MERCED COUNTY OFFICE OF EDUCATION ANNUAL FINANCIAL REPORT JUNE 30, 2017

Transcription

1 ANNUAL FINANCIAL REPORT JUNE 30, 2017

2 TABLE OF CONTENTS JUNE 30, 2017 FINANCIAL SECTION Independent Auditor's Report 2 Management's Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements Governmental Funds - Balance Sheet 18 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 19 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balances 20 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 21 Fiduciary Funds - Statement of Net Position 22 Discretely Presented Component Unit - Virginia Smith Charitable Trust Statement of Financial Position 23 Statement of Activities 24 Statement of Cash Flows 25 Notes to Financial Statements 26 REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 63 Special Education Pass-Through Fund - Budgetary Comparison Schedule 64 Child Development Fund - Budgetary Comparison Schedule 65 Schedule of Other Postemployment Benefits (OPEB) Funding Progress 66 Schedule of County Office of Education's Proportionate Share of the Net Pension Liability 67 Schedule of County Office of Education Contributions 68 Notes to Required Supplementary Information 69 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 71 Local Education Agency Organization Structure 73 Schedule of Average Daily Attendance 74 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements 75 Schedule of Financial Trends and Analysis 76 Schedule of Charter Schools 77 Combining Statements - Non-Major Governmental Funds Combining Balance Sheet 78 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 79 Note to Supplementary Information 80 INDEPENDENT AUDITOR'S REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 82 Report on Compliance for Each Major Program and Report on Internal Control Over Compliance Required by the Uniform Guidance 84 Report on State Compliance 86

3 TABLE OF CONTENTS JUNE 30, 2017 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditor's Results 90 Financial Statement Findings 91 Federal Awards Findings and Questioned Costs 92 State Awards Findings and Questioned Costs 93 Summary Schedule of Prior Audit Findings 94

4 FINANCIAL SECTION 1

5 INDEPENDENT AUDITOR'S REPORT Governing Board Merced County Office of Education Merced, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the Merced County Office of Education (MCOE) as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise MCOE's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, issued by the California Education Audit Appeals Panel as regulations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to MCOE's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of MCOE's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 2

6 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 discretely presented component unit, each major fund, and the aggregate remaining fund information of the Merced County Office of Education, as of June 30, 2017, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Change in Accounting Principles As discussed in Notes 2 and 17 to the financial statements, in 2017, the District adopted new accounting guidance, Governmental Accounting Standards Board (GASB) Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 5 through 15, budgetary comparison schedules on pages 63 through 65, schedule of other postemployment benefits funding progress on page 66, schedule of county office of education's proportionate share of net pension liability on page 67, and the schedule of county office of education contributions on page 68, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Merced County Office of Education's basic financial statements. The accompanying supplementary information such as the combining and individual non-major fund financial statements and Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and the other supplementary information as listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 3

7 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2017, on our consideration of the Merced County Office of Education'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 solely 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 effectiveness of Merced County Office of Education's internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Merced County Office of Education's internal control over financial reporting and compliance. Fresno, California December 15,

8 Merced County Office of Education Steve M. Tietjen, Ed.D., Superintendent Equal Opportunity Employer MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the Merced County Office of Education's (MCOE) annual financial report presents our discussion and analysis of MCOE's financial performance during the fiscal year that ended on June 30, Please read it in conjunction with MCOE's financial statements immediately following this section. Comparative information will be presented between the fiscal years ending June 30, 2016 and June 30, The Merced County Office of Education (MCOE) provides services to districts within Merced County, operates education programs for special populations of students and manages programs with education related objectives. Services provided to districts include administrative, fiscal, personnel, technology, media, educational television, curriculum, professional development, leadership training, beginning teacher support and assessment, Tier II professional services credential, psychological, occupational training, mental health, foster youth services, California student opportunity and access program, outdoor school, and governmental relations. Educational programs operated for special populations of students are three-county regional Migrant (Merced, Stanislaus, and Madera), Special Education, Regional Occupational Program, Valley Community School, Juvenile Court School, Workforce Investment Act Youth Programs, Merced Scholars Charter School, and Head Start/Early Head Start. Programs related to educational objectives include child care subsidy programs (for CalWORKS recipients and other financially eligible families), a multitude of child care and workforce support services, a six-county regional California Preschool Instructional Network and the Race To The Top Early Learning Challenge grant. Other education-related grant programs support business-education partnerships and the work of the Family Resource Council. MCOE operates an after school program in collaboration with Merced County school districts. MCOE has a main administrative complex which houses the Superintendent, Human Resources, and other various program administrative offices as well as a media center and print shop. MCOE has an ancillary administrative complex which houses Head Start administrative offices, information technology, and a warehouse. In addition, MCOE maintains five smaller off-site administrative offices and has over 200 school sites housing employee workstations. The Superintendent provides general administrative and executive functions for the organization and employs over 1,300 staff. MCOE has a $110.2 million annual operating expenditure budget. This includes a General Fund budget of $79.1 million, a Child Development Fund budget of $29.7 million, a Charter School Fund budget of $1.2 million, and an Adult Education Fund budget of $0.240 million. 632 West 13th Street Merced, California (209)

