per Also includes uninsured $500 per occurrence occurrence motorists Worker's Up to $1,000,000 per None Compensation occurrence Employment Up to $2,000,000 for all $100,000 per occurrence Practice loss combined (including defense) Crime Coverage Up to $500,000 for all $5,000 per occurrence loss combined Fiduciary Coverage Up to $1,000,000 None Maximum aggregate limit of liability All property is insured at full replacement value. To date, there have been no significant reductions in any of the Commission's insurance coverage, and no settlement amounts have exceeded commercial insurance coverage for the last three years. 54

59 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 8 EMPLOYEE BENEFITS Other Employee Benefits Commission employees are granted vacation, holiday, merit, compensation time, and sick leave in varying amounts. In the event of termination, an employee is reimbursed for accumulated vacation at various rates. Upon retirement, an employee, having at least ten (10) years continuous service with the Commission, having unused accumulated sick leave, shall have the option to be paid a lump sum in an amount equivalent to 25% of his or her then current daily wage rate for each day of unused sick leave. As of June 30, 2016, accrued vacation, holiday, merit, comp time, and sick leave pay totaled $380,867. Employee Retirement Plans The Commission participates in a defined contribution pension plan through the Commission Retirement Plan, which is available to all employees who have attained 21 years of age. In a defined contribution plan, benefits depend solely on amounts contributed to the plan plus investment earnings. Employees are eligible to participate from the date of employment. Contributions to the plan are entrusted to the ICMA Retirement Corporation, which provides investment consultation and administration. Contributions to the plan by the Commission are limited to 15% of compensation as determined by the Commission's Board of Directors. The Commission's contributions are fully vested after five years of continuous service. The Plan does not provide for employee contributions. Plan provisions and contribution requirements for the retirement plan are established and may be amended by the Commission's Board of Directors. The Commission's total contributions to the retirement plan on behalf of employees were $304,583 for the year ended June 30, $62,542 was paid for contributions from the ICMA Retirement Trust 401A Plan forfeiture reserves during the fiscal year ended June 30, Forfeiture reserves represent amounts paid into the 401A plan on behalf of employees that are forfeited by employees who leave service before they are fully vested in plan assets. These funds become available to the Commission for 401A retirement plan payments after various plan requirements are met. The balance of retirement payments was paid from current fiscal year revenues. Additionally, the Commission provides a deferred compensation plan under Section 457 of the Internal Revenue Code. Under the Commission's deferred compensation plan, a participant can contribute a portion of his or her salary on a tax-deferred basis, pursuant to limitations set by statute. For all Senior Management Group employees, the Commission shall make a contribution to the deferred compensation plan equal to 2% of the employee's annual base salary. For all Management Group employees, the Commission shall make a contribution to the deferred compensation plan equal to 1% of the employee's annual base salary. The Commission's deferred compensation plan employee and employer contributions are entrusted to the ICMA Retirement Corporation, which provides investment consultation and administration. The Commission's total contributions to the deferred compensation plan on behalf of employees were $7,365 for the year ended June 30,

60 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 8 EMPLOYEE BENEFITS (CONTINUED) Employees Covered At June 30, 2016, the following employees were covered by the benefit terms for each Plan: 401 A Active Employees Class 1 Class Eligible Management Senior Management Benefit vesting in service years 5 Years N/A N/A N/A Required employee contribution rate Required employer contribution rate 15% 0% 1% 2% NOTE 9 PUBLIC TRANSPORTATION MODERNIZATION, IMPROVEMENT, AND SERVICE ENHANCEMENT ACCOUNT (PTMISEA) In November 2006, California voters passed a bond measure enacting the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of Of the $ billion of State general obligation bonds authorized, $3.6 billion was set aside by the State as instructed by statute into the PTMISEA account. These funds are available to the California Department of Transportation for intercity rail projects and to transit operators in California for rehabilitation, safety or modernization improvements, capital service enhancements or expansions, new capital projects, bus rapid transit improvements or for rolling stock procurement, rehabilitation, or replacement. PTMISEA activity for the Commission as of and for the year ended June 30, 2016, is reported within the ACE Enterprise Fund as follows: Cash Balance - July 1, 2015 $ 572,126 Receipts: Interest 2,024 Receipts: PTMISEA funding 1,770,961 Expenses: Positive Train Control (731,971) Accounts receivable (999,303) Accounts payable 19,938 Fair market value adjustment 456 Cash balance - June 30, 2016 $ 634,231 NOTE 10 INSURANCE PREMIUM PAYABLE On March 1, 2016, the Commission entered into an insurance premium finance agreement with AFCO Premium Acceptance, Inc., to finance the insurance premiums due under the Commission's insurance policies as described in Note 8. The terms of the agreement required a down payment of $192,559, with monthly payments of $192,559. Final payment is due on November 20, Total payments are $1,733,028 including interest. The annual interest rate is 2.999%. At June 30, 2016, the remaining balance outstanding was $962,794 and is reflected as a short term liability in the General Fund and ACE Services Enterprise Fund in the amounts of $38,512 and $924,282 respectively. 56

