COMPREHENSIVE ANNUAL FINANCIAL REPORT

Transcription

1 COUNTY OF SANTA BARBARA STATE OF CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED JUNE 30, 2004 GUADALUPE DUNES ROBERT W. GEIS, CPA AUDITOR-CONTROLLER

2 The Guadalupe-Nipomo Dunes comprise 18 miles of the largest, coastal dune-lagoon habitat on earth. Nestled among wind-sculpted peaks of sand, some towering 500 feet, is a life-supporting web of shrublands, wetlands, dune hollows, lakes and native vegetation. Preservation of the land began in 1987 and approximately half of the area is permanently protected for habitat and passive recreation. Front Cover Photograph by Mark Bright

3 COMPREHENSIVE ANNUAL FINANCIAL REPORT June 30, 2004 TABLE OF CONTENTS INTRODUCTORY SECTION Page Letter of Transmittal... 1 FINANCIAL SECTION Independent Auditors' Report... 8 Management s Discussion and Analysis (Unaudited)...10 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets...23 Statement of Activities...24 Fund Financial Statements: Balance Sheet Governmental Funds...25 Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds...26 Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual: General Fund...27 Road Special Revenue Fund...28 Public Health Special Revenue Fund...29 Social Services Special Revenue Fund...30 Flood Control District Special Revenue Fund...31 Statement of Net Assets Proprietary Funds...32 Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds...33 Statement of Cash Flows Proprietary Funds...34 Statement of Fiduciary Net Assets Fiduciary Funds...35 Statement of Changes in Fiduciary Net Assets Fiduciary Funds Notes to the Basic Financial Statements...37 Combining and Individual Fund Statements and Schedules: Combining Balance Sheet Nonmajor Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Nonmajor Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual Nonmajor Governmental Funds...86 Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual Capital Projects Fund Combining Statement of Net Assets Internal Service Funds Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets Internal Service Funds Combining Statement of Cash Flows Internal Service Funds Combining Statement of Changes in Assets and Liabilities Agency Funds Capital Assets Used in the Operation of Governmental Funds: Schedule By Source Schedule by Function Schedule of Changes by Function i

4 COMPREHENSIVE ANNUAL FINANCIAL REPORT June 30, 2004 TABLE OF CONTENTS, Continued STATISTICAL SECTION (Unaudited) Page Financial Trends: Net Assets by Category Changes in Net Assets Fund Balances, Governmental Funds Changes in Fund Balances, Governmental Funds Revenue Capacity: Assessed Value of Taxable Property and Actual Value of Property Property Tax Rates Direct and Overlapping Principal Property Taxpayers Property Tax Levies and Collections Debt Capacity: Ratios of Outstanding Debt by Type Computation of Legal Debt Margin Direct and Overlapping Bonded Debt Economic and Demographic Information: Demographics and Economic Statistics Principal Employers Operating Information: County Employees by Function/Program Operating Indicators by Function/Program Capital Assets and Infrastructure Statistics by Function/Program GLOSSARY Glossary for the Comprehensive Annual Financial Report ii

5 INTRODUCTORY SECTION

6 COUNTY OF SANTA BARBARA ROBERT W. GEIS, C.P.A. Auditor-Controller JOHN J. TORELL, C.P.A. Assistant Auditor-Controller County Administration Bldg. 105 E. Anapamu Street, Rm. 303 Santa Barbara, CA (805) Mailing Address: P.O. Box 39 Santa Barbara, CA FAX (805) OFFICE OF THE AUDITOR-CONTROLLER August 6, 2004 To the Citizens of Santa Barbara County: The Comprehensive Annual Financial Report (CAFR) of the County of Santa Barbara (the County) for the fiscal year ended June 30, 2004, is hereby submitted as mandated by Sections and of the Government Code of the State of California. These statutes require the County to issue annually a report on its financial position and activity, and that this report be audited by an independent firm of certified public accountants. The CAFR is prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and audited in accordance with auditing standards generally accepted in the United States of America. This report consists of management s representations concerning the finances of the County. Consequently, management assumes full responsibility for the completeness and reliability of all the information presented in this report. To provide a reasonable basis for making these representations, management of the County has established a comprehensive internal control framework that is designed both to protect the government s assets from loss, theft or misuse and to compile sufficient reliable information for the preparation of the County s financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the County s comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The County s basic financial statements have been audited by KPMG LLP, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the County for the fiscal year ended June 30, 2004, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; and evaluating the overall financial statement presentation. The independent auditors concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the County s basic financial statements for the fiscal year ended June 30, 2004, are fairly presented in conformity with GAAP. The independent auditors report is presented as the first component of the financial section of this report. The independent audit of the basic financial statements of the County was part of a broader, federally mandated Single Audit designed to meet the special needs of federal grantor agencies. The standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the audited government s internal controls and compliance with legal requirements, with special emphasis on internal controls and legal requirements involving the administration of federal awards. These reports are available in the County s separately issued Single Audit Report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management s Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The County s MD&A can be found immediately following the report of independent auditors. 1

