CITY OF ALISO VIEJO, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2012

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2 CITY OF ALISO VIEJO, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2012 Prepared by: Financial Services Gina M. Tharani Director of Financial Services/City Treasurer

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4 CITY OF ALISO VIEJO COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2012 INTRODUCTORY SECTION TABLE OF CONTENTS Page Number Letter of Transmittal... i GFOA Certificate of Achievement... viii Organizational Chart... ix List of Officials... x FINANCIAL SECTION INDEPENDENT AUDITORS' REPORT... 1 MANAGEMENT S DISCUSSION AND ANALYSIS... 3 BASIC FINANCIAL STATEMENTS Government Wide Financial Statements: Statement of Net Assets Statement of Activities Fund Financial Statements: Balance Sheet Governmental Funds Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities Budgetary Comparison Statements: General Fund Gas Tax Development Impact Conference Center Statement of Fiduciary Net Assets Fiduciary Funds Notes to Basic Financial Statements... 31

5 CITY OF ALISO VIEJO COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2012 TABLE OF CONTENTS (Continued) REQUIRED SUPPLEMENTARY INFORMATION Page Number Notes to Required Supplementary Information 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 Budgetary Comparison Schedules Special Revenue Funds: Measure M Public Safety Grants Air Quality Improvement Integrated Waste Management Other Grants Technology Grants Federal Grants Aquatics Center Budgetary Comparison Schedules Capital Projects Funds: Street Improvements Capital Improvements Storm Water COP CFD Budgetary Comparison Schedules Debt Service Funds: Debt Service Agency Funds: Combining Balance Sheet - All Agency Funds Combining Statement of Changes in Assets and Liabilities - All Agency Funds... 82

6 CITY OF ALISO VIEJO COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2012 TABLE OF CONTENTS (Continued) STATISTICAL SECTION Page Number Net Assets by Component Table Changes in Net Assets Table Fund Balances of Governmental Funds Table Changes in Fund Balances of Governmental Funds Table General Government Expenditures by Function Table General Government Revenues by Source Table General Government Tax Revenues of Source Table Principal Sales Tax Producers by Category Table Property Tax Levies and Collections Table Assessed and Estimated Actual Value of Taxable Property Table Direct and Overlapping Property Tax Rates Table Principal Property Taxpayers Table Ratios of Net Direct General Obligation Debt Table Computation of Direct and Overlapping Bonded Debt Table Legal Debt Margin Table Demographic and Economic Statistics Table Principal Employers Table Operating Indicators by Function Table Full-Time and Part-Time City Employees by Function Table Capital Assets Statistics by Function Table Schedule of Insurance Table Miscellaneous Statistical Information Table

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9 This CAFR includes the financial activity for all funds of the City. In addition to the fund-by-fund financial information presented in the City s financial statements, government-wide financial statements are also included. The government-wide financial statements include a Statement of Net Assets that provides the total net equity of the City, including infrastructure, and the Statement of Activities that shows the cost of providing government services. These statements have been prepared using the accrual basis of accounting whereas the fund financial statements were prepared using the modified accrual method. A reconciliation report is provided as a key to understanding the changes between the two reporting methods. In addition, the Statement 34 standard includes an emphasis on the City s major funds as shown in the Governmental Fund Statements. These statements, combined with other information, are further analyzed in a narrative section called Management s Discussion and Analysis (MD&A). The MD&A provides financial highlights and interprets the financial reports by analyzing trends and explaining changes, fluctuations and variances in the financial data. In addition, the MD&A is intended to disclose any known significant events or decisions that affect the financial condition of the City. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. PROFILE OF THE CITY The City of Aliso Viejo was incorporated on July 1, 2001 as a general law city under the laws of the State of California. The City of Aliso Viejo encompasses approximately seven square miles in south Orange County and has a population of nearly 49,000 people. Approximately 46 miles south of Los Angeles and 70 miles north of San Diego, the City is adjacent to the cities of Laguna Beach, Laguna Woods, Laguna Hills and Laguna Niguel. The City operates under the Council-Manager form of government. The City Council is comprised of five members elected at large for staggered four-year terms of office. The Mayor and Mayor Pro Tem are selected by the Council from among its members to serve one-year terms. The Council acts as the legislative and policy-making body of the City, enacting all laws and directing such actions as required, to provide for the general welfare of the community. The City Manager is appointed by the City Council and is responsible for overseeing the operations of the City and implementing the policy decisions made by the City Council. The City Attorney, City Treasurer, and City Clerk are also appointed by the City Council. All other department heads and employees are appointed by the City Manager. The City provides municipal services through a combination of in-house staffing and contract services. Police and fire services, public works, building, engineering, code enforcement, recreation, and legal services are all provided through contracts. The Aliso Viejo Community Association, a master community association, owns and manages 21 parks within the City limits. This association also maintains most of the landscaped slopes and parkways. The City owns and manages Iglesia Park, Vista Park, and the Aliso Viejo Ranch property. The Orange County Library System provides public library services. Prior to the beginning of each fiscal year, the City Council adopts the annual budget, which serves as the foundation for the City s financial planning and control. The budget is arranged by fund, function and department and presented to the Council by the City Manager. The level of budgetary control is established at the fund level. Transfers of appropriations between fund budgets can be made with the approval of the City Manager and Director of Financial Services. The City Council s approval is required for all budget amendments that result in a change to the adopted budget. The budget is reviewed mid-year in January by the City Manager and the ii