9 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 OVERVIEW OF THE FINANCIAL STATEMENTS The Financial Statements The financial statements presented herein include all of the activities of the Merced County Office of Education and its component units using the integrated approach prescribed by GASB Statement Number 34. The Government-Wide Financial Statements present the financial picture of MCOE from the economic resources measurement focus using the accrual basis of accounting. MCOE statements present only governmental activities, as MCOE has no business-type activities. These statements include all assets of MCOE (including infrastructure) as well as all liabilities (including long-term obligations). Additionally, certain eliminations have been made as prescribed by the GASB Statement for interfund activity for payables and receivables. The Fund Financial Statements include statements for each of the two types of activities: governmental and fiduciary. MCOE has no business-type funds. The Governmental Funds are prepared using the current financial resources measurement focus and modified accrual basis of accounting. The Fiduciary Funds are agency funds. Agency funds report only a balance sheet and do not have a measurement focus. Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach. The primary unit of government is the Merced County Office of Education. REPORTING MCOE AS A WHOLE The Statement of Net Position and the Statement of Activities and Changes in Net Position The Statement of Net Position and the Statement of Activities and Changes in Net Position report financial information about MCOE as a whole and about its activities. These statements include all assets and liabilities of MCOE using the accrual basis of accounting, which is similar to the accounting 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 MCOE's net position and changes in them. Net position is the difference between assets and deferred outflows of resources, and liabilities and deferred inflows of resources, which is one way to measure MCOE's financial health, or financial position. Over time, increases or decreases in MCOE's net position will serve as a useful indicator of whether the financial position of MCOE is improving or deteriorating. Other factors to consider are changes in MCOE's property tax base and the condition of MCOE's facilities. 6

10 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 The difference between revenue and expense is MCOE's operating result. MCOE's responsibility is to provide services to our students, Merced county school districts and other populations, and not to generate profit as commercial entities do. Hence one must consider other factors when evaluating the overall health of MCOE. The quality of the education and services we provide and the safety and condition of our schools would likely be an important component in this evaluation. In the Statement of Net Position and the Statement of Activities and Changes in Net Position, we display MCOE activities as follows: Governmental Activities - MCOE reports all of its services in this category. This includes the education of students with special needs or at risk youth in kindergarten through grade twelve. Services include the education of ROP students, Migrant education activities, Head Start programs and alternate payment programs for child care providers. MCOE also provides a variety of business and instructional services to Merced County School Districts and funds an on-going effort to improve and maintain MCOE buildings and sites. Property taxes, state income taxes, user fees, interest income, federal, state and local grants finance these activities. REPORTING MCOE'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds - not MCOE as a whole. Some funds are required by State law and by bond covenants. However, management establishes 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 that it receives from the U.S. Department of Education. Governmental Funds - MCOE's basic services are reported in governmental funds. The governmental statements focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of MCOE's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance MCOE's programs. The differences in results in the governmental fund financial statements compared to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. MCOE AS TRUSTEE Reporting MCOE's Fiduciary Responsibilities MCOE is the trustee, or fiduciary, for funds held on behalf of others, like our funds for our Regional Occupational Program, the payroll revolving, and associated student body activities. MCOE's fiduciary activities are reported in the Statements of Fiduciary Net Position. We exclude these activities from MCOE's other financial statements because MCOE cannot use these assets to finance its operations. MCOE is responsible for ensuring that the assets reported in these funds are used for their intended purposes. 7

11 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 FINANCIAL HIGHLIGHTS OF THE PAST YEAR MCOE's stated financial worth has increased over last fiscal year. Total net position at the end of fiscal year 2017 is $46.7 million. This is a decrease of $2.0 million from the year ending June 30, The ending balance of the General Fund increased by $0.8 million from last year. In fiscal year , MCOE issued a Qualified Zone Academy Bond (QZAB) of $1 million which will be totally defeased (prefinanced) with an initial deposit of $554,464 and the interest earnings on the deposit. In FY , the office issued a second QZAB of $2 million. This QZAB is being paid off over a period of 15 years. FINANCIAL ANALYSIS OF MCOE AS A WHOLE Net Position MCOE's net position was $46.7 million for the fiscal year ended June 30, 2017, and $48.7 million for the fiscal year ended June 30, This is a decrease of $2.0 million. Of this amount, $18.7 million was restricted. Restricted net position is reported separately to show legal constraints from debt covenants and enabling legislation that limit MCOE's ability to use net position for day-to-day operations. Our analysis below focuses on the net position (Table 1) and change in net position (Table 2) of MCOE's governmental activities for the past two fiscal years. 8

12 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 Table 1 Net Position (Amounts in millions) Governmental Activities FY FY Difference Assets Current and other assets $ 57.2 $ 55.0 $ 2.2 Capital assets (2.1) Total Assets Deferred Outflows of Resources Liabilities Current liabilities Long-term obligations Aggregate net pension liability Total Liabilities Deferred Inflows of Resources (8.5) Net Position Net investment in capital assets (1.9) Restricted Unrestricted (36.5) (34.2) (2.3) Total Net Position $ 46.7 $ 48.7 $ (2.0) The $46.7 million in net position of governmental activities represents the accumulated results of all past years' operations. Unrestricted net position the part of net position that can be used to finance day-to-day operations without constraints established by debt covenants, enabling legislation, or other legal requirements decreased by 6.7 percent ($(36.5) million compared to $(34.2) million). Changes in Net Position The results of the past two year's operations for MCOE as a whole are reported in the Statement of Activities. Table 2 takes the information from this Statement, and rearranges it slightly so you can see our total revenues and expenses on a functional basis for the past two years. 9

13 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 Table 2 Changes in Net Position (Amounts in millions) Governmental Activities FY FY Difference Revenues Program revenues: Charges for services $ 9.4 $ 9.9 $ (0.5) Operating grants and contributions Capital grants and contributions General revenues: Federal and State aid not restricted (3.1) Property taxes Other general revenues Total Revenues Expenses Instruction related Student support services Administration Plant services (0.1) Community services Other Total Expenses Change in Net Position $ (2.0) $ 3.7 $ (5.7) 1 Amounts less than $50,000 Governmental Activities As reported in the Statement of Activities, the cost of all of our governmental activities this year was approximately $128.7 million as compared to $120.5 million in the prior year. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $11.5 million because the cost was paid by those who benefited from the programs ($9.4 million) or by government and other organizations who subsidized certain programs with grants and contributions ($88.1 million). We paid for the remaining "public benefit" portion of our governmental activities with $10.6 million in State and Federal unrestricted funds, and with other revenues like interest and general entitlements of $7.1 million. In Table 3, we have presented the cost and net cost (total cost less revenues generated by the activities) of each of MCOE's largest functions. As discussed above, net cost shows the amount that local taxpayers are required to pay for each of these functions 10

14 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 Table 3 Net Cost of Governmental Activities (Amounts in millions) Total Cost Net Cost of Services of Services Instruction related $ 56.1 $ 12.6 Student support services Administration Plant services Community services Other Total $ $ 31.2 FINANCIAL ANALYSIS OF MCOE'S FUNDS The financial performance of MCOE as a whole is reflected in its governmental funds. As MCOE completed this fiscal year, our governmental funds reported a balance of $41.3 million while the prior year reported a balance of $40.5 million. This was an increase of $0.8 million over the fiscal year ending fund balances. Our General Fund is our principal operating fund. The fund balance in the General Fund increased to approximately $36.5 million. This increase of nearly $0.8 million resulted primarily from increased State funding. Our special revenue fund balances decreased by approximately $0.1 million. The funds include a separate fund for the operation of our charter school, a fund for pass-through of special education funds, an Adult Education Fund, and a Child Development Fund. Our County School Facilities Fund showed a small increase in the current year. General Fund Budgetary Highlights Over the course of the year MCOE revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on June 30, A schedule showing MCOE's original and final budget amounts compared with amounts actually paid and received is provided in our annual report. Revenue and Expenditure revisions were made to the budget over the course of the year. MCOE had budgeted a decrease in the General Fund of approximately $1.5 million. However, revenues and transfers in from other funds were a little higher than expected, and expenditures ended the year $2.3 million below what was budgeted, resulting in an actual increase to the fund of $0.8 million. 11

15 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2017, MCOE had $66.3 million (net of depreciation) in a broad range of capital assets, including land, buildings, and furniture and equipment. At June 30, 2016, net capital assets totaled $68.4 million. This amount represents a net decrease (including additions, deductions and depreciation) of $2.1 million from the prior year. Table 4 displays our capital assets. Table 4 Capital Assets at Year-end (Net of depreciation, in millions of dollars) Governmental Activities FY FY Difference Land $ 5.0 $ 4.9 $ 0.1 Construction in process Buildings, sites, and improvements (2.4) Equipment (0.5) Total $ 66.3 $ 68.4 $ (2.1) We present more detailed information about our capital assets in the Notes to Financial Statements. Long-Term Obligations At the end of fiscal year , MCOE had $2.4 million in long-term obligations. Table 5 displays our longterm obligations. Table 5 Outstanding Debt at Year-end (Amounts in millions) Governmental Activities FY FY Difference Qualified Zone Academy Bonds $ 1.9 $ 1.9 $ - Compensated absences Total $ 2.4 $ 2.4 $ - MCOE's S&P rating at the time of its last issuance was "AAA". 12

16 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 Net Pension Liability (NPL) As of June 30, 2015, the District implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, which required the District to recognize its proportionate share of the unfunded pension obligation for CalSTRS and CalPERS. As of June 30, 2017, the District reported Deferred Outflows from pension activities of $15.5 million, Deferred Inflows from pension activities of $7.5 million, and a Net Pension Liability of $67.7 million. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS The Governor signed the State Budget, Assembly Bill (AB) 97 and AB 120 (Budget Act of 2017), and AB 99 (Education Budget Trailer Bill) with accompanying State Government Budget Trailer Bill AB 119 (New Employee Orientation) on June 27, The budget includes funding for education of $92.5 billion. The main source of K-12 education funding is Proposition 98, (Prop. 98). Prop. 98 funding is $74.5 billion for , an increase of $2.6 billion over the Budget Act level. Below are some major funding and policy components of the State Budget. One-time Funding: $876.6 million in one-time discretionary funding to LEAs in Note: this is a departure from the Governor s May Revision proposals to delay payment of these funds to LEAs until May All of these one-time discretionary funds will be apportioned in at a rate of $147 per ADA. Prop. 39: Extends the date for LEAs to encumber funds received under Prop. 39 by one year, until June 30, Legislative Priorities: o CTE Pathway program $15.3 million (ongoing) o Classified Employee Credential Program $25 million (one-time) o Bilingual Teacher Professional Development Program $5 million (one-time) o COLA for mandate block grants $3.5 million (one-time) o Equity Diversification Closing the Gap $2.5 million (one-time) o After-School / ASES Restoration $50 million (ongoing) Prop 98 The final state budget act suspends the statutory requirement to provide a supplemental appropriation on top of the Prop. 98 minimum guarantee from through This provision, known as the Test 3B supplement, applies when Test 3 is operative and state revenue is growing relatively slowly. This suspension is expected to have no impact in the and fiscal years, but will likely lower the Prop. 98 minimum guarantee in through The intention of this suspension is to ensure Prop. 98 is not appropriated above the minimum guarantee. Any funding reduced by this suspension will be added to the maintenance factor obligation, which would restore funding levels beyond the years of Test 3B suspension. 13

17 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 The revenue proposal also creates maintenance factor repayment in the year of $700 million, reducing the outstanding balance to $900 million and bringing the total funding increase for public education to $3.3 billion. Since , Proposition 98 funding for K-12 education has grown by more than $24.1 billion, representing an increase of more than $4,043 per student. Local Control Funding Formula (LCFF) Gap Funding: Funding will be $1.4 billion, which is $25 million below the May Revision but $636 million above the Governor s January budget. Statewide LEA average gap closure is currently 97%. The Department of Finance (DOF) is still projecting full implementation of LCFF to occur in This is the fifth year of the Local Control Funding Formula (LCFF). The LCFF is intended to correct historical inequities and increase local flexibility. The LCFF provides a form of equalization for County Offices of Education (COEs). For the Merced County Office of Education (MCOE) the LCFF target funding is 15% of our total budgeted revenue. The COE LCFF provides for two grants. The first is a county operations grant for COE operations and countywide services. The second is an alternative education grant for programs operated by the COE to provide direct instructional services to students for which the county has responsibility. The students identified in law for this funding include juvenile courts, probation referred, and mandatory expelled. LCFF is intended to provide a mechanism that is simple and transparent allowing Local Education Agencies (LEAs) maximum flexibility in allocating resources to meet local needs. LCFF for the MCOE replaces restricted and unrestricted Revenue Limit funding, restricted Court & Community School Revenue Limit funding and restricted funding received through many categorical programs. Transportation is a categorical program outside of the LCFF formula. The MCOE on behalf of the SELPA (Special Education Local Plan Area) receives approximately $1.2 million to transport special education children. This funding is an add-on to our LCFF and will not be increased by State COLA. Another aspect of the LCFF is the concept of Hold Harmless. LEAs are to receive minimum State funding of no less than the total received in the fiscal year, as adjusted for changes in ADA and property taxes. MCOE is an LEA that falls under this Hold Harmless provision. MCOE s projected LCFF target funding is less than our revenue limit and categorical funding base. Local Control Accountability Plan (LCAP) - The MCOE is preparing to meet with stakeholders to develop the MCOE s LCAP and review the progress of the plan. The requirement for LEA s to develop and adopt an LCAP that aligns with their budget became effective in LCAPs are required to describe LEA goals addressing the 8 State priorities (10 for COEs). Mandates backlog The approved budget includes $876.6 million in discretionary one-time Prop. 98 funding for , to be distributed to LEAs on a per-ada basis. To the extent that LEAs have unpaid mandate claims, these funds will be scored in satisfaction of those claims. Legislative intent is that these funds be prioritized for deferred maintenance, professional development, beginning teacher induction programs, instructional materials, technology infrastructure, and any other investments necessary to support implementation of state academic standards. 14

18 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2017 As always with one-time funding, the MCOE will exercise caution when expending one-time funding. The use of the funding will be directed toward expenditures supporting MCOE s goals. Mandated Cost Block Grant - The Adopted State Budget provides a cost of living adjustment to the block grant funding. The K-12 block grant now includes the California Assessment of Student Performance and Progress and the Training for School Employee Mandated Reporters mandates. Early Childhood Education - Almost all the Governor s May Revision proposals for early childhood programs were adopted as part of the budget package. Specifically, the following significant proposals which will effect MCOE were approved: An 11% increase in the State Preschool and other direct-contracted child care and development standard reimbursement rate, effective July 1, An increase in the income eligibility threshold; 12-month eligibility established. Federal Revenue - The outlook of federal funding levels for is known but future years are still uncertain. We are also planning flat funding in subsequent budget years. MCOE is committed to ensuring every student a success. We are using one-time funds on the best one-time purchases to support our programs and students. At the present time we have a balanced budget and the day to day operations of our organization are serving the needs of today s students. CONTACTING MCOE'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of MCOE's finances and to show MCOE's accountability for the money it receives. If you have questions about this report or need any additional financial information, contact Janet Riley, Assistant Superintendent, Business Services, at Merced County Office of Education, 632 W. 13th Street, Merced CA, 95341, or at: jriley@mcoe.org. 15

19 STATEMENT OF NET POSITION JUNE 30, 2017 Governmental Activities ASSETS Deposits and investments $ 39,676,475 Receivables 16,203,503 Prepaid expenses 49,612 Stores inventories 55,737 Net OPEB Plan Asset 1,204,522 Nondepreciable capital assets 5,998,946 Capital assets being depreciated 97,068,760 Accumulated depreciation (36,721,145) Total Assets 123,536,410 DEFERRED OUTFLOWS OF RESOURCES Deferred outflows of resources related to pensions 15,455,935 LIABILITIES Accounts payable 13,372,090 Unearned revenue 1,343,142 Long-term obligations: Current portion of long-term obligations other than pensions 105,140 Noncurrent portion of long-term obligations other than pensions 2,251,794 Total Long-Term Obligations 2,356,934 Aggregate net pension liability 67,673,042 Total Liabilities 84,745,208 DEFERRED INFLOWS OF RESOURCES Deferred inflows of resources related to pensions 7,541,215 NET POSITION Net investment in capital assets 64,503,101 Restricted for: Capital projects 3,758,186 Educational programs 14,964,840 Unrestricted (36,520,205) Total Net Position $ 46,705,922 The accompanying notes are an integral part of these financial statements. 16

20 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2017 Program Revenues Charges for Operating Capital Services and Grants and Grants and Functions/Programs Expenses Sales Contributions Contributions Governmental Activities: Instruction $ 38,508,571 $ 2,413,128 $ 28,435,952 $ 41,664 Instruction-related activities: Supervision of instruction 9,404, ,929 6,849,995 - Instructional library, media, and technology 571, , ,752 - School site administration 7,652, ,557 4,683,784 - Pupil services: Home-to-school transportation 5,227, ,612 - Food services 1,127,962 50, ,768 - All other pupil services 11,527,421 1,116,525 9,195,724 - Administration: Data processing 2,637, All other administration 6,583, ,742 4,394,102 - Plant services 5,262, ,451 2,825,742 - Ancillary services 2,151-2,151 - Community services 11,499,767 1,233,923 9,684,301 - Enterprise services 358,337 45,447 73,393 - Other outgo 28,315,992 2,635,204 20,763,307 - Total Governmental Activities $ 128,679,744 $ 9,361,849 $ 88,121,583 $ 41,664 General revenues and subventions: Property taxes, levied for general purposes Taxes levied for other specific purposes Federal and State aid not restricted to specific purposes Interest and investment earnings Interagency revenues Miscellaneous Subtotal, General Revenues Change in Net Position Net Position - Beginning Net Position - Ending The accompanying notes are an integral part of these financial statements. 17

21 Net (Expenses) Revenues and Changes in Net Position Governmental Activities $ (7,617,827) (2,044,586) (240,374) (2,653,267) (5,204,214) (86,044) (1,215,172) (2,637,312) (1,735,039) (1,982,292) - (581,543) (239,497) (4,917,481) (31,154,648) $ 11,391,741 87,691 10,571, , ,783 5,767,481 29,157,275 (1,997,373) 48,703,295 46,705,922 17

22 GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2017 Special Education Child General Pass-Through Development Fund Fund Fund ASSETS Deposits and investments $ 34,341,869 $ - $ 522,289 Receivables 8,890,056 3,306,930 3,851,929 Due from other funds 3,048, ,171 Prepaid expenditures 46,837-2,775 Stores inventories 55, Total Assets $ 46,383,349 $ 3,306,930 $ 4,519,164 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 8,573,867 $ 3,306,930 $ 1,463,655 Due to other funds 173,655-2,695,295 Unearned revenue 1,123, ,024 Total Liabilities 9,870,640 3,306,930 4,378,974 Fund Balances: Nonspendable 128,324-2,775 Restricted 13,968, ,415 Assigned 7,324, Unassigned 15,091, Total Fund Balances 36,512, ,190 Total Liabilities and Fund Balances $ 46,383,349 $ 3,306,930 $ 4,519,164 The accompanying notes are an integral part of these financial statements. 18

23 Non-Major Governmental Funds Total Governmental Funds $ 4,812,317 $ 39,676, ,588 16,203,503 31,767 3,222,788-49,612-55,737 $ 4,998,672 $ 59,208,115 $ 27,638 $ 13,372, ,838 3,222,788-1,343, ,476 17,938, ,099 4,617,196 18,723,026-7,324,816-15,091,154 4,617,196 41,270,095 $ 4,998,672 $ 59,208,115 18

24 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2017 Total Fund Balance - Governmental Funds $ 41,270,095 Amounts Reported for Governmental Activities in the Statement of Net Position are Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is $ 103,067,706 Accumulated depreciation is (36,721,145) Net Capital Assets 66,346,561 In governmental funds, OPEB costs are recognized when employer contributions are made. In the statement of net position, OPEB contributions that cumulatively exceed the current OPEB obligation are recognized as a Net OPEB Plan Asset. 1,204,522 Expenditures relating to contributions made to pension plans were recognized on the modified accrual basis, but are not recognized on the accrual basis. 5,626,474 The net change in proportionate share of net pension liability as of the measurement date is not recognized as an expenditure under the modified accrual basis, but is recognized on the accrual basis over the expected remaining service life of members receiving pension benefits. (5,678,571) The difference between projected and actual earnings on pension plan investments are not recognized on the modified accrual basis, but are recognized on the accrual basis as an adjustment to pension expense. 8,216,940 The differences between expected and actual experience in the measurement of the total pension liability are not recognized on the modified accrual basis, but are recognized on the accrual basis over the expected average remaining service life of members receiving pension benefits. 876,292 The changes of assumptions is not recognized as an expenditure under the modified accrual basis, but is recognized on the accrual basis over the expected average remaining service life of members receiving pension benefits. (1,126,415) Net pension liability is not due and payable in the current period, and is not reported as a liability in the funds. (67,673,042) Long-term obligations, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Qualified zone academy bonds 1,843,460 Compensated absences 513,474 Total Long-Term Obligations (2,356,934) Total Net Position - Governmental Activities $ 46,705,922 The accompanying notes are an integral part of these financial statements. 19

25 GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2017 REVENUES The accompanying notes are an integral part of these financial statements. 20 Special Education Child General Pass-Through Development Fund Fund Fund Local Control Funding Formula $ 20,699,055 $ - $ - Federal sources 13,060,950 8,061,359 16,895,528 Other State sources 22,618,241 15,924,434 6,377,753 Other local sources 17,931,998-3,659,071 Total Revenues 74,310,244 23,985,793 26,932,352 EXPENDITURES Current Instruction 29,777,100-5,616,586 Instruction-related activities: Supervision of instruction 8,236, ,550 Instructional library, media and technology 471, School site administration 4,562,984-2,653,591 Pupil services: Home-to-school transportation 4,611, Food services 260, ,482 All other pupil services 8,952,402-2,347,418 Administration: Data processing 2,459, All other administration 4,517,446-1,761,558 Plant services 3,524,880-1,304,519 Facility acquisition and construction 1,021, ,784 Ancillary services 2, Community services 419,356-11,032,849 Other outgo 4,330,199 23,985,793 - Enterprise services 354, Debt service Principal 105, Total Expenditures 73,607,423 23,985,793 26,924,337 Excess (Deficiency) of Revenues Over Expenditures 702,821-8,015 Other Financing Sources (Uses) Transfers in 65, Transfers out Net Financing Sources (Uses) 65, NET CHANGE IN FUND BALANCES 767,821-8,015 Fund Balance - Beginning 35,744, ,175 Fund Balance - Ending $ 36,512,709 $ - $ 140,190

26 Non-Major Governmental Funds Total Governmental Funds $ 728,289 $ 21,427,344-38,017, ,119 45,505,547 54,424 21,645,493 1,367, ,596, ,117 36,264, ,776 9,298, ,510 93,725 7,310, ,612,259-1,104,892 30,317 11,330,137-2,459,876 89,894 6,368, ,429 4,943,828-1,480,590-2,151-11,452,205-28,315, , ,140 1,357, ,875,390 9, ,831-65,000 (65,000) (65,000) (65,000) - (55,005) 720,831 4,672,201 40,549,264 $ 4,617,196 $ 41,270,095 20

27 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2017 Total Net Change in Fund Balances - Governmental Funds $ 720,831 Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures; however, for governmental activities, those costs are shown in the Statement of Net Position and allocated over their estimated useful lives as annual depreciation expenses in the Statement of Activities. This is the amount by which depreciation exceeds capital outlays in the period. Capital outlays $ 1,527,478 Depreciation expense (3,537,846) Net Expense Adjustment (2,010,368) Loss on disposal of capital assets is reported in the government-wide Statement of Net Position, but is not recorded in the governmental funds. (8,391) In the Statement of Activities, certain operating expenses - compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). Vacation earned was more than the amounts used by $58,723. (58,723) In the governmental funds, pension costs are based on employer contributions made to pension plans during the year. However, in the Statement of Activities, pension expense is the net effect of all changes in the deferred outflows, deferred inflows and net pension liability during the year. (275,134) Postemployment benefits other than pensions (OPEB): In governmental funds, OPEB costs are recognized when employer contributions are made. In the Statement of Activities, OPEB costs are recognized on the accrual basis. This year, the difference between OPEB costs and actual employer contributions was: (470,728) Payment of principal on long-term obligations is an expenditure in the governmental funds, but it reduces long-term obligations in the Statement of Net Position and does not affect the Statement of Activities: Qualified zone academy bonds 105,140 Change in Net Position of Governmental Activities $ (1,997,373) The accompanying notes are an integral part of these financial statements. 21

28 FIDUCIARY FUNDS STATEMENT OF NET POSITION JUNE 30, 2017 Agency Funds ASSETS Deposits and investments $ 7,606,312 LIABILITIES Due to student groups - Regional Occupational Program $ 16,554 Due to student groups - Schelby School 44,811 Due to student groups - Green Meadows 45 Other current liabilities - Payroll Revolving 7,544,902 Total Liabilities $ 7,606,312 The accompanying notes are an integral part of these financial statements. 22

29 DISCRETELY PRESENTED COMPONENT UNIT VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF FINANCIAL POSITION JUNE 30, 2017 ASSETS Current Assets: Cash and cash equivalents $ 221,786 Investments 1,318,107 Total Current Assets 1,539,893 Endowment Investments: Investments 2,000,000 Increase in fair value of investments 1,948,923 Total Endowment Investments 3,948,923 Nondepreciable capital assets 27,901,528 Total Assets $ 33,390,344 LIABILITIES AND NET ASSETS Current Liabilities: Accounts payable and accrued liabilities $ 62,979 Due to Merced County Office of Education 42,554 Total Current Liabilities 105,533 Net Assets: Unrestricted net assets 29,335,888 Permanently restricted net assets 3,948,923 Total Net Assets 33,284,811 Total Liabilities and Net Assets $ 33,390,344 The accompanying notes are an integral part of these financial statements. 23

30 DISCRETELY PRESENTED COMPONENT UNIT VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF ACTIVITIES JUNE 30, 2017 Permanently Unrestricted Restricted Total PUBLIC SUPPORT, REVENUES, AND RECLASSIFICATIONS Interest, dividends and investments income $ 9,665 $ 18,394 $ 28,059 Rent 90,797-90,797 Transfer of investment earnings available for distribution 21,000 (21,000) - Miscellaneous Total public support, revenues, and reclassifications 122,437 (2,606) 119,831 EXPENSES AND LOSSES Program - Scholarships: Scholarships 88,500-88,500 Supporting Activities: Meetings 7,420-7,420 Legal and professional consultations 47,558-47,558 Miscellaneous 2,260-2,260 Mitigation 3,731,325-3,731,325 Total program expenses 3,877,063-3,877,063 Administration: Merced County Office of Education (MCOE) 50,792-50,792 Total expenses 3,927,855-3,927,855 OTHER SOURCES Other sources from dissolution of UCLC interest 31,927,926-31,927,926 Subtotal change in Net Assets 28,122,508 (2,606) 28,119,902 Unrealized gain on investments 35, , ,776 Change in Net Assets 28,157, ,871 28,620,678 Net assets as of beginning of year 1,178,081 3,486,052 4,664,133 Net assets as of ending of year $ 29,335,888 $ 3,948,923 $ 33,284,811 The accompanying notes are an integral part of these financial statements. 24

31 DISCRETELY PRESENTED COMPONENT UNIT VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF CASH FLOWS JUNE 30, 2017 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 28,620,678 Adjustments to reconcile change in net assets to net cash provided by operating activities: Accounts receivable 49,212 Accounts payable and accrued liabilities 100,158 Noncash contributions of assets (27,901,528) Net Cash Provided by Operating Activities 868,520 CASH FLOWS FROM INVESTING ACTIVITIES Investments (48,116) Endowment investment (462,871) University Community Land Company, LLC investment (383,452) Net Cash Used by Investing Activities (894,439) Net decrease in cash and cash equivalents (25,919) Cash and cash equivalents as of beginning of year 247,705 Cash and cash equivalents as of ending of year $ 221,786 The accompanying notes are an integral part of these financial statements. 25