MANHATTAN BEACH UNIFIED SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2010

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2 TABLE OF CONTENTS FINANCIAL SECTION Independent Auditors' Report 2 Management's Discussion and Analysis 4 Basic Financial Statements Government-Wide Financial Statements Statement of Net Assets 13 Statement of Activities 14 Fund Financial Statements Governmental Funds - Balance Sheet 15 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 16 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balance 17 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 18 Proprietary Funds - Statement of Net Assets 20 Proprietary Funds - Statement of Revenues, Expenses, and Changes in Fund Net Assets 21 Proprietary Funds - Statement of Cash Flows 22 Fiduciary Funds - Statement of Net Assets 23 Fiduciary Funds - Statement of Changes in Net Assets 24 Notes to Financial Statements 25 REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 54 Special Reserve Fund For Other Than Capital Outlay Projects - Budgetary Comparison Schedule 55 Schedule of Other Postemployment Benefits (OPEB) Funding Progress 56 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 58 Local Education Agency Organization Structure 59 Schedule of Average Daily Attendance 60 Schedule of Instructional Time 61 Reconciliation of Annual Financial and Budget Report with Audited Financial Statements 62 Schedule of Financial Trends and Analysis 63 Combining Statements - Non-Major Governmental Funds Combining Balance Sheet 64 Combining Statement of Revenues, Expenditures, and Changes in Fund Balance 65 Note to Supplementary Information 66 INDEPENDENT AUDITORS' REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 69 Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A Report on State Compliance 73

3 TABLE OF CONTENTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditors' Results 76 Financial Statement Findings 77 Federal Awards Findings and Questioned Costs 78 State Awards Findings and Questioned Costs 79 Summary Schedule of Prior Audit Findings 80

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8 MANAGEMENT'S DISCUSSION AND ANALYSIS REPORTING THE DISTRICT AS A WHOLE The Statement of Net Assets and the Statement of Activities The Statement of Net Assets and the Statement of Activities report information about the District as a whole and about its activities. These statements include all assets and liabilities of the District using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the District's net assets and changes in them. Net assets are the difference between assets and liabilities, which is one way to measure the District's financial health, or financial position. Over time, increases or decreases in the District's net assets are one indicator of whether its financial health is improving or deteriorating. Other factors to consider are changes in the District's property tax base and the condition of the District's facilities. The relationship between revenues and expenses is the District's operating results. Since the governing board's responsibility is to provide services to our students and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District. The quality of the education and the safety of our schools will likely be an important component in this evaluation. In the Statement of Net Assets and the Statement of Activities, we present the District activities as follows: Governmental Activities - Most of the District's services are reported in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development activities, and the on-going effort to improve and maintain buildings and sites. Property taxes, State income taxes, user fees, interest income, Federal, State, and local grants, as well as general obligation bonds, finance these activities. REPORTING THE DISTRICT'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds - not the District as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. Department of Education. 5

9 MANAGEMENT'S DISCUSSION AND ANALYSIS Governmental Funds - Most of the District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The differences of results in the governmental fund financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. Proprietary Funds - When the District charges users for the services it provides, whether to outside customers or to other departments within the District, these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Assets and the Statement of Revenues, Expenses, and Changes in Fund Net Assets. In fact, the District's enterprise funds are the same as the business-type activities we report in the government-wide statements, but provide more detail and additional information, such as cash flows, for proprietary funds. We use internal service funds (the other component of proprietary funds) to report activities that provide supplies and services for the District's other programs and activities, such as the District's Self-Insurance Fund. The internal service funds are reported with governmental activities in the government-wide financial statements. THE DISTRICT AS A TRUSTEE Reporting the District's Fiduciary Responsibilities The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities, scholarships, employee retiree benefits, and pensions. The District's fiduciary activities are reported in the Statements of Fiduciary Net Assets. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. FINANCIAL HIGHLIGHTS The District exceeds all State Department of Education reserve for economic uncertainties requirements. Due to significant State of California budget issues the District has taken a conservative approach to budgeting expenditures by not increasing salaries in To further its financial stability, the District continues to reduce its long-term obligations. The passing of a General Obligation Bond in will be the financial vehicle used to relieve the District of this obligation. 6

10 MANAGEMENT'S DISCUSSION AND ANALYSIS THE DISTRICT AS A WHOLE Net Assets The District's net assets were $9,330,205 for the fiscal year ended June 30, Of this amount, $18,068,388 was unrestricted. Restricted net assets are reported separately to show legal constraints from debt covenants and enabling legislation that limit the governing board's ability to use those net assets for day-to-day operations. Our analysis below, in summary form, focuses on the net assets (Table 1) and change in net assets (Table 2) of the District's governmental activities. Table 1 Governmental Business-Type Activities Activities Total Assets Current and other assets $ 37,364,299 $ 31,204,805 $ 1,761,005 $ 1,594,197 $ 39,125,304 $ 32,799,002 Capital assets 77,852,640 79,322, ,852,640 79,322,180 Total Assets 115,216, ,526,985 1,761,005 1,594, ,977, ,121,182 Liabilities Current liabilities 12,726,219 11,703, , ,824 12,984,500 12,039,479 Non-current long-term obligations 94,663,239 92,382, ,663,239 92,382,033 Total Liabilities 107,389, ,085, , , ,647, ,421,512 County School Facilities Fund Net Assets Invested in capital assets, net of related debt (14,513,211) (13,309,411) - - (14,513,211) (13,309,411) Restricted 5,775,028 6,815, ,775,028 6,815,844 Unrestricted 16,565,664 12,934,864 1,502,724 1,258,373 18,068,388 14,193,237 Total Net Assets $ 7,827,481 $ 6,441,297 $ 1,502,724 $ 1,258,373 $ 9,330,205 $ 7,699,670 The $16,565,664 in unrestricted net assets of governmental activities represents the accumulated results of all past years' operations. 7

11 MANAGEMENT'S DISCUSSION AND ANALYSIS Changes in Net Assets The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 14. Table 2 takes the information from the Statement, rounds off the numbers, and rearranges them slightly so you can see our total revenues for the year. Revenues Program revenues: Charges for services 98,938 Table 2 Governmental Activities Business-Type Activities School District Activities $ $ 309,825 $ - $ - $ 98,938 $ 309,825 Operating grants and contributions 11,265,609 10,503, ,265,609 10,503,846 General revenues: Federal and State aid not restricted 14,440,800 19,100, ,440,800 19,100,384 Property taxes 29,801,891 28,129, ,801,891 28,129,694 Other general revenues 5,204,116 7,285,051 3,421,515 3,726,230 8,625,631 11,011,281 Total Revenues 60,811,354 65,328,800 3,421,515 3,726,230 64,232,869 69,055,030 Expenses Instructional 38,759,073 40,712, ,759,073 40,712,764 Student support services 5,426,971 5,258, ,426,971 5,258,749 Administration 3,237,319 3,238, ,237,319 3,238,681 Maintenance and operations 5,828,636 6,071, ,828,636 6,071,085 Other 6,173,171 7,623,381 3,177,164 3,085,106 9,350,335 10,708,487 Total Expenses 59,425,170 62,904,660 3,177,164 3,085,106 62,602,334 65,989,766 Change in Net Assets $ 1,386,184 $ 2,424,140 $ 244,351 $ 641,124 $ 1,630,535 $ 3,065,264 Governmental Activities As reported in the Statement of Activities on page 14, the cost of all of our governmental activities this year was $59,425,170. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $29,801,891 because the cost was paid by those who benefited from the programs ($98,938) or by other governments and organizations who subsidized certain programs with grants and contributions ($11,265,609). We paid for the remaining "public benefit" portion of our governmental activities with $19,644,916 in Federal and State funds, and with other revenues, like interest and general entitlements. 8

12 MANAGEMENT'S DISCUSSION AND ANALYSIS In Table 3, we have presented the cost and net cost of each of the District's largest functions: regular program instruction, student transportation services, other pupil services, administration, maintenance and operations, and other outgo. As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits they believe are provided by that function. Table 3 Total Cost of Services Net Cost of Services Instruction $ 38,759,073 $ 40,712,764 $ 29,598,027 $ 33,077,192 Pupil transportation 503, , , ,140 Other pupil services 4,922,990 4,663,898 3,559,737 3,427,608 Administration 3,237,319 3,238,681 3,045,500 3,150,115 Maintenance and operations 5,828,636 6,071,085 5,756,050 5,334,276 Other outgo 6,173,171 7,623,381 5,677,983 6,619,658 Total $ 59,425,170 $ 62,904,660 $ 48,060,623 $ 52,090,989 The Total Cost of Services reflected in Table 3 reflects how the District continues to reduce expenses in the wake of the current State and National recession. Expenditures in 2010 decreased by $3,479,490 compared to

13 MANAGEMENT'S DISCUSSION AND ANALYSIS THE DISTRICT'S FUNDS As the District completed this year, our governmental funds reported a combined fund balance of $28,479,695, which is an increase of $4,670,280 from last year (Table 4). Table 4 Balances and Activity July 1, 2009 Revenues Expenditures June 30, 2010 General Fund $ 11,046,830 $ 53,265,669 $ 51,583,578 $ 12,728,921 Cafeteria Fund 368,338 2,187,220 1,887, ,410 Deferred Maintenance Fund 292,057 2, , ,432 Special Reserve Fund for Other Than Capital Outlay Projects 5,696,679 80,766-5,777,445 Bond Interest and Redemption Fund 4,446,117 4,853,258 4,557,561 4,741,814 Building Fund 1,562,990 8,134,367 5,766,798 3,930,559 Capital Facilities Fund 282, , , ,474 County School Facilities Fund 102,181 1, ,640 Corporate Debt Service Fund 11, ,488 - Total $ 23,809,415 $ 68,846,252 $ 64,175,972 $ 28,479,695 The primary reasons for these increases/decreases are: the General Fund increase to $12,728,921 was largely due to additional revenue provided from the American Recovery Reinvestment Act, ARRA, and conservative budgeting. The Cafeteria Fund increase in revenue to $668,410 was from increases in price for breakfast and lunch as well as management efficiencies. All other funds increases were largely due to the interest earned on the principal amounts and limiting expenditures of certain funds. Bond related funds generated revenue to cover annual estimated expenditures. 10

14 MANAGEMENT'S DISCUSSION AND ANALYSIS CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2010, the District had $77,852,640 in a broad range of capital assets (net of depreciation), including land, buildings, furniture, and equipment. This amount represents a net decrease (including additions, deductions, and depreciation) of $1,469,540, or 1.85 percent, from last year (Table 5). Table 5 Governmental Activities Land and construction in progress $ 4,439,830 $ 3,924,033 Buildings and improvements 73,305,429 75,215,980 Equipment 107, ,167 Total $ 77,852,640 $ 79,322,180 This year's major additions included: Building improvements $ 515,797 This year's additions included software and hardware improvements to the District's private internet system and continued improvements to the District's facilities. Buildings and improvements reflected annual deprecation. No general fund debt was issued for these additions. With the passage of the 2009 capital facilities bond, the District is planning on making significant facility improvements to the high school. Long-Term Obligations At the end of this year, the District had $89,915,952 in bonds outstanding versus $83,287,388 last year, a decrease of 7.96 percent. Table 6 Governmental Activities General obligation bonds $ 89,915,952 $ 83,287,388 Premium on bonds 366,240 - Certificates of participation 7,720,000 11,970,000 Compensated absences 553, ,422 Postemployment benefits 789, ,507 Settlement agreement - 166,666 Total $ 99,344,484 $ 96,836,983 Other obligations include compensated absences payable, and other long-term obligations. We present more detailed information regarding our long-term obligations in Note 7 of the financial statements. 11

15 MANAGEMENT'S DISCUSSION AND ANALYSIS ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES In considering the District Budget for the year, the governing board and management used the following criteria: The key Average Daily Attendance assumptions in our revenue forecast are: ADA or the number of students used to calculate revenue was 6,405 and the revenue per ADA before deficit was $6,642 with revenue limit per ADA after an 18.4 percent deficit was $5,433. Unrestricted lottery revenue is projected at $117 per ADA with restricted lottery at $17 per ADA. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need any additional financial information, contact the Assistant Superintendent, Business Services, at Manhattan Beach Unified School District, South 325 Peck Avenue, Manhattan Beach, California

16 STATEMENT OF NET ASSETS Governmental Business-Type Activities Activities Total ASSETS Deposits and investments $ 29,142,829 $ 1,746,184 $ 30,889,013 Receivables 6,732,832 14,821 6,747,653 Deferred charges 1,261,061-1,261,061 Stores inventories 42,751-42,751 Other current assets 184, ,826 Capital assets Land and construction in process 4,439,830-4,439,830 Other capital assets 108,748, ,748,750 Less: Accumulated depreciation (35,335,940) - (35,335,940) Total Capital Assets 77,852,640-77,852,640 Total Assets 115,216,939 1,761, ,977,944 LIABILITIES Accounts payable 6,183, ,770 6,340,649 Interest payable 447, ,955 Deferred revenue 1,413, ,511 1,514,651 Current portion of long-term obligations 4,681,245-4,681,245 Noncurrent portion of long-term obligations 94,663,239-94,663,239 Total Liabilities 107,389, , ,647,739 NET ASSETS Invested in capital assets, net of related debt (14,513,211) - (14,513,211) Restricted for: Debt service 4,293,859-4,293,859 Capital projects 27,393-27,393 Educational programs 593, ,837 Other activities 807, ,188 Other restrictions 52,751-52,751 Unrestricted 16,565,664 1,502,724 18,068,388 Total Net Assets $ 7,827,481 $ 1,502,724 $ 9,330,205 The accompanying notes are an integral part of these financial statements. 13

17 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED Program Revenues Charges for Operating Services and Grants and Functions/Programs Expenses Sales Contributions Governmental Activities: Instruction $ 34,685,114 $ 64,260 $ 7,572,747 Instruction-related activities: Supervision of instruction 896,778 5, ,158 Instructional library, media, and technology 736,177 11, ,290 School site administration 2,441,004 4, ,678 Pupil services: Home-to-school transportation 503,981-80,655 Food services 1,887, ,625 All other pupil services 3,035,842 12,022 1,121,606 Administration: Data processing 394, All other administration 2,842, ,819 Plant services 5,828,636 1,099 71,487 Ancillary services 268, ,934 Interest on long-term obligations 3,594, Other outgo 2,310, ,610 Total Governmental Activities 59,425,170 98,938 11,265,609 Business-Type Activities: Enterprise services 3,177, Total Business-Type Activities 3,177, General revenues and subventions: Property taxes, levied for general purposes Property taxes, levied for debt service Taxes levied for other specific purposes Federal and State aid not restricted to specific purposes Interest and investment earnings Miscellaneous Subtotal, General Revenues Change in Net Assets Net Assets - Beginning Net Assets - Ending The accompanying notes are an integral part of these financial statements. 14

18 Net (Expenses) Revenues and Changes in Net Assets Business- Governmental Type Activities Activities Total $ (27,048,107) $ - $ (27,048,107) (419,543) - (419,543) 39,851-39,851 (2,170,228) - (2,170,228) (423,326) - (423,326) (1,657,523) - (1,657,523) (1,902,214) - (1,902,214) (394,419) - (394,419) (2,651,081) - (2,651,081) (5,756,050) - (5,756,050) (226,326) - (226,326) (3,594,241) - (3,594,241) (1,857,416) - (1,857,416) (48,060,623) - (48,060,623) - (3,177,164) (3,177,164) - (3,177,164) (3,177,164) 24,944,769-24,944,769 4,830,810-4,830,810 26,312-26,312 14,440,800-14,440, ,178 30, ,652 4,895,938 3,391,041 8,286,979 49,446,807 3,421,515 52,868,322 1,386, ,351 1,630,535 6,441,297 1,258,373 7,699,670 $ 7,827,481 $ 1,502,724 $ 9,330,205 14

19 GOVERNMENTAL FUNDS BALANCE SHEET Special Reserve Fund for Other Than General Capital Outlay Building Fund Projects Funds ASSETS Deposits and investments $ 12,691,284 $ 5,758,768 $ 4,375,280 Receivables 6,550,614 18,677 11,327 Stores inventories 21, Other current assets 184, Total Assets $ 19,447,821 $ 5,777,445 $ 4,386,607 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 5,305,760 $ - $ 456,048 Deferred revenue 1,413, Total Liabilities 6,718, ,048 Fund Balances: Reserved for: Revolving cash 10,000 - Stores inventories 21, Other reservations 593, Unreserved: Undesignated, reported in: General Fund 12,103, Special revenue funds - 5,777,445 - Debt service funds Capital projects funds - - 3,930,559 Total Fund Balance 12,728,921 5,777,445 3,930,559 Total Liabilities and Fund Balances $ 19,447,821 $ 5,777,445 $ 4,386,607 The accompanying notes are an integral part of these financial statements. 15

20 Bond Interest and Non Major Total Redemption Governmental Governmental Fund Funds Funds $ 4,741,814 $ 1,549,248 $ 29,116, ,125 6,732,743-21,654 42, ,826 $ 4,741,814 $ 1,723,027 $ 36,076,714 $ - $ 422,071 $ 6,183, ,413, ,071 7,597, ,000-21,654 42, , ,103, ,188 6,584,633 4,741,814-4,741, ,114 4,402,673 4,741,814 1,300,956 28,479,695 $ 4,741,814 $ 1,723,027 $ 36,076,714 15