10 Director of Financial Services to ensure compliance with City Council direction. The Mid-Year Budget is then reviewed by the City Council and consideration is given to necessary adjustments for new programs, projects and other adjustments to ensure that expenditures and revenues are in line with the budgeted projections. The City also maintains an encumbrance accounting system as an additional method of accomplishing budgetary control. As demonstrated by the statements and schedules included in the financial section of this report, the City continues to meet its responsibility for sound financial management. ECONOMIC CONDITION AND OUTLOOK Information presented in the City s financial statements is best understood within the context of our broader economic conditions. Fundamentals of the national economy were mixed over the fiscal year; employment and consumer spending remained relatively weak precluding any chance for a more robust recovery. Based on the most recent estimates from the Bureau of Economic Analysis, real GDP increased at an annual rate of 2.0% in the third quarter of 2012 after increasing 1.3% in the second quarter. The growth in GDP was attributed to higher consumer and federal government spending as well as residential housing investment. In September 2012, unemployment fell below 8% for the first time since January 2009 indicating some possible relief. However, rising gasoline prices, which contributed to the overall rise in the consumer price index, is a major concern for households battling stagnated incomes and an unpredictable housing market. The seasonally adjusted overall CPI increase of 0.6% was the largest since June Concerns about weak global economic growth and the looming fiscal cliff (the combination of scheduled tax increases and government spending cuts set for January 1, 2013) in the U.S. are contributing to worries of the economy heading back into recession. The Federal Reserve continued to maintain interest rates at near-zero levels and, in September 2012, declared the exceptionally low levels were likely to be warranted at least through mid Tax initiatives on the November ballot, if passed by voters, could impact the State budget and education funding in particular. The competing initiatives propose to increase various taxes mostly for the benefit of school funding. LOCAL ECONOMY Although California s unemployment rate was estimated at 10.2% in September 2012, Orange County s rate has been consistently lower. Unemployment in Orange County was estimated at 7.1% in September 2012, down from 8.7% a year ago, according to the latest available data by the California Employment Development Department. Orange County s regional economy remains on a solid path due to continued growth in professional and business services and the leisure and hospitality industries. Based on recent economic forecasts by California State University, Fullerton, and Chapman University, Orange County s economy is expected to continue its trend of slow, stalled growth. With improving employment conditions, continued low interest rates, and lower housing prices, housing demand is expected to rise and the number of distressed properties is anticipated to decline. iii

11 Aliso Viejo is comprised of single-family homes, condominiums, and apartments as well as a mixture of retail, office, light industrial, and service entities providing a solid tax base for the City. Most businesses are oriented toward serving local residents and visitors although the City is also home to several regional and corporate headquarters in a variety of industries. The City is nearly built-out, with limited future opportunities for new residential or commercial construction. However, existing retail and office space within the City continues to be sought after, which bodes well for the future economic condition of the City. The dynamic local business environment and availability of amenities in the community helped Aliso Viejo weather the recession and position the local economy for future growth. In addition, Soka University s recently opened Performing Arts Center has further added to the vitality of the City by bringing in visitors from across the region for performances by local talent as well as professional performers. The City s major revenue sources are property taxes, sales taxes, franchise fees and transient occupancy taxes. The City also receives significant revenue streams through the State of California, including gasoline taxes, which are apportioned by the State based upon population, and property taxes in-lieu of motor vehicle license fees, which are apportioned similarly to property taxes. Despite lingering effects of the recession, residential construction continues in Shea Homes Glenwood and Vantis developments. In addition to providing wider living options for residents, development projects within the City have brought in over $8.6 million in development impact fees to date for use in community enhancement, affordable housing, traffic mitigation and open spaces/trails projects. Glenwood includes several single-family and multi-family product types and designs, whereas the Vantis development is comprised of various types and sizes of condominiums and townhomes. Additionally, the City Walk component of the Vantis development delivered contemporary live/work spaces with residential units above the streetlevel commercial spaces. Development of the residential portions of the Glenwood and Vantis projects is expected to be completed over the next two years, although this timetable may be altered depending on the local economy and housing market. Build out for the non-residential areas of Vantis will likely take longer due to the current environment. With these projects nearing completion, developer activities have slowed resulting in an 8.5% decline in revenues for licenses and permits as compared to FY However, expenditures incurred to provide these services also decreased proportionately. With improving market conditions, property and sales taxes are estimated to see increases of 3.9% that will more than offset the fluctuations of these revenues as developments within the City reach build out. Revenue projections were based on conservative estimates to account for the slowly recovering economy. Appropriations have been maintained at prior year levels and service levels kept constant. LONG TERM FINANCIAL PLANNING As of June 30, 2012, the City has assigned $21.0 million in the General Fund fund balance, including $8.3 million for future replacement of City infrastructure assets, $5.0 million for long term debt, $4.7 million for contingencies, $2.5 million for other emergencies and unanticipated traffic projects, and $0.5 million for future benefit obligations. The remainder of $3.4 million is unassigned. iv

12 The Department of Financial Services published an update to the City s Five Year Strategic Plan in February The purpose of this document is to identify key factors affecting the City s fiscal outlook, examine fiscal trends and analyze the General Fund s ability over the next five years to continue current services, maintain existing assets, and fund City Council initiatives. The next Five Year Strategic Plan update is scheduled for March RELEVANT FINANCIAL POLICIES The City has made a practice of living within its means since incorporation. In fiscal year , the City Council formally adopted a Management and Budget policy to promote sound financial management which, in turn, led to improved bond ratings and lower cost of capital. The City continues to be conservative with expenditures while maintaining adequate reserves in accordance with City policies. General Fund surpluses, as well as outside funding sources when available, have been used to fund projects as directed by the City Council. To uphold the City s reputation of providing excellent amenities for residents and businesses, City staff continues to actively pursue outside grants and funding opportunities whenever possible. For example, the City was successful in obtaining $506,174 in Federal Transit Administration grant funds for the Town Center Loop Trail and $91,985 in Measure M2 Competitive Grant monies for a storm water project. Additional environmental cleanup funds were recently approved by OCTA for a second phase of the storm water project in FY Energy efficiency upgrades to City Hall were also completed in FY using the remaining federal Energy Efficiency and Conservation Block Grant (EECGB) funds received in FY MAJOR INITIATIVES The City s Economic Development program was expanded with ongoing initiatives aimed at facilitating the retention and expansion of existing businesses, attracting new businesses to the community, and promoting the City s business friendly environment. In FY , significant enhancements were made to the City s website, including the addition of demographic data, a listing of commercial, retail and office space vacancies, and information on the various amenities available in the community. Other ongoing aspects of the program include a business visitation program, meetings with property owners of key development sites and continual updates to promotional materials marketing the City as a premiere place to live and work. The City also completed a complete redesign of its website in FY and released the first version of an iphone application for the purpose of keeping residents and visitors informed and engaged with City news, events, and information. In addition, the City Council initiated the development of a new website, which will be known as the Aliso Viejo Exchange or AVX, to serve as an online matching service for local organizations needing volunteers and community members seeking these opportunities. The AVX website is anticipated to be ready for use in FY In FY , a mass grading plan for the Aliso Viejo Ranch site was completed in preparation for the grading work and parking lot construction scheduled in FY In addition, staff is fine-tuning the AV Ranch Master Plan with details needed to complete the environmental impact study necessary for the larger, more significant projects planned for the future. In FY , the City Council directed Planning department staff to proceed with the Green City Initiative. The Green City Initiative document will serve as a guide for the City to identify sources of Greenhouse Gas emissions, quantify the emissions, and reduce the emissions. The document also includes initiatives, goals, implementation measures and other relevant v

13 information. The City has held numerous working group meetings and public workshops and is currently refining the document based on feedback from business groups and public comments. The Green City Initiative document is expected to be completed in late 2012; however, monitoring and reporting on the initiatives will be ongoing. Once completed, the Green City Initiative document will be used as one of the elements in the Comprehensive General Plan update. Commenced in September 2011, the work program for the General Plan update includes regular meetings with stakeholders and one or more public workshops. The General Plan update is scheduled to be completed in The City of Aliso Viejo/Shea Homes Homebuyer Assistance Program assisted 14 homebuyers in FY to purchase one and two bedroom affordable units within the Glenwood Harbor Station and Vantis Latitudes residential developments. A total of 51 homebuyers have taken advantage of the program to date. A total of 78 affordable units are planned for construction within the two developments. The Crime Prevention Unit s multi-faceted safety programs provided Aliso Viejo parents and children with various opportunities to learn safety smart practices throughout the year. Ongoing programs include Neighborhood Watch trainings, child car seat inspections, bicycle safety rodeos, and a variety of other child safety events. Additionally, the City partnered with Target to sponsor National Night Out in August 2012 to provide crime prevention, emergency preparedness and family safety information to Aliso Viejo residents. The City initiated the development of the Town Center Loop Trail (TCLT) in fiscal year , in accordance with the Streets and Trails Amenities Master Plan adopted by the City Council in In addition to the TCLT, which encompasses the City s thriving Town Center area, the Master Plan also provides for three other walking/biking trails, each highlighting various scenic views and unspoiled wilderness within the City. Together, the four trails will compose a system of just over 20 miles of trails all designed to transform the City into a more pedestrian-oriented, balanced community and add to the identity of Aliso Viejo. Phase I of the TCLT was completed in FY ; Phase II was completed in October Both phases have been funded by a combination of the aforementioned Federal Transit Administration grant funds, Measure M and Community Enhancement developer fees. The Measure M2 Competitive grant funds that were awarded to the City provided for the purchase and installation of 46 catch basin filters on high priority drainage areas near Aliso Creek. In FY , phase 2 of the project will continue the City s water quality efforts and allow for 48 more catch basin filters to be installed. In addition to these projects, the overall health of the City is evident in the City s streets as well. The condition of the City s streets is good with a Pavement Condition Index (PCI) level of 80 or better on a scale of 1 to 100. Completed every two years, the Pavement Condition Assessment identifies the condition of City streets and assesses locations in need of rehabilitation. The study conducted mid-2012 concluded the overall condition of the City s street system was 89.9, an increase from 83.6 in The City spent about $2.0 million on street maintenance and improvement projects in FY Budgeted capital projects in FY total $2.0 million. All of these projects are designed to prolong the life of City streets and maximize the benefits of long-term infrastructure planning. Awards and Acknowledgments The Government Finance Officers Association of the United States and Canada (GFOA) offers a Certificate of Achievement for Excellence in Financial Reporting to cities for their vi

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16 Organization Chart of The City of Aliso Viejo July 1, 2011 * Contract Services ix

17 CITY OF ALISO VIEJO LIST OF PRINCIPAL OFFICIALS Council-Manager Form of Government CITY COUNCIL DONALD A. GARCIA Mayor WILLIAM PHILLIPS Mayor Pro Tem CARMEN CAVE Ph.D. GREG FICKE PHILLIP B. TSUNODA Council Member Council Member Council Member CITY ADMINISTRATION MARK A. PULONE City Manager Scott Smith, City Attorney Gina M. Tharani, Director of Financial Services/City Treasurer Susan A. Ramos, City Clerk Albert Armijo, Director of Planning Services Shaun Pelletier, City Engineer/Public Works Director Glenn Yasui, Director of Administrative Services Karen Crocker, Director of Community Services Lieutenant Robert Osborne, Chief of Police Services Division Chief Bryan Brice, Fire Services (Orange County Fire Authority) x

18 A Professional Corporation INDEPENDENT AUDITORS REPORT To the Honorable Mayor and Members of City Council City of Aliso Viejo, California We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Aliso Viejo, California, as of and for the year ended June 30, 2012, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of City of Aliso Viejo, California s management. Our responsibility is to express opinions on these financial statements based on our audit. The prior year partial comparative information has been derived from the financial statements of the City of Aliso Viejo, California for the year ended June 30, 2011 and, in our report dated October 17, 2011, we expressed an unqualified opinion. 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 the 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 opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Aliso Viejo, California, as of June 30, 2012, and the respective changes in financial position, thereof and the respective budgetary comparison for the General Fund, Gas Tax Fund, Development Impact Fund, and Conference Center for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 2, 2012, on our consideration of the City of Aliso Viejo, California s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards 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 and the modified approach for the City s infrastructure capital assets information as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have Lance, Soll & Lunghard, LLP Orange County Temecula Valley Silicon Valley

19 To the Honorable Mayor and Members of City Council City of Aliso Viejo, California applied certain limited procedures to the required supplementary information in accordance with auditing standardss 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. Our audit was conducted for the purpose of forming opinionss on the financial statements that collectively comprise the City of Aliso Viejo, California's financial statements as a whole. The introductory section, combining and individual nonmajor fund financial statementss and schedules, and statistical section, are presented for purposess of additional analysis and are not a required part of the financial statements. The combining and individual nonmajor fund financial statementss are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Brea, California November 2,

20 MANAGEMENT S DISCUSSION AND ANALYSIS Our discussion and analysis of the City of Aliso Viejo s financial performance provides an overview of the City s financial activities for the year ended June 30, Please read it in conjunction with the transmittal letter at the front of this report and the accompanying basic financial statements, which follow this section. FINANCIAL HIGHLIGHTS The General Fund fund balance increased by 3.9% from fiscal year , for a total balance of $24,424,794. This fund balance is comprised of non-spendable fund balance of $86,492, assigned fund balance of $20,953,123 and $3,385,179 of unassigned fund balance. The amount in unassigned fund balance at the fiscal year end of June 30, 2012 is equal to 24.8% of fiscal year s Adopted Budget General Fund Expenditures. The General Fund s actual resources available for appropriation (revenue inflows) were under the final budget by $22,862 and actual appropriations (outflows) were $379,664 under budget. The City decreased its overall net assets by $586,394 for a total net asset balance of $128,554,280. The overall fund balance decreased by $36,017, for an All Funds Balance of $38,479,638. The total revenue from all sources equaled $20,016,243. The total cost of all City programs equaled $20,602,637. The City spent $2,773,067 for its street improvement and maintenance projects; this includes slurry seal, pavement rehabilitation, and stormwater improvement projects. The City spent $1,024,761 on Capital Improvement projects including energy efficiency upgrades to City Hall and projects benefitting local parks. Special Revenue Funds, including Gas Tax and Measure M2, contributed $1,521,657 towards the City s slurry seal and street rehabilitation projects. Federal Grants contributed $506,174 towards capital projects, including Phase II of the Town Center Loop Trail project and further energy efficiency improvements to City Hall. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The Statement of Net Assets and the Statement of Activities provide information about the activities of the City as a whole and allow a longer-term view of the City s finances. Fund Financial Statements tell how City services were financed in the short-term as well as what remains for future spending. Fund financial statements also report the City s operations in more detail than the government-wide statements by providing information about the City s most significant funds. 3

21 Reporting the City as a Whole: Activities The Statement of Net Assets and the Statement of The Statement of Net Assets and the Statement of Activities report information about the City as a whole and about its activities in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting method used by most private sector companies. All of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the City s net assets and changes in them. Net assets, the difference between assets and liabilities, is one way to measure the City s financial health, or financial position. Over time, increases or decreases in the City s net assets are one indicator of whether its financial health is improving or deteriorating. Consideration should also be given to other non-financial factors, such as changes in the City s property tax base and the condition of the City s roads, to assess the overall health of the City. All of the City s basic services are considered to be governmental activities. The Statement of Net Assets and the Statement of Activities present information about these governmental activities, including: general government, community development, community services, public safety, and public works. Property tax, sales tax, transient occupancy tax, and franchise fees finance nearly 61.6% of these activities. Reporting the City s Most Significant Funds: Fund Financial Statements The Fund Financial Statements provide detailed information about the most significant funds - not the City as a whole. In addition to the General Fund, also included are Gas Tax, Development Impact, Aliso Viejo Conference Center, Street Improvements and lesser funds reported collectively as Non-major Governmental Funds. Some funds are required to be established by State law, however, the City Council establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money. The City currently has just one type of fund - governmental - which uses the modified accrual accounting approach. Governmental funds focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. Most of the City s basic services are reported in governmental funds. Under this method of accounting, revenues are recognized in the accounting period in which they become measurable and available to finance expenditures of the current fiscal period while expenditures are recognized in the accounting period in which the liability is incurred. The governmental fund statements provide a detailed short-term view of the City s general government operations and the basic services it provides. Governmental fund information helps the reader determine whether there are more or less financial resources that can be spent in the near future to finance the City s programs. The relationship (or differences) between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds are described in the reconciliation at the bottom of the fund financial statements. The City as Trustee: Reporting the City s Fiduciary Responsibilities The City is the trustee, or fiduciary, for certain amounts held on behalf of developers, property owners, and others. The City s fiduciary activities are reported in the Statement of Fiduciary Assets and Liabilities. We exclude these activities from the City s other financial statements because the City cannot use these assets to finance its operations. The City is responsible for ensuring that the assets reported in these funds are used for their intended purposes. 4

22 THE CITY AS A WHOLE Our analysis focuses on the net assets (Table 1) and changes in net assets (Table 2) of the City s governmental activities. The City has no business-type activities. Table 1 Net Assets June 30, 2012 Governmental Activities Current and other assets $ 39,660,662 $ 39,880,725 Capital assets, net 97,318,525 98,136,941 Total Assets 136,979, ,017,666 Non-current liabilities 7,482,861 7,612,366 Other liabilities 942,046 1,264,626 Total Liabilities 8,424,907 8,876,992 Net Assets: Invested in capital assets, net 89,945,456 90,618,780 Restricted 14,046,101 15,052,837 Unrestricted 24,562,723 23,469,057 Total Net Assets $ 128,554,280 $129,140,674 Total net assets decreased to $128,554,280 in FY from $129,140,674 in FY due to the following: Net assets decreased.5% or $586,394 as a result of current year operations. Current assets decreased by.8% due to reimbursements for construction costs for CFD that decreased cash and investments held by the fiscal agent. Current liabilities also decreased by 5.1% due to a decrease in accounts payable, bonds payable and deferred revenues. Net assets include investment in Capital Assets net of related debt in the amount of $89,945,456. 5

23 Fiscal Year 2011 Governmental Activities (See Table 2) Sources of Revenue Operating and Capital Contributions & Grants 26.8% Taxes 61.6% Charges for Service 10.4% Other 0.7% Investment Income 0.5% Functional Expenses General Government 13.1% Community Development 8.0% Community Services 9.1% Public Works 35.7% Interest on LT Debt 1.8% Public Safety 32.3% 6

24 Table 2 Change in Net Assets Year Ended June 30, 2012 Governmental Activities Revenues Program Revenues: Charges for Services $ 2,071,957 $ 1,960,206 Operating Contributions & Grants 5,129,941 3,463,190 Capital Contributions & Grants 232,558 - General Revenues: Taxes: Sales Taxes 4,180,373 4,213,850 Property Taxes 5,963,627 5,986,652 Franchise Taxes 1,479,666 1,490,642 Transient Occupancy Taxes 711, ,710 Motor Vehicle License Fees - 270,180 Investment Income 99, ,154 Other 147,825 64,340 Total revenues 20,016,243 18,241,924 Expenses General Government 2,704,444 2,670,620 Community Development 1,646,324 1,231,346 Community Services 1,867,175 1,625,617 Public Works 7,347,931 6,367,126 Public Safety 6,658,558 6,516,727 Interest and Fiscal Charges 378, ,473 Total expenses 20,602,637 18,797,909 Increase (decrease) in net assets $ (586,394) $ (555,985) Overall, the City continued to fare well despite minimal growth in the economy. The City s total revenues were $20,016,243, while the total cost of all programs and services was $20,602,637. Revenues were up 9.7% or $1,774,313. Charges for Services were up 5.7%, or $111,748, primarily as a result of the current pace of projects and development within the City. Operating Contributions and Grants increased by 48.1%, or $1,666,751, mainly due to funds collected from the Coastal Area Road Improvements and Traffic Signals Fee Program (CARITS) and Federal Grant funds received for the Town Center Loop Project. 7

25 Revenues were stable for the year with a slight increase in taxes. The City s main revenue streams consist of Property Tax, Sales Tax, Franchise Fees, and Transient Occupancy Taxes. Property Taxes have been the most reliable local government revenue for decades and are the City s largest revenue source at nearly $6.0 million. Property Taxes were down.4% from the prior year but are expected to stabilize around the current level. This decrease can be attributed to an adjustment to the City s unsecured property taxes which are payable for non-real property such as business fixtures, boats, and aircraft that are registered to a City address. Sales tax, the City s second largest revenue source, was down.8% from FY at $4.2 million mainly due to a negative Triple Flip true up in FY The City received higher payments in FY which were a result of unrealistic budget assumptions by the State for Sales Tax revenues. Franchise fees were.7% lower at $1.5 million due to a decrease in cable franchise revenues. Rapid developments in technology have provided the consumer with easy access to media and programming on mobile devices resulting in a modification in consumer behavior. Transient occupancy tax (TOT) increased 14.2% and has become another reliable source of revenue for the City at $.7 million. The current performance of City revenues is reflective of the present state of the economy and the lasting impacts of changes in the State Budget, which included the Motor Vehicle License Fee/Property Tax swap and the rippling effect of the Triple Flip. Additionally, investment earnings are still well below historical averages due to the nonexistent interest rate environment. These significant revenues fund a large part of the City s basic services. The City s total expenses were $20,602,637, which includes paying for the entire cost of police protection, animal control services, NPDES (storm water runoff), street repairs, recreation programs, administrative costs and capital outlay. In addition, the net operating cost of $281,506 for the Aliso Viejo Conference Center and Aquatic Center are also included. The increase of $.9 million in Public Works expenses was largely due to street rehabilitation projects and the reimbursement of construction costs in the amount of $1.9 million for CFD Long-term debt commitments include lease payments for the 2006 Certificate of Participation issue. Government Activities Tables 3 and 3A present the cost of each of the City s programs: General Government (Administrative Services), Community Development, Community Services, Public Safety, and Public Works, as well as each program s net cost (total cost less revenues generated by the activities. Table 3 Net Cost of Governmental Activities Year Ended June 30, 2012 Total Cost of Services Program Revenues Net (Revenue)/ Cost of Service General Government $ 2,704,444 $ (234,796) $ 2,469,648 Community Development 1,646,324 (3,688,695) (2,042,371) Community Services 1,867,175 (835,142) 1,032,033 Public Works 7,347,931 (2,180,270) 5,167,661 Public Safety 6,658,558 (495,553) 6,163,005 Interest and fiscal charges 378, ,205 Total $ 20,602,637 $ (7,434,456) $ 13,168,181 8

26 Table 3A Net Cost of Governmental Activities Year Ended June 30, 2011 Total Cost of Services Program Revenues Net (Revenue)/ Cost of Service General Government $ 2,670,620 $ (243,245) $ 2,427,375 Community Development 1,231,346 (2,666,583) (1,435,237) Community Services 1,625,617 (569,518) 1,056,099 Public Works 6,367,126 (1,497,444) 4,869,682 Public Safety 6,516,727 (446,606) 6,070,121 Interest and fiscal charges 386, ,473 Total $ 18,797,909 $ (5,423,396) $ 13,374,513 General Government expenses are 13.1% of the total governmental expenses and include City Council, City Manager, City Attorney, City Clerk, Non-Departmental, and Financial Services. Charges for Services and Operating Contributions & Grants contribute towards subsidizing the cost of this program. Community Development expenses are 8.0% of the governmental services expense and include Economic Development, Planning, Building and Safety, and Code Enforcement activities. Various building and planning fee revenues reduce the cost of this program. In addition, the program revenues include development impact fees in the amount of $1,731,352 and CARITS funds in the amount of $597,334. The change in revenues from prior year is primarily due to the timing in receipt of development fees and the receipt of a Federal Grant and CARITS funds. Progress on the General Plan Update and the last phases of the Green City Initiative were the two main contributors to the increase in the Total Cost of Services. Community Services expenses are 9.0% of the governmental services expenses and include Community Services, the Family Resource Center and Iglesia Park operating costs, and the Aliso Viejo Conference Center and Aquatic Center. Increases in both revenues and expenses were primarily a result of the expanded operation of the City Facilities. Included in the revenues are fees brought in by the city facilities in the amount of $829,230. Public Works expenses are 35.7% of the governmental services expenses. The Public Works department manages all street and traffic maintenance, capital improvement projects and any other major construction projects. Special Revenue funds, which are comprised of Gas Tax and Measure M monies, are used to subsidize the cost of this program. Program revenues increased due to Federal grant funds received for capital projects. Capital outlay costs for CFD also contributed to the increase in cost of services. Public Safety expenses comprise 32.3% of the governmental services expenses. Revenue from Fines, Fees & Forfeitures and Operating Contributions & Grants assist with offsetting the costs of this program. Debt service expenses are 1.8% and include interest and fiscal charges for the Certificates of Participation issued by the City in August 2006 for the acquisition of City Hall. 9

27 FINANCIAL ANALYSIS OF THE CITY S FUNDS At year-end, the City s Governmental Funds reported a combined Fund Balance of $38,479,638, a decrease of $36,017 from the prior year. Some of the minor factors contributing towards the change in fund balance have already been highlighted. More significantly, $1,892,823 was reimbursed for construction costs of the City facilities through CFD The Development Impact Fund had a net receipt of $1,731,352 due to Community Enhancement, Housing in Lieu, Traffic Mitigation, and Median Improvement fees. The City expended $1,987,913 in special revenue funds, including Measure M Fairshare and Competitive Grant monies, Development Impact Fees, and Gas Tax, on multiple capital improvement projects. Funds in the amount of $938,864 were expended from the Gas Tax Fund to maintain and enhance the City s streets, including street lighting and sweeping services. Federal Grant monies of $507,241 were expended on capital improvement projects at City Hall and the Town Center Loop Trail. Overall, City operations were consistent with prior year operating levels. The current fund balance reserves reflect both compliance with the Management and Budget policy adopted by the City Council and the City s fiscal responsibility towards services. General Fund Budgetary Highlights Revenues: Actual revenues received were below the final year-end budget by $22,862, or.2%, primarily due to the takeaway of MVLF revenues by the State and an unanticipated decrease in Unsecured Property Tax revenue. Adjustments to assessed valuations that have declined in value via Proposition 8 had a minimal impact on property tax collections since the City collects only.02134% of the basic 1% property tax levy. In addition, clean up effects of the Triple Flip as well as the Property Tax swap added to the ambiguity of revenues accrued during the yearend process, which may be impacted by future true up adjustments by the State. It is anticipated that revenues will stabilize as the State completes its reconciliations. Overall, General Fund revenues in FY are expected to increase by about 1.9% over FY receipts. Expenditures: Actual expenditures incurred were $379,664, or 2.8%, less than the final yearend budget as a result of the proactive approach by City Council, staff and departments. Cost recoveries on charges for services are offset by proportional costs for providing these services. Additional cost savings realized during FY were due to the rollover of various projects and programs to the new fiscal year. Overall, General Fund expenditures in FY are expected to increase by about 3.8% over FY expenditures largely due to ongoing projects carried over from the prior year in addition to new initiatives. Ending Fund Balance: Ending Fund Balance for the year increased by 3.9% from fiscal year , for a total ending balance of $24,424,794. The total ending fund balance exceeded the adopted budget by $556,802. Included in this balance are non-spendable reserves of $86,492 and assigned reserves of $20,953,123. The unassigned portion is the part of fund balance that is available for use without constraints established by legal requirements and is $3,385,179. The unassigned fund balance for the fiscal year ended June 30, 2012 is equal to 24.8% of fiscal year s Adopted Budget General Fund Expenditures. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets As of June 30, 2012, the City had $97,318,525 invested in a broad range of capital assets, including police equipment, buildings, land, park facilities, furniture and fixtures, and roads. (See Table 4 below). Additions to capital assets were made in the amount of $176,365. Additions 10

28 included building improvements to City Hall and the purchase of equipment. Disposals included $20,397 in obsolete equipment. Depreciation expense in the amount of $869,519 was incurred in FY For additional information on capital assets, refer to Note 4 of Notes to Basic Financial Statements. Table 4 Capital Assets at Year-End (Net of Depreciation) Asset Type Land $14,315,978 $14,315,978 Buildings and Improvements 18,114,296 18,304,645 Equipment, Furniture & Fixtures 116, ,392 Other Infrastructure 10,683,097 11,113,128 Streets & Highways 53,871,430 53,871,430 Construction-in-Progress 217, ,368 Total $97,318,525 $98,136,941 60,000,000 Capital Assets at Year End Fiscal Year ,000,000 40,000,000 30,000,000 20,000,000 10,000,000 - Land Buildings & Improvements Equipment, Furniture & Fixtures Other Infrastructure Streets & Highways Construction in Progress The City of Aliso Viejo elected to use the modified approach in reporting their streets and roads network. Under the modified approach, infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated as long as certain requirements (which are disclosed in the accompanying basic financial statements and required supplementary information) are met. In March 2002, the City Council approved a condition level of 80 as the minimum acceptable Pavement Condition Index (PCI). The following schedule discloses a comparison between the City s assessed condition level of the streets and roads network as of June 30, 2012 and the City s adopted target level of condition. 11

29 Actual Assessed Condition Level Minimum Condition Level Overall Pavement Network Under the modified approach, GASB Statement No. 34 requires that condition assessments be performed every three years. The City traditionally performs an assessment every two years and last completed one in May It is the City s intention to have another complete assessment performed on or before fiscal year ended June 30, During the year ended June 30, 2012, actual streets and roads maintenance costs were $1,987,913 compared to the estimate of $2,052,000. A cost of $2,300,000 was estimated to achieve the minimum PCI standard as of June 30, 2012 for the subsequent year. Non-Current Liabilities Changes in non-current liabilities for the fiscal year ended June 30, 2012 were as follows : Table 5 Non-Current Liabilities June 30, 2012 Balance at June 30, 2011 Additions Deletions Balance at June 30, 2012 Amount Due Within One Year Amount Due Beyond One Year Compensated Absences $ 94,205 $ 33,862 $ 18,275 $ 109,792 $ 44,950 $ 64,842 COP 7,640, ,000 7,490, ,000 7,335,000 Total $ 7,734,205 $ 33,862 $ 168,275 $ 7,599,792 $ 199,950 $ 7,399,842 Original issue discount (116,931) Total $ 7,482,861 Debt On August 15, 2006, the Aliso Viejo Public Facilities Corporation issued $8,155,000 in 2006 Certificates of Participation to finance the acquisition of the building that is primarily used as City Hall and to provide for certain tenant improvements for City Hall offices. Certificates of Participation (COP) are special obligations of the issuer and are payable from specific pledged revenues of the issuing agency. The certificates are not payable from any other revenues or assets of the City. The COP issue consists of Series A (Tax Exempt) and Series B (Taxable) Bonds. The Series A were used for the public facilities portion of the financing and Series B were used to finance the portion the City leases to tenants. The series A (Tax Exempt) bonds bear an interest rate of 4.12% to 4.625% and the Series B (Taxable) bonds bear an interest rate of 5.8%. The certificates are payable pursuant to a lease agreement. 12