HOUSING AUTHORITY OF THE CITY AND COUNTY OF SAN FRANCISCO, CALIFORNIA. Annual Financial and Compliance Report. For the Year Ended September 30, 2016

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1 CITY AND COUNTY OF SAN FRANCISCO, CALIFORNIA Annual Financial and Compliance Report

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3 FINANCIAL SECTION Table of Contents Page Independent Auditor s Report... 1 Management s Discussion and Analysis (Required Supplementary Information - Unaudited)... 5 Basic Financial Statements: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Notes to Financial Statements Required Supplementary Information (Unaudited): Schedule of Changes in the Net Pension Liability and Related Ratios Schedule of Proportionate Share of the Net Pension Liability and Related Ratios Schedule of Pension Contributions Schedule of Funding Progress Other Postemployment Benefits Other Supplementary Information: Discretely Presented Component Units: Combining Statement of Net Position Combining Statement of Revenues, Expenses and Changes in Net Position Financial Data Schedules: Entity Wide Balance Sheet Summary Entity Wide Revenue and Expense Summary Notes to the Financial Data Schedules Schedule of Modernization Costs for Completed Projects SINGLE AUDIT SECTION Independent Auditor s 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 Independent Auditor s Report on Compliance For Each Major Federal Program and on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs Summary Schedule of Prior Year Audit Findings Corrective Action Plan

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5 Independent Auditor s Report Members of the Board of Commissioners of the Housing Authority of the City and County of San Francisco, California San Francisco, California Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities and the aggregate discretely presented component units of the Housing Authority of the City and County of San Francisco, California (Authority), as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the Authority 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 did not audit the Authority s discretely presented component units: Bernal Housing Associates, L.P., Hayes Valley Apartments, L.P., Hayes Valley Apartments II, L.P., and Plaza East Associates, L.P., which together represent 100% of the total assets, net position, and revenues of the aggregate discretely presented component units. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for Bernal Housing Associates, L.P., Hayes Valley Apartments, L.P., Hayes Valley Apartments II, L.P., and Plaza East Associates, L.P., is based solely on the reports of the other auditors. 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. The financial statements of Bernal Housing Associates, L.P. and Plaza East Associates, L.P. were not audited in accordance with Government Auditing Standards. 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 entity 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 entity 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. Macias Gini & O Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA

6 Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities and the aggregate discretely presented component units of the Authority as of September 30, 2016 and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter Revenue Concentrations As discussed in Note 11 to the basic financial statements, the Authority is dependent on the U.S. Department of Housing and Urban Development for 93% of its operating revenues. 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, schedule of changes in the net pension liability and related ratios, schedule of proportionate share of the net pension liability and related ratios, schedule of pension contributions, and schedule of funding progress other postemployment benefits as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have 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 Authority s basic financial statements. The accompanying discretely presented component units - combining statement of net position and combining statement of revenues, expenses and changes in net position are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying financial data schedules and the schedule of modernization costs for completed projects are presented for purposes of additional analysis as required by the U.S. Department of Housing and Urban Development and are not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and is not a required part of the basic financial statements. The discretely presented component units combining statement of net position and combining statement of revenues, expenses and changes in net position, the financial data schedules, the schedule of modernization costs for completed projects, and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. 2

7 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 by us and other auditors. In our opinion, based on our audit, the procedures performed as described above, and the report of the other auditors, the discretely presented component units combining statement of net position and combining statement of revenues, expenses and changes in net position; the financial data schedules; the schedule of modernization costs for completed projects; 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 June 30, 2017 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority s internal control over financial reporting and compliance. Walnut Creek, California June 30,

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9 Management s Discussion and Analysis (Unaudited) The Housing Authority of the City and County of San Francisco, California (Authority) management s discussion and analysis report is designed to (a) assist the reader in focusing on significant financial issues, (b) provide an overview of the Authority s financial activity, (c) identify changes in the Authority s financial position (its ability to address the next and subsequent year challenges), and (d) identify individual program issues or concerns. As such, it should be read in conjunction with the Authority s financial statements and related notes, which follow this section. This financial report is designed to provide an overview of the Authority s total financial picture for the fiscal year ended September 30, 2016, for those with an interest. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Finance Department, San Francisco Housing Authority, 1815 Egbert Avenue San Francisco, California Financial Highlights The Authority s net position increased by $245.5 million or 183.7% during the fiscal year. The Authority s total revenues increased by $9.4 million or 4.7% during the fiscal year. The Authority s total expenses decreased by $12.5 million or 5.8% during the fiscal year. In November 2015, the Authority completed Phase I of the Rental Assistance Demonstration program and recognized the gain from the disposition of 14 properties in the amount of $241.0 million. At the close of the current fiscal year, the Authority s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $379.1 million and the Authority s unrestricted net position is $303.6 million. Overview of the Financial Statements The financial section of this report consists of the independent auditor s report, management s discussion and analysis, the basic financial statements, required supplementary information, and other supplementary information. The basic financial statements include the following: The financial statements provide information about the Authority s overall financial position and results. These statements, which are presented on an accrual basis, consist of the Statement of Net Position, the Statement of Revenues, Expenses and Changes in Net Position and the Statement of Cash Flows. Accompanying the basic financial statements are Notes to Financial Statements that explain some of the information in the financial statements and provide more detailed data. The financial statements report information about the Authority as a whole using accounting methods similar to those used by private sector companies. The Statement of Net Position includes all of the Authority s assets, deferred outflows of resources, liabilities and deferred inflows of resources. All of the current year s revenues and expenses are accounted for in the Statement of Revenues, Expenses and Changes in Net Position regardless of when cash is received or paid. The basic financial statements include both blended and discretely presented component units. Complete financial statements of individual component units can be obtained from the Authority s Finance Department. In addition to the basic financial statements, this report provides required and other supplementary information. Required supplementary information includes the Schedules of Changes in the Net Pension Liability and Related Ratios, Schedule of Proportionate Share of the Net Pension Liability and Related Ratios, Schedule of Pension Contributions, and Schedule of Funding Progress for the Authority s Other 5

10 Management s Discussion and Analysis (Unaudited) (Continued) Postemployment Benefits (OPEB). Other supplementary information includes the combining financial statements of its discretely presented component units, the financial data schedules, the schedule of expenditures of federal awards, and other information as mandated by regulatory bodies that fund the Authority s various programs. Financial Analysis of the Authority Net Position - A summary of the statement of net position as of September 30, 2016 and 2015 is shown in the following table (in thousands). September 30, Increase/(Decrease) Amount % Assets: Current and other assets $ 385,567 $ 107,221 $ 278, Capital assets 71, ,577 (31,891) (30.8) Total assets 457, , , Deferred outflows of resources 9,139 4,684 4, Liabilities: Current liabilities 15,221 50,459 (35,238) (69.8) Net pension liability 20,918 15,013 5, Other noncurrent liabilities 48,334 12,586 35, Total liabilities 84,473 78,058 6, Deferred inflows of resources 2,793 3,778 (985) (26.1) Net Position: Net investment in capital assets 71,686 70, Restricted 3, , Unrestricted 303,606 62, , Total net position $ 379,126 $ 133,645 $ 245, Significant balances with fluctuations compared to the prior year include: Cash and cash equivalents increased by $5.0 million from $9.7 million as of 9/30/2015 to $14.7 million as of 9/30/2016. Cash Management refers to HUD s change in funding of the Section 8 Housing Choice Voucher (HCV) Program whereby HUD funds the amount of housing assistance payments and utility assistance payments (HAP/UAP) paid monthly by the Authority less any excess restricted cash maintained by the Authority. HUD receivables decreased by $2.1 million from $3.6 million as of 9/30/2015 to $1.5 million as of 9/30/2016 primarily due to the timing of reimbursements from HUD for disbursements related to the Capital Fund Program. Notes receivable increased by $268.0 million and interest receivable increased by $7.4 million due to Rental Assistance Demonstration (RAD) Phase I conversions as discussed in Note 3. Net capital assets decreased by $31.9 million mainly due to the disposition of capital assets (1,422 public housing units) due to the Phase I RAD program conversion as discussed in Note 4. Total current liabilities decreased by $35.3 million from $50.5 million as of 9/30/2015 to $15.2 million as of 9/30/2016. This decrease is mainly due to RAD conversion where the loan from the City and County of San Francisco (City) was paid when the RAD conversion (Phase 1) was completed in November 2015 as discussed in Note 5. Total other noncurrent liabilities increased by $35.7 million from $12.6 million as of 9/30/2015 to $48.3 million as of 9/30/2016. The increase was partly due to the $20.0 million loan from the 6

11 HOUSING AUTHORITY OF THE Management s Discussion and Analysis (Unaudited) (Continued) Bank of America as part of the payoff of the City loan for the RAD Phase 1 conversion and the increase in unearned revenue also related to the RAD Phase I conversion. Net investment in capital assets decreased by $0.8 million due to the depreciation of capital assets during the year and disposition of capital assets due to the RAD Phase I conversion of 1,422 public housing units that occurred during FY 2016 and the sale of the Lundy Lane property as discussed in Note 4 and the repayment of the loan from the City. Restricted net position increased by $3.4 million mainly due to proceeds from the sale of the Lundy Lane property in the amount of $1.0 million as discussed in Note 2. Unrestricted net position increased by $241.3 million due mainly from the increase in sellerfinanced and permanent notes from the RAD conversion Phase I as discussed in Note 4. Included in unrestricted net position is $3.0 million of Board-designated funds as Public Housing Reserves for its initiatives to set aside funds to increase its reserves with the ultimate goal of increasing PHAS scores. Statement of Revenues, Expenses and Changes in Net Position - This statement shows the sources of the Authority s changes in net position. A summary of the activities for the years ended September 30, 2016 and 2015 is shown in the following table (in thousands). September 30, Increase/(Decrease) Amount % Revenues Operating revenues: Tenant revenues, net $ 11,575 $ 15,970 $ (4,395) (27.5) HUD revenue 182, ,527 6, Other 1,782 3,259 (1,477) (45.3) Nonoperating revenues: Operating grants - 1,991 (1,991) (100.0) Investment income 7,397 1,547 5, Other (388) (100.0) Gain (loss) on disposal of capital assets 114 (1,573) 1,687 (107.2) Capital contributions 3, , Total revenues 207, ,310 9, Expenses Operating expenses: Housing assistance payments 131, ,159 6, Depreciation 5,232 9,633 (4,401) (45.7) Other operating expenses 66,256 79,124 (12,868) (16.3) Nonoperating expenses: Interest expense 21 1,703 (1,682) (98.8) Total expenses 203, ,619 (12,451) (5.8) Excess (deficiency) before special items 4,519 (17,309) 21,828 (126.1) Special items 240,962 (2,678) 243,640 (9097.8) Change in net position 245,481 (19,987) 265,468 (1328.2) Net position, beginning of year 133, ,632 (19,987) (13.0) Net position, at end of year $ 379,126 $ 133,645 $ 245,

12 Management s Discussion and Analysis (Unaudited) (Continued) Revenues: Revenues increased by $9.4 million with the following explanations: HUD revenue increased by $6.3 million primarily due to increased utilization of vouchers. The increase of $3.8 million in capital contributions was due to the increase in Capital Fund Program funding used for capitalizable expenditures. The decrease of $2.0 million in operating grants was due to one-time funds received from the City during prior year to assist in the RAD conversion. The gain on disposal of capital assets totaling $0.1 million was due to the sale of the Lundy Lane property as discussed in Note 4. Expenses: Expenses decreased by $12.5 million with the following explanations: Housing Assistance Payments increased by $6.5 million due to an increase in the unit months leased in the Housing Choice Voucher program. The decrease of $12.9 million in other operating expenses and $4.4 million in depreciation expense was mainly due to the Authority s conversion of 1,422 public housing units in November Special Items: The Special Items totaling $241.0 million in 2016 is from the Phase I RAD conversion as discussed in Note 4. Capital Asset Activity During the year ended September 30, 2016, net capital assets decreased by $31.9 million due primarily to the disposition of 1,422 public housing units in the FY 2016 RAD Phase I conversion and the sale of the Lundy Lane property. This was offset by capital assets additions of $3.9 million. Additional information on the Authority s capital assets can be found in Note 4 to the basic financial statements. Long-Term Debt Activity In 2015, the Authority s EPC bonds were eliminated due to the payoff of the Authority s EPC bond with a loan from the City. This loan was paid in November 2015 with proceeds received from the RAD Phase I conversion and a $20.0 million loan from the Bank of America. Additional information on the Authority s long-term debt can be found in Note 5 to the basic financial statements. Economic Factors Over the past year, the Authority has made significant progress toward addressing the severe financial stress caused by an unsustainable cost structure from FY 2012 and prior that was further exacerbated by the impact of the federal sequester in FY Ongoing deficits generated by the Authority s low-rent public housing program resulted in a depletion of its unrestricted cash, as well as unrestricted net position from Housing Choice Voucher administrative fees that were used to offset public housing cost overruns. In October 2014, the Authority executed a repayment agreement with HUD to replenish HCV administrative fees from public housing over a 20 year period. In addition to the operating deficits, the Authority s public housing properties were in significant need of capital improvements that were estimated to exceed $270 million. 8

13 Management s Discussion and Analysis (Unaudited) (Continued) Other significant economic factors that have contributed to the Authority s stability in 2016 include: On June 26, 2014, under HUD s Operating Fund rule, the Authority received approval from HUD of the successful conversion to Asset Management. This approval results in the ongoing higher public housing operating subsidy level of approximately $3.7 million annually for the existing public housing portfolio. Stop Loss funding will continue going forward, as a result of the Authority s successful conversion to asset management. The Authority recognized that it could not meet the capital needs of the public housing portfolio and submitted a portfolio application for the Rental Assistance Demonstration (RAD) program in September of HUD approved the Authority s RAD application on January 6, 2014 to convert 4,575 public housing units to private ownership and management with project based Housing Choice Voucher subsidies attached. Conversion of 29 properties with 3,491 units took place in two phases with the second phase transferred in October The RAD conversion leveraged over $1.147 billion in private equity and debt ($816 million tax credit equity and $331 million tax-exempt permanent debt) to rehab 29 properties. The Authority will maintain a ground lease on the land for each property to preserve affordability of the housing developments for 99 years. The RAD conversion has transformed the first of 4,575 units of public housing into financially sustainable real estate assets while improving the resident experience and ensuring the sustainability of the City s public housing infrastructure. These units are being subsidized through HUD s Housing Choice Voucher program, with RAD and project based vouchers that the Authority will administer with the associated increased administrative fees. The Authority will retain 1,452 units of public housing while they are being redeveloped under the City s Hope SF program. The RAD conversion has resulted in a planned increase in Housing Choice Voucher program staffing and a reduction public housing and central office staffing at the Authority. The Authority negotiated with the labor partner organizations representing the employees potentially impacted by this change. The Authority executed a Public Housing Authority Recovery and Sustainability (PHARS) agreement with HUD and the City and County of San Francisco on September 4, 2013, with a goal of achieving long-term sustainability and financial stability over a two year period. To date, the Authority has met 86 of the 90 milestones in the agreement and anticipates reaching standard performer status in FY 2016 for the HCV program. The Authority developed a Five Year Strategic Plan with input from numerous sources including: community based organizations, residents, staff and both public and private entities. The Plan was presented to the Board of Commissioners and approved in late Focusing on these Strategic Plan goal areas is enabling the Authority to deliver its mission and vision to San Francisco constituents, community stakeholders, residents and participants of our housing programs. The Authority completed comprehensive authority-wide performance planning for all employees to assess quarterly progress and annual performance goals tied to the Five Year Strategic Plan, agency core competencies and professional and individual development. Training has been provided to all management and supervisory staff required to implement the process and the first quarterly reviews have been completed. Mandatory training and professional development plans have been established for all employees. There have been many improvements in the area of finance in FY From improved fiscal management, the Authority was able to set-aside $3 million for public housing reserves. The Authority was able to enter into a loan agreement with Bank of America for a $20 million 0% interest loan that shall be deemed paid in full provided that the property remains affordable over the 20 year use restriction and retire the balance of its $12 million obligation to the City s MOHCD for its Energy Performance Loan from the proceeds from the RAD Phase I conversion. In October 2016, the Authority received $16 million in proceeds from the conversion of RDA Phase II properties. In October 2016, the Authority prepaid $0.8 million outstanding balance of electric services from March 2013 with the City s Public Utilities Commission. 9