61 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 11 COMMITMENTS Union Pacific The Commission entered into a trackage agreement on August 11, 1997, with Union Pacific Railroad (Railroad) to secure the trackage rights from Stockton to San Jose for the initial commitment period of the ACE Service at a cost not to exceed $15,143,000 for capital improvements. The trackage rights agreement with the Railroad granted the Commission trackage rights for a period of five years beginning on the service commencement date. On December 5, 2003, the original trackage rights agreement was amended and extended for a period of ten years. The amended agreement expired on December 31, For consideration, the Commission agreed to pay the Railroad a capital access usage charge consisting of a lump sum payment of $5,000,000, and $1,810,049 for each additional year, thereafter. The payments are due to the Railroad no later than January 31 of each fiscal year. The payments are funded through Measure K revenues received from the SJCOG, and Federal Transit Administration Sec The Commission and the Railroad each have the right to terminate the agreement upon sixty (60) days advance written notice. On June 6, 2014, the SJRRC Board adopted the fourth amendment to the Altamont Pass Trackage Rights Agreement. The term of the agreement is extended from January 1, 2014 until December 31, Annual payments in the amount of $3,242,516 will be due by January 31. In addition, the Commission agreed to commit one million dollars per year per train per year ($4 mil) to a capitalized maintenance fund for track improvements. Track improvement projects require executed contracts between UPRR and the Commission and are anticipated to be funded with a combination of Federal, State and local grants. CalTrain The Commission secured an option to lease trackage rights from Peninsula Corridor Joint Powers Board (Caltrain) to operate the ACE Service in Santa Clara County. In July 2007, ACE entered into an amended agreement with CalTrain extending the trackage rights through June An extension of this agreement was executed on July 1, 2013, extending the trackage rights through June Either party has the power to terminate the restated agreement without cause upon sixty (60) days advance written notice. Agreements and Grants Contracts with Herzog Transit Services The Commission has extended its current agreement with Herzog Transit Services for the operation and maintenance of equipment for the ACE Service through June Total expenses billed to the Commission by Herzog for operating the rail service for the period ended June 30, 2015, was $6,859,044. Herzog contracts are adjusted annually in accordance with the change in the regional Consumer Price Index (CPI). Contracts for Capital Projects The Commission has entered into agreements over $1,000,000 with several additional vendors for capital projects, which had not been completed or had been committed for FY by June 30, The total remaining commitment to these agreements for the period ended June 30, 2016, was approximately $22.2 million. 57

62 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 11 COMMITMENTS (CONTINUED) Agreements and Grants (Continued) Contract with San Joaquin Joint Powers Authority (SJJPA) In September 2012, Assembly Bill 1779 was passed, which provided for the creation of the San Joaquin Joint Powers Authority (Authority). On June 29, 2015, the Authority entered into a Joint Exercise of Powers Agreement with ten public transportation agencies (Agencies) to establish the San Joaquin Joint Powers Authority (Authority), a public instrumentality of the State of California. SJJPA was formed for the purpose of administering and managing the operation of the existing rail service in the 365 mile San Joaquin Rail service route from Bakersfield to Oakland (San Joaquin Rail Service). On June 29, 2015, the Authority entered into an Interagency Transfer Agreement (ITA) with the State of California, Department of Transportation (State). The ITA provided for transfer of the responsibility for administration, managing and control of the operation of the San Joaquin Rail Service from the state to the Authority for an initial three-year term terminating June 30, Effective October 4, 2013, the Authority entered into an Agreement with the Commission for Managing Agency Services in the Oversight of the San Joaquin Intercity Rail Service ("Agreement"). Per this Agreement, SJRRC, as Managing Agency, is engaged to provide marketing and administrative support to the Board for the benefit of the Authority. The Managing Agency is reimbursed by the Authority for actual expenses incurred in excess of those amounts paid directly by the Authority. The Agreement has been extended to June 30, The Board may then select the current Managing Agency or another rail transit agency to provide marketing and administrative support to the Board. Marketing and administrative services and other operating expenses incurred by the Commission, the Managing Agency, on behalf of the Authority amounted to $107,325 for the year ended June 30, These advanced funds were repaid to the Managing Agency once funding was received from the State. There were no unreimbursed advances at June 30, The Authority reimburses the Managing Agency for indirect overhead charges computed using a ratio of budgeted indirect costs over budgeted direct salaries and benefits. For the fiscal year ended June 30, 2016, this overhead rate was computed at 10%. The overhead rate, when applied to actual salaries and benefits resulted in an overhead charge of $74,157. As of June 30, 2016, $74,157 due from SJJPA, was recorded as an intergovernmental receivable under Governmental Activities on the Statement of Net Position. NOTE 12 CONTINGENCIES Litigation On March 7, 2016, an ACE Train derailment occurred that resulted in a number of legal claims. At this time, the probable outcome and potential liability from these claims has not yet been determined. The Commission is the defendant in various other lawsuits and other claims arising in the ordinary course of its operations. It is the opinion of management and the Commission's legal counsel that the likelihood of the resolution of these matters resulting in a material adverse loss in the financial statements for the year ended June 30, 2016 is remote. 58