7 Profile of the Government The County, located approximately 100 miles north of Los Angeles and 300 miles south of San Francisco, was established by an act of the State legislature on February 18, The County occupies 2,744 square miles, one-third of that is located in the Los Padres National Forest. The County population is 414,735 as of January 1, Approximately 33% of the residents live in the unincorporated area. There are eight incorporated cities located within the County: Santa Barbara, Santa Maria, Lompoc, Goleta, Carpinteria, Guadalupe, Solvang, and Buellton. The largest cities in the County, and their respective populations, are Santa Barbara, the County seat 90,500 (22%), Santa Maria 85,300 (20%), and Lompoc 42,250 (10%). The largest employment categories in the County include services, wholesale and retail trade, public administration, and manufacturing. The mild climate, picturesque coastline, scenic mountains and numerous parks and beaches make the County a popular tourist and recreational area. Policymaking and legislative authority is vested in the County Board of Supervisors (the Board), which consists of an elected supervisor from each of five districts. The Board is responsible among other things, for passing ordinances, adopting the budget, appointing committees and appointing the County Administrator and non-elected department heads. Supervisors are elected to four-year staggered terms with two supervisors being elected in even-year elections and three supervisors being elected in odd-year elections. The County has five elected department heads responsible for the offices of the County Clerk-Recorder-Assessor, Auditor-Controller, District Attorney, Sheriff, and Treasurer-Tax Collector-Public Administrator. The following organization chart is presented so that it reflects the various functional categories reported in the government-wide statement of activities, along with the names of the principle officials. Policy & Executive Naomi Schwartz, Chair First District Supervisor Susan Rose Second District Supervisor Gail Marshall Third District Supervisor Joni Gray Fourth District Supervisor Joe Centeno, Vice Chair Fifth District Supervisor Michael Brown County Administrator General County Revenues & Programs Stephen Shane Stark County Counsel Law & Justice Public Safety Health & Public Assistance Community Resources & Public Facilities General Government & Support Services Thomas W. Sneddon Jr. District Attorney James Egar Public Defender Gary Blair Court Special Services John Scherrei Fire Susan J. Gionfriddo Probation James Anderson Sheriff James Broderick, Ph.D Alcohol, Drug, & Mental Health Services (ADMHS) Karin Roser Child Support Services Roger E. Heroux Public Health Services Kathy Gallagher Social Services William Gillette Agriculture & Cooperative Extension Edward Moses Housing & Community Development Terri Maus-Nisich Parks Dr. Valentin Alexeeff Planning & Development Philip M. Demery Public Works Robert W. Geis, CPA, CPFO Auditor-Controller Joseph E. Holland, CPFO Clerk-Recorder-Assessor Ron Cortez General Services Scott Ullery, Interim Human Resources Bernice James Treasurer-Tax Collector & Public Administrator The County, with an average of 4,209 full-time equivalent employees, provides a full range of services to its residents as depicted above on the organization chart. Following is a brief summary of some of the service efforts and accomplishments of the Santa Barbara County departments. As in past years, we have included a few media highlights in an effort to enhance areas of importance that have been reported by the media over the past year. 2

8 Service Efforts and Accomplishments Policy and Executive This functional area has 87 staff positions and expenses of $6 million. Setting policy, adopting the budget and providing legal services are its workload drivers. The County received the Government Finance Officer s Association Distinguished Budget Presentation Award for its fiscal year budget. The County Administrator utilizes a sophisticated set of management systems to assist County departments in delivering services in accordance with the Board of Supervisors strategic goals, operational priorities, and budgeted resources. Santa Barbara County Approves Spending Plan For Now Santa Maria Times June 12, 2004 General Government And Support Services With 413 employees and expenses of $27 million this functional area provides general government services to the citizens for important issues such as elections, and also provides support services to County operations such as payroll and human resources. The departments provide financial integrity for the County, quality services for our largest asset, which is our employees, as well as management of the County s financial assets. The workload of this function includes property tax assessment and tax collection on 122,800 parcels, elections involving 195,100 registered voters and cash management investment services. The 24 County departments also receive services such as bill paying, mail, purchasing, insurance, telephone, financial systems, and computer technology. Public Service in Paradise 3 Public Safety This functional area has 1,298 staff positions and expenses of $150 million. Protection of the community, including people and their property, through law enforcement, fire protection, custody of adult and juvenile criminals and probation monitoring of offenders are the workload drivers. The Fire Department stayed busy responding to 9,400 emergency calls. They maintain a strong hazardous material control program, fire prevention services and emergency response plan. Gaviota Fire Burns More Than 7,400 Acres Goleta Valley Voice June 11, 2004 Sheriff custody processed and booked 17,535 adult offenders through the County jail, while Sheriff s patrol services handled 332,000 calls for service. The Public Safety Dispatch answered more than 260,000 inquiries to the center during the year. The Probation Department processed over 6,300 juvenile referrals, supervised over 2,050 juveniles and 8,500 adult offenders, provided 58,300 days of institutional care for minors in two juvenile halls and two camps, and prepared and submitted 11,300 reports for the courts regarding adult offenders. Law and Justice California Crime Index for Santa Barbara crimes per County thousand 20 people Source: 2004 Economic Outlook, UCSB Economic Forecast Project, Department of Justice This functional area has 207 employees and expenses of $38 million. The District Attorney, Public Defender and Courts Special Services are all about protecting the rights and ensuring the safety of the citizens. Working with law enforcement, the District Attorney filed 3,500 felonies and 11,200 misdemeanors with the courts, while the Public Defender s caseload reached 25,900. There is an increasing emphasis throughout the law and justice system on prevention and enforcement remedies.

9 Service Efforts and Accomplishments Health & Public Assistance With 1,560 employees and expenses of $230 million these federal and state funded programs serve the less advantaged County residents. They strive to improve the health of the community through preventive health services, aiding individuals and families to become emotionally, socially and fiscally self sufficient, serving children and families by enforcing child support orders and providing a comprehensive array of alcohol, drug and mental health services CalWorks Caseload Community Resources And Public Facilities This functional area has 527 employees and expenses of $69 million. The departments in this functional area are devoted to enhancing the quality of life in Santa Barbara County. They look to preserve and protect natural resources, foster safe long-term land use, develop affordable housing, protect agriculture and maintain essential public works facilities to make everyday life as safe and convenient as possible. Santa Barbara County Building Permits Issued and Building Valuation Caseload /97 7/98 7/99 7/00 7/01 7/02 7/03 7/04 Millions $300 $240 $180 $120 $60 $0 92/93 94/95 96/97 98/99 00/01 02/03 Actual Valuation Permits Issued, (03/04 Projected) Fiscal Years 6,000 4,000 2,000 0 Permits Projected to 6/04 Bacara and Camino Real Marketplace A sample of their workload includes over 20,000 ADMHS clients served, over 156,000 child support payments worth $28 million processed, 62,500 assistance claims worth $38 million paid to eligible recipients and over 112,000 treated at Public Health clinics. The departments in this functional area are now collaborating more than ever to deliver integrated services to what frequently is a common client base. One in Five Children Lacks Health Insurance Santa Barbara News-Press November 20, 2003 These departments completed more than 25,000 building inspections, maintained or enhanced 150 of the 1,667 road lane miles, completed 200 flood control work requests, and provided services at 25 major county parks. Public Works Annually Updates its 5-Year Pavement Preservation Program General County Programs 18 employees with expenses of $13 million service a variety of general county programs. Included are Debt Service and Developing Strategies which are generally managed by the policy and executive group. The Children and Families Commission has its own governing body, but remains a part of the County financial entity. Transfers to other government entities, like libraries and the Local Agency Formation Commission, are also accounted for in this unit. Business Activities There are three business-type activities in the County: Solid Waste, Transit and Laguna Sanitation. A fee for service structure covers the costs of 99 employees and expenses of $21 million. Workload at solid waste includes waste reduction through recycling at 10,200 tons per month, landfill waste disposal of 19,910 tons per month, and the implementation of Phase I of the Tajiguas Landfill expansion which will provide four additional years of disposal capacity. Our future waste system program remains a long-term strategic issue for the community. 4

10 Factors Affecting Financial Condition Economy: Santa Barbara County recovered in FY following a slowdown in FY The following highlights and graphs are evidence of the changing economy. percent 8 7 Unemployment Rate Employment The County s unemployment rate peaked at only 4.2% in In 2003, the unemployment rate fell to 4.0%. Fed Raises Interest Rates Move Ends 4-Year Spiral Downward to Record Levels Santa Barbara News-Press July 1, 2004 Income The average annual salary was $35,293 in 2003, an increase of 2.6%, or about the rate of inflation. Retail Sales Retail sales increased to $5.4 billion, a growth rate of 3.3%. Real total sales growth rate has fluctuated about zero for the past three years due to the national recession, September 11 and its related tourism slowdown, and California s peculiar problems. Real Estate County residential prices are setting new highs every month due to low interest rates and unique demand forces. The median home price of $418,000 was an increase of 6.7% over the prior year. The median family income increased by the same percentage to $61,000. The housing-affordability index fell slightly to 18.3% Non-residential valuations were down in 2003 to $130 million compared with the 2002 value of $142.1 million. Tourism Real room sales have been declining for two years, but remain above the 2000 level. Most of the information about the Local Economy is derived from the 2004 Santa Barbara County Economic Outlook printed April 2004 and based on the 2003 calendar year (with permission from the UCSB Economic Forecast Project). billions of dollars thousands of dollars 450 Retail Sales Median Home Price Hotel/Motel Room Sales millions 250 of dollars Economic Indicators Beginning the first quarter of FY , economic growth at the national level was good news for the economy. It now appears, barring something surprising, recovery will be sustainable. Indications are that California s economy is currently much more robust than commonly thought. The Santa Barbara economy recovered in FY after a slowdown in the prior year. Financial Indicators We are experiencing an increase in the rate of growth in our economic-driven general revenues due to recovery from the recession in the U.S., California and local economies. State budget reductions this year offset a significant portion of our revenue growth. State budget cuts over the next two years will also have to be absorbed by the County. However, next year we believe revenues will outpace expenditures. 5

11 Factors Affecting Financial Condition Continued Budget Policy: The annual budget serves as the foundation for the County s financial planning and control. The County Budget Act, as presented in California Government Code sections and establish the general provisions and requirements concerning county budget matters. The County also prepares a separate County Performance Based Budget that is based on guidelines provided by the Government Finance Officers Association of the United States and Canada (GFOA). The performance based budget focuses on strategic planning and outcome based measures, while the County Budget Act focuses on appropriation controls for each fund, department and object level appropriations. The County starts the budget process by having the Board review and update its strategic plan and a set of budget principles. All departments submit requests for appropriation and estimates of available financing, the County Administrator reviews the request and prepares a recommendation. Hearings are set during the month of June, final budget changes are approved by the Board and the final budget is adopted prior to the start of the next fiscal year. The Auditor-Controller prepares a tabulation of the budget in its final form for submission to the State Controller and loads the budget to the financial system during the first month of the new fiscal year. The adopted budget is prepared by fund, department and cost centers. Monthly estimates for both revenues and expenditures are also used to assist departments with budgetary control and each department meets four times per year with the County Administrator to review the status of their budgets. Quarterly budget status reports are submitted for Board of Supervisor hearings. Capital Budget Policy: Each year a 5-year Capital Improvement Program (CIP) is compiled. The CIP is a plan for short range and long range capital acquisition and development. It also includes plans to improve or rehabilitate County-owned roads and facilities. The plan provides the mechanism for estimating capital requirements; setting priorities; planning, scheduling, and implementing projects; developing revenue policy for proposed improvements; monitoring and evaluating the progress of capital projects; and informing the public of projected capital improvements and unfunded needs. While the CIP covers a five-year planning period, it is updated each year to reflect ongoing changes as new projects are added, existing projects modified, and completed projects deleted from the plan document. The five-year CIP does not appropriate funds, rather it serves as a budgeting tool, identifying those Capital Budget appropriations to be made through the adoption of the County s annual budget. Debt Administration: In January 1991, the Board adopted a formal written Debt Management Policy for management of municipal debt. The policy provides general guidelines for the decision making process with regard to the issuance of debt instruments. The goal of the policy is to properly utilize debt as a major financing tool for the County. The use of debt must provide general or specific benefits to its citizens in relation to the cost of repayment levied upon those citizens. During FY , the County refinanced $18.4 million in certificates of participation (COPs) and issued $4.1 million in new COPs to take advantage of low interest rates. Cash Management: Short-term available cash is pooled by the County Treasurer for investment purposes, including demand deposits, certificates of deposit, U.S. Government Treasury and Agency securities, bankers acceptances, corporate bonds and notes, repurchase agreements, commercial paper and the State of California Local Agency Investment Fund. The maturities of the investments range from 1 day to 5 years, with a weighted average maturity of 587 days. The average yield on investments was 2.28% during fiscal year The County's investment performance compared favorably to the average yield rate of 1.80% for 2-year U.S. Treasury constant maturities for the past twenty months. The County policy also provides for directed investments beyond 5 years upon approval by the Board. These investments had a maturity range from 6 to 8 years and an average yield on investment was 5.63% during FY Investment income includes unrealized appreciation (depreciation) in the fair value of investments. Increases in fair value during the current year, however, do not necessarily represent trends that will continue; nor is it always possible to realize such amounts, especially in the case of temporary changes in the fair value of investments that the government intends to hold to maturity. Risk Management: The County has self-insurance programs for general liability, unemployment insurance, employee dental insurance, medical malpractice and workers' compensation claims. General liability claims and medical malpractice claims are self-insured up to $500,000 per occurrence with excess coverage provided through the California State Association of Counties (CSAC) Excess Insurance Authority. Workers' compensation claims are selfinsured up to $300,000 per occurrence with excess coverage provided through the CSAC Excess Insurance Authority for the balance up to $5 million for employer's liability and $45 million for workers' compensation statutory liability; the County assumes the risk of claims above these amounts. 6

12 Factors Affecting Financial Condition Continued The activities related to these programs are accounted for in separate internal service funds for actuarial tracking and are consolidated into one risk management fund for financial reporting. Claims administration services are provided by the County Risk Management Division, except for unemployment insurance and employee medical/dental insurance which are administered by the County Personnel Department. The liabilities included in the funds are based on the results of actuarial studies and include amounts for claims incurred but not reported. It is the County's practice to obtain actuarial reviews every year. Revenues of the various self-insurance funds, together with funds to be provided in the future, are expected to provide adequate resources to meet liabilities as they come due. Property damage claims are insured on an occurrence basis up to $259 million for real property by various insurance carriers. All properties are insured at full replacement values. Other Information Certificate of Achievement: The GFOA awarded a Certificate of Achievement for Excellence in Financial Reporting to the County for its CAFR for the fiscal year ended June 30, This was the twelfth consecutive year that the County has achieved this prestigious award. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current CAFR continues to meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. In addition, the County also received the GFOA s Distinguished Budget Presentation Award for its annual budget document for the fiscal year beginning July 1, In order to receive this award, a governmental unit must publish a budget document that meets program criteria as a policy document, as an operations guide, as a financial plan, and as a communications device. Also, the County received the GFOA s Award for Outstanding Achievement in Popular Annual Financial Reporting for its Popular Annual Financial Report for the fiscal year ended June 30, This award is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government popular reports. In order to receive this award, a government unit must publish a Popular Annual Financial Report, whose contents conform to program standards of creativity, presentation, understandability and reader appeal. Acknowledgments: The preparation of the Comprehensive Annual Financial Report and its timely issuance is the result of a concentrated, dedicated, and coordinated effort by the entire Auditor-Controller staff. We would like to acknowledge the special efforts of the Financial Reporting Division and our independent auditors, KPMG LLP, for their assistance in the report preparation. We would also like to thank all County departments and Internal Audit who participated in its preparation. Respectfully submitted, Michael F. Brown County Administrator Robert W. Geis, CPA Auditor-Controller 7

13 FINANCIAL SECTION

14 KPMG LLP Suite Anton Boulevard Costa Mesa, CA Independent Auditors Report The Honorable Board of Supervisors County of Santa Barbara, California: We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the County of Santa Barbara, California (County), as of and for the year ended June 30, 2004, which collectively comprise the County s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the County s management. 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our 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, each major fund, and the aggregate remaining fund information of the County of Santa Barbara, California, as of June 30, 2004, and the respective changes in financial position and cash flows, where applicable, thereof and the respective budgetary comparison for the General, Road, Public Health, Social Services, and Flood Control District Funds for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 of the notes to the basic financial statements, the County adopted Governmental Accounting Standards Board Statements No. 39, Determining Whether Certain Organizations Are Component Units an Amendment of GASB Statement No. 14, No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3, and No. 44, Economic Condition Reporting: The Statistical Section, effective July 1, KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

15 Management s discussion and analysis on pages 10 through 22 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. In accordance with Government Auditing Standards, we have also issued a report dated August 6, 2004 on our consideration of the County 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 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. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County s basic financial statements. The combining and individual fund statements and schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. August 6,

16 MANAGEMENT S DISCUSSION AND ANALYSIS The information in this section is not covered by the Independent Auditors' Report, but is presented as required supplementary information for the benefit of the readers of the comprehensive annual financial report.

17 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) As management of the County of Santa Barbara, California (the County), we offer readers of the County s financial statements this narrative overview and analysis of the financial activities of the County for the fiscal year ended June 30, We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in the County s basic financial statements, which immediately follow this section. All dollar amounts, unless otherwise indicated, are expressed in thousands. FINANCIAL HIGHLIGHTS Government-wide financial analysis: The assets of the County exceeded its liabilities at the close of the most recent fiscal year by $557,708 (net assets): $379,935 represents the County s investment in capital assets, less any related outstanding debt used to acquire those assets (invested in capital assets, net of related debt). $109,084 (restricted net assets) is available for the County s ongoing obligations related to programs with external restrictions. $68,689 (unrestricted net assets) is available to meet the County s ongoing obligations to citizens and creditors. The County s total net assets increased by $26,414 during the current fiscal year: The $18,880 increase in net assets invested in capital assets, net of related debt, represents capital purchases less depreciation plus the retirement of related long-term debt. The $4,768 decrease in restricted net assets is discussed in the government-wide financial analysis on page 12. The $12,302 increase in unrestricted net assets is attributable to increases in revenue over increases in expenses. $8,416 of this increase is Motor Vehicle In Lieu (MVIL) revenue that is not expected to be received from the State until August For governmental fund and budgetary reporting, this MVIL revenue is not considered spendable and is recorded as deferred revenue. While the County had an increase in total net assets, governmental funds available for spending as described next, decreased across the County s fund structure. Financial analysis of the County s funds: Total ending fund balance, $185,916, for the County s governmental funds at June 30, 2004 decreased 9%, or $17,734 from the prior year. Of this amount approximately 91%, or $169,685, is available for spending (unreserved fund balance). $10,110 of the decrease resulted primarily from using capital fund equity from a prior year debt financing to complete capital projects. In the General Fund and all of the major special revenue funds except the Flood Control District, expenditures exceeded revenues and drew down on fund balances by $7,697. Unreserved fund balance for the General Fund at year-end was $38,312, or 15%, of total General Fund expenditures for the year. Capital assets and debt administration: The County s investment in capital assets increased by $25,293, or 6%, to $449,487. During the current fiscal year, the County completed the Casa Nueva Building at a cost of $6,167, the Laguna Sanitation wastewater treatment project at a cost of $17,562, and a variety of other projects. The County recorded depreciation against its assets of $14,537. The County s total long-term debt decreased by $3,375, or 4%, to $77,

18 OVERVIEW OF THE FINANCIAL STATEMENTS Management s Discussion and Analysis introduces the County s basic financial statements. The County s basic financial statements include three components: 1) Government-wide financial statements 2) Fund financial statements 3) Notes to the basic financial statements Government-wide financial statements. The government-wide financial statements provide readers with a broad overview of the County s finances, in a manner similar to a private-sector business. The statement of net assets presents information on all of the County s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets are a useful indicator of an improving or deteriorating County financial position. The statement of activities presents the most recent fiscal year changes for the County s net assets. 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. The statement reports items resulting in cash flows in the future fiscal periods (e.g. uncollected taxes and earned but unused vacation leave) as revenues and expenses in this statement. The government-wide financial statements distinguish functions of the County principally supported by taxes and intergovernmental revenues (governmental activities) from other functions intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include policy and executive, law and justice, public safety, health and public assistance, community resources and public facilities, general government and support services, and general County programs. The business-type activities of the County include solid waste, sanitation services, and transit operations. Component units in the financial statements are legally separate entities financially accountable by the County and are under substantially the same governing board as the County or provide services entirely to the County. They include the Children and Families Commission, County Service Areas, Santa Barbara County Fire Protection District, Flood Control and Water Conservation Districts, Lighting Districts, Sanitation and Sewer Maintenance Districts, Sandyland Seawall Maintenance District, Redevelopment Agency of the County of Santa Barbara, the Santa Barbara County Finance Corporation, and the Water Agency. Pages of this report display the government-wide financial statements. Fund financial statements. A fund groups related accounts used to maintain control over resources segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. County funds are divided into three categories: Governmental funds Proprietary funds Fiduciary funds Governmental funds. Governmental funds 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 is useful in evaluating the County s near-term financing requirements. Governmental funds focus is narrower than that of the government-wide financial statements. To understand the long-term impact of the County s near-term financing decisions, compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. The reconciliations of the governmental funds balance sheet and the governmental funds 11

19 statement of revenue, expenditures, and changes in fund balance to the government-wide financial statement facilitate the comparison between governmental funds and governmental activities. The County maintains 57 individual governmental funds combined into 29 for financial reporting purposes. The County segregates from the General Fund a number of significant functions in major funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General, Road, Public Health, Social Services, Flood Control District and Capital Projects funds, all considered major funds. Data for the other 23 governmental funds are combined into a single, aggregated presentation. The County adopts an annual appropriated budget for all of its operating funds. The budgetary comparison statement provided for the General Fund and major special revenue funds demonstrate performance against this budget. Pages of this report display the governmental funds financial statements. Proprietary funds. The County maintains two different types of proprietary funds. Enterprise funds report the same functions presented as business-type activities in the government-wide financial statements. The County uses enterprise funds to account for solid waste operations, sanitation services, and transit operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among the County s various functions. The County s internal service funds account for information technology services, vehicle operations and maintenance, risk management and insurance, and communications functions. Since these services predominantly benefit governmental rather than business-type functions, they are consolidated within governmental activities in the government-wide financial statements. Proprietary funds provide more detailed information for the government-wide financial statements. The proprietary fund financial statements provide separate information for the Solid Waste Fund and Laguna Sanitation Fund, considered major funds of the County. Data for the four internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Pages of this report display the proprietary funds financial statements. Fiduciary funds. Fiduciary funds account for resources held for the benefit of parties outside the County. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County s own programs. Fiduciary fund accounting is similar to proprietary funds. Fiduciary funds report the external portions of the Treasurer s Investment Pool and agency funds. Pages of this report display the fiduciary funds financial statements. Notes to the basic financial statements. The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. Pages of this report display the notes to the basic financial statements. GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted earlier, net assets over time is a useful indicator of a government s financial position. In the case of the County, assets exceeded liabilities by $557,708 at the close of the current fiscal year. The components of total net assets are as follows: Investment in capital assets, $379,935 (e.g. land, buildings, roads, bridges, flood control channels and debris basins, machinery, and equipment), less any related outstanding debt used to acquire those assets is the largest portion of the County s net assets. The County uses these capital assets to provide services to citizens, as such; these assets are not available for future spending. Although the County s investment in its capital assets is reported net of related debt, the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. 12

20 Restricted net assets, $109,084, represents resources subject to external restrictions on their use. Restricted net assets is primarily comprised of: 1) Property taxes dedicated to specific services such as flood control and fire protection (45%), 2) State imposed restrictions (39%), 3) Debt service (6%), 4) Federal and state allocations for roads (6%), and 5) Cable television public access funds (3%). Restricted net assets decreased by $4,768 from the prior year. The following table describes the primary reasons for the decrease: Changes in restricted net assets Unrestricted net assets in the amount of $68,689 are available to meet the County s ongoing obligations to citizens and creditors. Unrestricted net assets increased $12,302 compared to the prior year. TABLE 1 - The County s Net Assets (in thousands) Increase (Decrease) Reduction of state restricted assets in the Public Health Fund as expenditures exceeded revenues $ (3,734) Reduction of restricted assets for debt service related to 1994 COP refinancing (2,320) Reduction of Fire District assets related to property tax restrictions as expenditures exceeded revenues (527) Reduction in restricted Sheriff programs as expenditures exceeded revenues (637) Reduction of Road Fund restricted assets as expenditures exceeded revenues (681) Reduction in the Alcohol Drug and Mental Health Fund as expenditures exceeded revenues (543) Reduction in restricted Probation programs as expenditures exceeded revenues (260) Reduction in Child Support Fund as expenditures exceeded revenues (236) Increase to Flood Control, Water Agency and RDA restrictions as revenue exceeded expenditures 3,969 Increase in restricted assets for debt service related to COPs 237 Increases in restricted assets related to courthouse construction funds as revenue exceeded expenditures 577 Increase in restricted assets of Clerk-Recorder-Assessor programs as revenue exceeded expenditures 626 Other increases (decreases), net (1,239) Total $ (4,768) Governmental Business-type Total Activities Activities Total Dollar Percent Change Change Current and other assets $ 347,551 $ 341,104 $ 29,177 $ 31,440 $ 376,728 $ 372,544 $ (4,184) (1%) Capital assets 373, ,890 50,240 52, , ,487 25,293 6% Total assets 721, ,994 79,417 84, , ,031 21,109 3% Current and other liabilities 104, ,906 1,425 1, , ,765 (1,597) (2%) Long-term liabilities 125, ,668 38,016 38, , ,558 (3,708) (2%) Total liabilities 230, ,574 39,441 40, , ,323 (5,305) (2%) Net assets: Invested in capital assets, net of related debt 326, ,596 34,219 36, , ,935 18,880 5% Restricted 112, , , ,084 (4,768) (4%) Unrestricted 51,563 62,673 4,824 6,016 56,387 68,689 12,302 22% Total net assets $ 491,318 $ 514,420 $ 39,976 $ 43,288 $ 531,294 $ 557,708 $ 26,414 5% At the end of the current fiscal year, the County reported a 5% increase in net assets invested in capital assets, net of related debt. As discussed above, the County s restricted net assets decreased by 4%, while unrestricted net assets increased by 22%. In the prior fiscal year, the County reported increase in two of three categories of net assets, however, restricted net assets decreased for the second consecutive year. The County s total net assets increased by $26,414 during the current fiscal year. The increase in net assets invested in capital assets, net of related debt, of $18,880 represents capital purchases net of depreciation plus the retirement of related long-term debt. The decrease in restricted net assets, $4,768, is illustrated above. The increase in unrestricted net assets, $12,302, is due to revenues exceeding expenses. $8,416 of this increase relates to MVIL revenue not expected to be received from State until August (See discussion on page 10) 13

21 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Net Assets $ Unrestricted Restricted Invested in capital assets, net of related debt $40,000 $20,000 $0 -$20,000 Change in Net Assets Total Unrestricted Restricted Invested in capital assets, net of related debt Revenues Program revenues: Charges for services Operating grants and contributions Capital grants and contributions Governmental Business-type Total Activities Activities Total Dollar Percent Change Change $ 140,783 $ 143,442 $ 21,641 $ 22,567 $ 162,424 $ 166,009 $ 3,585 2% 236, ,621 1,344 1, , ,929 2,194 1% 131 1, ,144 1, % General revenues: Property taxes 107, , , ,973 12,694 12% Motor vehicle in-lieu tax 26,932 29, ,932 29,923 2,991 11% Sales taxes 16,134 16, ,134 16, % Transient occupancy tax 4,423 5, ,423 5,448 1,025 23% Unrestricted investment earnings 3,420 1, ,391 1,357 (3,034) (69%) Gain on sale of capital assets % Other 4,293 4, ,293 4, % Total revenues 539, ,766 23,956 24, , ,949 21,207 4% Expenses Policy & executive Law & justice Public safety Health & public assistance Community resources & public facilities General government & support services General County programs Interest on long-term debt Solid waste Laguna sanitation Transit TABLE 2 - The County s Changes in Net Assets (in thousands) 7,235 6, ,235 6,242 (993) (14%) 36,850 38, ,850 38,088 1,238 3% 142, , , ,819 7,629 5% 221, , , ,432 8,444 4% 65,268 68, ,268 68,780 3,512 5% 26,927 26, ,927 26, % 15,644 13, ,644 13,050 (2,594) (17%) 4,610 4, ,610 4,172 (438) (10%) ,295 17,394 18,295 17,394 (901) (5%) ,825 3,495 3,825 3,495 (330) (9%) (11) (41%) (204) (66%) Loss on sale of capital assets Total expenses 520, ,630 22,424 20, , ,535 15,367 3% Excess of revenues over expenses before extraordinary items, special items, and tranfers 19,042 23,136 1,532 3,278 20,574 26,414 5,840 28% Extraordinary item (2,253) (2,253) -- 2,253 (100%) Special item 7, , (7,686) (100%) Transfers 17 (34) (17) Increase (decrease) in net assets 24,492 23,102 1,515 3,312 26,007 26, % Net Assets-Beginning, as restated 466, ,318 38,461 39, , ,294 26,007 5% Net Assets-Ending $ 491,318 $ 514,420 $ 39,976 $ 43,288 $ 531,294 $ 557,708 $ 26,414 5% 14