21 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS Total Fund Balance - Governmental Funds $ 28,479,695 Amounts Reported for Governmental Activities in the Statement of Net Assets are Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is: $ 113,188,580 Accumulated depreciation is: (35,335,940) Net Capital Assets 77,852,640 Expenditures relating to issuance of debt of next fiscal year were recognized on modified accrual basis, but are not recognized on the accrual basis. 1,261,061 In governmental funds, unmatured interest on long-term obligations is recognized in the period when it is due. On the government-wide financial statements, unmatured interest on long-term obligations is recognized when it is incurred. (447,955) An internal service fund is used by the District's management to charge the costs of the workers' compensation insurance program to the individual funds. The assets and liabilities of the Internal Service Fund are included with governmental activities. 26,524 Long-term obligations, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Long-term obligations at year-end consist of: Bonds payable $ 89,915,952 Premium on bonds 366,240 Certificates of participation 7,720,000 Compensated absences 553,271 Net OPEB obligation 789,021 Total Long-Term Obligations (99,344,484) Total Net Assets - Governmental Activities $ 7,827,481 The accompanying notes are an integral part of these financial statements. 16

22 GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED Special Reserve Fund for Other Than General Capital Outlay Fund Projects REVENUES Revenue limit sources $ 33,227,377 $ - Federal sources 2,198,979 - Other State sources 8,277,689 - Other local sources 9,561,624 80,766 Total Revenues 53,265,669 80,766 EXPENDITURES Current Instruction 33,396,146 - Instruction-related activities: Supervision of instruction 872,954 - Instructional library, media and technology 700,838 - School site administration 2,349,877 - Pupil services: Home-to-school transportation 480,753 - Food services - - All other pupil services 2,925,457 - Administration: Data processing 378,139 - All other administration 2,684,897 - Plant services 5,048,921 - Facility acquisition and construction - - Ancillary services 268,904 - Debt service Principal 166,666 - Interest and other - - Total Expenditures 49,273,552 - Excess (Deficiency) of Revenues Over Expenditures 3,992,117 80,766 OTHER FINANCING SOURCES (USES) Other sources - - Other uses (2,310,026) - Net Financing Sources (Uses) (2,310,026) - NET CHANGE IN FUND BALANCES 1,682,091 80,766 Fund Balance - Beginning 11,046,830 5,696,679 Fund Balance - Ending $ 12,728,921 $ 5,777,445 The accompanying notes are an integral part of these financial statements. 17

23 Bond Interest and Non-Major Total Building Redemption Governmental Governmental Fund Fund Funds Funds $ - $ - $ - $ 33,227, ,167 2,423,146-22,448 5,458 8,305,595 99,092 4,830,810 2,282,567 16,854,859 99,092 4,853,258 2,512,192 60,810, ,396, , , ,349, , ,887,148 1,887, ,925, , ,221 2,705, , ,472 5,639, , , ,904 4,250,000 2,553,476-6,970, ,564 2,004, ,194 2,774,843 5,766,798 4,557,561 2,268,035 61,865,946 (5,667,706) 295, ,157 (1,054,969) 8,035, ,035, (2,310,026) 8,035, ,725,249 2,367, , ,157 4,670,280 1,562,990 4,446,117 1,056,799 23,809,415 $ 3,930,559 $ 4,741,814 $ 1,300,956 $ 28,479,695 17

24 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED Total Net Change in Fund Balances - Governmental Funds $ 4,670,280 Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures, however, for governmental activities, those costs are shown in the Statement of Net Assets and allocated over their estimated useful lives as annual depreciation expenses in the Statement of Activities. This is the amount by which depreciation exceeds capital outlays expense in the period. Capital outlays $ 515,797 Depreciation expense (1,985,337) In the Statement of Activities Other Postemployment Benefit Obligations (OPEB) are measured by an actuarially determined Unfunded Frozen Actuarial Accrued Liability (UFAAL). In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). This year, amounts contributed toward the OPEB obligation were more than the UAAL by $74,486. In the Statement of Activities, certain operating expense - compensated absences (vacation) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for this item are measured by the amount of financial resources used (essentially, the amounts actually paid). Vacation used was less than the amounts earned by: Proceeds received from issuance of debt is a revenue in the governmental funds, but it increases long-term obligations in the Statement of Net Assets and does not affect the Statement of Activities: (1,469,540) 74,486 (3,849) General obligation bond (7,651,589) The accompanying notes are an integral part of these financial statements. 18

25 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES (Continued) FOR THE YEAR ENDED Governmental funds report the effect of premiums, discounts, issuance costs, and the deferred amount on a refunding when the debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. This amount is the net effect. Premium on issuance $ (383,686) Cost of issuance 310,996 Combined adjustment $ (72,690) Repayment of bond principal is an expenditure in the governmental funds, but it reduces long-term obligations in the Statement of Net Assets and does not affect the Statement of Activities: General obligation bonds 4,527,448 Certificates of participation 4,250,000 Settlement agreement 166,666 Under the modified basis of accounting used in the governmental funds, expenditures are not recognized for transactions that are not normally paid with expendable available financial resources. In the Statement of Activities, however, which is presented on the accrual basis, expenses and liabilities are reported regardless of when financial resources are available. This adjustment combines the net changes of the following balances: Amortization of debt premium 17,446 Amortization of cost of issuance (18,771) Amortization of deferred amount on refunding (94,510) Combined adjustment (95,835) Interest on long-term obligations in the Statement of Activities differs from the amount reported in the governmental funds because interest is recorded as an expenditure in the funds when it is due, and thus requires the use of current financial resources. In the Statement of Activities, however, interest expense is recognized as the interest accrues, regardless of when it is due. The additional interest reported in the Statement of Activities is the result of two factors. First, accrued interest decreased by $495,892 and second, $3,504,423 of additional accumulated interest was accreted on the District's "capital appreciation" general obligation bonds. (3,008,531) An internal service fund is used by the District's management to charge the costs of services to the individual funds. The net change in Net Assets of the Internal Service Fund is reported with governmental activities. (662) Change in Net Assets of Governmental Activities $ 1,386,184 The accompanying notes are an integral part of these financial statements. 19

26 PROPRIETARY FUNDS STATEMENT OF NET ASSETS Business-Type Activities Governmental Enterprise Funds Activities - Major Internal Enterprise Service Fund ASSETS Deposits and investments $ 1,746,184 $ 26,435 Receivables 14, Total Current Assets 1,761,005 26,524 LIABILITIES Accounts payable 156,770 - Deferred revenue 101,511 - Total Current Liabilities 258,281 - NET ASSETS Unrestricted 1,502,724 26,524 Total Net Assets $ 1,502,724 $ 26,524 The accompanying notes are an integral part of these financial statements. 20

27 PROPRIETARY FUNDS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEAR ENDED Business-Type Activities Governmental Enterprise Funds Activities - Major Internal Enterprise Service Fund OPERATING REVENUES Local and intermediate sources $ 3,391,042 $ - Total Operating Revenues 3,391,042 - OPERATING EXPENSES Payroll costs 2,298,841 - Supplies and materials 241, Facility rental 630, Other operating costs 5,454 - Total Operating Expenses 3,177,162 1,039 Operating Income (Loss) 213,880 (1,039) NON-OPERATING REVENUES Interest income 30, Total Nonoperating Revenues 30, Change in Net Assets 244,351 (662) Total Net Assets - Beginning 1,258,373 27,186 Total Net Assets - Ending $ 1,502,724 $ 26,524 The accompanying notes are an integral part of these financial statements. 21

28 PROPRIETARY FUNDS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED Business-Type Activities Governmental Enterprise Funds Activities - Major Internal Enterprise Service Fund CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from other local sources $ 3,494,745 $ - Cash payments for salaries and benefits (2,298,841) - Cash payments for interfund services used, including payments in lieu of taxes that are payments for, and equivalent to, services provided (1,057,375) (1,064) Net Cash Provided (Used) by Operating Activities 138,529 (1,064) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 30, Net Cash Provided by Investing Activities 30, Net Increase (Decrease) in Cash and Cash Equivalents 169,000 (644) Cash and Cash Equivalents - Beginning 1,577,184 27,079 Cash and Cash Equivalents - Ending $ 1,746,184 $ 26,435 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income (loss) $ 213,880 $ (1,039) Changes in assets and liabilities: Receivables 2,192 - Account payable (179,054) (25) Deferred revenue 101,511 - NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 138,529 $ (1,064) The accompanying notes are an integral part of these financial statements. 22

29 FIDUCIARY FUNDS STATEMENT OF NET ASSETS Retiree Benefits Agency Trust Funds ASSETS Deposits and investments $ 703,265 $ 137,287 Receivables 2,406 - Other current assets - 6,000 Total Assets 705,671 $ 143,287 LIABILITIES Accounts payable $ 244,322 $ - Due to student groups - 143,287 Total Liabilities 244,322 $ 143,287 NET ASSETS Unreserved 461,349 Total Net Assets $ 461,349 The accompanying notes are an integral part of these financial statements. 23

30 FIDUCIARY FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED Retiree Benefits ADDITIONS Trust Interest $ 10,532 Total Additions 10,532 Change in Net Assets 10,532 Net Assets - Beginning 450,817 Net Assets - Ending $ 461,349 The accompanying notes are an integral part of these financial statements. 24

