ESCONDIDO UNION ELEMENTARY SCHOOL DISTRICT COUNTY OF SAN DIEGO ESCONDIDO, CALIFORNIA AUDIT REPORT JUNE 30, 2016

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1 COUNTY OF SAN DIEGO ESCONDIDO, CALIFORNIA AUDIT REPORT JUNE 30, 2016 Wilkinson Hadley King & Co. LLP CPA's and Advisors 218 W. Douglas Ave. El Cajon, California

2 Introductory Section

3 Escondido Union Elementary School District Audit Report For The Year Ended June 30, 2016 TABLE OF CONTENTS Page Exhibit/Table FINANCIAL SECTION Independent Auditor's Report... 1 Management's Discussion and Analysis (Required Supplementary Information)... 4 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position Exhibit A-1 Statement of Activities Exhibit A-2 Fund Financial Statements: Balance Sheet - Governmental Funds Exhibit A-3 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position Exhibit A-4 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Exhibit A-5 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Exhibit A-6 Statement of Fiduciary Net Position - Fiduciary Funds Exhibit A-7 Notes to the Financial Statements Required Supplementary Information Budgetary Comparison Schedules: General Fund Exhibit B-1 Schedule of Funding Progress for Other Post Employment Benefits Plan Exhibit B-2 Schedule of the District's Proportionate Share of the Net Pension Liability - California State Teachers' Retirement System Exhibit B-3 Schedule of District's Contributions - California State Teachers' Retirement System Exhibit B-4 Schedule of the District's Proportionate Share of the Net Pension Liability - California Public Employees' Retirement System Exhibit B-5 Schedule of District's Contributions - California Public Employees' Retirement System.. 69 Exhibit B-6 Notes to Required Supplementary Information Combining Statements as Supplementary Information: Combining Balance Sheet - All Nonmajor Governmental Funds Exhibit C-1 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - All Nonmajor Governmental Funds Exhibit C-2 Special Revenue Funds: Combining Balance Sheet - Nonmajor Special Revenue Funds Exhibit C-3 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds Exhibit C-4

4 Escondido Union Elementary School District Audit Report For The Year Ended June 30, 2016 TABLE OF CONTENTS Page Exhibit/Table Capital Projects Funds: Combining Balance Sheet - Nonmajor Capital Projects Funds Exhibit C-5 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Capital Projects Funds Exhibit C-6 OTHER SUPPLEMENTARY INFORMATION SECTION Local Education Agency Organization Structure Schedule of Average Daily Attendance Table D-1 Schedule of Instructional Time Table D-2 Schedule of Financial Trends and Analysis Table D-3 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements Table D-4 Schedule of Charter Schools Table D-5 Schedule of Expenditures of Federal Awards Table D-6 Notes to the Schedule of Expenditures of Federal Awards 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 Report on Compliance for Each Major Program and on Internal Control over Compliance Required by Title 2 CFR Part 200 (Uniform Guidance) Independent Auditor's Report on State Compliance Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 97

5 Financial Section

6 Independent Auditor's Report To the Board of Trustees Escondido Union Elementary School District Escondido, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Escondido Union Elementary School District ("the District") as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the District'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. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Escondido Union Elementary School District as of June 30, 2016, and the respective changes in financial position, for the year then ended in accordance with accounting principles generally accepted in the United States of America. 1

7 Emphasis of Matter Change in Accounting Principles As described in Note A to the financial statements, in 2016, Escondido Union Elementary School District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 72, Fair Value. Our opinion is not modified with respect to this matter. As described in Note A to the financial statements, in 2016, Escondido Union Elementary School District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Our opinion is not modified with respect to this matter. As described in Note A to the financial statements, in 2016, Escondido Union Elementary School District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 76, Hierarchy of GAAP. 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, budgetary comparison information, schedule of funding progress for OPEB benefits, schedule of the District's proportionate share of the net pension liability and schedule of District pension contributions identified as Required Supplementary Information 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 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 Escondido Union Elementary School District's basic financial statements. The combining financial statements are presented for purposes of additional analysis and are not required parts of the basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis 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, Subpart F -- Audit Requirements (Uniform Guidance) and is also not a required part of the basic financial statements. The accompanying other supplementary information is presented for purposes of additional analysis as required by the State's audit guide, Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting prescribed in Title 5, California Code of Regulations, Section and is also not a required part of the basic financial statements. 2