63 NOTES TO THE BASIC FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 13 EXTRAORDINARY ITEMS When a significant transaction or event occurs that is both unusual and infrequent it is considered an Extraordinary Item. On March 7, 2016, an ACE Train derailed in Niles Canyon, between Fremont and Sunol, which sent a train car into the creek near Palomares Road. This event resulted in the following Extraordinary Items: Claims for damages - A number of claims were settled and paid by the Commission and ACE for medical costs and property damages. Costs incurred for settlement of claims through June 30, 2016 totaled $195,655. Impairment GASB 42 describes the impairment of a capital asset as a significant, unexpected decline in the service utility of a capital asset. Two passenger rail cars were seriously damaged, resulting in impairment of these capital assets. The FY impairment write-down costs recorded for these two assets totaled $875,675. Total Extraordinary Item costs for damages and impairments through June 30, 2016 was $1,071,330. NOTE 14 SUBSEQUENT EVENTS REVISED TAXABLE CERTIFICATE OF PARTICIPATION REBATES The Commission receives bi-annual refundable tax credits under Section 6431 of the Internal Revenue Code. These credits are used to supplement principal and interest payments on the Commission s outstanding Series A-2 Certificates of Participation. These bi-annual tax credits were originally in the approximate amount of $477,453. On August 10, 2016, the Commission received notice from the Bank of New York Mellon, the bond trustees, stating that a revised sequestration rate would be applied for FFY The revised rate resulted in a reduction in the bi-annual payments of 6.9%, or approximately $32,944. It is unknown whether future tax credits will return to the previous level or will remain at the FFY 2017 amounts. 59

64 REQUIRED SUPPLEMENTARY INFORMATION

65 SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL (GAAP BASIS) GENERAL FUND FOR THE YEAR ENDED JUNE 30, 2016 Budgeted Amounts Variance with Actual Final Budget Original Final Amounts Positive (Negative) REVENUES Sales and use taxes $ 1,044,591 $ 1,044,591 $ 621,629 $ (422,962) Investment earnings ,883 19,883 Other revenues - - 7,210 7,210 Total Revenues 1,044,591 1,044, ,722 (395,869) EXPENDITURES Current: Administration and project management: Salaries and benefits 407, , , ,097 Services and supplies 236, , , ,051 Maintenance and security 400, , , , ,380 (10,380) Total Expenditures 1,044,591 1,044, , ,080 Excess (deficiency) of revenues over (under) expenditures - - (27,789) (27,789) OTHER FINANCING SOURCES (USES) Transfers - out - - (7) (7) Total Other Financing Sources (Uses) - - (7) (7) Net change in fund balances - - (27,796) Fund balance - beginning 3,442,441 3,442,441 3,442,441 Fund balance - ending $ 3,442,441 $ 3,442,441 $ 3,414,645 See note to required supplementary information. 60

66 NOTE TO REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED JUNE 30, 2016 BUDGET AND BUDGETARY ACCOUNTING The Commission prepares and legally adopts a final budget on or before June 30, of each fiscal year for the General Fund. The Commission's operations, commencing July 1 st is governed by the proposed budget, adopted by the Commission's Board in June of the prior fiscal year. Final budgeted revenues and expenditures represent the original adopted budget. There were no budget amendments during FY All budget increases, amendments, or transfers between major budget categories are submitted to the Board for approval, and the Executive Director has the authority to transfer funds within a major budget category. The legal level of budgetary control for the Commission is total expenditures. The budgetary data is on a basis of accounting consistent with accounting principles generally accepted in the United States of America. 61

67 OTHER REPORTS

68 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Commissioners San Joaquin Regional Rail Commission Stockton, California We have audited, in accordance with the 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, the financial statements of the governmental activities, the businesstype activities and each major fund of the San Joaquin Regional Rail Commission (Commission) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Commission s basic financial statements, and have issued our report thereon dated March 20, Our report included an emphasis of matter paragraph regarding the Commission s adoption of Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurement and Application, effective July 1, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Commission s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Commission s internal control. Accordingly, we do not express an opinion on the effectiveness of the Commission s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify certain deficiencies in internal control, described in the accompanying schedule of findings and questioned costs as item that we consider to be a significant deficiency River Plaza Drive, Suite 308 Sacramento, CA Tel: Fax:

69 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Commission s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. The Commission s Response to Findings The Commission s response to the findings identified in our audit is described in the accompanying schedule of findings and questioned costs. The Commission s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Sacramento, California March 20,

70 SINGLE AUDIT REPORTS AND SCHEDULES

71 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Commissioners San Joaquin Regional Rail Commission Stockton, California Report on Compliance for Each Major Federal Program We have audited the San Joaquin Regional Rail Commission s (Commission) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Commission s major federal programs for the year ended June 30, The Commission s major federal programs are identified in the summary auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of federal awards applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the Commission s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Commission s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major program. However; our audit does not provide a legal determination of the Commission s compliance. Opinion on Compliance for Each Major Federal Program In our opinion, the Commission complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, River Plaza Drive, Suite 308 Sacramento, CA Tel: Fax: