ABERDEEN COMMUNITY DEVELOPMENT DISTRICT FINANCIAL REPORT. Year Ended September 30, 2012

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1 ABERDEEN COMMUNITY DEVELOPMENT DISTRICT FINANCIAL REPORT

2 TABLE OF CONTENTS Page I. Financial Section: Independent Auditor's Report 1 Management's Discussion and Analysis 3 Financial Statements: Government-Wide Financial Statements: Statement of Net Assets 7 Statement of Activities 8 Fund Financial Statements: Balance Sheet - Governmental Funds 9 Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds 10 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities 11 Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund 12 Notes to Financial Statements 13 II. Compliance Section: 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 28 Management Comments 30 Response to Management Comments 35

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4 In accordance with Government Auditing Standards, we have also issued a report dated March 11, 2013, on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis starting on page 3, be presented to supplement the 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. March 11,

5 MANAGEMENT S DISCUSSION AND ANALYSIS Our discussion and analysis of the Aberdeen Community Development District s (the District ) financial accomplishments provide an overview of the District s financial activities for the year ended September 30, Please read it in conjunction with the District s Independent Auditor s Report, financial statements and accompanying notes. This information is being presented to provide additional information regarding the activities of the District and to meet the disclosure requirements of Government Accounting Standards Board Statement (GASB) No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments issued June Financial Highlights The liabilities of the District exceeded its assets at September 30, 2012 by $36,202,911, an increase in the deficit of $1,145,331 in comparison with the prior year. At September 30, 2012, the District s governmental funds reported a combined fund balance deficit of $(1,230,018), an increase in the deficit of $1,772,926 in comparison with the prior year. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Aberdeen Community Development District s financial statements. The District s financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements and 3) notes to the financial statements. Government-Wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the District s finances, in a manner similar to a private-sector business. The statement of net assets presents information on all of the District s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the District is improving or deteriorating. The statement of activities presents information showing how the government s net assets changed during the most recent fiscal year. All changes in net assets 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. The government-wide financial statements include all governmental activities that are principally supported by special assessment revenues. The District does not have any business-type activities. The governmental activities of the District include general government, physical environment and recreation related functions. 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) 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 District, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The District has one fund category: Governmental Funds. Governmental Funds - 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, governmental fund financial statements 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 a District 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 governmentwide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The District maintains three individual governmental funds. Information is presented separately in the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances for the general fund, debt service fund and capital projects fund. The general fund and debt service fund are considered to be major funds. The District adopts an annual appropriated budget for its general fund. A budgetary comparison schedule has been provided for the general fund to demonstrate compliance with the budget. Notes to 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. Government-Wide Financial Analysis Statement of Net Assets - The District s net deficit was $(36,202,911) at September 30, The following analysis focuses on the net assets (deficit) of the District s governmental activities. 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Government-Wide Financial Analysis (Continued): Aberdeen Community Development District Statement of Net Assets September 30, September 30, Assets, excluding capital assets $ 4,000,251 $ 3,033,340 Capital assets net of depreciation 5,155,360 5,338,038 Total assets 9,155,611 8,371,378 Liabilities, excluding long-term liabilities 5,478,522 2,533,958 Long-term liabilities 39,880,000 40,895,000 Total liabilities 45,358,522 43,428,958 Net assets: Invested in capital assets, net of related debt (35,477,351) (35,292,226) Restricted for capital projects 7,051 11,003 Unrestricted (732,611) 223,643 Total net assets (deficit) $ (36,202,911) $ (35,057,580) The following is a summary of the District s governmental activities for the fiscal years ended September 30, 2012 and Changes in Net Assets Year ended September 30, Revenues: Program revenues $ 2,386,669 $ 2,237,571 General revenues 3,250 1,410 Total revenues 2,389,919 2,238,981 Expenses: General government 445, ,263 Physical environment 653, ,991 Recreation 26,961 8,794 Interest on long-term debt 2,410,006 2,270,566 Total expenses 3,535,250 3,317,614 Change in net assets (1,145,331) (1,078,633) Net assets (deficit) - beginning (35,057,580) (33,978,947) Net assets (deficit) - ending $ (36,202,911) $ (35,057,580) As noted above and in the statement of activities, the cost of all governmental activities during the year ended September 30, 2012 was $3,535,250. The majority of these costs are comprised of interest on long-term debt. 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Financial Analysis of the Government s Funds The District uses fund accounting to ensure and demonstrate compliance with finance related legal requirements. The focus of the District s governmental funds is to provide information on near-term inflows, outflows and balances of spendable resources. Such information is useful in assessing the District s financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government s net resources available for spending at the end of the fiscal year. At September 30, 2012, the District s governmental funds reported a combined ending fund deficit of $(1,230,018). Of this total, $1,200 is nonspendable, $7,051 is restricted and the remainder is an unassigned negative fund balance of $(1,238,269). The fund balance of the District s general fund increased $24,205 in the current year as a result of assessments and significant transfers in from the debt service fund. The fund balance of the debt service fund decreased $1,793,179 due to insufficient assessments collected to fund debt service requirements, as well as a significant transfer to the general fund. There was no significant change in the capital projects fund balance. General Fund Budgetary Highlights An operating budget was adopted and maintained by the governing board for the District pursuant to the requirements of Florida Statutes. The budget is adopted using the same basis of accounting that is used in preparation of the fund financial statements. There were no amendments to the September 30, 2012 general fund budget. The legal level of budgetary control is at the fund level. Capital Asset and Debt Administration Capital Assets - At September 30, 2012, the District had $5,155,360 invested in infrastructure, net of accumulated depreciation. More detailed information about the District s capital assets is presented in the notes to the financial statements. Capital Debt - At September 30, 2012, the District had $41,460,000 in bonds outstanding, including $1,580,000 in matured bonds payable. More detailed information about the District s capital debt is presented in the notes to the financial statements. Requests for Information If you have questions about this report or need additional financial information, contact the Aberdeen Community Development District s Finance Department at 475 West Town Place, Suite 114, St. Augustine, Florida

9 FINANCIAL STATEMENTS

10 STATEMENT OF NET ASSETS September 30, 2012 Governmental Activities Assets: Cash $ 30,978 Investments 17,566 Assessments receivable, net 50,411 Prepaid costs 1,200 Bond issuance costs 827,289 Restricted assets: Temporarily restricted investments 3,072,807 Capital assets not being depreciated 150,000 Capital assets being depreciated, net 5,005,360 Total assets 9,155,611 Liabilities: Accounts payable and accrued expenses 28,134 Accrued interest payable 1,075,542 Matured interest payable 2,794,846 Matured bonds payable 1,580,000 Noncurrent liabilities: Due within one year 690,000 Due in more than one year 39,190,000 Total liabilities 45,358,522 Net Assets: Invested in capital assets, net of related debt (35,477,351) Restricted for capital projects 7,051 Unrestricted (732,611) Total net assets (deficit) $ (36,202,911) The accompanying Notes to Financial Statements are an integral part of this statement. 7

11 STATEMENT OF ACTIVITIES Net (Expense) Revenue and Changes in Net Program Revenue Assets Operating Grants Capital Grants Charges for and and Governmental Functions/Programs Expenses Services Contributions Contributions Activities Governmental activities: General government $ 445,274 $ 152,187 $ - $ - $ (293,087) Physical environment 653, , (429,822) Recreation 26,961 9, (17,746) Interest on long-term debt 2,410,006 2,001, (407,926) Total governmental activities $ 3,535,250 $ 2,385,849 $ 817 $ 3 (1,148,581) General revenues: Investment and miscellaneous 3,250 Change in net assets (1,145,331) Net assets (deficit) - beginning (35,057,580) Net assets (deficit) - ending $ (36,202,911) The accompanying Notes to Financial Statements are an integral part of this statement. 8

12 BALANCE SHEET GOVERNMENTAL FUNDS September 30, 2012 Total General Debt Service Capital Projects Governmental Funds Assets: Cash $ 30,978 $ - $ - $ 30,978 Investments 17,566 3,065,756 7,051 3,090,373 Assessments receivable, net 2,595 47,816-50,411 Prepaid costs 1, ,200 Total assets $ 52,339 $ 3,113,572 $ 7,051 $ 3,172,962 Liabilities and Fund Balances: Liabilities: Accounts payable and accrued expenses $ 28,134 $ - $ - $ 28,134 Matured interest payable - 2,794,846-2,794,846 Matured bonds payable - 1,580,000-1,580,000 Total liabilities 28,134 4,374,846-4,402,980 Fund balances: Nonspendable 1, ,200 Restricted for capital projects - - 7,051 7,051 Unassigned 23,005 (1,261,274) - (1,238,269) Total fund balances 24,205 (1,261,274) 7,051 (1,230,018) Total liabilities and fund balances $ 52,339 $ 3,113,572 $ 7,051 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. 5,155,360 Bond issuance costs, which are expenditures in the funds, are deferred and amortized over the life of the bonds. 827,289 Liabilities not due and payable from current available resources are not reported in the governmental fund statements. All liabilities, both current and long-term, are reported in the government-wide statements. Accrued interest payable (1,075,542) Bonds payable (39,880,000) (40,955,542) Net Assets (Deficit) of Governmental Activities $ (36,202,911) The accompanying Notes to Financial Statements are an integral part of this statement. 9

13 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS Total General Debt Service Capital Projects Governmental Funds Revenues: Special assessments $ 384,589 $ 1,271,046 $ - $ 1,655,635 Special assessments - prepayments - 60,996-60,996 Impact fees - 669, ,218 Investment and miscellaneous income 3, ,070 Total revenues 387,839 2,002, ,389,919 Expenditures: Current: General government 197, , ,827 Physical environment 461, ,865 Recreation 25, ,765 Debt Service: Interest - 2,267,726-2,267,726 Principal - 1,015,000-1,015,000 Capital Outlay - - 9,662 9,662 Total expenditures 684,954 3,468,229 9,662 4,162,845 Excess (Deficit) of Revenues Over Expenditures (297,115) (1,466,152) (9,659) (1,772,926) Other Financing Sources (Uses) : Transfers in 321,320-5, ,027 Transfers out - (327,027) - (327,027) Total other financing sources (uses) 321,320 (327,027) 5,707 - Net change in fund balances 24,205 (1,793,179) (3,952) (1,772,926) Fund Balances - Beginning of Year - 531,905 11, ,908 Fund Balances (Deficit) - End of Year $ 24,205 $ (1,261,274) $ 7,051 $ (1,230,018) The accompanying Notes to Financial Statements are an integral part of this statement. 10

14 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds (page 10) $ (1,772,926) Governmental funds report outlays for capital assets as expenditures because such outlays use current financial resources; however, in the statement of net assets the cost of those assets is recorded as capital assets. Capital outlay 9,662 Depreciation expense (192,340) (182,678) Bond principal amounts due but not paid in the current period are an expenditure in the governmental funds, but are recorded as current liabilities on the statement of net assets. 625,000 Repayments of long-term liabilities are reported as expenditures in governmental funds, while repayments reduce long-term liabilities in the statement of net assets. 390,000 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 governmental funds. Change in accrued interest (142,280) Amortization of bond issuance costs (62,447) (204,727) Change in net assets of governmental activities (page 8) $ (1,145,331) The accompanying Notes to Financial Statements are an integral part of this statement. 11

15 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL - GENERAL FUND Variance with Final Budget Budgeted Amounts Actual Amounts Positive (Negative) Original Final Revenues: Special assessments $ 736,065 $ 736,065 $ 384,589 $ (351,476) Investment and miscellaneous income ,250 2,600 Total revenues 736, , ,839 (348,876) Expenditures: Current: General government 171, , ,324 (25,392) Physical environment 564, , , ,918 Recreation ,765 (25,765) Total expenditures 736, , ,954 51,761 Excess (deficit) of revenues over - - (297,115) (297,115) expenditures Other Financing Sources (Uses): Transfers in , ,320 Net change in fund balance ,205 24,205 Fund balance - beginning Fund balance - ending $ - $ - $ 24,205 $ 24,205 The accompanying Notes to Financial Statements are an integral part of this statement. 12

16 NOTES TO FINANCIAL STATEMENTS

17 NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies: Reporting Entity The Aberdeen Community Development District, (the District ) was established when the Florida Land and Water Adjudicatory Commission adopted administrative Rule 42NN-1 on November 5, 2003, pursuant to the Uniform Community Development District Act of 1980, otherwise known as Chapter 190, Florida Statutes. The Act provides, among other things, the power to manage basic services for community development, the power to borrow money and issue bonds, and the power to levy and assess non-ad valorem assessments for the financing and delivery of capital infrastructure. The District was established for the purpose of financing and managing the acquisition, construction, maintenance and operation of a portion of the infrastructure necessary for community development within the District. The District is governed by the Board of Supervisors (the Board ), which is composed of five members. The Board of Supervisors of the District exercises all powers granted to the District pursuant to Chapter 190, Florida Statutes. At September 30, 2012, three of the Supervisors were affiliated with one of the developers of the community, Aberdeen of St. Johns, LLC and D.R. Horton, Inc. Jacksonville ( Developers ). The District is economically dependent on the Developers. The Board has the final responsibility for, among other things: 1. Allocating and levying assessments. 2. Approving budgets. 3. Exercising control over facilities and properties. 4. Controlling the use of funds generated by the District. 5. Approving the hiring and firing of key personnel. 6. Financing improvements. The financial statements were prepared in accordance with Governmental Accounting Standards Board ( GASB ) Statement 14, and Statement 39, an amendment of GASB Statement 14. Under the provisions of those standards, the financial reporting entity consists of the primary government, organizations for which the District Board of Supervisors is considered to be financially accountable, and other organizations for which the nature and significance of their relationship with the District are such that, if excluded, the financial statements of the District would be considered incomplete or misleading. Management has determined that there are no entities considered to be component units of the District. 13

18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 1 - Summary of Significant Accounting Policies (Continued): Government-Wide and Fund Financial Statements The financial statements include both government-wide and fund financial statements. The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the non-fiduciary activities of the primary government. For the most part, the effect of interfund activity has been removed from these statements. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants, contributions and investment income that are restricted to meeting the operational or capital requirements of a particular function or segment and 3) operating-type special assessments that are treated as charges for services (including assessments for maintenance and debt service). Other items not included among program revenues are reported instead as general revenues. Measurement Focus, Basis of Accounting and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Assessments are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenues as soon as all eligibility requirements imposed by the provider have been met. 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 to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the District considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Assessments, including debt service assessments and operation and maintenance assessments, are non-ad valorem assessments imposed on all lands located within the District and benefited by the District s activities. Assessments are typically certified for collection by the District prior to the start of the fiscal year which begins October 1 st and ends on September 30 th. Operation and maintenance special assessments are imposed upon all benefited lands located in the District. Debt service special assessments are imposed upon certain benefited lots and lands as described in each resolution imposing the special assessment for each series of bonds issued by the District. Certain debt service assessments are collected upon the closing of those lots subject to short term debt and are used to prepay a portion of the bonds outstanding. 14

19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 1 - Summary of Significant Accounting Policies (Continued): Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued): Assessments and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the District. The District reports the following governmental funds. The general fund and debt service fund are considered to be major funds: General Fund - is the District s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. Debt Service Fund - accounts for the accumulation of resources for the annual payment of principal and interest on long-term general obligation debt. Capital Projects Fund - accounts for the financial resources to be used for the acquisition or construction of infrastructure within the District. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. When both restricted and unrestricted resources are available for use, it is the District s policy to use restricted resources first, then unrestricted resources as they are needed. Assets, Liabilities and Net Assets or Equity Restricted Assets - These assets represent cash and investments set aside pursuant to bond covenants. Deposits and Investments - The District s cash and cash equivalents are considered to be cash on hand and demand deposits. Investments of the District are reported at fair value. The District s investments consist of investments authorized per their investment policy adopted in accordance with Section , Florida Statutes. Prepaid Items - 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. 15

20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 1 - Summary of Significant Accounting Policies (Continued): Assets, Liabilities and Net Assets or Equity (Continued): Capital Assets - Capital assets, which include property, plant, equipment and infrastructure assets (e.g., roads, sidewalks, water management systems and similar items), are reported in the applicable governmental activities column in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Property, plant and equipment of the District are depreciated using the straight-line method over the following estimated useful lives: Assets Years Infrastructure 30 Recreational facilities and amenities 7-20 Long Term Obligations - In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of premiums or discounts. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as expenditures. Fund Balance Categories and Classification - The District implemented GASB 54 in 2011, which established the following fund balance classifications: nonspendable, restricted, committed, assigned, and unassigned. The District s general spending prioritization policy is to consider restricted resources to have been used first, followed by assigned and unassigned amounts when expenditures have been incurred for which resources in more than one classification could be used. Nonspendable - includes fund balance amounts that cannot be spent either because it is not in spendable form or because of legal or contractual requirements. 16

21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 1 - Summary of Significant Accounting Policies (Continued): Fund Balance Categories and Classification (Continued): Spendable Fund Balance Restricted - includes fund balance amounts that are constrained for specific purposes which are externally imposed by debt covenants or amounts constrained due to constitutional provisions or enabling legislation. Committed - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the government through formal action of the highest level of decision making authority, which is the Board of Supervisors. Assigned - includes spendable fund balance amounts that are intended to be used for specific purposes that are neither considered restricted nor committed. The Board of Supervisors has authorized the District Accountant to assign amounts for specific purposes. Unassigned - includes residual positive fund balance within the General Fund which has not been classified within the other above mentioned categories. Unassigned fund balance may also include negative balances for any governmental fund if expenditures exceed amounts restricted, committed, or assigned for those specific purposes. Net assets in the government-wide statements are categorized as invested in capital assets, net of related debt, restricted or unrestricted. Invested in capital assets, net of related debt represents net assets related to infrastructure and property, plant and equipment, net of any related debt. Restricted net assets represent the assets restricted by the District s bond covenants. Other Disclosures Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. Note 2 - Stewardship, Compliance and Accountability: A. Budgetary Information The District is required to establish a budgetary system and an approved annual budget for the General Fund. Annual budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America. All annual appropriations lapse at the fiscal year end. The legal level of budgetary control is at the fund level. Any budget amendments that increase the aggregate budgeted appropriations, at the fund level, must be approved by the Board of Supervisors. 17

22 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 2 - Stewardship, Compliance and Accountability (Continued): A. Budgetary Information (Continued): The District follows these procedures in establishing the budgetary data reflected in the financial statements. 1. Each year the District Manager submits to the District Board a proposed operating budget for the fiscal year commencing the following October A public hearing is conducted to obtain public comments. 3. Prior to October 1, the budget is legally adopted by the District Board. 4. All budget changes must be approved by the District Board. 5. The budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America. 6. The appropriation resolution authorizes District staff to initiate certain budget reclassifications. B. Deficit Fund Balance At September 30, 2012, the debt service fund had a deficit fund balance. Note 3 - Deposits and Investments: Deposits The District s cash balances were entirely covered by federal depository insurance or by a collateral pool pledged to the State Treasurer. Florida Statutes Chapter 280, Florida Security for Public Deposits Act, requires all qualified depositories to deposit with the Treasurer or another banking institution eligible collateral equal to various percentages of the average daily balance for each month of all public deposits in excess of any applicable deposit insurance held. The percentage of eligible collateral (generally, U.S. Governmental and agency securities, state or local government debt, or corporate bonds) to public deposits is dependent upon the depository s financial history and its compliance with Chapter 280. In the event of a failure of a qualified public depository, the remaining public depositories would be responsible for covering any resulting losses. 18

23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 3 - Deposits and Investments (Continued): Investments Investments are stated at fair value, which is the amount for which an investment could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Fair value is based on quoted market prices. Changes in the fair value of investments are recognized as revenue and included in investment revenue. Investment revenue is recognized as earned and is recorded in the respective fund related to the investment activity. The District s investment policies are governed by State Statutes and the District Trust Indentures. The District investment policy allows investments in any financial institution that is a qualified public depository of the State of Florida as identified by the State Treasurer, in accordance with Chapter 280 of the Florida Statutes. Authorized District investments include, but are not limited to: 1. The Local Government Surplus Funds Trust Fund (SBA); 2. Securities and Exchange Commission Registered Money Market Funds with the highest credit quality rating from a nationally recognized rating agency; 3. Interest-bearing time deposits or savings accounts in qualified public depositories; 4. Direct obligations of the U.S. Treasury; 5. Short-term bond funds investing in U.S. Government securities or U.S. Government Agency Securities; 6. Securities of registered investment companies (mutual funds) that are limited to obligations of the U.S. Government or any agency or instrumentality thereof. The SBA is not a registrant with the Securities and Exchange Commission (SEC); however, the Board has adopted operating procedures consistent with the requirements for a 2a-7-like fund for the Florida Prime Fund. Therefore, the pool account balance can be used as fair value for financial reporting. Fund B is accounted for as a fluctuating NAVPOOL, not a 2a- 7-like money market fund. 19

24 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 3 - Deposits and Investments (Continued): Investments (Continued): Investments made by the District at September 30, 2012 are summarized below. accordance with GASB 31, investments are reported at fair value. Investment Type Fair Value Credit Rating In Weighted Average Maturity US Bank Money Market $ 3,072,807 Not Rated N/A First American Prime Obligation Fund Z 17,484 AAAm 54 days Local Government Investment Pool 82 AAAm 39 days $ 3,090,373 Credit Risk: The District s investment policy limits credit risk by restricting authorized investments to those described. Investments in U.S. Government securities and agencies must be backed by the full faith and credit of the United States Government. Short term bond funds shall be rated by a nationally recognized ratings agency and shall maintain the highest credit quality rating. Custodial Credit Risk: In the case of deposits, this is the risk that, in the event of a bank failure, the District s deposits may not be returned to it. The District s investment policy requires that bank deposits be secured as provided by Chapter 280, Florida Statutes. This law requires local governments to deposit funds only in financial institutions designated as qualified public depositories by the Chief Financial Officer of the State of Florida, and creates the Public Deposits Trust Fund, a multiple financial institution pool with the ability to assess its member financial institutions for collateral shortfalls if a default or insolvency has occurred. At September 30, 2012, all of the District s bank deposits were in qualified public depositories. For an investment, this is the risk that, in the event of the failure of the counterparty, the government will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The District has no formal policy for custodial risk. At September 30, 2012, none of the investments listed are exposed to custodial credit risk because their existence is not evidenced by securities that exist in physical or book entry form. Concentration of Credit Risk: The District s investment policy does not specify limits on the amount the District may invest in any one issuer. 20

25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 3 - Deposits and Investments (Continued): Investments (Continued): Interest Rate Risk: The District s investment policy does not specifically address interest rate risk; however, the general investment policy is to apply the prudent-person rule: Investments are made as a prudent person would be expected to act, with discretion and intelligence, to seek reasonable income, preserve capital, and in general, avoid speculative investments. The District manages its exposure to declines in fair values by investing primarily in pooled investments that have a weighted average maturity of less than three months. Note 4 - Interfund Transfers: In the current year, $321,320 was transferred from the debt service fund to the general fund as per the Funding Agreement discussed in Note 9. Additionally, $5,707 was transferred from the debt service fund to the capital projects fund, as directed by the Trustee, to pay construction invoices. Note 5 - Bond Issue Costs: In connection with the issuance of long-term debt discussed in Note 7, the District incurred bond issuance costs totaling $827,289. In the government-wide financial statements, this amount has been capitalized and is being amortized over the estimated life of the bonds. Amortization for the year ended September 30, 2012 was $62,

26 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 6 - Capital Assets: Capital asset activity for the year ended September 30, 2012 was as follows: Beginning Balance Additons Disposals Ending Balance Governmental Activities: Capital assets not being depreciated: Land $ 150,000 $ - $ - $ 150,000 Capital assets being depreciated: Infrastructure 5,734, ,734,313 Recreational facility and amenities 8,369 9,662-18,031 Total capital assets being depreciated 5,742,682 9,662-5,752,344 Less accumulated depreciation for: Infrastructure (553,448) (191,144) - (744,592) Recreational facility and amenities (1,196) (1,196) - (2,392) Total accumulated depreciation (554,644) (192,340) - (746,984) Total capital assets being depreciated, net 5,188,038 (182,678) - 5,005,360 Governmental activities capital assets, net $ 5,338,038 $ (182,678) $ - $ 5,155,360 Depreciation expense for 2012 was charged in the amounts of $191,144 and $1,196 to physical environment and recreation, respectively. The total projected cost of the infrastructure improvements was originally estimated at $78.1 million, of which $47.5 million was to be funded with the proceeds from Series 2005 and 2006 bonds. The estimated cost to complete the project is $9.5 million, however this estimate is subject to change due to possible involvement of new developers and possible changes to the project. 22

27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 7 - Long-Term Liabilities: Series 2005 Special Assessment Bonds In October 2005, the District issued $38,765,000 of Special Assessment Bonds, Series 2005 with a fixed interest rate of 5.5%. Interest is due semiannually on each May 1 and November 1. Principal on the Series 2005 Bonds is due annually commencing on May 1, 2007 through May 1, The Series 2005 Bonds are subject to extraordinary mandatory redemption prior to their selected maturity in the manner determined by the Bond Registrar if certain events occur as outlined in the Bond Indenture. The Series 2005 Bonds are subject to optional redemption prior to maturity at the option of the issuer, in whole or in part at any time on or after May 1, 2014 at the redemption price of 100% of the principal amount of the Series 2005 Bonds to be redeemed, together with accrued interest to the redemption date. The Bond Indenture requires that the District maintain adequate funds in a reserve account to meet the debt service reserve requirement as defined in the Indenture. The District is not in compliance with this requirement at September 30, The District did not receive all assessments owed from certain of the owners of lands involved in the foreclosure proceedings as described herein. As a result, the District made prior year s debt service interest payments in part by utilizing reserve funds. The Bond Indenture has certain restrictions and requirements relating principally to the use of proceeds to pay for the infrastructure improvements and the procedures to be followed by the District on assessments to property owners. The District did not receive all assessments owed from certain of the Developers to make the full payment of debt service and meet reserve fund requirements. The District is not in compliance with these requirements of the Bond Indenture. In the current year, $60,000 of principal and $1,650 of interest was paid and total special assessment revenue pledged was $1,242,390. Current year principal due of $655,000 was accrued to matured bonds payable. Current year interest due of $1,916,200 was accrued to matured interest payable. Total principal and interest remaining on the Series 2005 Bonds as of September 30, 2012 is $66,165,500 including $1,280,000 of matured bonds payable and $1,916,200 of matured interest payable. Series 2006 Special Assessment Bonds In December 2006, the District issued $8,170,000 of Special Assessment Bonds, Series and $545,000 Series Impact Fee Bonds with a fixed interest rate of 5.25% and 5.5%, respectively. Interest is due semiannually on each May 1 and November 1 for Series Bonds and quarterly on each February 1, May 1, August 1, and November 1 for Series Bonds. Principal on the Series Bonds is due November 1, Principal on the Series Bonds was due November 1, 2011, but was not paid. 23

28 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 7 - Long-Term Liabilities (Continued): Series 2006 Special Assessment Bonds (Continued): The Series Bonds and the Series Bonds are subject to extraordinary mandatory redemption prior to their selected maturity in the manner determined by the Bond Registrar if certain events occur as outlined in the Bond Indenture. The Bond Indenture requires that the District maintain adequate funds in a reserve account to meet the debt service reserve requirement as defined in the Indenture. The District is not in compliance with this requirement at September 30, The District did not receive all assessments owed from the owners of lands involved in the foreclosure proceedings described herein. As a result, the District made prior year s debt service interest payments in part by utilizing reserve funds. The Bond Indenture has certain restrictions and requirements relating principally to the use of proceeds to pay for the infrastructure improvements and the procedures to be followed by the District on assessments to property owners. The District failed to collect revenue to make the full payment of debt service and meet reserve fund requirements. The District is not in compliance with the requirements of the Bond Indenture. Current year principal due of $300,000 was accrued to matured bonds payable. Current year interest due of $349,876 was accrued to matured interest payable. Total principal and interest remaining on the Series 2006 Bonds as of September 30, 2012 is $8,695,458, including $300,000 of matured bonds payable and $878,645 of matured interest payable. In the current year, total special assessment revenue pledged was $758,870, $669,218 of which is reported as impact fee revenue. No debt service was paid in the current year. Impact fee payments alone secure the District s Impact Fee Bonds, Series However, if the impact fee revenue raised in any given quarter is insufficient to meet the quarterly debt repayment obligation of the Series Bonds, then the Master Developer, Aberdeen Development, LLC, is obligated to fund the difference between the amount of impact fees collected and the minimum quarterly requirement, pursuant to an Impact Fee Guarantee Agreement between the District and Aberdeen Development, LLC. The principal payment of $300,000 on the Series Bonds was due in the current year. However, due to a deficiency in collected impact fees, the Series Bonds were not paid and are reported as matured bonds payable. This led to an event of default under the trust indenture, entitling the Trustee to certain remedies. The District intends to tender impact fees as they become available until such time as the Series Bonds have been paid off. 24