14 Statement of Net Position September 30, 2016 (With Discretely Presented Component Units as of December 31, 2015) Primary Government - Business-Type Activities Assets: Current assets: Unrestricted cash and cash equivalents 9,194,938 Discretely Presented Component Units $ $ 698,202 Restricted cash and cash equivalents 5,464,603 3,448,242 Due from the U.S. Department of Housing and Urban Development 1,454,903 31,447 Due from other governments 211,349 - Accounts receivable, net: Tenants, net of allowance of $3,345,084 and $143,790 for primary government and discretely presented component units, respectively 461, ,319 Fraud recovery, net of allowance of $162,986 68,466 - Others 2,183,047 29,336 Notes receivable from tenants 160,034 - Due from primary government - 613,690 Prepaid expenses 305, ,300 Total current assets 19,505,086 5,111,536 Noncurrent assets: Noncurrent interest receivable due from component units and others, net of allowance of $7,353,097 16,294,800 - Notes receivable from component units and others 343,915,151 - Other noncurrent assets 5,852,387 1,521,652 Capital assets: Nondepreciable 11,457,789 - Depreciable, net 60,228,286 45,701,675 Total capital assets 71,686,075 45,701,675 Total noncurrent assets 437,748,413 47,223,327 Total assets 457,253,499 52,334,863 Deferred outflows of resources 9,138,698 - See accompanying notes to financial statements. 10

15 Statement of Net Position (Continued) September 30, 2016 (With Discretely Presented Component Units as of December 31, 2015) Primary Government - Business-Type Activities Liabilities: Current liabilities: Accounts payable 6,113,528 Discretely Presented Component Units $ $ 637,526 Due to the U.S. Department of Housing and Urban Development 140,444 - Due to primary government - 417,735 Accrued interest payable - 12,426 Accrued salaries and benefits 1,685,227 - Unearned revenues - 52,840 Other accrued liabilities 850,877 - Tenant security deposits 853, ,826 Current portion of long-term debt to others - 88,706 Current portion of compensated absences 600,912 - Other current liabilities 4,975, ,287 Total current liabilities 15,220,635 1,665,346 Noncurrent liabilities: Compensated absences, net of current portion 455,530 - Net other postemployment benefits liability 7,542,075 - Net pension liability 20,917,502 - Long-term interest payable to others - 4,070,297 Long-term interest payable to primary government - 7,620,920 Long-term debt due to primary government - 35,722,573 Long-term debt to others, net of current portion 24,976,255 6,110,061 Noncurrent unearned revenue - lease 14,583,978 - Other noncurrent liabilities 776, ,186 Total noncurrent liabilities 69,252,217 53,988,037 Total liabilities 84,472,852 55,653,383 Deferred inflows of resources 2,793,121 - Net position: Net investment in capital assets 71,686,075 3,744,194 Restricted for: Escrow accounts and replacement reserves - 3,153,416 Housing assistance payment reserves 2,787,165 - U.S. Housing Act of 1937 Section 18 programs 1,046,676 - Unrestricted net position 303,606,308 (10,216,130) Total net position $ 379,126,224 $ (3,318,520) See accompanying notes to financial statements. 11

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17 Statement of Revenues, Expenses and Changes in Net Position (With Discretely Presented Component Units for the Year Ended December 31, 2015) Primary Discretely Government - Presented Business-Type Component Activities Units Operating revenues: Tenant revenues, net $ 11,574,576 $ 3,311,456 Housing assistance payment revenues 182,840,324 - Operating subsidy from primary government - 2,348,863 Miscellaneous and other revenues 1,781,858 58,729 Total operating revenues 196,196,758 5,719,048 Operating expenses: Housing assistance payments 131,659,017 - Administrative 23,547,939 1,115,380 Tenant services 86,943 - Utilities 10,226,322 1,312,407 Maintenance 20,381,550 1,925,928 Protective services 1,766, ,573 General 10,247, ,618 Depreciation 5,231,714 2,402,405 Total operating expenses 203,147,612 7,495,311 Operating loss (6,950,854) (1,776,263) Nonoperating revenues (expenses): Gain on disposal of capital assets 114,487 - Investment income 162 1,733 Investment income from notes and loans receivable 7,396,831 - Interest expense (20,835) (1,285,475) Total nonoperating revenues (expenses) 7,490,645 (1,283,742) Gain (loss) before capital contributions and special items 539,791 (3,060,005) Capital contributions 3,979,365 - Special items 240,961,638 - Change in net position 245,480,794 (3,060,005) Net position, beginning of year, as previously reported 133,645,430 (18,515) Prior period adjustments - (240,000) Net position, beginning of year, as restated 133,645,430 (258,515) Net position, end of year $ 379,126,224 $ (3,318,520) See accompanying notes to financial statements. 13

18 Statement of Cash Flows Primary Government - Business-Type Activities Cash flows from operating activities: Receipts from tenants $ 10,932,033 Receipts from others 535,479 Receipts from housing assistance programs 185,162,967 Payments to suppliers for goods and services (41,148,707) Payments to employees for services (22,382,869) Housing assistance payments on behalf of tenants (131,659,017) Net cash provided by operating activities 1,439,886 Cash flows from noncapital financing activities: Intergovernmental revenues 784,625 Net cash provided by noncapital financing activities 784,625 Cash flows from capital and related financing activities: Capital contributions received 3,979,365 Proceeds from sale of capital assets 14,047,696 Acquisition of capital assets (4,045,151) Proceeds of long-term debt 21,523,746 Repayments of long-term liabilities (32,706,926) Interest paid (20,835) Net cash provided by capital and related financing activities 2,777,895 Cash flows from investing activities: Interest received 192 Net cash provided by investing activities 192 Net change in cash and cash equivalents 5,002,598 Cash and cash equivalents, beginning of year 9,656,943 Cash and cash equivalents, end of year $ 14,659,541 Cash and cash equivalents: Unrestricted cash and cash equivalents $ 9,194,938 Restricted cash and cash equivalents 5,464,603 Total cash and cash equivalents $ 14,659,541 See accompanying notes to financial statements. 14

19 Statement of Cash Flows (Continued) Primary Government - Business-Type Activities Reconciliation of operating loss to net cash provided by operating activities: Operating loss $ (6,950,854) Adjustment to reconcile operating loss to net cash provided by operating activities: Depreciation 5,231,714 Decrease (increase) in: Due from the U.S. Department of Housing and Urban Development 2,182,199 Other receivables (908,341) Prepaid expenses (40,483) Increase (decrease) in: Accounts payable (688,695) Accrued salaries and benefits 669,046 Unearned revenues (556,348) Other accrued liabilities (774,048) Tenant security deposits (317,720) Family self-sufficiency escrow 33,931 Compensated absences (279,333) Net other postemployment benefits liability 1,080,343 Net pension liability and related balances 464,196 Other current and noncurrent liabilities 2,294,279 Net cash provided by operating activities $ 1,439,886 Noncash capital and related financing activities: Disposition of capital assets with seller-financed and $ 267,964,675 permanent loan receivables from related party Capitalization of ground lease on property dispositions 10,232,000 Noncash noncapital financing activities: Interest accrued on long-term receivables 7,396,801 See accompanying notes to financial statements. 15

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21 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Entity The Housing Authority of the City and County of San Francisco, California (Authority) is a public body organized in 1938 under the laws of the State of California for the purpose of engaging in the development, acquisition, leasing and administration of low-cost housing for individuals meeting criteria established by the U.S. Department of Housing and Urban Development (HUD). The governing body of the Authority is its Board of Commissioners (Board) composed of seven members appointed by the Mayor of the City and County of San Francisco (City). The Mayor of the City has the authority to appoint the Board members, but not to remove them from office. The Authority is not a component unit of the City, as defined by the Governmental Accounting Standards Board (GASB), as the Board independently oversees the Authority s operations. The governmental reporting entity consists of the Authority (Primary Government) and its component units. Component units are legally separate organizations for which the Board is financially accountable or other organizations whose nature and significant relationship with the Authority are such that exclusion would cause the Authority s financial statements to be misleading or incomplete. Financial accountability is defined as the appointment of a voting majority of the component unit s board, and (i) either the Authority s ability to impose its will on the organization or (ii) there is potential for the organization to provide a financial benefit to or impose a financial burden on the Authority. Financial accountability is also defined as the fiscal dependency of the component units on the Authority and the potential for the component unit to provide a financial benefit to or impose a financial burden on the Authority regardless of the organization of the governing board of the component unit. Blended component units are, although legally separate entities, in substance part of the Authority s operations and so data from these units are combined with data of the primary government. The discretely presented component units, on the other hand, are reported in a separate column in the government-wide financial statements to emphasize they are legally separate from the government. For financial reporting purposes, the Authority s basic financial statements include all financial activities that are controlled by or are dependent upon actions taken by the Authority s Board. The basic financial statements include the following blended and discretely presented component units. Blended Component Unit - The Authority s operations include one blended component unit, which is included in the basic financial statements and consists of a legally separate entity for which the Authority is financially accountable. The Authority organized the SFHA Housing Corporation, a California nonprofit public benefit corporation, in June 2002 to provide, develop, finance, rehabilitate, own and operate decent, safe and sanitary housing affordable to persons and households of low income; to assist low income households by enabling them to secure the basic human need of decent shelter; to combat community blight and deterioration in the City and contribute to their physical improvement; and to provide and expand economic opportunities for persons assisted by or eligible for assistance from the Authority; to provide, develop, finance and operate supportive service programs for low income residents of the Authority and surrounding communities; and to assist low income households to secure education, training and services for self-sufficiency; and to promote healthy and safe communities. Although legally separate from the Authority, the SFHA Housing Corporation is reported as if it were part of the primary government because its sole purpose is to provide loans to Plaza East Associates, L.P., a discrete component unit of the Authority, and to Valencia Gardens Housing, L.P for the Valencia Gardens development. The SFHA Corporation is governed by a separate eight-member board of directors. 17

22 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In addition, the following component units are California not-for-profit corporations created as instrumentalities of the Authority to be a general partner in certain limited partnerships for the purpose of providing and developing affordable housing opportunities. Bernal Housing Corporation Hayes Valley Housing Corporation Plaza East Housing Corporation Discretely Presented Component Units The Authority follows the guidance provided by the GASB on the relationship of housing authorities as general partners of limited tax credit partnerships whereby the limited partners have limited rights regarding the operation of the partnership and the housing authority possesses essentially all authority over day-to-day operations. The following discretely presented component units fiscal year ended on December 31, 2015 and their financial activities are reported as of and for the year ended December 31, Bernal Housing Associates, L.P. (Bernal Housing), a real estate development limited partnership, was formed in April 1999 to develop and operate Bernal Dwellings, containing 160 low-income rental units in San Francisco, California. Bernal Housing leased the land from the Authority on which the apartment complex is situated and has obtained HUD loans and other loans through the Authority, and receives annual rental subsidies for occupied units covered under agreements with HUD and the Authority. The agreements extend through the minimum period during which the project units are required by the applicable public housing requirements to be operated as public housing in accordance with the U.S. Housing Act of 1937, or the expiration of 40 years from the date the units become fully available for occupancy. The Authority has significant influence over Bernal Housing given its significant financial relationships. Third parties unrelated to the Authority are allocated 99.99% of Bernal Housing s interests and Bernal Housing Corporation, the managing general partner controlled by the Authority, is allocated 0.01% of Bernal Housing s interests. Hayes Valley Apartments, L.P. (Hayes Valley I), a real estate development limited partnership, was formed in February 1995 to develop and operate an 8-building, 85-unit occupancy apartment complex in San Francisco, California. Hayes Valley I leased the land from the Authority on which the apartment complex is situated and has obtained HUD loans and other loans through the Authority, and receives annual rental subsidies for occupied units covered under agreements with HUD and the Authority. The agreements extend through the minimum period during which the project units are required by the applicable public housing requirements to be operated as public housing in accordance with the U.S. Housing Act of 1937, or the expiration of 40 years from the date the units become fully available for occupancy. The Authority has significant influence over Hayes Valley I given its significant financial relationships. Third parties unrelated to the Authority are allocated 99.95% of Hayes Valley I s interests and Hayes Valley Housing Corporation, a general partner controlled by the Authority, is allocated 0.05% of Hayes Valley I s interests. 18

23 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Hayes Valley Apartments II, L.P. (Hayes Valley II), a real estate development limited partnership, was formed in May 1996 to develop and operate an 8-building, 110-unit occupancy apartment complex in San Francisco, California. Hayes Valley II leased the land from the Authority on which the apartment complex is situated and has obtained HUD loans and other loans through the Authority, and receives annual rental subsidies for occupied units covered under agreements with HUD and the Authority. The agreements extend through the minimum period during which the project units are required by the applicable public housing requirements to be operated as public housing in accordance with the U.S. Housing Act of 1937, or the expiration of 40 years from the date the units become fully available for occupancy. The Authority has significant influence over Hayes Valley II given its significant financial relationships. Third parties unrelated to the Authority are allocated 99.95% of Hayes Valley II s interests and Hayes Valley Housing Corporation, a general partner controlled by the Authority, is allocated 0.05% of Hayes Valley II s interests. Plaza East Associates, L.P. (Plaza East), a real estate development limited partnership, was formed in April 2000 to develop and operate a 193-unit multi-family apartment complex in San Francisco, California. Plaza East leased the land from the Authority on which the apartment complex is situated and has obtained HUD loans and other loans through the Authority, and receives annual rental subsidies for occupied units covered under agreements with HUD and the Authority. The agreements extend through the minimum period during which the project units are required by the applicable public housing requirements to be operated as public housing in accordance with the U.S. Housing Act of 1937, or the expiration of 40 years from the date the units become fully available for occupancy. The Authority has significant influence over Plaza East given its significant financial relationships. Third parties unrelated to the Authority are allocated 99.99% of Plaza East s interests and Plaza East Housing Corporation, a developer general partner controlled by the Authority, is allocated 0.01% of Plaza East s interests. Although these discretely presented component units do not follow governmental accounting and financial reporting standards, for presentation purposes, certain transactions may be reported differently in these financial statements than in separately issued financial statements in order to conform to the presentation of the Authority. Separately issued financial statements for the year ended December 31, 2015 for each discretely presented component unit can be obtained by contacting the Authority at 1815 Egbert Ave., San Francisco, California (b) Basis of Accounting The Authority distinguishes operating revenues and expenses from nonoperating items. Operating activity generally arises from providing services in connection with a proprietary fund s principal activity. The operating revenues of the Authority consist primarily of rental charges to tenants and housing assistance payment (HAP) revenues from HUD, and include, to a lesser extent, certain operating subsidies that offset operating expenses. Operating expenses for the Authority include the cost of administrative, maintenance, tenant services, general, utilities, protective services, depreciation and HAPs. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses, except for capital contributions, which are presented separately. 19

24 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) When restricted resources meet the criteria to be available for use and unrestricted resources are also available for use, it is the Authority s policy to use restricted resources first, and then unrestricted resources, as needed. (c) Measurement Focus Measurement focus is a term used to describe which transactions are recorded within the various financial statements. The Authority and its discretely presented component units utilize an economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net position (or cost recovery), financial position, and cash flows. All assets, deferred outflows of resources, liabilities, and deferred inflows of resources (whether current or noncurrent) associated with their activities are reported. Basis of accounting refers to when transactions are recorded regardless of the measurement focus applied. The basis of accounting used is similar to businesses in the private sector; thus, the Authority s and discretely presented component units activities are maintained on the accrual basis of accounting. Revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. For financial reporting purposes, the Authority considers its HUD grants associated with operations as operating revenue because these funds more closely represent revenues generated from operating activities rather than nonoperating activities. HUD grants associated with capital acquisition and improvements are considered capital contributions and are presented after nonoperating activity on the accompanying statement of revenues, expenses and changes in net position. (d) Summary of Programs The accompanying basic financial statements include the activities of several housing programs subsidized by HUD and other federal entities at the Authority. A summary of each significant program is provided below. Public Housing Program includes the asset management projects (AMPs), which collect low rent operating subsidies, and the Public Housing Capital Fund program. The purpose of the public housing program is to provide decent and affordable housing to low-income families at reduced rents. The developments are owned, maintained and managed by the Authority. The developments/units are acquired, developed and modernized under HUD s Public Housing Capital Fund programs. Funding of the program s operations and development is provided by annual federal contributions or appropriations, operating subsidies and tenant rentals (determined as a percentage of family income, adjusted for family composition and other allowances). Central Office Cost Center (COCC) is the program mandated by HUD to account for centralized services and functions necessary to the Authority s operations. Most of the functions of the COCC are not directly attributable to the public housing or other programs. Funding for the COCC is in the form of fees charged to other Authority programs and activities. HUD regulations generally do not allow for the allocation of costs. The fees include those specified by HUD as management fees, bookkeeping fees, asset management fees, or fees for services. HUD regulates which of these fees may be charged to any given program and how the fee is to be calculated. 20

25 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) HAP Programs utilize existing privately owned family rental housing units to provide decent and affordable housing to low-income families. HAP programs include Moderate Rehabilitation, Single Room Occupancy, and the Housing Choice Voucher (Voucher) programs. The Moderate Rehabilitation and Single Room Occupancy programs allow for the rehabilitation of housing units, which then must be rented to low-income individuals for a contracted period of time. The program provides owners with sufficient rental income to pay for rehabilitation costs. Developers must obtain their own financing and HUD subsidizes rents once the units are occupied. Funding for the Voucher program, which includes the Veterans Affairs Supportive Housing program, is provided by federal housing assistance contributions from HUD for the difference between the approved landlord contract rent and the rent paid by the tenant. In addition, the Authority receives an administrative fee to cover operating expenses. Rental Assistance Demonstration (RAD) Program The Authority recognized that it cannot meet the capital needs of its public housing portfolio estimated at $270 million, and submitted a portfolio application to HUD to participate in the RAD program in September On January 6, 2014, HUD approved the Authority s RAD application to convert 4,575 public housing units to private ownership and management with attached project based Housing Choice Vouchers. The conversion is scheduled to take place over two phases: Phase I relates to the 1,422 public housing units converted in November 2015 (see Note 3) and Phase II relates to the remaining units anticipated to be completed in September 2017 (see Note 15). (e) Cash and Cash Equivalents For purposes of the statement of cash flows, the Authority considers all unrestricted and restricted highly liquid investments with an initial maturity of three months or less to be cash equivalents. (f) Fair Value of Financial Instruments The carrying amount of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short term maturity of these instruments. The carrying value of long-term debt approximates fair value based on prevailing borrowing rates currently available for loans with similar terms and maturities. (g) Receivables, Net and Accrued Interest, Net Receivables consist of revenues earned during the year and not yet received. Amounts due from HUD and other governments represent reimbursable expenses or grant subsidies earned that have not been collected as of year-end; these amounts are considered fully collectible. (h) Capital Assets, Net The Authority s policy is to capitalize assets with a value in excess of $5,000 and a useful life in excess of one year. The Authority capitalizes the costs of site acquisition and improvement, structures, equipment and direct development costs meeting the capitalization policy. Assets are valued at historical cost, or estimated historical cost if actual historical cost is not available, and contributed assets are valued at fair value on the date contributed. 21

26 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Depreciation has been provided using the straight-line method over the estimated useful lives, which range as follows: Buildings 40 years Building improvements years Furniture and equipment 3-7 years The Authority evaluates events or changes in circumstances affecting capital assets to determine whether an impairment of its assets has occurred. If the Authority determines that a capital asset is impaired, and that impairment is significant and outside normal life cycle of the capital asset, then an impairment loss will be recorded in the Authority s financial statements. (i) Accrued Compensated Absences Fringe benefits such as health and welfare, pension, vacation, training and annuity for members of the trade unions (carpenters, electricians, floor layers, glaziers, laborers, painters and plumbers) are determined by the respective agreement between the Authority and the respective employees labor contract. Annual vacation hours may be accumulated up to 400 hours for Maintenance Generalist I and administrative personnel represented by the Service Employees International Union (SEIU), Local 1021, and management personnel. SEIU Local 1021 Maintenance Generalist I earns vacation rates ranging from 104 hours per year for the first 5 years of service and up to a maximum of 184 hours per year after 15 years of service. SEIU Local 1021 administrative personnel and management personnel earn vacation rates ranging from 100 hours per year for the first 36 months of service and up to a maximum of 220 hours per year after 228 months of service. Employees hired on or before September 30, 1984 earn unused sick leave at the base rate of pay excluding overtime or premium rates. There is no limit in accumulation with cash-out capped at 1,040 hours for SEIU Local 1021 Maintenance Generalist I and maximum accumulation of up to 130 days for SEIU Local 1021 administrative personnel. There is no limit in accumulation of sick leave accrual for management personnel. Employees hired after September 30, 1984 are not eligible for reimbursement of unused sick leave. In addition, the Authority records a liability related to the payroll taxes due until the leave times are used or cashed out. The estimated liability for vested leave benefits is recorded when it is earned as an expense and the cumulative unpaid amount is reported as a liability. (j) Unearned Revenues Current unearned revenue represents prepaid tenant rental income. Noncurrent unearned revenue includes rent received in advance from long-term ground leases that is amortized over the term of agreements. (k) Eliminations Interprogram due from/to - In the normal course of operations, certain programs may pay for common costs or advance funds for operational shortfalls that create interprogram receivables or payables. At September 30, 2016, the Authority had interprogram balances in the amount of $2,805,034 from its normal course of operations. These balances are netted to zero and are eliminated for the presentation of the Authority s basic financial statements. During the year ended September 30, 2014, the Authority performed an analysis of the interprogram due to/from balances and determined that the AMPs have net payables due to the Moderate 22

27 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Rehabilitation program and the Voucher program of $2,764,649 and $1,349,204, respectively. Additionally, during the year ended September 30, 2014, the Authority and HUD entered into a Repayment Agreement for the repayment of the interprogram loans. In accordance with the terms of the Repayment Agreement, the AMPs will repay the loans with excess cash, as calculated on an annual basis using the data reported in the HUD-Real Estate Assessment Center approved annual Audited Financial Data Schedules, in equal annual installments in the amount of $205,693 for a maximum of 20 years. In the event of the existence of excess cash after the required annual installment amount is paid, an additional payment in the amount of 33% of the remaining excess cash will be paid to further reduce the interprogram loans. To the extent that insufficient excess cash is available to make the annual installment amount, the Authority will repay the difference with non-federal funding. The loans do not provide for the payment of interest. During the year ended September 30, 2016, the Authority repaid $205,693 towards these loans. At September 30, 2016, the Authority interprogram loans in the amount of $3,496,775 are netted to zero and are eliminated for the presentation of the Authority s basic financial statements. Fee for service - The Authority s COCC internally charges fees to the AMPs. These charges include management fees, bookkeeping fees, front line service fees, and asset management fees. For financial reporting purposes $15,228,221 of fee for service charges have been eliminated for the year ended September 30, (l) Net Position Net position comprises the various net earnings from operating income or loss, nonoperating revenues and expenses, and capital contributions. Net position is classified in the following three components: Net investment in capital assets - This component of net position consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds is not included in the calculation of net investment in capital assets. Rather, that portion of the debt is included in the same net position as the unspent proceeds. Restricted - This component of net position consists of constraints imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted - This component represents net position that does not meet the definition of restricted or net investment in capital assets. (m) Tenant and Other Revenues Tenant and other revenues are presented in the financial statements net of the bad debt expense for uncollectible amounts. During the year ended September 30, 2016, the Authority recorded $2,804,726 of tenant revenues as bad debt expenses. (n) Leasing Activities The Authority is the lessor of dwelling units to low-income and market rate residents. The low-income rents under the leases are determined generally by the resident s income as adjusted for eligible deductions regulated by HUD, although the resident may opt for a flat rent. Leases may be cancelled by the lessee at any time or renewed every year. 23

28 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Authority may cancel the leases only for cause. Most of the Authority s capital assets are used in these leasing activities. Revenues associated with these leases are recorded in the accompanying financial statements within tenant revenue. The Authority recognizes revenue on HOPE VI and HOPE SF land leases (see Notes 12 and 13) and RAD ground leases when payments are received because payments are dependent on defined available cash flows; payments less than the annual amount are not accrued and are not recorded as a receivable. (o) Defined Benefit Pension Plans For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Authority s pension plan and additions to/deduction from the pension plan s fiduciary net position have been determined on the same basis as they are reported by California Public Employees Retirement System (CalPERS). For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Pension plan investments are reported at fair value. (p) Special Items Special items are transactions or events that are within the control of the Authority and that are either unusual in nature or infrequent in occurrence. The Authority s conversion of its public housing units under the RAD Program is reported as special items (see Notes 3 and 4). (q) Use of Estimates Management of the Authority has made certain estimates and assumptions relating to the reporting of assets, liabilities, deferred inflows and outflows of resources, revenues and expenses to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Actual results may differ from those estimates. (r) New Accounting Standards Adopted During the year ended September 30, 2016, the Authority implemented GASB Statement No. 72, Fair Value Measurement and Application; GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASB Statement No. 68 and Amendments to Certain Provisions of GASB Statements No. 67 and 68; GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments; and GASB Statement No. 79, Certain External Investment Pools and Pool Participants. These statements did not have a material impact on the Authority s financial statements. (s) New Accounting Standards To Be Implemented The Authority is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB Statements: In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. This statement addresses reporting by OPEB plans that administer benefits on behalf of governments. The requirements of this statement are effective for the Authority s fiscal year ending September 30,

29 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. This statement addresses reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other governments. The requirements of this statement are effective for the Authority s fiscal year ending September 30, In August 2015, GASB issued Statement No. 77, Tax Abatement Disclosures. This statement requires governments that enter into tax abatement agreements to disclose the following information about the agreements: (i) brief descriptive information; (ii) the gross dollar amount of taxes abated during the period; and (iii) commitments made by a government, other than to abate taxes, as part of a tax abatement agreement. This statement is effective for the Authority s fiscal year ending September 30, In December 2015, the GASB issued Statement No. 78, Pensions Provided through Certain Multiple- Employer Defined Benefit Pension Plans. The objective of this statement is to address a practice issue regarding the scope and applicability of Statement No. 68 associated with pensions provided through certain cost-sharing multiple-employer defined benefit pension plans and to state or local governmental employers whose employees are provided with such pensions. Such plans are not considered a state or local government pension plan and are used to provide benefits to both employees of state and local governments and employees of employers that are not state or local governments. This statement is effective for the Authority s fiscal year ending September 30, In January 2016, the GASB issued Statement No. 80, Blending Requirements for Certain Component Units an amendment of GASB Statement No. 14. The objective of this statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This statement amends the blending requirements established in GASB Statement No. 14, The Financial Reporting Entity, as amended. The statement is effective for the Authority s fiscal year ending September 30, In March 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements. The statement provides recognition and measurement guidance for situations in which a government is a beneficiary of these agreements. The requirements of this statement are effective for financial statements for periods beginning after December 15, 2016, and should be applied retroactively. The requirements of this statement are effective for the Authority s fiscal year ending September 30, In March 2016, the GASB issued Statement No. 82, Pension Issues an amendment of GASB Statements No. 67, No. 68, and No. 73. The objective of this statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and 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. Specifically, this statement addresses issues regarding (1) the presentation of payroll-related measures in the required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The requirements of this statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this statement for the selection of assumptions in a circumstance in which an employer s pension liability is measured as of a date other than the employer s most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15,

30 Notes to Financial Statements (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In November 2016, the GASB issued Statement No. 83, Certain Asset Retirement Obligations. The statement addresses accounting and financial reporting for certain asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this statement. The requirements of this statement are effective for the Authority s fiscal year ending September 30, In January 2017, the GASB issued Statement No. 84, Fiduciary Activities. The statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities. The statement provides recognition and measurement guidance for situations in which a government is a beneficiary of these agreements. The requirements of this statement are effective for the Authority s fiscal year ending September 30, In March 2017, the GASB issued Statement No. 85, Omnibus The objective of the statement is to address practice issues that have been identified during implementation and application of certain GASB Statements. The statement addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits). The requirements of this statement are effective for the Authority s fiscal year ending September 30, In May 2017, the GASB issued Statement No. 86, Certain Debt Extinguishment Issues. The primary objective of the statement is to improve consistency in accounting and financial reporting for insubstance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources - resources other than the proceeds of refunding debt - are placed in an irrevocable trust for the sole purpose of extinguishing debt. The requirements of this statement are effective for the Authority's fiscal year ending September 30,

31 Notes to Financial Statements (Continued) NOTE 2 CASH AND CASH EQUIVALENTS The Authority s cash and cash equivalents at September 30, 2016 (primary government) and December 31, 2015 (discrete component units) are reported as follows: Primary Component Government Units Total Unrestricted cash and cash equivalents $ 9,194,938 $ 743,585 $ 9,938,523 Restricted cash and cash equivalents 5,464,603 3,402,859 8,867,462 Total cash and cash equivalents $ 14,659,541 $ 4,146,444 $ 18,805,985 (a) Custodial Credit Risk Deposits Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the Authority will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The Authority s investment policy does not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure Authority deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. The Authority s discrete component units maintain cash and cash equivalents with various financial institutions. At times, these balances may exceed federal insurance limits; however, the discretely presented component units have not experienced any losses with respect to their bank balances in excess of government provided insurance. (b) Restricted Cash and Cash Equivalents The Authority s restricted cash and cash equivalents consist of the following: Section 8 Voucher HAP Reserves - Under HUD s Section 8 Program contract administration requirements, the Authority has an established bank account that is restricted to receiving and disbursing HAPs each month. The amount of HAP approved and received from HUD in this account is immediately disbursed to Section 8 property owners under an arrangement with the bank. Any income earned in the account is required to be reported and returned to HUD periodically as program income. At September 30, 2016, restricted funds of $2,787,165 held in the Section 8 Housing Choice Voucher Program are included in the accompanying financial statements. Family Self-Sufficiency (FSS) Escrow - The FSS Escrow Account is an interest bearing account reported as part of restricted cash and investments and established by the Authority for each qualified Section 8 participant enrolled in the Section 8 Housing Choice FSS Program. The participants earn monthly escrow credits during their 5-year Contract of Participation and the escrow credit is reported as a liability based on increases in earned income of the family. This escrow is credited to this account by the Authority during the term of the FSS contract. The Authority may make a portion of this escrow account available to the family during the term of the contract to enable the family to complete an interim goal such as education. If the family completes the contract and no member of the family is 27

32 Notes to Financial Statements (Continued) NOTE 2 CASH AND CASH EQUIVALENTS (Continued) receiving welfare, the amount of the FSS account is paid to the head of the family. If the Authority terminates the contract, or if the family fails to complete the contract before its expiration, the family s FSS escrow account is forfeited. At September 30, 2016, FSS funds of $776,878 held in the Section 8 Housing Choice Voucher Program are reported as a component of the other noncurrent liabilities. Restricted Sales Proceeds In May 2016, the HUD approved the disposition of Lundy Lane (see Note 4). The proceeds from this disposition may only be expended on authorized uses under Section 18 of the U.S. Housing Act of Prior to the obligation and/or use of the disposition proceeds, the Authority must obtain written approval from HUD. At September 30, 2016, the Authority s restricted sales proceeds in the amount of $1,046,676 were included in the AMPs. Tenant Security Deposits Upon moving into public housing development, tenants are required to pay a security deposit, which is refundable when the tenant vacates the apartment, provided the apartment s physical condition is satisfactory. At September 30, 2016, the Authority s security deposits in the amount of $853,884 held in the AMPs are included in the accompanying financial statements. Deposits and Funded Reserves Held With Discrete Component Units - The discrete component units hold restricted cash and cash equivalents for escrow deposits, and funded replacement and other reserves, and tenant deposits. NOTE 3 NOTES RECEIVABLE AND ACCRUED INTEREST, NET The Authority has entered into four limited partnerships under its Hope VI program for the purpose of developing low-income and mixed income housing financed by HUD and private tax credit investors. As part of the project financing structure, the four limited partnerships received HUD Hope VI funds through the Authority or its component units and issued seven promissory notes payable to the Authority. In addition, other related parties entered into long-term leases on the Authority s low income land sites (see Note 12). All notes receivable are secured by deeds of trust on the respective property. 28

33 Notes to Financial Statements (Continued) NOTE 3 NOTES RECEIVABLE AND ACCRUED INTEREST, NET (Continued) The following is a summary of the transactions of the notes receivable: Balance Balance October 1, September 30, 2015 Additions Reductions 2016 Notes receivable: From component units: Hayes Valley 1 $ 1,600,000 $ - $ - $ 1,600,000 Hayes Valley II 3,110, ,110,990 Bernal Housing 20,122, ,122,140 Plaza East 13,464, ,464,813 From others: Hunters View 8,087, ,087,723 North Beach 13,848, ,848,535 Valencia Gardens 15,716, ,716,275 Related to RAD Phase I - 267,964, ,964,675 Total notes receivable $ 75,950,476 $ 267,964,675 $ - $ 343,915,151 Accrued interest receivable: From component units: Hayes Valley 1 $ 2,654,591 $ 298,672 $ - $ 2,953,263 Hayes Valley II 4,550, ,241-5,026,332 Bernal Housing 218,270 20, ,595 Plaza East 3,858, ,245-4,234,558 From others: Hunters View 95,895 20, ,114 North Beach 4,873, ,456-5,289,392 Related to RAD Phase I - 5,789,643-5,789,643 Subtotal 16,251,096 7,396,801-23,647,897 Less allowance (7,353,097) - - (7,353,097) Total accrued interest, net $ 8,897,999 $ 7,396,801 $ - $ 16,294,800 Terms and descriptions of the notes receivable are as follows: Hayes Valley I - The Authority issued a 57-year, $1,600,000 promissory note, also referred to as the second mortgage loan, dated November 25, 1996, and maturing on November 24, 2053 to Hayes Valley I. Based on the note s simple interest rate of 12% per annum through December 31, 1997 and compound interest rate of 7.02% per annum thereafter, the Authority has accrued interest of $2,953,263 as of September 30, The principal and accrued interest is payable only from net available cash flow, net proceeds or condemnation proceeds, as defined in the promissory note. Hayes Valley II - The Authority issued a 57-year, $3,250,000 promissory note, also referred to as the second mortgage loan, dated December 1, 1997 and maturing on December 1, 2054 to Hayes Valley II. Based on the note s simple interest rate of 12% per annum through December 31, 1998 and compound interest rate of 6.31% per annum thereafter, the Authority has accrued interest of $5,026,332 as of September 30, The principal and interest is payable only from net available cash flows, net proceeds or condemnation proceeds, as defined in the promissory note. 29

34 Notes to Financial Statements (Continued) NOTE 3 NOTES RECEIVABLE AND ACCRUED INTEREST, NET (Continued) Bernal Housing - The Authority issued a 55-year, $2,465,501 promissory note, also referred to as the predevelopment loan, dated November 23, 1999 and maturing on November 23, 2054 to Bernal Housing. Due to a partial early repayment of $2,380,861 on the loan and an adjustment increase of $250,000, the principal balance was reduced to $334,640. Based on the note s compound interest rate of 0.1% per annum, the Authority has calculated a cumulative accrued interest amount of $26,684 as of September 30, The principal and accrued interest is payable only from net available cash flows, net proceeds or condemnation proceeds, as defined in the promissory note. The Authority issued a 55-year, $4,287,500 promissory note, also referred to as the construction/permanent loan, dated November 23, 1999 and maturing on November 23, 2054 to Bernal Housing. Based on the note s compound interest rate of 0.1% per annum, the Authority has accrued interest of $64,857 as of September 30, The principal and accrued interest is payable only from net available project cash flow, net proceeds or condemnation proceeds, as defined in the promissory note. The Authority issued a 55-year, $15,500,000 promissory note, also referred to as the permanent loan, dated November 23, 1999 and maturing on November 23, 2054 to Bernal Housing. Based on the note s compound interest rate of 0.1% per annum, the Authority has accrued interest of $147,054 as of September 30, The principal and accrued interest is payable only from net available project cash flows, net project proceeds or project condemnation proceeds, as defined in the promissory note. Plaza East Plaza East Housing Corporation, a blended component unit, issued a 65-year, $2,700,000 Applicable Federal Rate (AFR) promissory note dated September 18, 2000 and maturing on September 17, 2065 to Plaza East. Based on the note s simple interest rate of 10% per annum through December 31, 2001 and compound interest rate of 6.09% per annum thereafter, the Authority has accrued interest of $3,854,328 as of September 30, The principal and interest is payable only from net available cash flows, net proceeds or condemnation proceeds, as defined in the promissory note. The Authority, through the SFHA Housing Corporation, provided construction and permanent financing under a loan commitment of $10,764,813. The nonrecourse loan is secured by a second leasehold deed of trust on the property and matures in September Interest accrued on the loan at an annual rate of 10% through December 31, No interest shall accrue on the loan thereafter. Interest and principal are payable only from net available cash flow of the project, or from net proceeds or condemnation proceeds as defined in the loan agreement. The Authority has accrued interest of $380,230, as of September 30, Hunters View - The Authority issued a 55-year, $8,087,723 promissory note dated July 1, 2011 and maturing on April 1, 2068 to Hunters View to provide financing to Hunters View to assist in financing certain predevelopment and construction activities related to the Hunters View Rental Housing Development. Based on the note s compound interest rate of 0.25% per annum, the Authority has accrued interest of $116,114 as of September 30, The principal and accrued interest is payable from Residual Receipts as defined in the Loan Agreement. Such annual payments are due and payable in arrears no later than July 15 th of each year, commencing on earlier of (i) July 15 th of the first year after the issuance of a Certificate of Occupancy for the Improvements, or (ii) December 15, 2012 and shall be accompanied by the Hunters View s report of Residual Receipts. 30

35 Notes to Financial Statements (Continued) NOTE 3 NOTES RECEIVABLE AND ACCRUED INTEREST, NET (Continued) North Beach - The Authority issued a 55-year, $13,848,535 promissory note dated December 1, 2002 and maturing on November 30, 2057 to North Beach Development Associates, LLC (North Beach). This note was an amendment of the residential promissory note for $4,911,097 and the commercial loan of $313,001, both dated November 28, 2001 to finance the development of the North Beach affordable rental property pursuant to the Hope VI construction/permanent loan agreement. Based on the note s simple interest rate of 3% per annum, the Authority has calculated a cumulative accrued interest amount of $5,289,392 as of September 30, The principal and accrued interest is payable only from net available project cash flows, net project proceeds or project condemnation proceeds, as defined in the promissory note. Valencia Gardens - The Authority established a partnering agreement with Mission Housing Development Corporation (MHDC), a California non-profit public benefit corporation, which gives MHDC the exclusive right to develop and revitalize the Valencia Gardens development funded by the Hope VI grant agreement between the Authority and HUD. The Authority issued a 55-year, $15,716,275 permanent loan to finance the construction and development of the Valencia Gardens development, dated September 1, 2004 and maturing on August 31, This permanent loan does not provide for the payment of interest; however, if a default occurs, interest at 10% on the principal balance shall accrue. The principal and accrued interest, if any, is payable only from the net available project cash flows, net project proceeds or project condemnation proceeds, as defined in the promissory note. RAD Phase I In November 2015, the Authority converted 14 public housing sites to private developer teams to begin work on significant project rehabilitations through the RAD program. The RAD program permits the developer teams to leverage public and private debt and equity in order to reinvest in the public housing stock. Under the RAD program, all of the public housing units become permanently affordable units under the Section 8 platform with a long-term contract that must be renewed by law. The conversion to the RAD program is providing approximately $220 million in long-deferred property repairs needed to renovate a substantial number of the public housing units in San Francisco. In order to ensure the long-term preservation of the properties disposed by the Authority under either the RAD program or Section 18 of the United States Housing Act of 1937, the Authority converted the form of federal funding that supports its properties from public housing subsidies provided to the Authority to Section 8 Project-Based Vouchers for the properties owned by private entities. The conversion of the public housing units under the RAD and Section 18 programs involves a transfer of ownership from the Authority to private ownership through a leasehold interest in each property and a fee interest in the improvements located thereon (see Note 12). Upon such transfer, each developer of such transferred property intends to accomplish the rehabilitation and recapitalization of the applicable property. The private financing for the undertaking was provided by Bank of America as the construction lender and equity investor for all of the projects, in partnership with Freddie Mac as the permanent lender, as well as significant financing from the San Francisco Mayor s Office of Housing and Community Development ( MOHCD ) and the Authority. Phase I of the RAD conversion includes the rehabilitation of more than 1,400 units at a cost of $692 million. 31

36 Notes to Financial Statements (Continued) NOTE 3 NOTES RECEIVABLE AND ACCRUED INTEREST, NET (Continued) In connection with RAD Phase I, the Authority entered into the following seller-financed and permanent notes: Lessee Project AMP # Seller- Financed Permanent Notes Holly Courts Housing Associates, L.P. 100 Appleton Street AMP 966 $ 27,457,957 $ 2,500,000 Bay Street, L.P. 227 Bay Street AMP 972 8,175, ,000 Pacific Avenue, L.P. 990 Pacific Street AMP ,940, Pine, L.P Pine Street AMP ,796, Woodside Housing Associates, L.P. 255 Woodside AMP ,100,000 4,900, Ellis, L.P. 666 Ellis Street AMP ,375, , Sanchez Housing Associates, L.P. 25 Sanchez Street AMP ,000,000 5,000, Duboce Housing Associates, L.P. 462 Duboce Avenue AMP 986 6,734, Arguello, L.P. 345 Arguello Street AMP ,780, , st Ave, L.P st Avenue AMP ,026, & 951 Eddy Associates, L.P Eddy Street AMP 987 7,400, , Turk Associates, L.P. 430 Turk Street AMP ,925,000 2,500,000 Robert Pitts Housing Partners, L.P Scott Street/1825 Eddy Street AMP ,054,517 - Hunters Point East West LP 1065 Oakdale Ave. & 798 Jerrold Ave. AMP ,300,000 5,700,000 Total $ 245,064,675 $ 22,900,000 Seller-Financed Notes - In November 2015, the Authority (Lessor), and each of the partnerships listed above (Lessee) have entered into seller take-back notes totaling $245,064,675. Each of these notes are secured by a leasehold deed of trust and an assignment of rents and security agreement recorded against the property. These notes bear 2.57% compounded annually. The term of each note commences on the date of each note and expires the earlier of (i) fifty-five (55) years after the closing of the permanent financing, but in no event later than December 31, 2075; (ii) the full repayment of each loan; or (iii) the date of a default, subject to all applicate notice and cure periods. Beginning on the first June 30 th after the completion of the respective project and continuing each June 30 th thereafter until the maturity date, each borrower shall make an annual payment to the Authority in the amount of $15,000 (the Annual Payment ). In addition to the Annual Payment, beginning on the first June 30 th after the completion of the respective and continuing each June 30 th thereafter during the term of each note, each borrower shall also make an additional payment in the amount equal to the Authority s share of its Residual Receipts as defined in each promissory note from the preceding year (the Additional Payment ). Any unpaid principal and interest amounts due under each note shall accrue and be due in subsequent year(s) to the extent of each lender s share of Residual Receipts. As of September 30, 2016, the outstanding seller-financed notes totaled is $245,064,675 and related accrued interest is $5,789,643. Permanent Notes - In November 2015, the Authority (Lessor), and each of the partnerships listed above (Lessee) have entered into permanent notes totaling $22,900,000. Each of these notes are secured by a leasehold deed of trust and an assignment of rents and security agreement recorded against the property and does not bear interest. The term of each note commences on the date of each note and expires the earlier of (i) fifty-five (55) years after the date of disbursement of the loan funds to borrower, but in no event later than December 31, 2075; (ii) the full repayment of each loan; or (iii) the date of a default, subject to all applicate notice and cure periods. Beginning on the first June 30 th after the completion of the respective and continuing each June 30 th thereafter during the term of each note, each borrower shall also make a payment in the amount equal to the Authority s share of its Residual Receipts as defined in each promissory note from the preceding year. Any unpaid principal and interest amounts due under each note shall accrue and be due in subsequent year(s) to the extent of each lender s share of Residual Receipts. As of September 30, 2016, the outstanding seller-financed notes totaled is $22,900,

37 Notes to Financial Statements (Continued) NOTE 4 CAPITAL ASSETS Capital assets activity for the year ended September 30, 2016 was as follows: Balance Balance October 1, Reclassifications/ September 30, 2015 Additions Reductions Transfers 2016 Capital assets, not being depreciated : Land $ 11,636,984 $ - $ (150,931) $ (94,050) $ 11,392,003 Construction in progress - 65, ,786 Total capital assets, not being depreciated 11,636,984 65,786 (150,931) (94,050) 11,457,789 Capital assets, being depreciated: Building and improvements 203,325,948 3,549,342 (69,617,031) 146, ,404,360 Furniture and equipment 10,312, ,023 (1,036,684) (750,359) 8,955,722 Leasehold improvements 10,811 - (10,811) 698, ,308 Total capital assets, being depreciated 213,649,501 3,979,365 (70,664,526) 94, ,058,390 Less accumulated depreciation Building and improvements (107,863,631) (5,119,133) 39,438,720 (4,947,087) (78,491,131) Furniture and equipment (13,845,970) (112,581) 672,491 4,947,087 (8,338,973) Less accumulated depreciation (121,709,601) (5,231,714) 40,111,211 - (86,830,104) Total capital assets, being depreciated, net 91,939,900 (1,252,349) (30,553,315) 94,050 60,228,286 Total capital assets, net $ 103,576,884 $ (1,186,563) $ (30,704,246) $ - $ 71,686,075 In November 2015, the Authority completed the RAD ownership transfer of the following Phase I projects and recognized a gain from this from these dispositions as special items as follows: Sales Price AMP # Notes Receivable Capitalized Ground Lease Cash Proceeds to CCSF Cash Proceeds to the Authority Total Sales Price Capital Assets Book Value Gain on Sale of Capital AMP 966 $ 29,957,957 $ (250,000) $ 2,002,043 $ 40,000 $ 31,750,000 $ (2,503,717) $ 29,246,283 AMP 972 8,575,000 (375,000) - - 8,200,000 (1,643,749) 6,556,251 AMP ,940,000 (1,390,000) ,550,000 (1,005,860) 15,544,140 AMP ,796,519 (1,640,000) 3,299,485 13,996 15,470,000 (2,341,755) 13,128,245 AMP ,000,000 (150,000) ,850,000 (938,456) 23,911,544 AMP ,975,000 (350,000) ,625,000 (936,256) 13,688,744 AMP ,340,682 (2,200,000) 4,199, ,100 51,479,999 (2,402,670) 49,077,329 AMP ,325,000 (725,000) ,600,000 (7,485,715) 15,114,285 AMP ,054,517 (2,652,000) 3,206, ,000 32,708,698 (7,051,966) 25,656,732 AMP ,000,000 (500,000) ,500,000 (3,461,915) 49,038,085 Tota $ 267,964,675 $ (10,232,000) $ 12,706,926 $ 294,096 $ 270,733,697 $ (29,772,059) $ 240,961,638 In addition, HUD approved the disposition of Lundy Lane, which included the land and improvement of one dwelling building containing two dwelling units in May The Authority sold the property with a book value of $932,187 to a third-party for $1,046,674 and reported gain on the sale of capital assets in the amount of $114,

38 Notes to Financial Statements (Continued) NOTE 4 CAPITAL ASSETS (Continued) The Authority s discretely presented component units capital assets activity for the year ended December 31, 2015 was as follows: Balance Balance January 1, December 31, 2015 Additions Reductions 2015 Capital assets, being depreciated: Land improvements $ 6,930,396 $ - $ - $ 6,930,396 Buildings and improvements 75,122, ,122,531 Equipment and vehicles 2,867,520 48,278-2,915,798 Total capital assets, being depreciated 84,920,447 48,278-84,968,725 Less accumulated depreciation (36,864,645) (2,402,405) - (39,267,050) Component units capital assets, net $ 48,055,802 $ (2,354,127) $ - $ 45,701,675 NOTE 5 LONG-TERM OBLIGATIONS Changes to the business-type activities long-term obligations are as follows: Balance Balance Amounts October 1, September 30, Due Within 2015 Additions Reductions 2016 One Year Loans payable: Bank of America $ - $ 20,000,000 $ - $ 20,000,000 $ - Energy performance loan payable to the City 32,706,926 - (32,706,926) - - Other loan payable to the City 3,452,509 1,523,746-4,976,255 - Subtotal 36,159,435 21,523,746 (32,706,926) 24,976,255 - Other noncurrent liabilities: Compensated absences 1,335, ,857 (497,190) 1,056, ,912 FSS liability 742,946 33, ,877 - Unearned revenue - lease 4,512,841 10,232,000 (160,863) 14,583,978 - Utilities payable to the City 1,315,356 - (489,437) 825, ,919 Total $ 44,066,353 $ 32,007,534 $ (33,854,416) $ 42,219,471 $ 1,426,831 Bank of America and Energy Performance Loans Payable - In October 28, 2015, the Authority entered into a loan agreement in the amount of $20,000,000 with Bank of America, N.A. for the purpose of the Affordable Housing Land Use Restriction agreement, and ancillary documents to evidence the loan. The loan is due and payable on October 28, 2033, the final maturity of the promissory note and bears 0% interest. Notwithstanding anything in the note or the other loan documents to the contrary, provided no event of default has occurred and is continuing, and provided further that the Property (Hunters Point East West) is and has during the entire term of the loan been in compliance with the Affordable Housing Land Use Restriction, the principal amount then unpaid and shall be deemed paid in full on the earlier of the maturity date, sale of the Property to a bona fide third party not affiliated with the Authority, or refinance of the Property. The Authority used the unsecured loan in the amount of $20,000,000 and proceeds from the RAD Phase I in the amount of $12,706,926 to repay its obligation to the City s MOHCD for the prior year s retirement of its Energy Performance Loan related to RAD and other Authority-owned properties. Other Loan Payable to the City On June 12, 2014, the Authority entered into a loan agreement with the City to borrow a maximum amount of $5,396,000 for the purpose of paying certain costs related to the modernization and/or repair of its elevators located at nine public housing locations. On November 1, 2015, 34

39 Notes to Financial Statements (Continued) NOTE 5 LONG-TERM OBLIGATIONS (Continued) the Authority and the City entered into an Amendment to Loan Agreement and Promissory Note to allow for forgiveness of the corresponding loan allocation on RAD conversion sites and the repayment of the remaining balance of the loan to the extent Excess Proceeds as defined in the loan agreement are received. The loan bears interest at an annual rate of 1%. The balances of principal and interest will be due and payable on the date that is the earlier of: (i) the 55 th anniversary of the date of the loan agreement (June 12, 2069); or (ii) the date the Authority transfers ownership in any of the property sites other than in connection with a conversion of such property sites under the RAD Program. Notwithstanding anything to the contrary contained herein, for each site that: (i) converts to the RAD Program; and (ii) completes the rehabilitation work required in connection with the RAD Program conversion, the City shall forgive the corresponding loan allocation amount applicable to such site, along with all accrued and unpaid interest on that amount, upon completion of such work. Notwithstanding the foregoing, in the event that, prior to the date that the entire loan amount has been forgiven, the Authority is required to pay to the City a portion of Excess Proceeds as a partial repayment for the loan; but only to the extent such Excess Proceeds are received by the Authority. During the year ended September 30, 2016, the Authority received loan disbursements totaling $1,523,746 from the City. At September 30, 2016, the loan payable balance in the amount of $4,976,255 is reported as a component of the noncurrent portion of long term debt to others. Utilities Payable to the City The Authority s Commission approved a Memorandum of Agreement (MOA) with the City s Public Utilities Commission (SFPUC) regarding payment of the Outstanding Housing Authority Electric Service Charges from March through September The MOA requires that the Authority pays the unpaid electric utility amount to SFPUC in accordance with an agreed-upon payment schedule, which requires 48 monthly debt service payments of $46,500 at an interest rate of 2%. The Authority began making the monthly payments in March The interest is paid out of the Central Office Cost Center, while the principal is paid from the AMPs that incurred the electric utility charges. The Authority has the right to prepay all or any portion of the unpaid electric utility amount without penalty. In October 2016, the Authority prepaid the outstanding other current liability in the amount of $825,919. Unearned Revenue Lease The balance consists of a $4,959,165 prepayment received from a tenant on a long-term ground lease entered into in January 2009 for land adjacent to a public housing property net of accumulated amortization of $512,446 at September 30, The unearned revenue is amortized over the initial lease ground term of 75 years. In addition, the balance includes RAD Phase I capitalized ground lease in the amount of $10,232,000 (see Note 4) net of accumulated amortization of $94,741 at September 30, This unearned revenue is amortized over the initial lease ground term of 99 years (see Note 12). Conduit Debt In October 1, 2004, the Authority issued tax-exempt Multifamily Housing Revenue Bonds, Series 2004 in the principal amount of $40,000,000 to provide funds for the construction of the Valencia Gardens Project. The bonds shall mature on September 1, 2049 and are secured by a deed of trust on the property and a direct-pay letter of credit issued by Citibank, N.A. Proceeds from the sale of the Permanent Bonds were not received by the Authority, but were deposited with a trustee in accordance with a loan agreement (dated October 1, 2004) between the Authority and Valencia Gardens Housing, L.P. The bonds are payable solely from payments made on the related secured loan. These bonds have maturity dates that are due at various dates through April 1, As of September 30, 2016, the outstanding conduit bonds issued by the Authority have a balance of $6,020,000. In the opinion of the Authority s officials, these bonds are not payable from any revenues or assets of the Authority. Neither the faith and credit nor the taxing power of the Authority or any political subdivision thereof are pledged for the payment of the principal or interest on the bonds. 35

40 Notes to Financial Statements (Continued) NOTE 6 DEFINED CONTRIBUTION PENSION PLANS Members in the trade unions (carpenters, electricians, floor layers, glaziers, laborers, painters and plumbers) are eligible for pension benefits in accordance with their respective contracts. Pension contributions are based on rates established by negotiated contracts. The Authority agreed to fund the unions pension plans through union dues, which call for contributions ranging from $0.96 to $22.83 per work hour for the year ended September 30, The Authority s total pension costs for members in the trade unions were $1,870,005, $2,309,896, and $1,595,324 for the years ended September 30, 2016, 2015, and 2014, respectively. NOTE 7 DEFINED BENEFIT PENSION PLANS (a) General Information Plan Descriptions All qualified permanent and probationary members in the San Francisco Municipal Employee s Association (MEA), SEIU Local 1021, SEIU Local 1877, and other unrepresented personnel hired after March 1, 1961 are eligible to participate in the Authority s Miscellaneous Plan and the Authority s former public safety employees were eligible to participate in the Authority s Safety Plan. The Miscellaneous Plan is an agent multiple-employer defined benefit pension plan and the Safety Plan is a cost sharing multiple-employer defined benefit pension plan administered by the CalPERS, which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under each Plan are established by State statute and the Authority resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website, < Benefits Provided CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each plan are applied as specified by the Public Employees Retirement Law. Miscellaneous Safety Prior to On or after Prior to On or after January 1, January 1, January 1, January 1, Benefit formula Benefit vesting schedule 5 yrs of service 5 yrs of service 5 yrs of service 5 yrs of service Benefit payments monthly for life monthly for life monthly for life monthly for life Retirement age Monthly benefits, as a % of eligible compensation 1.4% - 2.4% 1% - 2.5% 2.4% - 3% 2% - 2.7% Required employee contribution rates 7% 6.5% 9% 10.75% Required employer contribution rates (10/1/15-6/30/16) % % 0.00% 0.00% Required employer contribution rates (7/1/16-9/30/16) % % 0.00% 0.00% 36

41 Notes to Financial Statements (Continued) NOTE 7 DEFINED BENEFIT PENSION PLANS (Continued) Employees Covered As of June 30, 2016, the measurement date, the following employees were covered by the benefit terms for each plan: Miscellaneous Safety Inactive employees or beneficiaries currently receiving benefits Inactive employees entitled to but not yet receiving benefits Active employees Total Contributions Section 20814(c) of the California Public Employees Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the Plans are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the measurement period ended June 30, 2016, the employee contribution rate for classic employees (employees hired before January 1, 2013 or employees hired after January 1, 2013 who are previous CalPERS members) was 7.0% of annual pay. For new members hired after January 1, 2013, the contribution rate was 6.5% of annual pay, based on 50% of the normal cost rate. The Authority makes the contribution required of their employees on their behalf under the Memorandum of Understandings (MOUs) with the MEA and the SEIU Local Under the current MOU between the Authority and the SEIU 1877, the members of SEIU Local 1877 contribute 7.0% of their covered payroll. (b) Net Pension Liability At September 30, 2016, the Authority s net pension liability is comprised of the following: Miscellaneous Plan $ 20,424,388 Safety Plan 493,114 Total $ 20,917,502 The Authority s net pension liability for the Miscellaneous Plan is measured as the total pension liability, less the Authority s fiduciary net position held by the pension plan and the Safety Plan is reported as the Authority s proportionate share of the CalPERS Public Safety Risk Pool s net pension liability. The Authority s proportion of the net pension liability was based on a projection of the Authority s long-term share of contributions to the Safety pension plan relative to the projected contributions of all participating employers, actuarially determined. The Authority s net pension liability for each plan is measured as of June 30, 2016, using an actuarial valuation as of June 30, 2015 rolled forward to June 30, 2016 using standard update procedures. 37

42 Notes to Financial Statements (Continued) NOTE 7 DEFINED BENEFIT PENSION PLANS (Continued) A summary of principal assumptions and methods used to determine the net pension liability is shown below. Valuation Date June 30, 2015 Measurement Date June 30, 2016 Measurement Period July 1, 2015 to June 30, 2016 Actuarial Cost Method Entry Age Normal in accordance with GASB Statement No. 68 Actuarial Assumptions: Discount Rate 7.65% net of pension plan investment expenses, includes inflation Inflation 2.75% Salary Increases Varies by Entry Age and Services Mortality Rate Table 1 Derived using CalPERS' Membership Data for all Funds Post Retirement Benefit Contract COLA up to 2.75% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter 1 The mortality table used was developed based on CalPERS specific data. The table includes 20 years of mortality assumptions using Society of Actuaries Scale BB. All other actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period 1997 to 2011, including updates to salary increases, mortality and retirement rates. Discount Rate - The discount rate used to measure the total pension liability was 7.65 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.65 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.65 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called GASB Crossover Testing Report that can be obtained at CalPERS website under the GASB 68 section. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds asset classes, expected compound returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. The present value of benefits was calculated using the expected nominal returns for both short-term and long-term. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The long term expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. 38

43 Notes to Financial Statements (Continued) NOTE 7 DEFINED BENEFIT PENSION PLANS (Continued) The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Asset Class: New Strategic Allocation Real Return Years Real Return Years Global Equity 51.0% 5.25% 5.71% Global Fixed Income 20.0% 0.99% 2.43% Inflation Sensitive 6.0% 0.45% 3.36% Private Equity 10.0% 6.83% 6.95% Real Estate 10.0% 4.50% 5.13% Infrastructure and Forestland 2.0% 4.50% 5.09% Liquidity 1.0% -0.55% -1.05% 1 An expected inflation of 2.5 percent used for this period. 2 An expected inflation of 3.0 percent used for this period. (c) Changes in the Net Pension Liability The following table shows the changes in net pension liability for the Miscellaneous Plan recognized over the measurement period. Total Pension Liability Balances calculated at July 1, ,839,910 Plan Net Position Net Pension Liability $ $ $ 99,285,968 14,553,942 Changes recognized for the measurement period: Service cost 1,886,495-1,886,495 Interest on total pension liability 8,399,765-8,399,765 Differences between expected and actual experiences (1,672,545) - (1,672,545) Contributions from employer - 1,549,425 (1,549,425) Contributions from employees - 771,266 (771,266) Net investment income - 483,088 (483,088) Administrative expense - (60,510) 60,510 Benefit payments, including refunds of employee contributions (6,619,492) (6,619,492) - Net changes 1,994,223 (3,876,223) 5,870,446 Balances reported at June 30, 2016 $ 115,834,133 $ 95,409,745 $ 20,424,388 The Authority s proportionate share of the net pension liability for the Safety Plan was % as of the June 30, 2016 measurement date, which equals $493,

44 Notes to Financial Statements (Continued) NOTE 7 DEFINED BENEFIT PENSION PLANS (Continued) Sensitivity of the Net Pension Liability to Changes in Discount Rate - The following presents the net pension liability of each Plan as of the measurement date, calculated using the discount rate of 7.65 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage-point lower (6.65 percent) or 1 percentage-point higher (8.65 percent) than the current rate: Discount Rate -1% (6.65%) Current (7.65%) +1% (8.65%) Miscellaneous Plan $ 34,962,847 $ 20,424,388 $ 8,376,331 Safety Plan 750, , ,826 Net Pension Liability $ 35,713,349 $ 20,917,502 $ 8,658,157 Pension Plan Fiduciary Net Position - Detailed information about the pension plan fiduciary net position is available in the separately issued CalPERS financial reports. The plan fiduciary net position disclosed per the GASB Statement No. 68 accounting valuation report may differ from the plan assets reported in the funding actuarial valuation report due to several reasons. For the accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary self-insurance and OPEB expense included as assets. These amounts are excluded for rate setting purposes in the Authority s funding actuarial valuation. In addition, differences may result from early financial statement closing and final reconciled reserves. (d) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended September 30, 2016, pension expense recognized by the Authority for the measurement period ended June 30, 2016 for the Miscellaneous Plan and Safety Plan were $1,883,253 and $118,346, respectively. At September 30, 2016, the Authority deferred outflows of resources and deferred inflows of resources related to pensions are from the following sources. Deferred Outflows of Resources Pension contributions subsequent to measurement date 343,524 Deferred Inflows of Resources $ $ - Changes of assumptions - 554,207 Differences between expected and actual experiences - 2,158,739 Net difference between projected and actual earnings on Plan investments 8,771,914 - Differences between the employer's actual and proportionate share of contribution 23,260 32,122 Changes in employer's proportion - 48,053 Total $ 9,138,698 $ 2,793,121 40

45 Notes to Financial Statements (Continued) NOTE 7 DEFINED BENEFIT PENSION PLANS (Continued) The $343,524, reported as deferred outflows of resources related to contributions subsequent to the measurement date, will be recognized as a reduction of the net pension liability in the year ending September 30, Other amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized as future pension expense as follows. Measurement Periods Ended June 30, Deferred Outflows/ (Inflows) of Resources 2017 $ 116, ,047, ,445, ,392,443 Expected Average Remaining Service Lifetime (EARSL) The EARSL for the Miscellaneous Plan for the June 30, 2016 measurement date is 2.6 years, which was obtained by dividing the total service years of 1,705 (the sum of remaining service lifetimes of the active employees) by 647 (the total number of participants: active, inactive, and retired). The EARSL for the Safety Plan for the June 30, 2016 measurement date is 3.7 years, which was obtained by dividing the total service years of 475,689 (the sum of remaining service lifetimes of the active employees) by 127,009 (the total number of participants: active, inactive, and retired). The inactive employees and retirees have remaining service lifetimes equal to 0. In addition, the total future service is based on the members probability of decrementing due to an event other than receiving a cash refund. NOTE 8 OTHER POSTEMPLOYMENT BENEFITS Plan Description The Authority offers the same medical plans to its MEA, SEIU 1021, and other unrepresented retirees as to its active employees, with the exception that once a retiree becomes eligible for Medicare (that is, reaches age 65), he or she must join a Medicare HMO or a Medicare Supplement plan under the Public Employees Medical and Hospital Care Act (PEMHCA). Employees become eligible to retire and receive Authority-paid healthcare benefits upon attainment of age 50 and 5 years of covered CalPERS service, or by qualifying disability retirement status. Benefits are paid for the lifetime of the retiree with continuation to eligible surviving spouses whose benefits continue under CalPERS. The Authority s contribution on behalf of all eligible retirees and surviving spouses has been 80% of the premium since January 1, The Authority also pays a 0.34% of premium administrative charge for all retirees. Funding Policy The Authority finances its other postemployment benefit (OPEB) plan on a pay-as-yougo basis. The Authority does not have any assets segregated and restricted to provide funds towards the OPEB plan. 41

46 Notes to Financial Statements (Continued) NOTE 8 OTHER POSTEMPLOYMENT BENEFITS (Continued) Annual OPEB Cost and Net OPEB Obligation - The Authority s annual OPEB cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. GASB Statement No. 45 requires that an actuarial valuation of a plan with a total membership of 200 or more be completed at least biennially. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The Authority s annual OPEB cost for the year ended September 30, 2016 and the related information for the Plan based on an actuarial valuation dated September 30, 2016 are as follows: Annual required contribution $ 1,924,414 Interest on net OPEB obligation 258,469 Adjustment to the annual required contribution (359,310) Annual OPEB cost (expense) 1,823,573 Contributions made (743,230) Change in net OPEB obligation 1,080,343 Net OPEB obligation, beginning of year 6,461,732 Net OPEB obligation, end of year $ 7,542,075 The Authority s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the current and prior two years are as follows: Percentage of Annual Annual OPEB Net Year OPEB Cost OPEB Ended Cost Contributed Obligation 9/30/2016 $ 1,823, % $ 7,542,075 9/30/2015 1,553, % 6,461,732 9/30/2014 1,566, % 5,672,216 Funded Status and Funding Progress - The unfunded actuarial accrued liability is being amortized on a 30 year level dollar, open period. The table below indicates the funded status of the OPEB plan as of September 30, 2016, the date of the most recent actuarial valuation. Actuarial accrued liability (AAL) $ 19,001,281 Actuarial value of plan assets - Unfunded actuarial accrued liability (UAAL) $ 19,001,281 Funded ratio (actuarial value of plan assets)/aal 0.0% Approximate annual covered payroll (active plan members) $ 12,351,831 UAAL as a percentage of annual covered payroll 153.8% 42

47 Notes to Financial Statements (Continued) NOTE 8 OTHER POSTEMPLOYMENT BENEFITS (Continued) Actuarial Methods and Assumptions - Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contribution of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The actuarial cost method used in the valuation to determine the Actuarial Accrued Liability (AAL) and the Actuarial Required Contribution (ARC) was the projected unit credit method with service pro-rated. Under this method, the total present value of benefits is determined by projecting the benefit to be paid after the expected retirement date (or other event) and discounting those amounts to the valuation date. The normal cost is computed by dividing the total present value of benefits by the participant s total service (actual plus expected service) at retirement. The AAL under this method represents the total present value of benefits multiplied by the ratio of the participant s actual service to date and divided by expected service at retirement. The AAL for participants currently receiving payments and deferred vested participants is calculated as the actuarial present value of future benefits expected to be paid. No normal cost for these participants is payable. The following summarizes other significant methods and assumptions used in valuing the AAL and annual required contribution under the plan. Actuarial valuation date 9/30/16 Amortization method 30 year level dollar, open period Actuarial assumptions: Discount rate 4.00% Rate on return on assets 4.00% 6% in year 2016 and 5% in year 2017 Health care cost trend rates thereafter Mortality table Pre-retirement mortality: RP-2014 Employee Mortality, without projection Post-retirement Mortality: RP-2014 Healthy Annuitant Mortality, without projection Further, the valuation assumes that the Authority will continue to fund the liability on a pay-as-you-go basis. 43

48 Notes to Financial Statements (Continued) NOTE 9 RISK MANAGEMENT The Authority is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. There have been no significant reductions in insurance coverage from the previous year. The Authority has not settled claims which exceeded the Authority s insurance coverage in any of the past three years. (a) General and Other Liabilities The Authority purchased coverage with the Housing Authority Insurance Group, Inc. for property and commercial liabilities and losses incurred above its deductible limits. Claims liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, newly discovered information and damage awards. Accordingly, claims are reevaluated periodically to consider the effects of inflation, recent claims settlement trends (including frequency and amount of pay-outs), economic and social factors, newly discovered information and changes in the law. The Authority s deductibles and maximum coverage follows: Coverage Deductible Coverage Property coverage $ 50,000 $ 100,000,000 (aggregate) General liability Law enforcement liability Public officials liability 25,000 25,000 25,000 15,000,000 (aggregate) 1,000,000 (per occurrence) 1,000,000 (aggregate) 1,000,000 (per occurrence) 2,000,000 (aggregate) (b) Workers Compensation Liability The Bay Area Housing Authority Risk Management Agency (BAHARMA) was formed under a joint powers agreement between the Authority and the Housing Authority of the City of Oakland (OHA). BAHARMA does not provide pooling or sharing of risk between its two members. Its purpose is to provide administrative and risk management services to the two housing authorities workers compensation selfinsurance funds. Effective July 1, 2010, BAHARMA maintained excess insurance coverage above the selfinsured retention level of $350,000 up to $5 million per occurrence. Claims are paid from contributions received from the Authority and OHA. BAHARMA is considered to be a claims-servicing entity and each member s net assets are reported as due to members in the BAHARMA s statement of net position. At September 30, 2016, the Authority s deposit with BAHARMA is approximately $5.8 million and is reported as a component of the other noncurrent assets in the Authority s statement of net position. 44

49 Notes to Financial Statements (Continued) NOTE 9 RISK MANAGEMENT (Continued) Condensed financial information for BAHARMA s most recently completed audit is presented below as of and for the year ended September 30, 2015: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position September 30, 2015 For the Year Ended September 30, 2015 Assets: Operating revenues: Cash and equivalents $ 1,581,316 Claims servicing revenues $ 618,420 Prepaid and other 1,459,886 Investments 32,958,143 Total operating revenues 618,420 Total assets 35,999,345 Operating expenses: Claims administration 270,390 Liabilities: General and administration 348,030 Claims liability 22,057,698 Due to members 13,767,569 Total operating expenses 618,420 Other 174,078 Change in net position - Total liabilities 35,999,345 Net position, beginning of year - Net position $ - Net position, end of year $ - Complete financial statements of BAHARMA can be obtained from the Treasurer at 1619 Harrison Street, Oakland, California NOTE 10 COMMITMENTS AND CONTINGENCIES Grants and Contracts - The Authority participates in various federally and locally-assisted grant programs that are subject to review and audit by the grantor agencies. Entitlements to these resources are generally conditional upon compliance with the terms and conditions of grant agreements and applicable federal and other regulations, including the expenditure of resources for allowable purposes. Any disallowance resulting from a review or audit may become a liability of the Authority; however, as of the date of this report, no such reviews exist, and accordingly, no liabilities are reflected in the accompanying basic financial statements. Payment In Lieu Of Taxes (PILOT) A cooperative agreement between the Authority and the City dated January 21, 1965 exempts all public housing developments of the Authority from all real and personal property taxes and special assessments collected by the local tax collector. During the period of this exemption, the Authority agrees to make alternate payments to the City. Such payments are referred to as payments in lieu of taxes (PILOT). As specified in the agreement, the Authority s PILOT equals total rent charged less utilities multiplied by 10%. In November 2013, the Board of Supervisors approved a waiver of the PILOT beginning with the fiscal year ended September 30,

50 Notes to Financial Statements (Continued) NOTE 11 CONCENTRATIONS For the year ended September 30, 2016, approximately 93% of operating revenues and 33% of receivables reflected in the basic financial statements are from HUD. The Authority operates in a heavily regulated environment. The operations of the Authority are subject to the administrative directives, rules and regulations of federal, state and local regulatory agencies, including, but not limited to HUD. Such administrative directives, rules and regulations are subject to change by an act of Congress or an administrative change mandated by HUD. Such changes may occur with little notice or inadequate funding to pay for the related costs and the additional administrative burden to comply with the changes. Since 2011, the Authority has been declared Troubled the lowest classification prior to placing an agency under Federal receivership under the HUD s Public Housing Assessment System (PHAS). On September 4, 2013, HUD and the Authority entered into a Recovery Agreement to correct all HUDidentified deficiencies through the implementation of an Action Plan. This three year agreement was extended through June While the Authority is still on the HUD Troubled list, it has made progress by improving and transforming the operational platform and administration of the organization toward becoming a Standard Performer. Based on HUD Field Office s recent review, the Authority completed 86 out of the 90 PHAS Agreement Action Plan deliverables. During this time, the Authority has been engaged in the re-envisioning process with portfolio wide re-positioning and restructuring of public housing properties and expansion of the leased housing programs. The re-envisioning process is still underway. NOTE 12 GROUND LEASES WITH OTHERS North Beach Housing Associates Limited Partnership - The Authority leased the land for 75 years to the North Beach Housing Associates Limited Partnership on which the North Beach Place project, a 341 unit rental apartment complex, was built. The lease will expire in December The annual rent amount of $800,000 (base rent) began on January 1, 2005 and is payable in arrears on July 1 of each succeeding year, to the extent of 70% of residual receipts generated from the previous year by the Section 8 Housing Authority Units. Additional base rent is also payable from the remaining 30% of residual receipts if such amount exceeds $114,500, which is to be increased by 3% annually, and from 57% of the excess development proceeds. Additional base rent is also deemed to be paid upon the funding of the initial operating period reserve, the affordability reserve, and the performance reserve held by the Authority. Any rent payment is to be applied first toward the base rent, and then as a rent prepayment for the following years. For the year ended September 30, 2016, the Authority did not receive any ground lease rent. An option to acquire the North Beach Place project has been provided to the Authority during the period from January 1, 2016 to June 30, The option price is the greater of the project s fair market value, or the assumption of all outstanding debt and taxes. If such right is not exercised by the Authority, the partnership s managing general partner s option to acquire the project will begin on July 1, 2021 and will expire on December 31, In addition, the Authority has a ground lease receivable in the amount of $3,796,005 from North Beach Housing Associates Limited Partnership payable from residual receipts as defined in the. In accordance with the Authority s policies for recognizing lease revenues (see Note 1(n)), revenues are recognized when payments are received. Thus a corresponding allowance equal to 100% of this receivable is also recorded and the net value of the receivable as of September 30, 2016 is $0. 46

51 Notes to Financial Statements (Continued) NOTE 12 GROUND LEASES WITH OTHERS (Continued) Valencia Gardens Housing Limited Partnership - The Authority leased the land for 65 years to the Valencia Gardens Housing Limited Partnership on which the Valencia Gardens project, an apartment complex of 260 units for low-income housing, was built. The annual lease payments consist of annual base rent of $200,000. The rent is payable in arrears starting on July 1, 2006 and on July 1 of each succeeding year until the termination of the lease to the extent of 33% of residual receipts from the preceding year. Additional base rent is also payable of the lesser of $100,000 from residual receipts or such amounts as may be permissible under Multifamily Housing Program regulations. Any unpaid base rent shall not accrue. For the year ended September 30, 2016, the Authority did not receive any ground lease rent. The Partnership has granted the Authority, and the General Partner, if such rights are not exercised by the Authority, an option to purchase the property commencing on the first day after the credit period, January 1, 2017, and expiring on the last day of the end of the compliance period, December 31, The option agreement further allows an additional option term that commences the day after the end of the compliance period, January 1, 2021 and expires eighteen months thereafter, June 30, The purchase price of the property shall be the greater of the following amounts: (a) the amount of any outstanding indebtedness of the Property plus the amount of any federal, state and local tax of the Partnership or, (b) the fair market value of the Property. Hunters View Associates L.P. and HV Partners 1, LP (Hunters View) - The Authority entered into three agreements to lease three parcels of land on which the Hunters View complex will be built, located in San Francisco, California, for an annual rent amount of $1 per parcel. The leases commenced during January 2011 and terminate after 88 years for one parcel (Rental Housing) and 5 years for each of the remaining two parcels. The Hunters View complex will replace 267 low-income public housing units and add affordable housing to the community under the HOPE SF program. The rent is payable on February 1, 2011 and on February 1 of each succeeding year until the termination of the lease. In addition, residual rent is payable from surplus cash flow and is determined to be $1,999 per year. For the year ended September 30, 2016, the Authority did not receive any ground lease rent. RAD Phase I Lessees - The Authority leased the land related to the projected for 99 years to the lessees listed below. In November 2015, the lessees capitalized their lease payments through seller-financed notes with the Authority as discussed in Notes 3, 4 and 5 as follows: Lessee Project Capitalized Ground Lease Holly Courts Housing Associates, L.P. 100 Appleton Street $ 250,000 Bay Street, L.P. 227 Bay Street 375,000 Pacific Avenue, L.P. 990 Pacific Street 1,390, Pine, L.P Pine Street 1,640, Woodside Housing Associates, L.P. 255 Woodside 150, Ellis, L.P. 666 Ellis Street 350, Sanchez Housing Associates, L.P. 25 Sanchez Street 150, Duboce Housing Associates, L.P. 462 Duboce Avenue 150, Arguello, L.P. 345 Arguello Street 920, st Ave, L.P st Avenue 980, & 951 Eddy Associates, L.P Eddy Street 375, Turk Associates, L.P. 430 Turk Street 350,000 Robert Pitts Housing Partners, L.P Scott Street/1825 Eddy Street 2,652,000 Hunters Point East West LP 1065 Oakdale Ave. & 798 Jerrold Ave. 500,000 Total $ 10,232,000 47

52 Notes to Financial Statements (Continued) NOTE 13 DISCRETELY PRESENTED COMPONENT UNITS The following partnerships are considered discretely presented component units of the Authority and are reported as of their respective financial year end, December 31, Certain items may have changed for presentation purposes from the separately issued audited financial statements to conform to the Authority s presentation. The following disclosures are those that are material to the Authority and are not meant to be a full representation of each component unit s required disclosures. A copy of each component unit s separately issued audited financial statements can be obtained from the Authority s management. (a) Bernal Housing Associates, L.P. (Bernal Housing) (i) Incentive Management Fee Pursuant to the Partnership Agreement, Bernal Housing Corporation, the Managing General Partner, will be paid an incentive management fee for services in managing the project. In consideration for such services, Bernal Housing shall pay a fee, solely from Net Cash Flow, and such fee shall not be cumulative. No such fee was accrued or paid by Bernal Housing during the year ended December 31, (ii) Ground Lease In November 1999, Bernal Housing has executed a 75-year ground lease agreement with the Authority. The lease is subject to various use restrictions and operating requirements, as defined in the agreement, including the requirement that all 160 of the units be continuously set aside during the term of the Regulatory and Operating Agreement for occupancy by public housing eligible households. The terms of the lease provide rent of $10 per year throughout the term of the Regulatory Agreement. Upon expiration of the lease, all improvements, alterations, additions, equipment and fixtures shall become the property of the Authority without cost or charge. (iii) Long-term Debt Permanent Loan - A permanent loan of $15,500,000 was provided by the Authority. Under the terms of the loan, interest shall accrue at 0.1%, compounded annually. Interest and principal are payable from net available cash flow, as defined in the Hope VI permanent loan agreement dated November 23, 1999 (Hope VI Agreement). Pursuant to the Hope VI Agreement, the loan matures on November 23, The Authority and HUD have entered into an Urban Revitalization Demonstration Program Implementation Grant Agreement effective August 12, 1994 providing for a grant to be made by HUD to the Authority to assist in the financing of the construction of the project. Pursuant to the terms of the Hope VI Agreement, the Authority has loaned the funds to Bernal Housing as permanent financing for the project in order to repay the loan funded through the issuance of the bonds. The permanent loan is secured by a first leasehold deed of trust in favor of the Authority. As of December 31, 2015, the outstanding loan balance was $15,635,356 which was comprised of principal of $15,500,000 and accrued interest of $135,356. Construction Loan - A construction/permanent loan of up to $4,287,500 was provided by the Authority. Under the terms of the loan, interest shall accrue at 0.1%, compounded annually. Interest and principal are payable from net available cash flow, net proceeds or condemnation proceeds as defined in the loan agreement. The loan is secured by a second deed of trust on the project, and matures on November 23, As of December 31, 2015, the outstanding loan balance was $4,334,615, which was comprised of principal of $4,273,120 and accrued interest of $61,

53 Notes to Financial Statements (Continued) NOTE 13 DISCRETELY PRESENTED COMPONENT UNITS (Continued) Predevelopment Loan - A predevelopment loan of $2,465,501 was provided by the Authority. Under the terms of the loan, interest shall accrue at 0.1%, compounded annually. Interest and principal are payable from net available cash flow, net proceeds or condemnation proceeds as defined in the loan agreement. The loan is secured by a third deed of trust on the project and matures on November 23, As of December 31, 2015, the outstanding loan balance was $361,053, which was comprised of principal of $334,640 and accrued interest of $26,413. (b) Hayes Valley Apartments, L.P. (Hayes Valley I) (i) Ground Lease In November 1996, Hayes Valley I has executed a ground lease agreement with the Authority. The agreement is subject to various use restrictions and operating requirements, as defined in the agreement, including the requirements that 51 of the units be continuously set aside for occupancy by public housing eligible households and 33 units that will not be reserved as public housing units be restricted for occupancy by tax credit eligible households. The terms of the agreement provide rent of $10 per year throughout the 57-year term. Upon expiration of the agreement, all improvements, alterations, additions, equipment and fixtures shall become the property of the Authority without cost or charge. (ii) Long-term Debt Mortgage Note - Gershman Investment Corp. is providing a loan commitment of $1,601,300. The nonrecourse loan is insured by HUD under Section 221(d)(4) of the National Housing Act and is secured by a first deed of trust on the property. The loan bears interest at an annual rate of 6.5%. Monthly principal and interest payments amount to $10,196. The balance of principal and interest, if any, remaining shall be due and payable January 1, As of December 31, 2015, the outstanding loan balance was $1,419,123. Second Mortgage Loan - Construction and permanent financing is provided by the Authority under a loan commitment of $1,600,000. The nonrecourse loan is secured by a second leasehold deed of trust on the property. The loan currently bears interest at an annual rate of 7.02%. At initial closing of the construction loan, Hayes Valley I paid the Authority, solely from syndication proceeds, $235,000 as prepaid interest. All further interest, and all principal, are payable only from net available cash flow of the project, or from net proceeds or condemnation proceeds, as defined in the loan agreement. Payments are applied first to accrued interest and then against outstanding principal. Unpaid accrued interest compounds annually and is added to principal at the end of each year. Accrued interest added for the year ended December 31, 2015 amounted to $283,734 and total accrued interest amounted to $2,574,235 at December 31, The loan matures on November 24, As of December 31, 2015, the outstanding loan balance including unpaid accrued interest added was $4,174,235. (iii) Prior Period Adjustment During year, it was determined that prior years fees due to the Managing General Partner had not been properly recorded in prior periods. The correction of this error decreased the beginning net position by $80,

54 Notes to Financial Statements (Continued) NOTE 13 DISCRETELY PRESENTED COMPONENT UNITS (Continued) (c) Hayes Valley Apartments II, L.P. (Hayes Valley II) (i) Ground Lease In December 1997, Hayes Valley II has executed a ground lease agreement with the Authority. The agreement is subject to various use restrictions and operating requirements, as defined in the agreement, including the requirements that 66 of the units be continuously set aside for occupancy by public housing eligible households and 44 units that will not be reserved as public housing units be restricted for occupancy by tax credit eligible households. The terms of the agreement provide rent of $10 per year throughout the 57-year term. Upon expiration of the agreement, all improvements, alterations, additions, equipment and fixtures shall become the property of the Authority without cost or charge. (ii) Long-term Debt Mortgage Loan - Construction and permanent financing was originally provided by Midland Loan Services under a loan commitment of $2,324,500. The nonrecourse loan was insured by HUD under Section 221(d)(4) of the National Housing Act and is secured by a first deed of trust on the property. The loan bore interest at an annual rate of 8.2%. Interest alone was payable monthly on the first day of January 1998, and on the first day of each month thereafter to and including May 1, Monthly principal and interest payments of $16,512 began in June In May 2009, the mortgage note was refinanced with a new mortgage financing of $2,297,200, provided by Gershman Investment Corp. The mortgage note remains insured by HUD, bears interest at an annual rate of 6.5%, and is secured by a security deed to the property. Beginning July 1, 2009, monthly principal and interest payments of $14,520 are payable through June 1, On February 1, 2014, the loan was amended under a HUD Interest Rate Reduction program. Commencing March 1, 2014, monthly principal and interest payments of $12,491 are payable through June 1, As of December 31, 2015, the outstanding loan balance was $2,079,644. Authority Loan - Construction and permanent financing is also provided by the Authority under a loan commitment of $3,250,000. The nonrecourse loan is secured by a second leasehold deed of trust on the property. The loan bore interest at an annual rate of 12% through December 31, 1998, and thereafter bears interest at an annual rate of 6.31%. At initial closing of the construction loan, Hayes Valley II paid the Authority, solely from syndication proceeds, $300,000 as prepaid interest. All further interest, and all principal, are payable only from net available cash flow of the project, or from net proceeds or condemnation proceeds, as defined in the loan agreement. Payments are applied first to accrued interest and then against outstanding principal; unpaid accrued interest compounds annually and is added to principal at the end of each year. Accrued interest added for the year ended December 31, 2015 amounted to $456,627 and total accrued interest amounted to $4,443,191. The loan matures on December 1, As of December 31, 2015, the outstanding loan balance including unpaid accrued interest added was $7,693,191. (iii) Prior Period Adjustment During year, it was determined that prior years fees due to the Managing General Partner had not been properly recorded in prior periods. The correction of this error decreased the beginning net position by $80,