31 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Manhattan Beach Unified School District (the "District") was established in 1912 and unified in 1993 under the laws of the State of California. The District operates under a locally elected five-member Board form of government and provides educational services to grades K - 12 as mandated by the State and/or Federal agencies. The District operates five elementary schools, one middle school, and one high school. A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. For Manhattan Beach Unified School District, this includes general operations, food service, and student related activities of the District. Component Units Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. The Manhattan Beach Education Foundation Inc. The Manhattan Beach Education Foundation Inc. (the "Foundation") is a legally separate, tax-exempt entity. The Foundation's sole purpose is to provide financial support for Manhattan Beach Unified School District. Although the District does not control the timing or the amount of receipts of the Foundation, the majority of the resources held by the Foundation can only be used by, or for the benefit, of the District. The Foundation is not considered a component unit of the District. During the year ended June 30, 2010, the Foundation contributed approximately $4,073,340 to the District. Current audited financial information was not available at the time of the District's audit. Basis of Presentation - Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major and non-major governmental funds: 25

32 NOTES TO FINANCIAL STATEMENTS Major Governmental Funds General Fund The General Fund is the chief operating fund for all districts. It is used to account for the ordinary operations of a district. All transactions except those required or permitted by law to be in another fund are accounted for in this fund. Special Reserve Fund for Other Than Capital Outlay Projects The Special Reserve for Other Than Capital Outlay Projects is used primarily to provide for the accumulation of General Fund monies for general operating purposes other than for capital outlay (Education Code Section 42840). Building Fund The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued. Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a district (Education Code Sections ). Non-Major Governmental Funds Special Revenue Funds The Special Revenue funds are established to account for the proceeds from specific revenue sources (other than trusts or for major capital projects) that are restricted to the financing of particular activities: Cafeteria Fund The Cafeteria Fund is used to account separately for Federal, State, and local resources to operate the food service program (Education Code Sections ) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections and 38100). Deferred Maintenance Fund The Deferred Maintenance Fund is used to account separately for State apportionments and the District's contributions for deferred maintenance purposes (Education Code Sections ) and for items of maintenance approved by the State Allocation Board, except for State apportionments which, as a result of Senate Bill 4 of the Third Extraordinary Session (SBX3 4), may be used for any educational purpose. Capital Project Funds The Capital Project funds are established to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds). Capital Facilities Fund The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections ). Expenditures are restricted to the purposes specified in Government Code Sections or to the items specified in agreements with the developer (Government Code Section 66006). 26

33 NOTES TO FINANCIAL STATEMENTS County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section to receive apportionments from the 1998 State School Facilities Fund (Proposition la), the 2002 State School Facilities Fund (Proposition 47), or the 2004 State School Facilities Fund (Proposition 55) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section et seq.). Debt Service Funds The Debt Service funds are established to account for the accumulation of resources for and the payment of principal and interest on general long-term debt. Corporate Debt Service Fund The Corporate Debt Service Fund is used to account for the interest and redemption of principal of Certificates of Participation. Proprietary Funds Proprietary fund reporting focuses on the determination of operating income, changes in net assets, financial position, and cash flows. The District applies all GASB pronouncements, as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Proprietary funds are classified as enterprise or internal service. The District has the following proprietary funds: Enterprise Fund Enterprise funds may be used to account for any activity for which a fee is charged to external users for goods or services. The only enterprise fund of the District accounts for the financial transactions related to the Community Preschool of the District. Internal Service Fund Internal service funds may be used to account for any activity for which goods or services are provided to other funds of the District on a cost-reimbursement basis. The District operates a Self-Insurance Fund that is accounted for in an internal service fund. Fiduciary Funds Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into four classifications: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds. Trust funds are used to account for the assets held by the District under a trust agreement for individuals, private organizations, or other governments and are therefore, not available to support the District's own programs. The District's trust fund is a Retiree Benefits Trust Fund. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. The District's agency fund accounts for associated student body activities (ASB). Basis of Accounting - Measurement Focus Government-Wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements, but differs from the manner in which governmental fund financial statements are prepared. 27

34 NOTES TO FINANCIAL STATEMENTS The government-wide Statement of Activities presents a comparison between expenses, both direct and indirect, and program revenues for each segment of the business-type activities of the District and for each governmental function, and excludes fiduciary activity. Direct expenses are those that are specifically associated with a service, program, or department and are therefore, clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities, except for depreciation. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District. Eliminations have been made to minimize the double counting of internal activities. Net assets should be reported as restricted when constraints placed on net asset use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net assets restricted for other activities result from special revenue funds and the restrictions on their net asset use. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental and proprietary fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. Governmental Funds All governmental funds are accounted for using the flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The Statement of Revenues, Expenditures, and Changes in Fund Balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements, therefore, include reconciliations with brief explanations to better identify the relationship between the government-wide financial statements, prepared using the economic resources measurement focus and the accrual basis of accounting, and the governmental fund financial statements, prepared using the flow of current financial resources measurement focus and the modified accrual basis of accounting. Proprietary Funds Proprietary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the Statement of Net Assets. The Statement of Changes in Fund Net Assets presents increases (revenues) and decreases (expenses) in net total assets. The Statement of Cash Flows provides information about how the District finances and meets the cash flow needs of its proprietary fund. Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of the District. 28

35 NOTES TO FINANCIAL STATEMENTS Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter, to be used to pay liabilities of the current fiscal year. Generally, available is defined as collectible within 45 or 60 days. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to State-aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose restrictions. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Deferred Revenue Deferred revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed from the balance sheet and revenue is recognized. Certain grants received before the eligibility requirements are met are recorded as deferred revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as deferred revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable, and typically paid within 90 days. Principal and interest on longterm obligations, which has not matured, are recognized when paid in the governmental funds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds but are recognized in the entity-wide statements. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the Statement of Cash Flows. 29

36 NOTES TO FINANCIAL STATEMENTS Investments Investments held at June 30, 2010, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county and State investment pools are determined by the program sponsor. Restricted Assets Restricted assets arise when restrictions on their use change the normal understanding of the availability of the asset. Such constraints are either imposed by creditors, contributors, grantors, or laws of other governments or imposed by enabling legislation. Stores Inventories Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost, on the first-in, first-out basis. The costs of inventory items are recorded as expenditures in the governmental funds and expenses in the proprietary funds when used. Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. Capital assets are long-lived assets of the District. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide Statement of Net Assets. The valuation basis for capital assets is historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. Capital assets in the proprietary funds are capitalized in the fund in which they are utilized. The valuation basis for proprietary fund capital assets is the same as those used for the capital assets of governmental funds. Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings, 20 to 50 years; improvements/infrastructure, 5 to 50 years; equipment, 2 to 20 years. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables". These amounts are eliminated in the governmental and business-type activities columns of the Statement of Net Assets, except for the net residual amounts due between governmental and business-type activities, which are presented as internal balances. 30

37 NOTES TO FINANCIAL STATEMENTS Compensated Absences Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide statement of net assets. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year-end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January 1, At retirement, each member will receive.004 year of service credit for each day of unused sick leave. Credit for unused sick leave is applicable to all certificated employees and is determined by dividing the number of unused sick days by the number of base service days required to complete the last school year, if employed full-time. Accrued Liabilities and Long-Term Obligations All payables, accrued liabilities, and long-term obligations are reported in the government-wide and proprietary fund financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the governmental funds. However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the governmental fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and other long-term obligations are recognized as liabilities in the governmental fund financial statements when due. Deferred Issuance Costs, Premiums and Discounts In the government-wide financial statements and in the proprietary fund type financial statements, long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund Statement of Net Assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Fund Balance Reserves and Designations The District reserves those portions of fund balance which are legally segregated for a specific future use or which do not represent available expendable resources and therefore are not available for appropriation or expenditure. Unreserved fund balance indicates that portion of fund balance which is available for appropriation in future periods. Fund balance reserves have been established for revolving cash accounts, stores inventories, prepaid expenditures (expenses), and legally restricted grants and entitlements. 31

38 NOTES TO FINANCIAL STATEMENTS Designations of fund balances consist of that portion of the fund balance that has been designated (set aside) by the governing board to provide for specific purposes or uses. Fund balance designations have been established for economic uncertainties, unrealized gains of investments and cash in county treasury, and other purposes. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. The District has no related debt outstanding as of June 30, Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. The government-wide financial statements reports $5,775,028 of restricted net assets. Operating Revenues and Expenses Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. Operating expenses are necessary costs incurred to provide the good or service that are the primary activity of the fund. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Interfund Activity Transfers between governmental and business-type activities in the government-wide financial statements are reported in the same manner as general revenues. Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented in the financial statements. Interfund transfers are eliminated in the governmental and business-type activities columns of the Statement of Activities, except for the net residual amounts transferred between governmental and business-type activities. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. 32