29 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 7 - Long-Term Liabilities (Continued): Series 2006 Special Assessment Bonds (Continued): Long-term debt activity for the year ended September 30, 2012 was as follows: Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental activities: Bonds payable: Series 2005 $ 34,245,000 $ - $ (715,000) $ 33,530,000 $ 690,000 Series ,350, ,350,000 - Series ,000 - (300,000) - - Governmental activity longterm liabilities $ 40,895,000 $ - $ (1,015,000) $ 39,880,000 $ 690,000 The beginning balance in the schedule above includes a principal reduction of $625,000 that was due but was not paid. Of the total current year reductions, $955,000 was also due, but was not paid. These amounts total $1,580,000 and are reported as matured bonds payable in the financial statements. At September 30, 2012, the scheduled debt service requirements on the bonds payable were as follows, excluding amounts owed for principal and interest that are shown as currently due in matured bonds payable and matured interest payable. Governmental Activities Year Ending September 30, Principal Interest 2013 $ 690,000 $ 2,247, ,000 2,209, ,000 2,169, ,165,000 1,960, ,000 1,749, ,100,000 7,976, ,715,000 6,406, ,850,000 4,338, ,990,000 1,547,150 $ 39,880,000 $ 30,606,113 25

30 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 8 - Developer Transactions: In the current year, D.R. Horton paid $929,784 of special assessments to the District, representing 39% of total District revenue. Aberdeen of St. Johns, LLC paid $390,431 of special assessments to the District, including $14,636 which is included in assessments receivable at year end, representing 16% of total District revenue. In prior years, the District began foreclosure proceedings on its liens for unpaid special assessments on lands within the District formerly owned by Aberdeen Development, LLC and formerly owned by Aberdeen of St. Johns, LLC, representing approximately half of the planned assessable units within the District. These unpaid assessments are fully reserved for in an allowance for doubtful accounts. Final judgments were entered and foreclosure sales subsequently postponed pursuant to an agreement with the Trustee, on behalf of the bondholders, to fund District operations as discussed in Note 9. Aberdeen Development, LLC sold all of its land subject to the foreclosure and its entitlements to new landowner, Aberdeen Land II, LLC. Note 9 - Funding Agreement: In November 2011, the Trustee, on behalf of the bondholders, and the District entered into a Funding Agreement whereby the Trustee agreed to fund District operations with trust estate assets and, in return, the District would postpone the pending foreclosure sales of the property for which a final judgment on its claims under the foreclosure actions described in Note 8, were awarded by the court. This Funding Agreement, including its amendments, is effective through March 31, In the current year, $321,320 of trust estate assets was transferred by the Trustee to fund the District and is recorded as a transfer out of the debt service fund and a transfer into the general fund. Note 10 - Deficit Net Assets: The District has a government-wide net deficit of $(36,202,911) at September 30, This deficit primarily results from capital assets which were financed by District long-term debt but were conveyed to other governmental entities. Note 11 - Risk Management: The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. These risks are covered by commercial insurance from independent third parties. The District has not filed any claims under this commercial coverage during the last three years. Note 12 - Subsequent Events: Debt Service Payments As of the date of this report, the District has not made the debt service payments due on November 1, 2012 due to the conditions described above. 26