55 Notes to Financial Statements (Continued) NOTE 13 DISCRETELY PRESENTED COMPONENT UNITS (Continued) (d) Plaza East Associates, L.P. (Plaza East) (i) Working Capital Reserve Plaza East Housing Corporation (a blended component unit of the Authority), the Managing General Partner, has advanced funds to Plaza East for the purpose of funding the Working Capital Reserve. The balance due at December 31, 2015 was $165,000 and is included in other noncurrent liabilities on the statement of net position. (ii) Ground Lease Plaza East has executed a 75-year ground lease agreement with the Authority. The agreement is subject to various use restrictions and operating requirements, as defined in the agreement, including the requirement that all 193 of the units be continuously set aside during the term of the Regulatory and Operating Agreement for occupancy be public housing eligible households. The terms of the agreement provide for rent of $10 per year throughout the term of the regulatory agreement. Upon expiration of the agreement, all improvements, alterations, additions, equipment and fixtures shall become the property of the Authority without cost or charge. (iii) Long-Term Debt Plaza East Housing Corporation Note - Construction and permanent financing is being provided by Plaza East Housing Corporation under a loan commitment of $2,700,000. The nonrecourse loan is secured by a first leasehold deed of trust on the property. Interest accrued on the loan at an annual rate of 10% through December 31, Thereafter, interest accrues at an annual rate of 6.09%. At initial closing of the construction loan, the Plaza East paid Plaza East Housing Corporation, solely from syndication proceeds, $270,000 as prepaid interest. All further interest, and all principal, are payable only from net available cash flow of the project, or from net proceeds or condemnation proceeds, as defined in the loan agreement. Payments are applied first to accrued interest and then against outstanding principal; unpaid accrued interest compounds annually. Unpaid accrued interest added to principal at December 31, 2015 was $3,563,264. The loan matures on September As of December 31, 2015, the outstanding loan balance including unpaid accrued interest added was $6,263,264. SFHA Housing Corporation Note - Construction and permanent financing is also provided by SFHA Housing Corporation under a loan commitment of $10,764,813. The nonrecourse loan is secured by a second leasehold deed of trust on the property. Interest accrued on the loan at an annual rate of 10% through December 31, No interest shall accrue on the loan thereafter. In 2004, Plaza East paid SFHA Housing Corporation, from development sources other than public housing funds, $443,000 for interest through December 31, All further interest, and all principal, are payable only from net available cash flow of the project, or from net proceeds or condemnation proceeds, as defined in the SFHA Loan Agreement. Payments are applied first to unpaid accrued interest, if any, and then against outstanding principal. Unpaid accrued interest at December 31, 2015 was $380,230. The loan matures in September As of December 31, 2015, the outstanding loan balance was $10,764,813. (iii) Prior Period Adjustment During year, it was determined that prior years fees due to the Managing General Partner had not been properly recorded in prior periods. The correction of this error decreased the beginning net position by $80,

56 Notes to Financial Statements (Continued) NOTE 13 DISCRETELY PRESENTED COMPONENT UNITS (Continued) Condensed financial information for the discretely presented component units as of and for the year ended December 31, 2015 is as follows: Bernal Housing Hayes Valley Hayes Valley Plaza East Associates, L.P. Apartments, L.P. Apartments II, L.P. Associates, L.P. Total Assets: Unrestricted cash and cash equivalents $ 86,069 $ 201,495 $ 386,600 $ 24,038 $ 698,202 Restricted cash and cash equivalents 1,280, , , ,989 3,448,242 Accounts receivable and other current assets 69, , , , ,092 Other noncurrent assets 10,609 76, ,163 1,079,816 1,521,652 Capital assets, net 18,119,981 4,530,024 7,823,580 15,228,090 45,701,675 Total assets 19,566,203 5,953,651 9,836,006 16,979,003 52,334,863 Liabilities: Current liabilities 520, , , ,231 1,665,346 Long-term interest and other noncurrent liabilities 224,273 2,864,446 4,447,957 4,618,727 12,155,403 Long-term debt due to primary government, net of current portion 20,107,760 1,600,000 3,250,000 10,764,813 35,722,573 Long-term debt to others, net of current portion - 1,382,982 2,027,079 2,700,000 6,110,061 Total liabilities 20,852,931 6,100,802 10,012,879 18,686,771 55,653,383 Total net position $ (1,286,728) $ (147,151) $ (176,873) $ (1,707,768) $ (3,318,520) Operating revenues $ 1,362,159 $ 1,220,408 $ 1,443,152 $ 1,693,329 $ 5,719,048 Operating expenses (2,097,695) (1,166,538) (1,539,106) (2,691,972) (7,495,311) Operating income (loss) (735,536) 53,870 (95,954) (998,643) (1,776,263) Nonoperating revenues ,733 Nonoperating expenses (18,154) (352,844) (559,437) (355,040) (1,285,475) Change in net position (753,275) (298,403) (654,688) (1,353,639) (3,060,005) Net position, beginning of year, as restated (533,453) 151, ,815 (354,129) (258,515) Net position, end of year $ (1,286,728) $ (147,151) $ (176,873) $ (1,707,768) $ (3,318,520) Cash flows from operating activities $ 67,496 $ 44,787 $ 149,332 $ 104,972 $ 366,587 Cash flows from financing activities - (184,613) (122,398) - (307,011) Cash flows from investing activities (59,998) (70,642) (51,773) (83,226) (265,639) Change in cash and cash equivalents 7,498 (210,468) (24,839) 21,746 (206,063) Cash and cash equivalents, beginning of year 153, , ,439 2, ,371 Cash and cash equivalents, end of year $ 161,175 $ 201,495 $ 386,600 $ 24,038 $ 773,308 Reconciliation of cash and cash equivalents: Unrestricted cash and cash equivalents $ 86,069 $ 201,495 $ 386,600 $ 24,038 $ 698,202 Restricted cash and cash equivalents 1,280, , , ,989 3,448,242 Less replacement and other reserves (1,205,165) (749,870) (987,112) (430,989) (3,373,136) Total cash and cash equivalents $ 161,175 $ 201,495 $ 386,600 $ 24,038 $ 773,308 52

57 Notes to Financial Statements (Continued) NOTE 14 SUMMARIZED FINANCIAL INFORMATION OF THE BLENDED COMPONENT UNIT Condensed financial information for the SFHA Housing Corporation is presented below as of and for the year ended September 30, 2016: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position September 30, 2016 Assets: Nonoperating revenues: Cash and equivalents $ 212,160 Investment income $ 376,245 Noncurrent interest receivable 2,482,724 Change in net position 376,245 Notes receivable 29,181,088 Net position, beginning of year 31,499,727 Total assets $ 31,875,972 Net position, end of year $ 31,875,972 Net Position: Unrestricted net position $ 31,875,972 During the year ended September 30, 2016, the SFHA Housing Corporation had noncash noncapital financing activities in the amount of $376,245 due from interest accrued on long-term receivables. NOTE 15 SUBSEQUENT EVENT RAD Phase II In October 2016, the Authority converted 14 properties with over 2,000 public housing units to private ownership through HUD s RAD Program. Upon conversion of these properties, the Authority entered into $452.6 million in seller-financed notes and $5.6 million in permanent notes and received $16.0 million in proceeds from the private partnerships. 53

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59 Schedule of Changes in the Net Pension Liability and Related Ratios (Unaudited) Miscellaneous Plan Last 10 Years* Measurement Period Total Pension Liability Service cost $ 1,886,495 $ 1,854,872 $ 2,047,378 Interest on the total pension liability 8,399,765 8,244,228 8,217,837 Changes of assumptions - (1,918,301) - Differences between expected and actual experience (1,672,545) (3,948,271) - Benefit payments, including refunds of employee contributions (6,619,492) (6,198,883) (6,012,848) Net change in total pension liability during measurement period 1,994,223 (1,966,355) 4,252,367 Total pension liability, beginning 113,839, ,806, ,553,898 Total pension liability, ending $ 115,834,133 $ 113,839,910 $ 115,806,265 Plan Fiduciary Net Position Contributions - employer $ 1,549,425 $ 1,422,186 $ 1,268,058 Contributions - employees 771, , ,140 Net investment income 483,088 2,214,386 15,277,147 Benefit payments, including refunds of employee contributions (6,619,492) (6,198,883) (6,012,848) Administrative expense (60,510) (111,804) - Net change in plan fidicuary net position (3,876,223) (1,844,761) 11,513,497 Plan fidicuary net position, beginning 99,285, ,130,729 89,617,232 Plan fidicuary net position, ending $ 95,409,745 $ 99,285,968 $ 101,130,729 Plan Net Pension Liability, ending $ 20,424,388 $ 14,553,942 $ 14,675,536 Plan Fidicuary Net Position as a Percentage of the Total Pension Liability 82.37% 87.22% 87.33% Covered-Employee Payroll $ 12,351,831 $ 11,924,600 $ 12,708,743 Plan Net Pension Liability as a Percentage of Covered-Employee Payroll % % % * Fiscal year 2015 was the first year of implementation of GASB Statement No. 68, therefore only three years are shown. Notes to Schedule of Changes in Net Pension Liability and Related Ratios: Benefit changes: The figures above do not include any liability impact that may have resulted from the plan changes which occurred after the June 30, 2015 valuation date. This applies to voluntary benefit changes as well as any offers of Two Years Additional Service Credit. Assumption changes: In 2016, there were no changes. In 2015, amounts reported reflect an adjustment of the discount rate from 7.50% (net of administrative expenses) to 7.65% (without a reduction for pension plan administration changes). In 2014, amounts reported were based on the 7.5% discount rate. 55

60 Schedule of Proportionate Share of the Net Pension Liability and Related Ratios (Unaudited) Safety Plan Last 10 Years* Measurement period Plan's proportion of the net pension liability % % % Plan's proportionate share of the net pension liability $ 493,114 $ 459,172 $ 422,112 Plan's covered-employee payroll (the Authority has no active members) n/a n/a n/a Plan's proportionate share of the net pension liability as a percentage of its covered-employee payroll n/a n/a n/a Plan's proportionate share of the fiducary net pension as a percentage of the plan's total pension liability 74.06% 78.40% 80.43% * Fiscal year 2015 was the first year of implementation of GASB Statement No. 68, therefore only three years are shown. 56

61 Schedule of Pension Contributions (Unaudited) For the Fiscal Year Ended June 30 - Last 10 Years* Miscellaneous Plan Actuarially determined contribution $ 1,549,425 $ 1,422,186 $ 1,263,076 Contributions in relation to the actuarially determined contribution (1,549,425) (1,422,186) (1,263,076) Contribution deficiency (excess) $ - $ - $ - Covered-Employee Payroll $ 12,351,831 $ 11,924,600 $ 12,708,743 Contributions as a Percentage of Covered-Employee Payroll 12.54% 11.93% 9.94% Safety Plan Actuarially determined contribution $ 4,459 $ 95,116 $ 89,845 Contributions in relation to the actuarially determined contribution (4,459) (95,116) (89,845) Contribution deficiency (excess) $ - $ - $ - Covered-Employee Payroll (Authority has no active employees) N/A N/A N/A Contributions as a Percentage of Covered-Employee Payroll N/A N/A N/A The actuarial methods and assumptions used to set the actuarially determined contributions are as follows: Valuation dates June 30, 2013 June 30, 2012 June 30, 2011 Actuarial cost method Amortization method Asset valuation method Entry-age normal cost method Level percent of payroll Actuarial value of assets 15 year smoothed market Inflation Payroll growth Projected salary increases Investment rate of return Retirement age Mortality 2.75% 3.00% 3.30% to 14.20% depending on age, service, and type of employment 7.50%, net of pension plans' investment expenses, including inflation The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to Pre-retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries. * Fiscal year 2015 was the first year of implementation of GASB Statement No. 68, therefore only three years are shown. 57

62 Schedule of Funding Progress (Unaudited) Other Postemployment Benefits (Dollars in Thousands) Last 3 Valuations (B) (F) Actuarial UAAL as a (A) Accrued (C) (D) Percentage Actuarial Actuarial Liability Unfunded Funded (E) of Covered Valuation Value of (AAL) - AAL (UAAL) Ratio Covered Payroll Date Assets Entry Age [(B) - (A)] [(A) / (B)] Payroll [(C) / (E)] 9/30/2016 $ - $ 19,001 $ 19, % $ 12, % 9/30/ ,359 17, % 11, % 9/30/ ,259 17, % 12, % 58

63 Discretely Presented Component Units Combining Statement of Net Position December 31, 2015 Assets: Current assets: Unrestricted: Cash and cash equivalents 86,069 Bernal Housing Hayes Valley Hayes Valley Plaza East Associates, L.P. Apartments, L.P. Apartments II, L.P. Associates, L.P. Total $ $ 201,495 $ 386,600 $ 24,038 $ 698,202 Due from the U.S. Department of Housing and Urban Development - 31, ,447 Tenants receivable, net 45,319 41,412 49,287 24, ,319 Accounts receivable from others 110 9,226-20,000 29,336 Due from primary government - 289, , , ,690 Prepaid expenses 23,844 24,401 32,348 49, ,300 Total unrestricted current assets 155, , , ,108 1,663,294 Restricted: Cash and cash equivalents: Replacement and other reserves 1,205, , , ,208 3,153,416 Tenant security deposits 75,106 59,809 82,130 77, ,826 Total restricted cash and cash equivalents 1,280, , , ,989 3,448,242 Total current assets 1,435,613 1,347,563 1,657, ,097 5,111,536 Noncurrent assets: Other noncurrent assets 10,609 76, ,163 1,079,816 1,521,652 Capital assets: Depreciable, net 18,119,981 4,530,024 7,823,580 15,228,090 45,701,675 Total noncurrent assets 18,130,590 4,606,088 8,178,743 16,307,906 47,223,327 Total assets 19,566,203 5,953,651 9,836,006 16,979,003 52,334,863 Liabilities: Current liabilities: Accounts payable 9, , , , ,526 Due to primary government 417, ,735 Accrued interest payable - 5,026 7,400-12,426 Unearned revenues 13,073 5,984 24,053 9,730 52,840 Other current liabilities 5,600 45,480 11,150 99, ,287 Tenant security deposits 75,106 59,809 82,130 77, ,826 Current portion of notes payable to others - 36,141 52,565-88,706 Total current liabilities 520, , , ,231 1,665,346 Noncurrent liabilities: Long-term interest payable to others ,070,297 4,070,297 Long-term interest payable to primary government 223,264 2,574,235 4,443, ,230 7,620,920 Long-term debt due to primary government 20,107,760 1,600,000 3,250,000 10,764,813 35,722,573 Long-term debt to others, net of current portion - 1,382,982 2,027,079 2,700,000 6,110,061 Other noncurrent liabilities 1, ,211 4, , ,186 Total noncurrent liabilities 20,332,033 5,847,428 9,725,036 18,083,540 53,988,037 Total liabilities 20,852,931 6,100,802 10,012,879 18,686,771 55,653,383 Net position: Net investment in capital assets (1,987,779) 1,474,760 2,493,936 1,763,277 3,744,194 Restricted 1,205, , , ,208 3,153,416 Unrestricted (504,114) (2,311,972) (3,575,791) (3,824,253) (10,216,130) Total net position $ (1,286,728) $ (147,151) $ (176,873) $ (1,707,768) $ (3,318,520) 59

64 Discretely Presented Component Units Combining Statement of Revenues, Expenses and Changes in Net Position For the Year Ended December 31, 2015 Bernal Housing Hayes Valley Hayes Valley Plaza East Associates, L.P. Apartments, L.P. Apartments II, L.P. Associates, L.P. Total Operating revenues: Tenant revenues, net $ 853,268 $ 811,809 $ 987,623 $ 658,756 $ 3,311,456 Operating subsidy from primary government 485, , ,946 1,029,601 2,348,863 Miscellaneous and other revenues 23,646 15,528 14,583 4,972 58,729 Total operating revenues 1,362,159 1,220,408 1,443,152 1,693,329 5,719,048 Operating expenses: Administrative 282, , , ,616 1,115,380 Utilities 283, , , ,878 1,312,407 Maintenance 529, , , ,813 1,925,928 Protective services 55,025 29,097 31,817 40, ,573 General 111,439 97, , , ,618 Depreciation 835, , , ,121 2,402,405 Total operating expenses 2,097,695 1,166,538 1,539,106 2,691,972 7,495,311 Operating income (loss) (735,536) 53,870 (95,954) (998,643) (1,776,263) Nonoperating revenues (expenses): Investment income ,733 Interest expense (18,154) (352,844) (559,437) (355,040) (1,285,475) Total nonoperating revenues (expenses) (17,739) (352,273) (558,734) (354,996) (1,283,742) Change in net position (753,275) (298,403) (654,688) (1,353,639) (3,060,005) Net position, beginning of year, as previously reported (533,453) 231, ,815 (274,129) (18,515) Prior period adjustment - (80,000) (80,000) (80,000) (240,000) Net position, beginning of year, as restated (533,453) 151, ,815 (354,129) (258,515) Net position, end of year $ (1,286,728) $ (147,151) $ (176,873) $ (1,707,768) $ (3,318,520) See accompanying notes to financial statements. 60