39 NOTES TO FINANCIAL STATEMENTS Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 st of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes, on behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles. Property Tax Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Los Angeles bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. New Accounting Pronouncements In March 2009, the GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The requirements of this Statement are effective for the financial statements for periods beginning after June 15, Early implementation is encouraged. NOTE 2 - DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2010, are classified in the accompanying financial statements as follows: Governmental activities $ 29,142,829 Business-type activities 1,746,184 Fiduciary funds 840,552 Total Deposits and Investments $ 31,729,565 33

40 NOTES TO FINANCIAL STATEMENTS Deposits and investments as of June 30, 2010, consist of the following: Cash on hand and in banks $ 2,075,043 Cash in revolving 10,000 Investments 29,644,522 Total Deposits and Investments $ 31,729,565 Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investment in County Treasury - The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. 34

41 NOTES TO FINANCIAL STATEMENTS General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: Maximum Maximum Maximum Authorized Remaining Percentage Investment Investment Type Maturity of Portfolio in One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker's Acceptance 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements 1 year None None Reverse Repurchase Agreements 92 days 20% of base None Medium-Term Corporate Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass-Through Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Powers Authority Pools N/A None None Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by investing in the county pool longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. 35

42 NOTES TO FINANCIAL STATEMENTS Specific Identification Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investment by maturity: Fair Maturity Investment Type Value Date * County Pool $ 29,816, * Weighted average days to maturity Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The District's investment in the county pool is not required to be rated, nor has it been rated as of June 30, Custodial Credit Risk - Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for 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 percent of the total amount deposited by the public agency. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2010, the District's bank balance of $892,734 was exposed to custodial credit risk because it was uninsured and collateralized with securities held by the pledging financial institution's trust department or agent, but not in the name of the District. 36

43 NOTES TO FINANCIAL STATEMENTS NOTE 3 - RECEIVABLES Receivables at June 30, 2010, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full. Special Reserve Fund for Other Than Non-Major General Capital Outlay Building Governmental Fund Projects Fund Funds Federal Government Categorical aid $ 337,957 $ - $ - $ 33,303 State Government Apportionment 1,195, Categorical aid 576, Lottery 290, Local Government Interest 36,766 18,677 11,327 2,425 Other Local Sources 4,113, ,702 Total $ 6,550,614 $ 18,677 $ 11,327 $ 152,125 Federal Government Categorical aid State Government Apportionment Categorical aid Lottery Local Government Interest Other Local Sources Total Proprietary Fiduciary Total Funds Funds $ 371,260 $ - $ - 1,195, , , ,195 9,146 2,406 4,228,806 5,764 - $ 6,732,743 $ 14,910 $ 2,406 37

44 NOTES TO FINANCIAL STATEMENTS NOTE 4 - CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2010, was as follows: Governmental Activities Capital Assets Not Being Depreciated: Land 3,909,383 Balance Balance July 1, 2009 Additions Deductions June 30, 2010 $ $ - $ - $ 3,909,383 Construction in Progress 14, , ,447 Total Capital Assets Not Being Depreciated 3,924, ,797-4,439,830 Capital Assets Being Depreciated: Land Improvements 3,547, ,547,297 Buildings and Improvements 101,434, ,434,952 Furniture and Equipment 3,766, ,766,501 Total Capital Assets Being Depreciated 108,748, ,748,750 Total Capital Assets 112,672, , ,188,580 Less Accumulated Depreciation: Land Improvements 2,363,595 84,716-2,448,311 Buildings and Improvements 27,402,674 1,825,835-29,228,509 Furniture and Equipment 3,584,334 74,786-3,659,120 Total Accumulated Depreciation 33,350,603 1,985,337-35,335,940 Governmental Activities Capital Assets, Net $ 79,322,180 $ (1,469,540) $ - $ 77,852,640 Depreciation expense was charged as a direct expense to governmental functions as follows: Governmental Activities Instruction $ 1,358,566 Supervision of instruction 23,824 Instructional library, media, and technology 35,339 School site administration 91,127 Home-to-school transportation 23,228 All other pupil services 110,385 Data processing 16,280 All other administration 137,782 Plant services 188,806 Total Depreciation Expenses Governmental Activities $ 1,985,337 38

45 NOTES TO FINANCIAL STATEMENTS NOTE 5 - ACCOUNTS PAYABLE Accounts payable at June 30, 2010, consisted of the following: Non-Major General Building Governmental Fund Fund Funds Vendor payables $ 2,231,245 $ 4,986 $ 362,659 State apportionment 49,909-1,273 Salaries and benefits 3,024,606-58,139 Construction - 451,062 - Total $ 5,305,760 $ 456,048 $ 422,071 Vendor payables State apportionment Salaries and benefits Construction Total Proprietary Fiduciary Total Funds Funds $ 2,598,890 $ 16,117 $ - 51, ,082, , , , $ 6,183,879 $ 156,770 $ 244,322 NOTE 6 - DEFERRED REVENUE Deferred revenue at June 30, 2010, consists of the following: General Proprietary Fund Funds Federal financial assistance $ 62,034 $ - State categorical aid 19,823 - Other local 1,331, ,511 Total $ 1,413,140 $ 101,511 39

46 NOTES TO FINANCIAL STATEMENTS NOTE 7 - LONG-TERM OBLIGATIONS Summary The changes in the District's long-term obligations during the year consisted of the following: Balance Balance Due in July 1, 2009 Additions Deductions June 30, 2010 One Year General obligation bonds $ 83,287,388 $ 11,156,012 $ 4,527,448 $ 89,915,952 $ 4,108,805 Premium on bonds - 383,686 17, ,240 17,440 Certificates of participation 11,970,000-4,250,000 7,720, ,000 Compensated absences 549,422 3, ,271 - Postemplyment benefits 863,507 56, , ,021 - Settlement agreement payable 166, , $ 96,836,983 $ 11,599,675 $ 9,092,174 $ 99,344,484 $ 4,681,245 Bonded Debt The outstanding general obligation bonded debt is as follows: Issue Maturity Interest Original Date Date Rate Issue % $ 25,184, % 6,000, % 5,000, % 5,148, % 21,513, % 4,485, % 5,940, % 18,400, % 7,651,589 Bonds Bonds Outstanding Outstanding July 1, 2009 Issued Accretion Redeemed June 30, 2010 $ 22,104,366 $ - $ 1,185,424 $ 2,105,000 $ 21,184,790 10,468, ,831 95,000 10,937,384 7,795, ,057,448 6,737,652 6,997, , ,000 7,199,271 7,459, ,356-7,931,204 3,595, , ,000 3,467,754 7,796, , ,000 7,987,239 17,070, ,000 16,480,000-7,651, ,069-7,990,658 $ 83,287,388 $ 7,651,589 $ 3,504,423 $ 4,527,448 $ 89,915,952 40

47 NOTES TO FINANCIAL STATEMENTS Debt Service Requirements to Maturity 1995 Election, 1996 Series A Capital Appreciation Bonds On February 20, 1996, the District issued $12,165,000, Series A Current Interest Bonds, and $13,019,723, Series A Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize facilities within the District. The bonds mature on September 1, 2020, and yield an interest rate of 3.60 percent to 5.65 percent. At June 30, 2010, the principal balance outstanding was $21,184,790. The bonds mature through 2021 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 2,127,535 $ 57,465 $ 2,185, ,084, ,127 2,260, ,043, ,829 2,340, ,002, ,847 2,425, ,965, ,150 2,515, ,214,736 4,775,264 13,990, ,746,472 1,388,528 3,135,000 Total $ 21,184,790 $ 7,665,210 $ 28,850, Election, 1998 Series B Capital Appreciation Bonds On February 27, 1998, the District issued $6,000,501, Series B Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize facilities within the District. The bonds mature on September 1, 2023 and yield an interest rate of 4.50 percent to 5.25 percent. At June 30, 2010, the principal balance outstanding was $10,937,384. The bonds mature through 2024 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 141,532 $ 3,468 $ 145, ,361 14, , ,348 31, , ,861 54, , ,874 82, , ,236,774 1,083,226 3,320, ,526,634 7,273,366 14,800,000 Total $ 10,937,384 $ 8,542,616 $ 19,480,000 41

48 NOTES TO FINANCIAL STATEMENTS 1995 Election, 1999 Series C Current Interest and Capital Appreciation Bonds On September 23, 1999, the District issued $990,000, Series C Current Interest Bond and $4,010,040, Series C Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize facilities within the District. The bonds mature on September 1, 2024, and yield an interest rate of 3.50 percent to 5.87 percent. At June 30, 2010, the principal balance outstanding was $6,735,652. The bonds mature through 2025 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 339,738 $ 10,262 $ 350, ,256 30, , ,777 51, , ,391 70, , ,425 90, , ,336, ,804 2,090, ,814,869 5,140,131 8,955,000 Total $ 6,735,652 $ 6,147,348 $ 12,883, Election, 2001 Series D Current Interest and Capital Appreciation Bonds On January 23, 2001, the District issued $885,000, Series D Current Interest Bond and $4,263,769, Series D Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize facilities within the District. The bonds mature on September 1, 2025, and yield an interest rate of 3.00 percent to 5.33 percent. At June 30, 2010, the principal balance outstanding was $7,199,271. The bonds mature through 2026 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 200,000 $ 7,500 $ 207, ,110 18, , ,521 34, , ,032 53, , ,697 76, , ,600, ,383 2,430, ,432,744 1,427,256 2,860, ,979,550 3,960,450 6,940,000 Total $ 7,199,271 $ 6,408,230 $ 13,607,501 42

49 NOTES TO FINANCIAL STATEMENTS 2000 Election, Series A Current Interest and Capital Appreciation Bonds On May 3, 2001, the District issued $16,885,000, Series A Current Interest Bond and $4,628,829, Series A Capital Appreciation Bonds. Proceeds from the bonds were used for the purpose to modernize the High School within the District. The bonds have a final maturity to occur on September 1, 2026, and yield an interest rate of 4.00 percent to 5.69 percent. On March 2004, the District issued $18,400,000 of General Obligation Refunding Bonds to advance refund the $16,885,000 Current Interest Bonds. As a result the $16,885,000 Series A Current Interest Bonds are considered to be defeased and the liability for these bonds has been removed from the accompanying financial statements. The outstanding principal amount of the defeased debt as of June 30, 2010, was $15,635,000. At June 30, 2010, the principal balance outstanding for the Capital Appreciation Bonds was $7,931,204. The bonds mature through 2027 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ - $ - $ ,162,062 7,082,938 13,245, ,769,142 2,850,858 4,620,000 Total $ 7,931,204 $ 9,933,796 $ 17,865, Election, 2002 Series B Current Interest and Capital Appreciation Bonds On January 23, 2002, the District issued $2,545,000, Series B Current Interest Bond and $1,940,101, Series B Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize one of the elementary schools within the District. The bonds mature on September 1, 2026, and yield an interest rate of 3.00 percent to 5.57 percent. At June 30, 2010, the principal balance outstanding was $3,467,

50 NOTES TO FINANCIAL STATEMENTS The bonds mature through 2027 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 85,000 $ 13,775 $ 98, ,000 10,630 95, ,000 7,400 97, ,000 3,800 98, ,876 23, , , , , ,247,052 1,392,948 2,640, ,243,247 2,016,753 3,260,000 Total $ 3,467,754 $ 3,782,851 $ 7,250, Election, 2002 Series E Current Interest and Capital Appreciation Bonds On January 23, 2002, the District issued $1,415,000, Series E Current Interest Bond and $4,525,925, Series E Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to modernize one of the elementary schools within the District. The bonds mature on September 1, 2026, and yield an interest rate of 3.10 percent to 5.57 percent. At June 30, 2010, the principal balance outstanding was $7,987,239. The bonds mature through 2027 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ 205,000 $ 31,775 $ 236, ,000 24, , ,000 16, , ,000 8, , ,770 46, , , , , , , , ,092,259 9,042,741 15,135,000 Total $ 7,987,239 $ 9,853,326 $ 17,840,565 44

51 NOTES TO FINANCIAL STATEMENTS 2004 Refunding Bonds On March 2004, the District issued $18,400,000 in 2004 refunding General Obligation Bonds. Proceeds from the bonds will be used for the purpose to refunding Series 2001A General Obligation Bonds (serial current interest bonds portion). The bonds mature on September 1, 2019, and yield an interest rate of 2.00 percent to 4.00 percent. At June 30, 2010, the principal balance outstanding was $16,480,000. The bonds mature thorough 2020 as follows: Fiscal Year Principal Interest Total 2011 $ 1,010,000 $ 670,065 $ 1,680, ,110, ,815 1,754, ,230, ,515 1,841, ,350, ,540 1,921, ,510, ,040 2,014, ,270,000 1,316,060 11,586,060 Total $ 16,480,000 $ 4,318,035 $ 20,798, Election, 2009 Series A Capital Appreciation Bonds On June 23, 2009, the District issued $7,651,589 in 2009 Series A, Capital Appreciation Bonds. Proceeds from the bonds will be used for the purpose to finance the rehabilitation of District buildings and prepayment of certain lease payments related to Certificate of Participation. The bonds mature on September 1, 2031, and yield an interest rate of 6.39 percent to 6.73 percent. At June 30, 2010, the principal balance outstanding was $7,990,658. The bonds mature through 2032 as follows: Principal Current Including Accreted Interest to Fiscal Year Interest to Date Maturity Total 2011 $ - $ - $ ,801,606 12,078,394 16,880, ,189,052 9,515,948 12,705,000 Total $ 7,990,658 $ 21,594,342 $ 29,585,000 45

52 NOTES TO FINANCIAL STATEMENTS Certificates of Participation 2001A Issuance In June 2001, the Manhattan Beach School Facilities Corporation issued certificates of participation in the amount of $12,020,000 with interest rates ranging from 4.00 to 5.00 percent. The maturity date of the certificates is August 1, As of June 30, 2010, the principal balance outstanding was $7,720,000. Fiscal Year Principal Interest Total 2011 $ 555,000 $ 368,585 $ 923, , , , , , , , , , , , , ,805, ,620 4,612, ,000 44, ,000 Total $ 7,720,000 $ 2,443,275 $ 10,163,275 Accumulated Unpaid Employee Vacation The long-term portion of accumulated unpaid employee vacation for the District at June 30, 2010, amounted to $553,271. Settlement Agreement The District accrued a settlement in the amount of $1,065,825 on a law suit in August Pursuant to GASB Statement No. 10, the District accrued the loss because the amount was known and the settlement was probable (actual as of August 3, 2005). The total settlement was $6,731,650. Of the total settlement, the District is responsible to pay $5,465,825 with the remaining $1,265,825 paid by the California Department of Education. The District's $5,465,825 settlement was funded by an insurance reimbursement in the amount of $4,400,000, a loan in the amount of $500,000 from Alliance Risk Management Services (agreement was signed in August 2005) payable in three yearly installments commencing fiscal year As of June 30, 2010, there was no remaining balance. Other Postemployment Benefits (OPEB) Obligation The District implemented GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions during the year ended June 30, The District's unfunded Frozen Actuarial accrued liability as of June 30, 2009, was $863,507 and contributions made by the District during the year were $130,614. Interest on the net OPEB obligation was $56,128, which resulted in a net decrease OPEB obligation of $74,786. See Note 9 for additional information regarding the OPEB obligation and the postemployment benefit plan. The OPEB obligation for the District at June 30, 2010, amounted to $789,

53 NOTES TO FINANCIAL STATEMENTS NOTE 8 - FUND BALANCES Fund balances are composed of the following elements: Special Reserve Fund for Other Than Bond Interest Non-Major General Capital Outlay Building and Redemption Governmental Fund Projects Fund Fund Funds Total Reserved Revolving cash $ 10,000 $ - $ - $ - $ - $ 10,000 Stores inventories 21, ,654 42,751 Restricted programs 593, ,837 Total Reserved 624, , ,588 Unreserved Undesignated 12,103,987 5,777,445 3,930,559 4,741,814 1,279,302 27,833,107 Total Unreserved 12,103,987 5,777,445 3,930,559 4,741,814 1,279,302 27,833,107 Total $ 12,728,921 $ 5,777,445 $ 3,930,559 $ 4,741,814 $ 1,300,956 $ 28,479,695 NOTE 9 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The Postemployment Benefit Plan (the "Plan") is a single-employer defined benefit healthcare plan administered by the District. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 46 retirees and beneficiaries currently receiving benefits. The District is no longer offering postemployment health care benefits to its employees. There are certain past employees of the District who are entitled to receive various postemployment health care benefits as described below, which are payable from its General Fund. The District pays these amounts on a pay-as-you-go basis. The District has not conducted an actuarial study for these benefits but because both the number of employees and the dollar amount of the contribution are capped, the District expects its annual contribution from the General Fund to be less than $200,000 for these benefits. The District provides postemployment health care benefits, in accordance with District employment contracts, to all employees who retire from the District on or after attaining age 55 with at least 15 years of service. Currently, 46 employees meet those eligibility requirements. The District contributes $400 per year for premiums incurred by retirees and their dependents and the retiree contributes the remainder. Expenditures for postemployment benefits are recognized on a pay-as-you-go basis. During the year, expenditures of $130,614 were recognized for retirees' health care benefits. 47

54 NOTES TO FINANCIAL STATEMENTS A third category of postemployment benefits was inherited from the old South Bay Union High School District when the District was unified in Employees from this district came with lifetime postemployment benefits, paid by their own Retiree Benefits Fund, separate from the District's General Fund. As of June 30, 2010, the Retiree Benefit Fund contained $461,349. Contribution Information The contribution requirements of plan members and the District are established and may be amended by the District and the Teachers Association (CEA), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year , the District contributed $93,136 to the Plan, all of which was used for current premiums. Annual OPEB Cost and Net OPEB Obligation The District's annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed 30 years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the Plan, and changes in the District's net OPEB obligation to the Plan: Annual required contribution $ - Interest on net OPEB obligation 56,128 Contributions made (130,614) Decrease in net OPEB obligation (74,486) Net OPEB obligation, beginning of year 863,507 Net OPEB obligation, end of year $ 789,021 48

55 NOTES TO FINANCIAL STATEMENTS Trend Information Trend information for annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation is as follows: Annual Actual Year Ended OPEB Employer Percentage Net OPEB June 30, Cost Contribution Contributed Obligation 2009 $ 991,883 $ 128, % $ 863, , , % 789,021 Funded Status and Funding Progress The schedule of funding progress presented as required supplementary information following the notes to the financial statements, presents multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. As of July 2, 2002, the most recent actuarial valuation date, the plan was zero percent funded. The actuarial accrued liability for benefits was $991,883, and the actuarial value of assets was zero, resulting in an UAAL of $991,883. The covered payroll (annual payroll of active employees covered by the plan) was $1,649,937, and the ratio of the UAAL to the covered payroll was percent. 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, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions 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 multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. NOTE 10 - RISK MANAGEMENT Property and Liability The District 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. During fiscal year ending June 30, 2010, the District contracted with Alliance of Schools for Cooperative Insurance Programs (ASCIP) for property and liability insurance coverage. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year. 49

56 NOTES TO FINANCIAL STATEMENTS Workers' Compensation For fiscal year 2010, the District participated in the Schools' Excess Liability Fund (SELF), an insurance purchasing pool. The intent of SELF is to achieve the benefit of a reduced premium for the District by virtue of its grouping and representation with other participants in SELF. The workers' compensation experience of the participating districts is calculated as one experience and a common premium rate is applied to all districts in SELF. Each participant pays its workers' compensation premium based on its individual rate. Total savings are then calculated and each participant's individual performance is compared to the overall savings. A participant will then either receive money from or be required to contribute to the "equity-pooling fund". This "equity pooling" arrangement insures that each participant shares equally in the overall performance of SELF. Participation in SELF is limited to districts that can meet SELF's selection criteria. The third party administrator provides administrative, cost control, and actuarial services to the JPA. NOTE 11 - EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer retirement plans maintained by agencies of the State of California. Certificated employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). CalSTRS Plan Description The District contributes to CalSTRS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalSTRS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. CalSTRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalSTRS annual financial report may be obtained from CalSTRS, 7919 Folsom Blvd., Sacramento, California Funding Policy Active plan members are required to contribute 8.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by CalSTRS Teachers' Retirement Board. The required employer contribution rate for fiscal year was 8.25 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalSTRS for the fiscal years ending June 30, 2010, 2009, and 2008, were $1,977,066, $2,016,634, and $2,015,618, respectively, and equal 100 percent of the required contributions for each year. 50

57 NOTES TO FINANCIAL STATEMENTS CalPERS Plan Description The District contributes to the School Employer Pool under CalPERS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Laws. CalPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS' annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California Funding Policy Active plan members are required to contribute 7.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalPERS Board of Administration. The required employer contribution rate for fiscal year was percent of covered payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalPERS for the fiscal years ending June 30, 2010, 2009, and 2008, were $721,552, $694,112, and $819,244, respectively, and equal 100 percent of the required contributions for each year. On Behalf Payments The State of California makes contributions to CalSTRS on behalf of the District. These payments consist of State General Fund contributions to CalSTRS in the amount of $1,082,408 (4.267 percent of annual payroll). Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budget amounts reported in the General Fund - Budgetary Comparison Schedule. NOTE 12 - COMMITMENTS AND CONTINGENCIES Grants The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the General Fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30,

58 NOTES TO FINANCIAL STATEMENTS Litigation The District is involved in various litigations arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30, Postemployment Health Benefit Programs On July 1, 1993, the District unified with the South Bay Union High School District and assumed its early retirement incentive and postemployment health benefit program. Contracts were assumed with eligible retirees whereby retirement and health benefits will be paid for varying lengths of time. Based on an actuarial study, the estimated remaining liability for these retirees is $244,322. This liability reflects in the Self-Funded Retiree Benefits Fund. On June 30, 2010, 23 retirees were eligible and a total of $83,339 in benefits was paid under this program. NOTE 13 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS, JOINT POWERS AUTHORITIES AND OTHER RELATED PARTY TRANSACTIONS The District is a member of the Alliance of Schools for Cooperative Insurance Programs (ASCIP), Schools' Excess Liability Fund (SELF), and the Centinela South Bay Self-Insurance Authority (CSBSIA) joint powers authorities (JPA's). The District pays an annual premium to the applicable entity for its health, workers' compensation, and property liability coverage. The relationships between the District, the pools, and the JPA's are such that they are not component units of the District for financial reporting purposes. These entities have budgeting and financial reporting requirements independent of member units and their financial statements are not presented in these financial statements; however, fund transactions between the entities and the District are included in these statements. Audited financial statements are generally available from the respective entities. During the year ended June 30, 2010, the District made payments of $522,381 and $17,169 to ASCIP and SELF, respectively. NOTE 14 - FISCAL ISSUES RELATING TO BUDGET REDUCTIONS The State of California continues to suffer the effects of a recessionary economy. California school districts are reliant on the State of California to appropriate the funding necessary to continue the level of educational services expected by the State constituency. With the implementation of education trailer bill Senate Bill 16 of the Fourth Extraordinary Session (SBX4 16) (Chapter 23, Statutes of 2009), 25 percent of current year appropriations have now been deferred to a subsequent period, creating significant cash flow management issues for districts in addition to requiring substantial budget reductions, ultimately impacting the ability of California school districts to meet their goals for educational services. 52

59 REQUIRED SUPPLEMENTARY INFORMATION 53

60 GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED Variances - Positive Budgeted Amounts (Negative) (GAAP Basis) Actual Final Original Final (GAAP Basis) to Actual REVENUES Revenue limit sources $ 35,170,426 $ 29,658,222 $ 33,227,377 $ 3,569,155 Federal sources 2,915,083 2,619,355 2,198,979 (420,376) Other State sources 6,551,666 12,817,911 8,277,689 (4,540,222) Other local sources 6,459,210 3,054,012 9,561,624 6,507,612 Total Revenues 1 51,096,385 48,149,500 53,265,669 5,116,169 EXPENDITURES Current Certificated salaries 22,562,764 23,907,977 24,321, (413,069) Classified salaries 6,499,847 6,771,182 7,368, (597,342) Employee benefits 7,690,716 7,815,479 9,105, (1,290,516) Books and supplies 1,762,566 2,040,879 2,436, (395,533) Services and operating expenditures 7,824,824 7,910,102 5,874, ,035,193 Debt service Principal 166, , ,666 - Total Expenditures 1 46,507,383 48,612,285 49,273,552 (661,267) Excess (Deficiency) of Revenues Over Expenditures 4,589,002 (462,785) 3,992,117 4,454,902 OTHER FINANCING SOURCES (USES) Transfers out Other uses (2,218,907) (2,218,907) (2,310,026) (91,119) Net Financing Sources (Uses) (2,218,907) (2,218,907) (2,310,026) (91,119) NET CHANGE IN FUND BALANCES 2,370,095 (2,681,692) 1,682,091 4,363,783 Fund Balance - Beginning 11,046,830 11,046,830 11,046,830 - Fund Balance - Ending $ 13,416,925 $ 8,365,138 $ 12,728,921 $ 4,363,783 1 On behalf payments of $1,082,408 are included in the actual revenues and expenditures, but have not been included in the budgeted amounts. 54

61 SPECIAL RESERVE FUND FOR OTHER THAN CAPITAL OUTLAY PROJECTS BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED Variances - Positive Budgeted Amounts (Negative) (GAAP Basis) Actual Final Original Final (GAAP Basis) to Actual REVENUES Other local sources $ 60,000 $ 60,000 $ 80,766 $ 20,766 Total Revenues 60,000 60,000 80,766 20,766 Excess of Revenues Over Expenditures 60,000 60,000 80,766 20,766 NET CHANGE IN FUND BALANCE 60,000 60,000 80,766 20,766 Fund Balance - Beginning 5,696,679 5,696,679 5,696,679 - Fund Balance - Ending $ 5,756,679 $ 5,756,679 $ 5,777,445 $ 20,766 55

62 SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS FOR THE YEAR ENDED Schedule of Funding Progress Actuarial Accrued Liability Unfunded UAAL as a Actuarial (AAL) - AAL Percentage of Valuation Actuarial Value Unprojected (UAAL) Funded Ratio Covered Covered Payroll Date of Assets (a) Unit Credit (b) (b - a) (a / b) Payroll (c) ([b - a] / c) July 1, 2002 $ - $ 991,883 $ 991, % $ 1,649, % 56

63 SUPPLEMENTARY INFORMATION 57

64 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF EDUCATION Passed through California Department of Education (CDE): No Child Left Behind Act (NCLB): Title I, Part A - Grants to Local Educational Agencies $ 124,550 Title II - Part A, Improving Teacher Quality ,558 Title IV - Safe and Drug Free Schools ,537 Title V - Innovative Education Strategies ,331 ARRA - State Fiscal Stabilization Fund ,710,150 Individuals with Disabilities Education Act (IDEA) Special Education Cluster Basic Local Assistance Entitlement, Part B Section ,685 Basic Local Assistance ARRA, Part B Section ,998 Preschool Grant ,470 Special Ed: ARRA IDEA Part B, Sec 619, Preschool Grants ,367 Local Preschool Entitlement A ,374 Special Ed: ARRA IDEA Part B, Sec 611, Preschool Local Entitlement ,385 Preschool Staff Development A Total Special Education Cluster 1,547,469 Subtotal 3,462,595 U.S. DEPARTMENT OF AGRICULTURE Passed through CDE: Child Nutrition Cluster National School Lunch Program ,293 Basic Breakfast ,445 Food Distribution ,429 Subtotal 224,167 Total Federal Programs $ 3,686,762 See accompanying note to supplementary information. 58

65 LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE ORGANIZATION The Manhattan Beach Unified School District was established in 1912, and unified in 1993, and consists of an area comprising approximately 3.88 square miles in the southwestern portion of the County of Los Angeles, and is conterminous with the City of Manhattan Beach. The District operates five elementary schools, one middle school, and one high school. There were no boundary changes during the year. GOVERNING BOARD MEMBER OFFICE TERM EXPIRES Ida VanderPoorte President December 2012 Amy Howorth Vice President December 2012 Bill Fournell Clerk December 2011 Penny Bordokas Member December 2012 Ellen Rosenberg Member December 2011 ADMINISTRATION Beverly Rohrer Stephen Romines Kathy Hall Ellyn Schneider Carolyn Seaton Superintendent Assistant Superintendent, Administrative Services Director, Human Resources Executive Director, Student Services Executive Director, Educational Services See accompanying note to supplementary information. 59

66 SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED Final Report Second Period Annual Report Report ELEMENTARY Kindergarten First through third 1,441 1,430 Fourth through sixth 1,316 1,305 Seventh and eighth Home and hospital 2 2 Special education Total Elementary 4,073 4,039 SECONDARY Regular classes 2,277 2,247 Home and hospital 1 2 Special education Total Secondary 2,353 2,323 Total K-12 6,426 6,362 See accompanying note to supplementary information. 60

67 SCHEDULE OF INSTRUCTIONAL TIME FOR THE YEAR ENDED Reduced Reduced Number of Days Actual Actual Minutes Minutes Actual Traditional Multitrack Grade Level Minutes Minutes Requirement Requirement Minutes Calendar Calendar Status Kindergarten 35,000 34,028 36,000 35,000 36, Complied Grades ,000 43,750 50,400 49,000 Grade 1 51, Complied Grade 2 51, Complied Grade 3 51, Complied Grades ,250 52,743 54,000 52,500 Grade 4 55, Complied Grade 5 55, Complied Grade 6 63, Complied Grades ,875 55,295 54,000 52,500 Grade 7 63, Complied Grade 8 63, Complied Grades 9-12 * * 64,800 62,222 Grade 9 65, Complied Grade 10 65, Complied Grade 11 65, Complied Grade 12 65, Complied * Not applicable - The high school joined the District in July 1, See accompanying note to supplementary information. 61

68 RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements. General Building Fund Fund FUND BALANCE Balance, June 30, 2010, Unaudited Actuals $ 12,672,818 $ 4,386,996 Increase in: Account receivable 73,800 - Accounts payable (17,697) (451,062) Decrease in: Cash with fiscal agent - (5,375) Balance, June 30, 2010, Audited Financial Statements $ 12,728,921 $ 3,930,559 See accompanying note to supplementary information. 62

69 SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED (Budget) GENERAL FUND Revenues $ 47,314,854 $ 53,265,669 $ 57,266,482 $ 54,762,826 Expenditures 50,449,867 49,273,552 51,415,786 51,877,518 Other uses and transfers out - 2,310,026 2,235,685 1,935,576 Total Expenditures and Other Uses 50,449,867 51,583,578 53,651,471 53,813,094 INCREASE (DECREASE) IN FUND BALANCE $ (3,135,013) $ 1,682,091 $ 3,615,011 $ 949,732 ENDING FUND BALANCE $ 9,593,908 $ 12,728,921 $ 11,046,830 $ 7,431,819 AVAILABLE RESERVES 2 $ 14,750,316 $ 17,881,432 $ 15,180,933 $ 11,242,956 AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO % 35.41% 28.90% 21.33% LONG-TERM OBLIGATIONS NA $ 99,344,484 $ 96,836,983 $ 96,943,921 K-12 AVERAGE DAILY ATTENDANCE AT P-2 6,356 6,426 6,304 6,190 The General Fund balance has increased by $5,297,102 over the past two years. The fiscal year budget projects a decrease of $3,135,013 (24.6 percent). For a district this size, the State recommends available reserves of at least three percent of total General Fund expenditures, transfers out, and other uses (total outgo). The District has incurred operating surpluses in all of the past three years, but anticipates incurring an operating deficit during the fiscal year. Total long-term obligations have increased by $2,400,563 over the past two years. Average daily attendance has increased by 236 over the past two years. A decline of 70 ADA is anticipated during fiscal year Budget 2011 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all undesignated fund balances contained within the General Fund and the Special Reserve Fund for Other Than Capital Outlay Projects. 3 On behalf payments of $1,082,408, $1,129,230, and $1,114,272 have been excluded from the calculation of available reserves for the fiscal years ending June 30, 2010, 2009, and See accompanying note to supplementary information. 63

70 NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET Deferred Capital Cafeteria Maintenance Facilities Fund Fund Fund ASSETS Deposits and investments $ 916,663 $ 159,892 $ 369,402 Receivables 150, ,046 Stores inventories 21, Total Assets $ 1,088,507 $ 160,432 $ 370,448 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 420,097 $ - $ 1,974 Total Liabilities 420,097-1,974 Fund Balances: Reserved for: Stores inventories 21, Unreserved: Undesignated, reported in: Special revenue funds 646, ,432 - Capital projects funds ,474 Total Fund Balance 668, , ,474 Total Liabilities and Fund Balances $ 1,088,507 $ 160,432 $ 370,448 See accompanying note to supplementary information. 64

71 County School Corporate Debt Total Non-Major Facilities Service Governmental Fund Fund Funds $ 103,291 $ - $ 1,549, , ,654 $ 103,640 $ - $ 1,723,027 $ - $ - $ 422, , , , , , ,640-1,300,956 $ 103,640 $ - $ 1,723,027 64

72 NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED Deferred Capital Cafeteria Maintenance Facilities Fund Fund Fund REVENUES Federal sources $ 224,167 $ - $ - Other State sources 5, Other local sources 1,957,595 2, ,724 Total Revenues 2,187,220 2, ,724 EXPENDITURES Current Pupil services: Food services 1,887, Administration: All other administration ,221 Plant services - 134,472 - Debt service Interest and other ,706 Total Expenditures 1,887, , ,927 NET CHANGE IN FUND BALANCES 300,072 (131,625) 85,797 Fund Balance - Beginning 368, , ,677 Fund Balance - Ending $ 668,410 $ 160,432 $ 368,474 See accompanying note to supplementary information. 65

73 County School Corporate Debt Total Non-Major Facilities Service Governmental Fund Fund Funds $ - $ - $ 224, ,458 1, ,282,567 1, ,512, ,887, , ,472-12, ,194-12,488 2,268,035 1,459 (11,546) 244, ,181 11,546 1,056,799 $ 103,640 $ - $ 1,300,956 65

74 NOTE TO SUPPLEMENTARY INFORMATION NOTE 1 - PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of Federal awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. The following schedule provides reconciliation between revenues reported on the Statement of Revenues, Expenditures, and Changes in Fund Balance, and in Business-Type Activities and the related expenditures reported on the Schedule of Expenditures of Federal Awards. The reconciling amounts represent Federal funds that have been recorded as revenues that have not been expended by June 30, The unspent balances are reported as legally restricted ending balances within the General Fund. CFDA Number Amount Description Total Federal Revenues From the Statement of Revenues, Expenditures and Changes in Fund Balance: $ 2,423,146 State Fiscal Stabilization Fund: ARRA ,263,616 Total Schedule of Expenditures of Federal Awards $ 3,686,762 Local Education Agency Organization Structure This schedule provides information about the District's boundaries and schools operated, members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through Districts must maintain their instructional minutes at either the actual minutes or the requirements, whichever is greater, as required by Education Code Section Senate Bill 2 of the Fourth Extraordinary Session (SBX4 2) allows for an equivalent five-day reduction to the required number of instructional minutes for the fiscal years through

75 NOTE TO SUPPLEMENTARY INFORMATION Reconciliation of Annual Financial and Budget Report With Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Unaudited Actual Financial Report to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balance is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance. 67

76 INDEPENDENT AUDITORS' REPORTS 68

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