8 The combining financial statements and other supplementary information and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining financial statements and other supplementary information and the schedule of expenditures of federal awards are fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2016 on our consideration of Escondido Union Elementary School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Escondido Union Elementary School District's internal control over financial reporting and compliance. El Cajon, California December 15,

9 Profile of the District ESCONDIDO UNION ELEMENTARY SCHOOL DISTRICT MANAGEMENT S DISCUSSION & ANALYSIS For the year ended June 30, 2016 (Unaudited) The Escondido Union School District covers seventy-seven square miles in northeast San Diego County and serves over 17,200 students. The District operates twenty-two elementary and middle schools, one specialty school for students in fourth through seventh grade, and a State Preschool program on a traditional calendar. Management s Discussion and Analysis This section of Escondido Union School District's annual financial report presents Management s Discussion and Analysis (MD&A) of the District's financial performance during the fiscal year ended June 30, The MD&A is a required element of the reporting model established by the Governmental Accounting Standards Board (GASB) in Statement Number 34, Basic Financial Statements - and Management Discussion and Analysis for State and Local Governments. This reporting requirement represents a change in public sector accounting by requiring agencies to report on the accrual basis in accordance with generally accepted accounting principles (GAAP). This change was made to enhance the usefulness and understandability of the external financial reports of public agencies. Please read the MD&A in conjunction with the District s financial statements, which immediately follow this section. Financial Highlights State of California The Budget Act included landmark legislation that shifted California from a complex school finance system to one focused on equity, transparency, and performance through the implementation of the Local Control Funding Formula (LCFF) and the Local Control Accountability Plan (LCAP). This change represented a major shift in how California schools are funded. For nearly 40 years, California relied on a system that included general purpose funding (known as revenue limits) and more than 50 tightly defined categorical programs to provide funding to local educational agencies (LEAs). Attempts were made in the past decade to simplify the categorical program structure, but this effort was limited, first to consolidation with modest flexibility, then to making a wide range of programs flexible without reforming the funding system. Under the LCFF most state categorical programs were eliminated. Instead, LEAs now receive funding based on the demographic profile of the students they serve and are expected to meet enhanced accountability requirements. The Governor proposed the new funding formula to simplify the unwieldy and complex system of existing funding streams, and shift focus from funding dozens of state-mandated programs to funding based on local control and student needs. The LCFF provides a base grant for all students (based on grade level; which, upon full implementation, will be uniform throughout the state), and substantial dollars allocated for low income students, foster youth, and English language learners. The intent is to bring uniformity and predictability to school finance; districts with similar populations of high-needs students will receive similar levels of per-student funding. Under the LCFF formula, LEAs are expected to rethink their approach to planning and budgeting, ensuring full alignment with the comprehensive educational plan outlined in the district s LCAP. In addition, they are expected to align their use of funds with the state s eight broad priorities outlined in Education Code 52060(d): Compliance with the Williams requirements appropriate teacher assignments, sufficient instructional materials, and facilities in good repair. Implementation of academic content and performance standards to be adopted by the State Board of Education (SBE). Parent involvement, including efforts the school district made to seek input in decision making. 4

10 Pupil achievement, as measured by multiple indicators. Pupil engagement, as measured by multiple indicators, including attendance and high school graduation rates. School climate, as measured by multiple measures, including suspension and expulsion rates. The extent to which students have access to a broad course of study, including those programs and services developed and provided to economically disadvantaged students. Pupil outcomes, if available, in the subject areas comprising a broad course of study. The gradually improving economy, and passage of The Schools and Local Public Safety Protection Act of 2012 (Proposition 30) in November 2012, were key to enabling the State to move to the new funding model. During this third year of the eight-year planned phase-in to full implementation of the LCFF, most LEAs received new funding which allowed them to expand upon the progress made in toward rebuilding robust educational programs as they continued to recover from the Great Recession. The District was able to add significant new services for students, strengthen our Educational Services staff, offer increased professional development opportunities to our instructional staff, and provide a salary enhancement to all employee groups. We also made significant progress in addressing our aging facilities issues through commencement of construction work that was enabled by passage on November 4, 2014 of Proposition E, which authorized $182.1 million in Proposition 39 General Obligation Bonds, to be issued in seven series over eighteen years. Just as in the prior education funding model, student enrollment and attendance are key to determining district revenues under the LCFF. Funded average daily attendance (ADA) was 16,228.60, down ADA from the level of 16, Under the LCFF, base grant funding was thus received for 16, ADA. Also important under the new formula is the number of students who qualify for supplemental funding, based on district demographics. For , approximately 77.9 percent of district students qualified as English learners, foster youth, or were eligible for free or reduced-price meals according to National School Lunch Program guidelines. Overall, new LCFF funding received in by the District was approximately $15.9 million (Figure A-1, below), including supplemental and concentration grant funding. With the new funding comes increased expectations for local performance, which is now defined by and aligned to a Local Control Accountability Plan (LCAP). Additional accountability and transparency are key goals of the LCFF and LCAP. Fig. A-1 EUSD Estimated Local Control Funding Formula (8-YR Phase-In) Millions $165.0 $155.0 $145.0 $135.0 $125.0 $115.0 $105.0 $95.0 $109.4 $102.6 $123.9 $139.8 $143.7 $147.7 $148.9 $150.5 $ /13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 $49.5 5

11 Financial Highlights The District Despite requiring the second year of recognition of our proportionate share of the state s pension liability, as required under Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, the district s financial position remained stable. Significant new funding from the state, including approximately $8.8 million in unrestricted one-time funds were key to our stability and an increase in our financial position by $.01 million ($10.8 million, or 29.1 percent, when including a beginning balance adjustment related to pension recognition). The District provided a salary increase to all employee groups of 4.00 percent, effective July 1, 2015, and added several certificated positions that helped to enhance both academic, social, and emotional services to district students. On June 29, 2015, the District issued $62.0 million in voter-approved Proposition 39 General Obligation Bond debt for the purpose of modernizing district facilities, addressing student safety needs, and improving our districtwide technology infrastructure. Considerable planning and construction activities were ongoing across the District in Proposition E authorized the District to issue up to $182.1 million in General Obligation Bonds over the next eighteen years. All bond expenditures are overseen by a Citizens Oversight Committee, and are subject to annual audit. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three components: 1) government-wide financial statements; 2) fund financial statements; and, 3) required supplementary information, which includes Management s Discussion and Analysis and notes to the financial statements. Figure A-2 shows how the various parts of this annual report are arranged and related. GOVERNMENT-WIDE FINANCIAL STATEMENTS The government-wide financial statements are designed to provide readers with a broad overview of the district s financial condition using methods similar to those used by privatesector companies. The Statement of Net Position includes all of the district s assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in a district s net position are an indicator of whether its finances are improving or deteriorating. Supplemental nonfinancial information may also need to be assessed in order to gauge the overall health of a district. Figure A-2. Organization of Escondido Union Elementary School District's Annual Financial Report Management's Discussion And Analysis Basic Financial Statements Required Supplementary Information The Statement of Activities presents information on all the assets and liabilities of the district and how they changed during the current year. All activities are accounted for, regardless of when cash was received or paid. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in a future period, such as earned but unused vacation, or accrued but unpaid revenues. District-wide Financial Statements Summary Fund Financial Statements Detail Notes To the Financial Statements 6

12 Government-wide financial statements distinguish between governmental activities and business-type activities. Most of the District s basic services are accounted for here, including regular and special education, instructional support, maintenance and operations, transportation, and administration. Property taxes, state formula aid, and federal and state grants finance most of these activities. Business activities include those that are operated as an enterprise or on a cost-recovery basis where fees are charged to external users for goods or services. While some districts operate their cafeteria funds on an enterprise basis, ours is included in the District s governmental activities. FUND FINANCIAL STATEMENTS The fund financial statements provide more detailed information about the District's most significant funds - not the District as a whole. Funds are accounting devices used to keep track of specific sources of revenues and spending on particular programs. As a governmental entity, we use fund accounting to demonstrate compliance with federal and state law. Our fund financial statements are on the modified accrual basis. Some funds are required by state law and by bond covenants. The district establishes other funds to control and manage money for particular purposes, such as repaying long-term debt, or managing federal grants. There are three kinds of funds. Our district currently operates two of these funds governmental and fiduciary. The following information describes the three types of funds available and their purpose: Governmental funds - Most of the District's basic services are included in governmental funds, which generally focus on (1) how cash and other financial assets can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps determine whether there are more or fewer financial resources that can be spent in the near future. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for the governmental funds with similar information presented for governmental activities in the government-wide financial statements. This comparison can help demonstrate the long-term impact of the entity s near-term operating and financial decisions. Both the governmental fund Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balance provide data that serve as a starting point to reconcile to the accrual basis change in net position stated in the government-wide statements. The District maintains eleven individual governmental funds. Information for those funds is provided in the fund Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balance. Funds that meet the criteria of a major fund are presented separately, while non-major funds are presented in the aggregate. For , the general fund and building fund are considered major funds. Data presented for the other funds is aggregated into special revenue funds, debt service fund, building funds, and permanent fund. By law, the District adopts an annual appropriated budget for all of its funds by July 1 of each year. However, this should be viewed as a preliminary spending plan until the California State Budget is formally adopted and final amounts are known. Several revisions to the budget are made during the fiscal year. A budgetary comparison statement has been provided for the general fund. Proprietary funds - Services for which the District charges a fee are generally reported in proprietary funds. Proprietary funds are reported in the business-type sections of the government-wide statements. The District does not currently have any proprietary funds. 7

13 Enterprise funds (one type of proprietary fund) are financed and operated in a manner similar to private business enterprises. The District does not currently have any enterprise funds. Internal service funds (the other type of proprietary fund) are used to report activities that provide supplies and services for the District's other programs and activities. Fiduciary Funds - The District is the trustee, or fiduciary, for assets that belong to others, such as trust funds and student activities funds. The District is responsible for ensuring that the assets reported in these funds are used only for their intended purposes. All of the District's fiduciary activities are reported in a separate Statement of Fiduciary Net Position. We exclude these activities from the district-wide financial statements because the District cannot use these assets to finance its operations. Student body activities constitute the only fiduciary fund for the District. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net Position: The District's combined net position was higher on June 30, 2016, than it was the year before, increasing 29.1 percent, due to increased revenues, including $8.8 million in one-time funding received from the state. Table A-1 Escondido Union School District Balance Sheet/Net Position (millions) Total Governmental Business-Type Total Percentage Activities Activities School District Change Current and other assets $ $ $ - $ - $ $ % Capital Assets $ $ $ - $ - $ $ % Total Assets $ $ $ - $ - $ $ % Deferred Outflows of Resources $ 22.6 $ 22.1 $ - $ - $ 22.6 $ % Long-term debt outstanding * $ $ $ - $ - $ $ % Other liabilities $ 6.1 $ 9.9 $ - $ - $ 6.1 $ % Total Liabilities $ $ $ - $ - $ $ % Deferred Inflows of Resources $ 31.1 $ 7.7 $ - $ - $ 31.1 $ % Net Position ** $ (37.1) $ (26.3) $ - $ - $ (37.1) $ (26.3) 29.1% Invested in capital assets $ 61.1 $ 61.5 $ - $ - $ 61.1 $ % Restricted for: Capital Projects $ 3.3 $ 4.2 $ - $ - $ 3.3 $ % Debt Service $ 7.3 $ 9.0 $ - $ - $ 7.3 $ % Educational Programs $ 4.1 $ 5.7 $ - $ - $ 4.1 $ % Other (Expendable) $ 7.5 $ 7.7 $ - $ - $ 7.5 $ % Unrestricted $ (120.5) $ (114.4) $ - $ - $ (120.5) $ (114.4) 5.1% Total Net Position $ (37.1) $ (26.3) $ - $ - $ (37.1) $ (26.3) 29.1% Note: Totals may not add due to rounding. * Accreted Interest on Capital Appreciation Bonds included in Long-term debt outstanding. ** Note: Commencing with 2015 GASB Statement No. 68 required the recognition of the District's share of the state's pension liability. The 2016 year beginning balance includes an adjustment for the GASB 68 State Pension Liability. 8

14 The changes to the District's financial position are the product of many factors. However, several events of the last year stand out: Total assets for the District increased by 6.1 percent, as new capital assets as a result Proposition E bond financing were used to enhance district facilities, technology infrastructure, and school site safety features. Key to the increase in current assets was increased state funding intended to repay California LEAs for funds owed from the recession years. The District s increase in liabilities of $26.5 million (9.9 percent) included new current liabilities as of June 30, 2016, resulting from robust maintenance and construction work, timed for late summer completion. In addition, long-term liabilities were higher as we recorded the second year of the District s share of state pension costs, as required. The District s total net position of ($26.3) million continues to be recognized within the categories specified in Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The classification of restricted and unrestricted net positions is intended to better define those resources that are truly restricted from those which are available for appropriation. Note that the District s net share of the state s pension liability is classified as unrestricted. Governmental Activities: The total revenues for governmental activities were $212.2 million (Table A- 2). Property taxes of $52.8 million (25 percent) and state formula aid of $111.5 million (52 percent) accounted for most of the district's revenues (Figure A-3). Another $39.5 million (19 percent) came from state and federal aid for specific programs such as Federal Title I, Title III, special education, and the After School Education and Safety Program, and the remainder of $8.4 million (4 percent) from fees charged for services, interest earnings and miscellaneous sources. Figure A-3 Sources of Revenue 19% 4% Unrestricted Federal/State 52% Unrestricted Property Taxes Restricted Programs 25% Unrestricted Other Just as with the prior K-12 funding formula, state aid under the LCFF is based primarily on average daily attendance (ADA) and per-student allocations for certain categorical programs. If a student is in attendance a full 180 days, the State awards one average daily attendance (ADA). The State guarantees that if local property taxes do not provide enough funding to equal a district s funding entitlement, it will make up the difference with state aid. Property taxes increased in by 8.6 million as a result of higher assessed valuations. State aid of $111.5 million included $21.1 million of Education Protection Act (EPA) funding, as a result of the 2012 passage of Proposition 30, which provided the State with additional temporary taxes during the Great Recession. On November 8, 2016 California voters approved the extension of higher temporary taxes on high-income earners, with approval of Proposition 55. 9

15 Revenues Table A-2 Change in Escondido Union's Net Position (millions) Total Governmental Business-Type Total % Activities Activities School District Change Program revenues: Charges for services $ 6.0 $ 6.2 $ - $ - $ 6.0 $ % Federal & state categorical grants $ 37.6 $ 39.5 $ - $ - $ 37.6 $ % Capital grants/contributions $ - $ - $ - $ - $ - $ - 0.0% General revenues: Property taxes $ 44.2 $ 52.8 $ - $ - $ 44.2 $ % State formula aid $ 92.1 $ $ - $ - $ 92.1 $ % Other $ 1.2 $ 2.2 $ - $ - $ 1.2 $ % Total revenues $ $ $ - $ - $ $ % Expenses Instruction $ $ $ - $ - $ $ % Instruction-related services $ 24.8 $ 27.8 $ - $ - $ 24.8 $ % Pupil support services $ 18.5 $ 20.4 $ - $ - $ 18.5 $ % Maintenance & operations $ 17.7 $ 20.7 $ - $ - $ 17.7 $ % Administration $ 8.1 $ 9.7 $ - $ - $ 8.1 $ % Interest long-term debt $ 3.3 $ 5.9 $ - $ - $ 3.3 $ % Other $ 3.4 $ 3.1 $ - $ - $ 3.4 $ % Total expenses $ $ $ - $ - $ $ % Increase (decrease) in net assets $ 0.5 $ 0.1 $ - $ - $ 0.5 $ % Net assets - beginning ** $ (37.6) $ (26.4) $ - $ - $ (37.6) $ (26.4) 4.1% Net assets - ending $ (37.1) $ (26.3) $ - $ - $ (37.1) $ (26.3) 29.1% Note: * Totals may not add due to rounding. * * 2016 Beginning balance includes an adjustment for GASB 68 State Pension Liability. The total cost of all programs and services was $212.1 million, up 17.4 percent from The cost of instruction increased $19.6 million (18.7 percent) due the deliberate increase in instructional and support positions to service our students. Instructionally-related services increased $3.0 million, or 12.1 percent. The district maintained its staffing ratio for all transitional kindergarten through third grade classrooms at an average of 24:1. Pupil services, including higher expenditures for additional certificated personnel to address student behaviors, increased $1.9 million (10.3 percent). Maintenance and operations expenses increased $3.0 million (16.9 percent), reflecting a significant acceleration in efforts to address our deferred maintenance needs in Administrative services increased $1.9 million (19.8 percent), primarily due to new positions and the planned refreshment of technology services and equipment. The District's expenses are predominantly related to instruction, $124.4 million (59 percent), and instructional services, $27.8 million (13 percent) (Figure A-4). Pupil support services were an additional $20.4 million (10 percent). Plant operation costs, including maintenance and custodial increased in to $20.7 million (10 percent). The purely administrative activities of the district, including centralized data processing costs accounted for $9.7 million (5 percent) of total costs. Interest expense was $5.9 million 10

16 (3 percent), and other expenses, including ancillary, community services, and other outgo, were $3.1 million (1 percent). Overall, the cost of providing services to students, including modern, safe facilities, increased 17.4 percent, from $180.6 million to $212.1 million. FIGURE A-4 Cost of Major Government Activities 10% 13% 10% 4% 3% 1% 59% Instruction Instructional Services Pupil Services Plant M & O Administration Debt Service Community Svcs./Oth Figure A-5 below illustrates an eight-year trend analysis of the District s revenues per ADA versus its expenditures per ADA. The ability of the District to provide resources to meet student needs is directly linked to the strength and stability of California s economy. Despite the deteriorating condition of the state s economy in , receipt of federal stimulus monies, and the district s efforts at cost containment, allowed for a positive ratio of revenue to cost per ADA that year. For through , the state and LEAs grappled with difficult financial conditions. Passage of Proposition 30 in November 2012 brought tax relief to California and, along with a recovering economy, enabled Governor Jerry Brown to embark on a bold new funding model for K-12 education, commencing with the fiscal year. The Local Control Funding Formula (LCFF) has provided the District with significant new revenues to enhance student services, improving the revenues per student to $11,397. As illustrated in Figure 1-A (p. 4), this trend of increased per student revenues is expected to continue for the next several years. 8,731 8,367 7,690 Figure A-5 Revenues and Expenses per ADA through ,308 8,194 8,693 8,139 8,293 08/09 09/10 10/11 11/12 12/13 13/14 * 14/15 * 15/16 * 8,026 8,343 REV/ADA 8,620 8,889 9,526 EXP/ADA 10,279 11,397 10,857 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- * Local Control Funding Formula commenced

17 FINANCIAL ANALYSIS OF THE DISTRICT'S FUNDS As noted earlier, the District uses fund accounting to ensure compliance with all applicable legal and financial requirements. The operations of each fund are accounted for with a separate set of self-balancing accounts. The general fund serves as the general operating fund for the District, and is used to account for all financial resources except those required to be maintained in a special revenue fund, capital projects fund, debt service fund, proprietary fund, or fiduciary fund. The District s fund financial statements, the Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balance, are presented in a major fund format. Major funds must meet certain size requirements or be of particular interest to the District or user of the financial report. The general fund is always considered a major fund and is presented separately. In , the building fund met the requirements of a major fund and is also presented separately. Other governmental funds are presented in an aggregate format. Governmental Funds: The District s governmental funds reported a combined fund balance of $119.4 million, an increase of $6.9 million from the level of $111.5 million. This change is primarily explained by the receipt of one-time state funding, intended to repay California LEAs for amounts owed during the Great Recession. Of that balance, $55.7 million is comprised of unspent proceeds from Proposition E, General Obligation Bonds. As our bond projects move from the design to the construction phase, expenditure of bond dollars is anticipated to increase during the next year. The District is also in the planning stages for the second of seven issuances of bonds, (Series B), which is currently envisioned for issuance in late 2017 or early Along with accounting for bond construction costs, the building fund also accounts for debt service on the District s 1998 Refunded Certificates of Participation (COP). In , the capital facilities fund did not meet the criteria of a major fund, however, it did continue as an important source of $3.9 million of redevelopment (RDA) funding, which was used to assist with debt service payments related to our 2014 Refinanced Health Insurance Refunding Bonds, as well as helping to defray general fund expenses. The capital facilities fund was also the source of $1.5 million in developer fees, which helped to extend the funds available for the district s facilities improvement program. FIGURE A-6 General Fund Costs by Major Object 23% 4% 13% 11% 1% 1% 47% Certificated Salaries Classified Salaries Employee Benefits Books & Supplies Services Capital Outlay Debt Svc/Oth Outgo The District s general fund includes expenditures for the major operations of the District, including employee salary and benefits, which comprised 83 percent of expenditures. As illustrated in Figure A-6, the general fund also included expenditures for books and supplies of 4 percent, services and other operating 12

18 expenses of 11 percent, and capital outlay and debt service expenses of a combined 2 percent. Most of the District s capital outlay occurred outside of the general fund, in our building funds. Governmental funds report the differences between assets and liabilities as fund balance. Under Governmental Accounting Standards Board Statement No. 54 (GASB 54), Fund Balance Reporting and Governmental Fund Type Definitions, the GASB defined five categories for reporting ending fund balance. This change was intended to enhance the quality and usefulness of financial information being reported, and to make it easier for users to understand. Nonspendable reserves reflect amounts which are not in spendable form, such as inventory, or amounts that are contractually required to remain intact. Restricted amounts are subject to externally imposed and legally enforceable constraints, such as those imposed by creditors, grantors, or laws and regulations. Committed fund balances reflect amounts subject to selfimposed constraints by formal action taken by the Board of Education. Assigned fund balances are less formal than committed amounts, and reflect amounts that the district intends to use for a specific purpose. By the end of , District administration had identified $17.1 million in assigned balances, including $6.5 million in unused general fund one-time funding, and $3.5 million in recognition of increased employer contributions to employee pension systems. The Unassigned category represents the residual balance that is not restricted, committed, or assigned, and includes the District s Reserve for Economic Uncertainty, or 4.00 percent of expenditures, transfers out, and other uses, as specified in our Minimum Fund Balance Policy, adopted in June The general fund ending balance is one indicator of fiscal health of a district. The maintenance of appropriate reserve levels is key to securing favorable short-term and long-term bond ratings, and other financing terms. It is also critical to helping offset the effects of state funding uncertainty. Over time, general fund reserve levels are a key indicator of a district s improving or diminishing resources. Also important is the comparison between unrestricted and restricted reserve levels. Increasing unrestricted reserves indicate that a district has more discretionary resources at its disposal. District general fund reserves were $38.6 million, up $11.8 million from This increase was due to additional ongoing and one-time state funding levels. Our Reserve for Economic Uncertainty was $7.0 million, the restricted general fund balance was $5.4 million, and unappropriated amount was $8.4 million. The June 30, 2016 general fund ending cash balance was $34.1 million, with $8.1 million recorded in accounts receivable. FIGURE A-7 General Fund Ending Balance and Restricted Balances through ,000,000 35,000,000 32,000,000 29,000,000 26,000,000 23,000,000 20,000,000 17,000,000 14,000,000 11,000,000 8,000,000 5,000, RESTRICTED UNRESTRICTED Figure A-7 illustrates an eight-year survey of district reserve levels. By mid , it was clear that the national and state economies were experiencing the most severe recession in decades, exacerbated by a 13

19 worldwide financial crisis and the bursting of the housing bubble. In addition, the California Legislature had failed to deal with its multi-year structural budget deficit, which, in the face of the significant recession caused the state s revenues to collapse during late Mid-year budget reductions and new education deferrals were imposed, as were drastic cuts to all areas of the State Budget for Figure A-7 illustrates reserve amounts for that were assisted with the receipt of one-time federal fiscal stimulus money and the mandatory utilization of state flexibility options. This was followed by a significant drop in During the period of through , the Legislature provided additional relief (though not cash) in the form of fewer education reductions, and increased flexibility. In conjunction with a second infusion of federal stimulus, significant district-imposed reductions, and unused refunding bond proceeds in the restricted general fund, the fund balance improved. By the fund balance was reduced slightly due to lower revenues and higher costs, despite passage of Proposition 30 in November With commencement in of the new LCFF model, district revenues improved. However, new costs outstripped new revenues as the District began to address many of the demands that had been placed on hold during the height of the recession. This trend continued into , when the fund balance was again slightly reduced from the prior year level. In keeping with the state s intent of the new funding law, the District made the decision to significantly increase and improve the services to our students. The reserve balances increased due to unspent one time funds received in both the unrestricted and restricted general fund on hand at June 30, Further, the availability of a dedicated funding stream to address the District s facilities needs provided by Proposition E helped to minimize the need for general fund resources to address district facility issues. General Fund Budgetary Highlights Over the course of the year, the District revised the annual operating budget several times. Budget revisions were made to reflect changes in program funding and coincided with the adoption of the State Budget, and the First and Second Interim reporting periods. Other adjustments were made to increase appropriations to prevent budget overruns. The general fund budget presentation compares the Original (Adopted) Budget, prepared in conjunction with the Governor s Proposed State Budget proposal, with the District s final budget, reflecting the following information: During the year, total revenues increased $2.5 million overall, while the Local Control Funding Formula (LCFF) decreased from million to million, due to declining enrollment and adjustments to the state s final LCFF factors. During the year, the final expenditure budget increased $2.2 million (1.3 percent), from $174.3 million to $176.5 million, as new spending priorities were identified. The general fund budget comparison of the Final Budget versus the Actuals reflects the following information: At year s end, final actual revenues exceeded the final budget estimates by $1.9 million (1.1 percent), as local revenues included a required change in the District s methodology of accounting for credits received through the School and Library Universal Service Program (E-Rate), which were reflected as the District closed its books. 14

20 Final actual expenditures were $1.7 million lower than projected in the final budget, (0.9 percent), primarily due to unused grant and one-time amounts that carried over for use in , with the majority of savings inuring from the discretionary items in the budget. DEBT ADMINISTRATION AND CAPITAL ASSETS Without regard to the GASB 68 requirement to recognize the District s net share of the statewide pension liability related to the State Teachers Retirement System (STRS) and the Public Employees Retirement System (PERS), the district decreased its outstanding debt by a net $2.5 million, or 1.7 percent (Table A-3), as debt service payments were recorded for a variety of District debt issuances, including the final payoff of the 2007 Refunded General Obligation Bonds (Series A). Note that while the majority of the District s 2002 Series A (Proposition K) bonds were refunded in 2007, the District has $1.3 million in Capital Appreciation Bonds from this issuance that won t be repaid until Final payout will include $3.8 million of accreted interest, for a total of $5.1 million. The District repaid $0.9 million of outstanding Certificates of Participation (COP) debt, including our annual payment for the Aldergrove district office site. In July 2015, the District refinanced its 2006 Certificate of Participation to take advantage of reduced interest rates. We anticipate savings of approximately $750,000 for Escondido taxpayers over the remaining life of the issuance. In November 2016, the District refinanced its 2007 General Obligation Bond (Series B) debt, utilizing a forward delivery method expected to be completed in early May As a result district taxpayers are expected to save an estimated $2.8 million over the remaining life of the bond issuance. Bond Ratings: In November 2016, Moody s Investors Service affirmed its Aa2 rating for District General Obligation Bonds, including new Refinanced 2016 General Obligation Bonds (2007, Series B). Standard & Poor s Ratings Services assigned a rating of A+ for Proposition E, Series A Bonds. Limitations on Debt: The state limits the amount of general obligation debt the district can issue to 1.25 percent of the assessed value of all taxable property within the District's corporate limits. Our outstanding debt is below this limit - which is currently $207.2 million. In this second year of required recognition under GASB 68, the District recognized $142.7 million as its net proportional share of statewide pension liability. 15

21 Table A-3 Escondido Union School District Long-Term Debt - Principal balance (millions) % Change General obligation bonds (includes premium) * $102.2 $ % (financed with property taxes) Accreted Interest on Cap Appreciation Bonds $1.3 $ % Certificates of Participation (includes premium) $19.5 $ % 2014 Remarketed Hlth. Insur. Refunding Bonds $8.8 $ % Capital Leases (relocatable buildings) $0.9 $ % Other Postemployment Benefits (OPEB) $9.2 $ % Compensated Absences $0.7 $ % Other general long-term debt $0.4 $ % Total District Long-term Debt $143.0 $ % Net Pension Liability (GASB 68) ** $117.5 $142.7 Total Long-term Debt with Net Pension Liability $260.5 $283.2 Note: * Escondido voters authorized $182.1 million in General Obligation Bonds; In June 2015, the District issued Series A, $62.0 million in GO bonds to address critical facilities, safety, and the infrastructure needs. ** Includes adjustment to liability due to a change in pension system assumption under GASB 68. CAPITAL ASSETS By the end of , the District had acquired $125.3 million (net of accumulated depreciation of $108.2 million) of capital assets, including land, land improvements, school buildings, and equipment (Table A-4). Additions to buildings, land improvements, and equipment, net of disposals, amounted to $10.8 million for the year, less depreciation of $7.0 million. Proposition E General Obligation Bonds Proposition E is intended to address facilities, safety, and technology infrastructure needs. Among the major acquisitions this year was the completion of Phase I of the renovations needed to transform the Nicolaysen Center into the Quantum Academy, a speciality school for fourth through eighth grade, which commenced first-year operations in August, With a focus on STEAM (Science, Technology, Engineering, Arts, and Math, the new program provides students with a unique opportunity to create, collaborate, communicate, and think critically in order to impact their community. With a focus on school safety for bond funds, a major accomplishment this year was completion of security fencing at our Hidden Valley Middle School, Oak Hill Elementary, Lincoln Elementary, and L.R. Green Elementary. Other key accomplishments included the removal and replacement of selected aged relocatable buildings at campuses across the district, and major progress on the district s technology infrastructure project, which will provide modern, 21 st Century connectivity to every site and location within the district. During the first phase of bond construction, which coincides with the expenditure of Series A ($62.0 million), major modernizations commenced for our three oldest schools, including Mission Middle School, Central Elementary, and Orange Glen Elementary. The year was one of accomplishment, as demonstrated by the District s increase in construction in progress, which increased $5.8 million (159.5 percent). Completion of most Phase I projects is projected for