65 Housing Authority of the City and County of San Francisco, California Entity Wide Balance Sheet Summary September 30, 2016 (With Discretely Presented Component Units as of December 31, 2015) 6.2 Component Unit - Blended Lower Income Housing Assistance Program_Section 8 Moderate Rehabilitat Section 8 Moderate Rehabilitation Single Room Occupancy Housing Choice Vouchers Total Primary Government 6.1 Component Unit - Discretely Presented REAC Total (Primary Government and Component Units) Project Total COCC ELIM 111 Cash - Unrestricted 2,701, ,160 3,912,709-1,325,973 1,042,590-9,194, ,202 9,893, Cash - Other Restricted 1,046, ,564,043-4,610,719 3,153,416 7,764, Cash - Tenant Security Deposits 853, , ,826 1,148, Total Cash 4,602, ,160 3,912,709-1,325,973 4,606,633-14,659,541 4,146,444 18,805, Accounts Receivable - PHA Projects ,178-29,178-29, Accounts Receivable - HUD Other Projects 854,303-24, ,698-1,454,903 31,447 1,486, Accounts Receivable - Other Government 182, , , , Accounts Receivable - Miscellaneous 845, ,685 3,888 30, ,408-2,183,047 29,336 2,212, Accounts Receivable - Tenants 3,806, ,806, ,109 4,111, Allowance for Doubtful Accounts -Tenants (3,345,084) (3,345,084) (143,790) (3,488,874) 127 Notes, Loans, & Mortgages Receivable - Current 160, ,693 (205,693) 160, , Fraud Recovery , , , Allowance for Doubtful Accounts - Fraud (162,986) - (162,986) - (162,986) 120 Total Receivables, Net of Allowances for Doubtful Accounts 2,503, ,587 3,888 30,683 1,493,443 (205,693) 4,539, ,792 5,374, Prepaid Expenses and Other Assets , , , , Inter Program Due From 1,857, ,820 (2,805,034) Total Current Assets 8,963, ,160 4,932,146 3,888 1,356,656 7,047,896 (3,010,727) 19,505,086 5,111,536 24,616, Land 11,216, , ,392,003 6,930,396 18,322, Buildings 136,803, , ,404,360 75,122, ,526, Furniture, Equipment & Machinery - Dwellings 50, ,409-50, Furniture, Equipment & Machinery - Administration 2,066,401-6,948, ,494-9,603,621 2,915,798 12,519, Accumulated Depreciation (78,895,226) - (7,346,384) - - (588,494) - (86,830,104) (39,267,050) (126,097,154) 167 Construction in Progress 65, ,786-65, Total Capital Assets, Net of Accumulated Depreciation 71,307, , ,686,075 45,701, ,387, Notes, Loans and Mortgages Receivable - Non-Current 314,734,064 29,181,088-2,764, ,432 (3,291,082) 343,915, ,915, Other Assets 13,812,076 2,482,724 5,852, ,147,187 1,521,652 23,668, Total Non-Current Assets 399,853,495 31,663,812 6,231,107 2,764, ,432 (3,291,082) 437,748,413 47,223, ,971, Deferred Outflow of Resources 3,240,081-3,087, , ,198 2,557,037-9,138,698-9,138, Total Assets and Deferred Outflow of Resources 412,056,643 31,875,972 14,250,256 2,896,916 1,482,854 10,131,365 (6,301,809) 466,392,197 52,334, ,727, Accounts Payable <= 90 Days 4,113, ,358 61,286-1,115,883-6,113, ,526 6,751, Accrued Wage/Payroll Taxes Payable 212,539-1,422,727 35,388 14, ,685,227-1,685, Accrued Compensated Absences - Current Portion 97, , , , , Accrued Interest Payable ,426 12, Accounts Payable - HUD PHA Programs ,497 18, , , Accounts Payable - Other Government , , Tenant Security Deposits 853, , ,826 1,148, Unearned Revenues ,840 52, Current Portion of Long-term Debt - Capital Projects/Mortgage Reven ,706 88, Other Current Liabilities 3,909,706-1,271, (205,693) 4,975, ,287 5,137, Accrued Liabilities - Other 332, , , , , Inter Program - Due To 1,702, ,102, (2,805,034) Total Current Liabilities 11,221,730-3,904,968 1,320,658 33,520 1,750,486 (3,010,727) 15,220,635 1,665,346 16,885, Long-term Debt, Net of Current - Capital Projects/Mortgage Revenue ,868,775 41,868, Long-term Debt, Net of Current - Operating Borrowings 24,976, ,976,255-24,976, Non-current Liabilities - Other 17,875, ,878 (3,291,082) 15,360,855 12,119,262 27,480, Accrued Compensated Absences - Non Current 42, , , , , Accrued OPEB Liabilities 4,481, , ,146,986-7,542,075-7,542, Accrued Pension Liabilities 7,774,265-6,985, , ,600 5,589,429-20,917,502-20,917, Total Non-Current Liabilities 55,150,030-8,145, , ,600 8,679,589 (3,291,082) 69,252,217 53,988, ,240, Total Liabilities 66,371,760-12,050,577 1,606, ,120 10,430,075 (6,301,809) 84,472,852 55,653, ,126, Deferred Inflow of Resources 1,247, ,145 36,408 36, ,489-2,793,121-2,793, Net Investment in Capital Assets 71,307, , ,686,075 3,744,194 75,430, Restricted Net Position 1,046, ,787,165-3,833,841 3,153,416 6,987, Unrestricted Net Position 272,083,701 31,875,972 1,017,814 1,254,379 1,129,806 (3,755,364) - 303,606,308 (10,216,130) 293,390, Total Equity - Net Assets / Position 344,437,732 31,875,972 1,396,534 1,254,379 1,129,806 (968,199) - 379,126,224 (3,318,520) 375,807, Total Liabilities, Deferred Inflows of Resources and Equity - Net 412,056,643 31,875,972 14,250,256 2,896,916 1,482,854 10,131,365 (6,301,809) 466,392,197 52,334, ,727,060 See accompanying notes to the financial data schedules. 61

66 Housing Authority of the City and County of San Francisco, California Entity Wide Revenue and Expense Summary (With Discretely Presented Component Units for the Year Ended December 31, 2015) Lower Income Housing Assistance Section 8 REAC Total (Primary 6.2 Component Unit - Program_Section 8 Moderate Rehabilitation Housing Choice Total Primary 6.1 Component Unit - Government and Project Total Blended COCC Moderate Rehabilitat Single Room Occupancy Vouchers ELIM Government Discretely Presented Component Units) Net Tenant Rental Revenue 14,370, ,370,109 3,311,456 17,681, Tenant Revenue - Other 7,433-1, ,193-9, Total Tenant Revenue 14,377,542-1, ,379,302 3,311,456 17,690, HUD PHA Operating Grants 38,374, ,806,192 5,043, ,616, ,840, ,840, Capital Grants 3,979, ,979,365-3,979, Management Fee - - 7,499, (7,499,080) Asset Management Fee , (67,560) Book Keeping Fee - - 1,102, (1,102,932) Front Line Service Fee - - 6,558, (6,558,649) Total Fee Revenue ,228, (15,228,221) Investment Income - Unrestricted ,182 1, Mortgage Interest Income 7,020, , ,396,831-7,396, Fraud Recovery ,101-80,101-80, Other Revenue 577, ,865 1, ,382-1,701,757 2,407,592 4,109, Gain or Loss on Sale of Capital Assets 114, , , Investment Income - Restricted Total Revenue 64,443, ,245 16,113,846 4,807,347 5,043, ,935,730 (15,228,221) 210,492,329 5,720, ,213, Administrative Salaries 3,195,917-3,696, , ,039 3,596,493-10,864, ,235 11,269, Auditing Fees 108,631-32,515 3, , ,136 58, , Management Fee 5,329, ,704 52,782 1,985,622 (7,499,080) 29, , , Book-keeping Fee 326, ,918 22, ,392 (1,102,932) 12,320-12, Advertising and Marketing , ,284-80,784 4,623 85, Employee Benefit contributions - Administrative 2,281,360-1,886,262 97,703 94,410 1,867,238-6,226,973-6,226, Office Expenses 1,802,887-2,580,527 31,475 25, ,965-5,187,114 46,109 5,233, Legal Expense 8, , , , , Travel 1,117-49, ,772-67,970-67, Other 252, , , , , , Total Operating - Administrative 13,307,305-8,920, , ,262 8,989,705 (8,602,012) 23,547,939 1,115,380 24,663, Asset Management Fee 67, (67,560) Tenant Services - Other 86, ,943-86, Total Tenant Services 86, ,943-86, Water 1,943,519-3, ,795-1,949, ,513 2,393, Electricity 2,797, ,514 4,296 4,150 83,959-3,144,607 59,664 3,204, Gas 2,321, ,322, ,051 2,493, Sewer 2,804,673-2, ,368-2,809, ,179 3,447, Total Utilities 9,867, ,608 5,566 5,378 87,565-10,226,322 1,312,407 11,538, Ordinary Maintenance and Operations - Labor 2,879,068-2,827, ,037-5,716, ,017 5,980, Ordinary Maintenance and Operations - Materials and Other 1,082, , ,097-1,227, ,597 1,485, Ordinary Maintenance and Operations Contracts 19,350, , ,478 (6,558,649) 13,226,825 1,404,314 14,631, Employee Benefit Contributions - Ordinary Maintenance , , , Total Maintenance 23,312,612-3,542,129 1,335 1,462 56,071 (6,558,649) 20,354,960 1,925,928 22,280, Protective Services - Labor , , , Protective Services - Other Contract Costs 1,592,692-56, ,649, ,573 1,806, Employee Benefit Contributions - Protective Services Total Protective Services 1,592, , ,766, ,573 1,923, Property Insurance 796,588-6, , ,424 1,063, Liability Insurance 535, ,162 14, , , , Workmen's Compensation 1,066,810-1,242,358 10,306 9, ,206-2,504,406 48,844 2,553, All Other Insurance 109,863-11,065 3,116 2,916 41, , , Total insurance Premiums 2,509,210-1,259,686 28,584 27, ,197-4,249, ,268 4,559, Other General Expenses 4,526,360-78, ,604, ,490 4,805, Compensated Absences 524, , ,794-1,392,329-1,392, Bad debt - Tenant Rents 2,804, ,804,726 72,860 2,877, Total Other General Expenses 7,855, , ,794-8,801, ,350 9,075, Interest of Mortgage (or Bonds) Payable , , Interest on Notes Payable (Short and Long Term) , , , , Total Interest Expense and Amortization Cost , ,835 1,285,475 1,306, Total Operating Expenses 58,599,346-14,724, , ,394 9,958,540 (15,228,221) 69,055,852 6,378,381 75,434, Excess of Operating Revenue over Operating Expenses 5,844, ,245 1,389,352 4,221,048 4,628, ,977, ,436,477 (657,600) 140,778, Extraordinary Maintenance 26, ,590-26, Housing Assistance Payments 338, ,904,539 4,522, ,669, ,434, ,434, HAP Portability-In , , , Depreciation Expense 5,216,694-15, ,231,714 2,402,405 7,634, Total Expenses 64,181,174-14,739,514 4,490,838 4,937, ,852,245 (15,228,221) 205,973,173 8,780, ,753, Operating Transfer In 3,525, (3,525,686) Operating transfer Out (1,682,295) - (1,843,391) ,525, Special Items (Net Gain/Loss) 240,961, ,961, ,961, Total Other financing Sources (Uses) 242,805,029 - (1,843,391) ,961, ,961, Excess (Deficiency) of Total Revenue Over (Under) Total Expenses 243,067, ,245 (469,059) 316, ,008 2,083, ,480,794 (3,060,005) 242,420, Required Annual Debt Principal Payments ,687 81, Beginning Equity 104,744,510 31,499,727 (1,508,791) 937,870 1,023,798 (3,051,684) - 133,645,430 (18,515) 133,626, Prior Period Adjustments, Equity Transfers and Correction of Errors (3,374,384) - 3,374, (240,000) (240,000) Administrative Fee Equity (3,755,364) - (3,755,364) - (3,755,364) Housing Assistance Payments Equity ,787,165-2,787,165-2,787, Unit Months Available 53, ,420 6, , ,778 6, , Number of Unit Months Leased 52, ,420 5,980 94, ,516 6, , Excess Cash (7,593,239) (7,593,239) - (7,593,239) Building Purchases 3,412, ,412,719-3,412, Furniture & Equipment - Dwelling Purchases 98, ,171-98, Furniture & Equipment - Administrative Purchases 327, , ,563 See accompanying notes to the financial data schedules. 62

67 Notes to the Financial Data Schedules NOTE 1 GENERAL As required by HUD, the Authority prepares its financial data schedules in accordance with HUD requirements in a prescribed format. The schedules format excludes depreciation expense, HAPs and extraordinary maintenance expense from operating activities, includes investment revenue, HUD capital grants revenue, gains and losses on the disposal of capital assets and interest expense in operating activities, differs in classifications of current and noncurrent assets, and reflects tenant and interest revenue separate from bad debt expense, which differs from the presentation of the Authority s basic financial statements in accordance with accounting principles generally accepted in the United States of America. NOTE 2 - RELATIONSHIP TO BASIC FINANCIAL STATEMENTS The schedules agree to or can be reconciled with the amounts reported in the Authority s basic financial statements. 63

68 Schedule of Modernization Costs for Completed Projects Modernization costs for completed projects are as follows for the year ended September 30, 2016: Projects CA39R CA39R CA39R Funds approved $ 13,568,787 $ 11,176,035 $ 10,097,741 Funds expended 13,568,787 11,176,035 10,097,741 Excess (deficiency) of funds approved $ - $ - $ - HUD grants $ 13,568,787 $ 11,176,035 $ 10,097,741 Funds expended 13,568,787 11,176,035 10,097,741 Excess (deficiency) of funds approved $ - $ - $ - Projects CA39R CA39R CA39E Funds approved $ 690,074 $ 260,111 $ 250,000 Funds expended 690, , ,000 Excess (deficiency) of funds approved $ - $ - $ - HUD grants $ 690,074 $ 260,111 $ 250,000 Funds expended 690, , ,000 Excess (deficiency) of funds approved $ - $ - $ - Notes to the Schedule of Modernization Costs for Completed Projects 1) 2) The distribution of modernization costs by projects as shown on the Final Performance and Evaluation Report dated September 30, 2016 for projects CA39R , CA39R , CA39R , CA39R , CA39R , and CA39E , respectively, accompanying the Actual Modernization Cost Certification submitted to HUD agrees with the Authority's records. All modernization costs have been paid and all related liabilities have been discharged through payments. 64

69 Independent Auditor s 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 Members of the Board of Commissioners of the Housing Authority of the City and County of San Francisco, California San Francisco, California We have audited 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, the financial statements of the business-type activities and the aggregate discretely presented component units of the Housing Authority of the City and County of San Francisco, California, (Authority) as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements, and have issued our report thereon dated June 30, Our report also includes a reference to other auditors who audited the financial statements of the Authority s discretely presented component units: Bernal Housing Associates, L.P.; Hayes Valley Apartments, L.P.; Hayes Valley Apartments II, L.P.; and Plaza East Associates, L.P., as described in our report on the Authority s financial statements. This report does not include the results of the other auditors testing of internal control over financial reporting or compliance and other matters that are reported on separately by those auditors. The financial statements of Bernal Housing Associates, L.P. and Plaza East Associates, L.P. were not performed in accordance with Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Authority s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing our opinion on the effectiveness of the Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency or a combination of deficiencies in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did identify certain deficiencies in internal control, described in the accompanying schedule of findings and questioned costs as items , , , and that we consider to be material weaknesses. Macias Gini & O Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA

70 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instance of noncompliance that is required to be reported under Government Auditing Standards. Authority s Response to Findings The Authority s responses to the findings identified in our audit are described in the accompanying corrective action plan. The Authority s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Walnut Creek, California June 30,

71 Independent Auditor s Report on Compliance For Each Major Federal Program and on Internal Control Over Compliance Required by the Uniform Guidance Members of the Board of Commissioners of the Housing Authority of the City and County of San Francisco, California San Francisco, California Report on Compliance for Each Major Federal Program We have audited the Housing Authority of the City and County of San Francisco, California s (Authority) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Authority s major federal programs for the year ended September 30, The Authority s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the Authority s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Authority s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Authority s compliance. Macias Gini & O Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA