CITY OF RIALTO. Annual Financial Report. For the Year Ended June 30, 2011

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1 Annual Financial Report For the Year Ended June 30, 2011

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3 Annual Financial Report For the Year Ended June 30, 2011 Table of Contents Page FINANCIAL SECTION Independent Auditor s Report...1 Management s Discussion and Analysis (Required Supplementary Information - Unaudited)...3 Basic Financial Statements Statement of Net Assets...17 Statement of Activities...18 Balance Sheet Governmental Funds...20 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets...22 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds...24 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities...27 Statement of Net Assets Proprietary Funds...28 Statement of Revenues, Expenses and Changes in Fund Net Assets Proprietary Funds...30 Statement of Cash Flows Proprietary Funds...32 Statement of Fiduciary Assets and Liabilities Fiduciary Funds...36 Notes to the Basic Financial Statements...37 Required Supplementary Information (Unaudited) Schedule of Funding Progress for PERS...83 Schedule of Funding Progress for OPEB...84 Budgetary Comparison Schedule General Fund...85 Note to Required Supplementary Information...86 Supplementary Information Budgetary Comparison Schedule Redevelopment Agency Debt Service Fund...89 Combining Balance Sheet Nonmajor Governmental Funds...90 Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Governmental Funds

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5 Annual Financial Report For the Year Ended June 30, 2011 Table of Contents (Continued) Page Budgetary Comparison Schedules Nonmajor Funds: Gas Tax Local Transportation Development Transportation Development Act Traffic Congestion Relief Street Lighting and Landscape Maintenance Landscape and Lighting District No Traffic Development Office of Traffic Safety Retirement Tax Local Drainage Open Space Development General Facilities Development Major Grant Funding Park Development Police Development Fire Development Waste Management SCAQMD Asset Forfeiture Business Improvement District Transportation Enhancement Activities Citizens Option for Public Safety Local Law Enforcement Block Grant CDBG Housing Low-Moderate Income Housing Housing Authority Traffic Safety Prop 1B Neighborhood Stabilization Program Neighborhood Stabilization Program Program Income Energy Efficiency Block Grant Homeless Prevention and Re-Housing Program CDBG Recovery Grant Measure I

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7 Annual Financial Report For the Year Ended June 30, 2011 Table of Contents (Continued) Page Brownfield Community Wide Assessment Grant Brownfield Clean Up Grant COP Nonmajor Enterprise Funds: Combining Statement of Net Assets Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets Combining Statement of Cash Flows Internal Service Funds: Combining Statement of Net Assets Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets Combining Statement of Cash Flows

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9 The Honorable City Council of the City of Rialto, California Independent Auditor s Report We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Rialto, California (City), as of and for the year ended June 30, 2011, which collectively comprise the City s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City s management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of June 30, 2011, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 (p) to the basic financial statements, effective July 1, 2010, the City adopted the provisions of Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. As discussed in Note 17 (b) to the basic financial statements, on June 29, 2011, the California State Legislature enacted legislation that is intended to provide for the dissolution of redevelopment agencies in the State of California (Assembly Bill 1X 26) unless certain payments can be made to the State of California (Assembly Bill 1X 27). On December 29, 2011, the California Supreme Court (Court) largely upheld the legislation for the dissolution of redevelopment agencies. Furthermore, the Court invalidated Assembly Bill 1X 27. Accordingly, the Agency dissolved on January 31, 2012 under the guidelines for dissolution set forth in the legislation. Except for establishing an allowance for doubtful accounts for advances owed by the Redevelopment Agency of the City of Rialto (Agency) to the Airport Enterprise Fund and advances owed from the Airport Enterprise Fund to the General Fund as discussed in Note 6, the financial statements do not include any adjustments as a result of the dissolution of the Agency. In accordance with Government Auditing Standards, we have also issued our report dated May 3, 2012on our consideration of the City s internal control over financial reporting and on our tests of its compliance with 1

10 certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and other required supplementary information identified in the accompanying table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements as a whole. The major debt service fund budgetary comparison schedule, combining and individual nonmajor fund financial statements and schedules listed as supplementary information are presented for purposes of additional analysis and are not a required part of the financial statements. The major debt service fund budgetary comparison schedule and the combining and individual nonmajor fund financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. Newport Beach, California May 3,

11 , CALIFORNIA M ANAGEMENT S D ISCUSSION & A NALYSIS T MANAGEMENT S DISCUSSION AND ANALYSIS he management of the City of Rialto has prepared this narrative overview and analysis of the financial activities of the City for the Fiscal Year (FY) ended June 30, This discussion and analysis is intended to serve as an introduction to the City s basic financial statements and to provide financial comparisons with the previous year. Please read this information in conjunction with the City s financial statements, which follow this section. F INANCIAL HIGHLIGHTS NET ASSETS FISCAL YEAR 2011 HIGHLIGHTS The City s combined net assets as of June 30, 2011 (FY 11), was $279.0 million (see Chart 1). Net assets represents the difference between the City s resources (total assets) and its obligations (total liabilities). The City s net assets decreased by $12.2 million during the fiscal year reflecting a $1.5 million (.8%) increase in governmental activities and a $13.7 million (-12%) decrease in business-type activities. The most significant change was a $12.3 million decrease in unrestricted cash and investments. Decreases in revenues are primarily due to the continuing economic challenges. Reduced revenues were $9.2 million and included decreases in service charges, other income, tax income and investment income. CHART 1 NET ASSETS $550,000,000 $500,000,000 $450,000,000 $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 Restricted Assets decreased by $6.7 million primarily due to the decrease of cash and investments with fiscal agents for the I-10 Riverside construction escrow account. Notes Receivable increased by $2.9 million due to the development funding by the Housing Authority to TELACU for both Telacu I and Telacu II projects. Since there is no estimate for timing of cash collections on the note, an offset to an allowance for uncollectible notes was recorded; this also explains the increase in Allowance for uncollectible notes by the same amount. Net effect to net assets is $0. Revenue will be recognized on a cash basis, when the cash is received in future years. Capital Assets increased by $7 million due mainly to additions to projects that are in progress of $12.3 million and additions of completed projects of $4.3 million offset by depreciation of $8 million. Total liabilities net difference is insignificant due to an increase in Accounts Payable of $5.6 million offset by a decrease in Debt service payments due more than one year of $6.3 million. The increase in Accounts Payable of $5.6 million is due to expenses that have been accrued at June 30, 2011 and have been paid in the next fiscal year. On the other hand, debt service liabilities decrease over the years as principal balances are reduced. $100,000,000 $50,000,000 $ Governmental Activities Business Activities Total Government Type Primary $392,524,956 $395,071,153 $150,046,600 $135,165,746 $542,571,556 $530,236,898 TOTAL ASSETS TOTAL LIABILITIES $215,339,449 $216,404,405 $36,011,040 $34,843,081 $251,350,489 $251,247,486 TOTAL NET ASSETS $177,185,507 $178,666,748 $114,035,560 $100,322,665 $291,221,067 $278,989,412 3

12 , CALIFORNIA FINANCIAL HIGHLIGHTS, CONTINUED MANAGEMENT S DISCUSSION AND ANALYSIS REVENUES & EXPENDITURES The Statement of Revenues, Expenditures, and Changes in Fund Balances for Governmental Funds reported a decrease in fund balance of $11 million. The decrease in fund balance for the current year is a result of the continuing decrease in revenues, the continuing increase in expenditures for public safety, and expected decreases in fund balances from RDA as projects that utilize prior year revenues from bond proceeds move forward and are expended. Tax Revenues of $63.5 million were mostly from sales tax, utility users tax (UUT), property tax, and Redevelopment Agency tax increment. Tax revenues decreased by $4.4 million over last year, which is primarily due to a decrease in the Property Tax of $3.7 million. Revenues received from other agencies totaled $13.5 million, which is an increase of $299 thousand. These are revenues received from Federal, State, County, and other municipalities that mainly fund special revenue funds, T O VERVIEW OF THE FINANCIAL STATEMENTS his annual report consists of four parts: Management s Discussion and Analysis (this section), the basic financial statements, required supplementary information, and optional sections that present combining statements for non-major governmental funds, nonmajor enterprise funds, and internal service funds. The basic financial statements include two kinds of statements that present different views of the City. The government-wide financial statements provide both long-term and short-term information about the City s overall financial status in a manner similar to a private-sector business. The fund financial statements focus on individual parts of the City government and report the City s operations in a more detailed format than the governmentwide statements. The fund statements can be divided into three categories: Governmental fund statements tell how general government services such as police, fire, public works and special revenue funds were financed in the short-term, as well as what remains for future spending. Proprietary fund statements offer short-term and longterm financial information about the activities the City operates like businesses, such as utilities services, the airport, the cemetery and the recreation department. Fiduciary fund statements provide information about the financial relationships in which the City acts solely as a trustee or agent for the benefit of other governmental units, private organizations, or individuals to whom the resources belong. 4 such as street expenditures, after school programs, and GENERAL FUND RESERVES various grants. The City s reserve policy goal is to reserve 50% of the next year s annual General Fund budget. As of June 30, 2011, that goal was achieved at 58.1%. This amounts to $35.5 million in General Fund Assigned for Capital Projects and Unassigned fund balances. As of June 30, 2011, the General Fund balance totaled $40.5 million, of which $5 million is considered nonspendable due to its nature representing receivables from other funds. The total reserve after non-spendable fund balances is $35.5 million mentioned earlier. $26.3 million of that amount has been assigned per Council Action to be used for specific projects or purposes. Thus, $11.7 million is available for roll forwards of purchase orders, carry forwards of capital projects and contingencies. The projected deficit for FY2012 after midyear adjustments is expected Required Components of the City of Rialto s Annual Financial Report Management s Discussion and Analysis Governmentwide Financial Statements Summary Basic Financial Statements Fund Financial Statements Required Supplementary Information Notes to the Financial Statements Detail The notes to the financial statements provide additional information that is essential to the full understanding of the data provided in the government-wide and fund financial statements. This report also presents certain required supplementary information including budgetary comparison schedules for governmental funds. The notes to the required supplementary information present information concerning the City s budget process. In addition to these required elements, combining statements and schedules that provide details about non-major governmental funds, and non-major enterprise funds, and internal service funds are also presented.

13 , CALIFORNIA OVERNMENT-WIDE FINANCIAL STATEMENTS G REPORTING THE CITY AS A WHOLE MANAGEMENT S DISCUSSION AND ANALYSIS T he government-wide statements report information about the City as a whole using accounting methods similar to those used by privatesector companies. The statement of net assets includes all of the City s assets and liabilities. The statement of activities reports all of the current year s revenues and expenses regardless of when cash is received or paid. The two government-wide financial statements report the City s net assets and how they have changed during the fiscal year. Over time, increases or decreases in the City's net assets are an indicator of whether its financial position is improving. The two government-wide financial statements of the City are divided as follows: Governmental Activities Most of the City s basic services are included here, such as police, fire, public works, redevelopment, and general government. Governmental activities are financed by taxes, revenues from other government agencies, state/federal grants, and charges for services. Business-type Activities Certain services provided by the City are funded by customer fees. Among these are the City's water, wastewater, airport, recreation, and cemetery services. The government-wide financial statements include not only the City itself, but also legally separate component units such as: Rialto Redevelopment Agency, Rialto Nonprofit Public Building Authority, the Rialto Public Financing Authority, Rialto Utility Authority and Rialto Housing Authority. These component units, while legally separate from the City, provide services entirely or almost exclusively for the benefit of the City. Therefore, these component units are blended with the City government because of their governance and their financial relationships with the City. F UND FINANCIAL STATEMENTS T he fund financial statements provide more detailed information about the City s most significant funds, not the City as a whole. A fund is an accounting entity with a self-balancing set of accounts that the City uses to keep track of resources that have been segregated for specific activities or objectives. The City has three types of funds: Governmental funds Most of the City s basic services are included in governmental funds, which are used to account for (1) short-term inflows and outflows of spendable resources, and (2) the remaining year-end balances available for spending. Due to the fact that this information does not encompass the additional long -term focus of the government-wide statements, a reconciliation that explains the relationship (or differences) between governmental funds and governmental activities follow each of the governmental funds statements. Proprietary funds Services for which customer fees are intended to finance the costs of operations are generally reported in proprietary funds. Proprietary funds and financial statements, like the government-wide statements, provide both long-term and short-term financial information. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. Internal service funds report activities that provide services for the City s other programs and activities, such as the City s Fleet Fund, Worker s Compensation, General Liability, Management Information System, and Engineering and Development Services. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside of the City. The City is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of the City s fiduciary activities are reported in a separate statement of fiduciary assets and liabilities. We exclude these activities from the City s government-wide financial statements because the City cannot use these assets to finance its operations. 5

14 , CALIFORNIA MANAGEMENT S DISCUSSION AND ANALYSIS F INANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS The government-wide financial statements provide long-term and short-term information about the City s overall financial condition. This analysis addresses the financial statements of the City as a whole. NET ASSETS Net assets represent the difference between the City s resources and its obligations. Over time, net assets may serve as an indication of a government s financial position. The City s combined net assets as of June 30, 2011, as shown in Table 1, were $279 million, a decrease of $12.2 million during the fiscal year. The Financial Highlights section on page one, discusses the details or make up of the net assets. There are three classifications for net assets: For the primary government, 80% represent investments in capital assets (i.e., land, buildings, machinery, equipment, and infrastructure) less any related debt used to acquire those assets. The City uses capital assets to provide services to citizens; consequently, these assets are not available for future spending. An additional portion of the City s net assets, 23.7% represent resources that are subject to external restrictions on how they may be used, such as, transportation, development, grants and debt service reserve requirements for the outstanding bonds. The remaining portion is a deficit of $10.9 million in unrestricted net assets. This portion represents the amount used to meet ongoing obligations to citizens and creditors. The net of governmental activities has a deficit of $31.6 million and business-type activities has unrestricted net assets of $20.7 million. The positive unrestricted resources can be used to finance the continuing operations of the City s enterprises: water, wastewater, airport, recreation, and cemetery. The governmental activities total net assets has increased by.8% from last year. Within these activities, restricted funds consist 34% of this total. The City uses restricted funds to provide services and resources to specific designated areas or objectives. TABLE 1 SUMMARY OF NET ASSETS SUMMARY OF NET ASSETS AS OF JUNE 30, 2010 AND 2011 GOVERNMENTAL BUSINESS TYPE TOTAL PRIMARY ACTIVITES ACTIVITES GOVERNMENT TOT % CHG CURRENT AND OTHER ASSETS $243,027,560 $237,624,295 $43,883,384 $29,845,800 $286,910,944 $267,470, % CAPITAL ASSETS 149,497, ,446, ,163, ,319, ,660, ,766, % TOTAL ASSETS $392,524,956 $395,071,153 $150,046,600 $135,165,746 $542,571,556 $530,236, % CURRENT LIABILITIES $16,540,315 $20,945,593 $2,947,220 $3,945,690 $19,487,535 $24,891, % NONCURRENT LIABILITIES 198,799, ,458,812 33,063,820 30,897, ,862, ,356, % TOTAL LIABILITIES $215,339,449 $216,404,405 $36,011,040 $34,843,081 $251,350,489 $251,247, % NET ASSETS: INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT $140,559,035 $148,690,370 $73,990,866 $75,171,230 $214,549,901 $223,861, % RESTRICTED FOR: COMMUNITY DEVELOPMENT 64,387,816 41,233, ,387,816 41,233, % PUBLIC SAFETY 1,890,355 1,454, ,890,355 1,454, % DEBT SERVICE 15,728,160 18,913,787 4,464,331 4,451,690 20,192,491 23,365, % UNRESTRICTED (45,379,859) (31,625,219) 35,580,363 20,699,744 (9,799,496) (10,925,475) 11.49% TOTAL NET ASSETS $177,185,507 $178,666,748 $114,035,560 $100,322,665 $291,221,067 $278,989, % CHANGES IN NET ASSETS The combined net assets of the primary government decreased by 4% this fiscal year from $291.2 million at June 30, 2010 to $279.0 million at June 30, Net assets represents the difference between the City resources (total assets) and its obligations (total liabilities). The most significant changes to Net Assets were a result of decreases in unrestricted cash and investments (-$12.3 million) 6 Increases are mostly due to capital assets ($7.1 million). Total liabilities net difference is insignificant due to an increase in Accounts Payable of $5.6 million and decrease in Debt service payments due more than one year of $6.3 million as addressed in the Financial Highlights section.

15 , CALIFORNIA FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS, CONTINUED REVENUES Revenues for fiscal year ended June 30, 2011 were approximately $109.7 million. Tax revenues, which include property taxes, sales taxes, utility users tax, and other taxes, account for 59% of revenue sources relied upon to provide City services. The next largest revenue source for 2011 comes from charges for services at 29% (see Chart 2) Compared to FY10, total revenues decreased by $9.2 million. Table 2 provides information on the major revenue sources and comparisons between the current and prior fiscal year. Revenue sources that show significant changes are discussed in more detail below. MANAGEMENT S DISCUSSION AND ANALYSIS Charges for services represent Water and Wastewater services provided, and other types of services rendered such as inspections, permits, certain billable public safety services, and many recreational activities. This source of revenues decreased by $1.4 million and was offset by an increase in grants/contributions. This was simply due to a change in classification of program revenue in the Redevelopment Agency Capital Projects Fund. Property Taxes decreased by $3.7 million primarily due to property tax assessments adjusting to the broader real estate market decline. Tax increment revenue is based on assessed property values, which increase or decrease with the economic condition of the residential and commercial market. Sales Tax decreased by $443 thousand due to the ongoing recession. Other income decreased by $4.6 million due to a one time receipt by Wastewater funds of $4 million from The Gas Company for the Chevron project in prior fiscal year. CHART 2 SOURCES OF REVENUE City of Rialto Sources of Revenue for Fiscal Year $109.7 Million Property Taxes 37% Charge for Services 23% Gain/ loss on sale of property 0% Investment Income 2% Sales Tax 8% Other Taxes 4% VLF 1% Other Income 3% Grants / Contributions 12% Utility User Tax 10% TABLE 2 SOURCES OF REVENUE Revenues Increase / (Decrease) CHG % % of Total Revenue Charge for Services $26,744,395 $25,320,616 ($1,423,779) -5.3% 23% Property Taxes 43,881,570 40,215,786 (3,665,784) -8.4% 37% Sales Tax 9,515,319 9,072,262 (443,057) -4.7% 8% Utility User Tax 11,205,005 11,204,683 (322) 0.0% 10% Grants / Contributions 12,356,825 13,420,348 1,063, % 12% Other Income 8,142,484 3,457,625 (4,684,859) -57.5% 3% VLF 293, , , % 1% Other Taxes 4,407,375 4,659, , % 4% Investment Income 2,328,607 1,893,198 (435,409) -18.7% 2% Gain sale on property % 0% Transfers % 0% Total Revenue $118,875,120 $109,703,311 ($9,171,809) -7.7% 100% 7

16 , CALIFORNIA FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS, CONTINUED MANAGEMENT S DISCUSSION AND ANALYSIS EXPENSES Expenses for the City totaled $121.9 million, a decrease of 10.1% over FY10 (see Table 3). Governmental Activities totaled $101.3 million, or 83% of total expenses. Governmental activities are grouped by functional activity. General Government includes Administrative, City Clerk, City Treasurer, Finance, Human Resources, Code Enforcement and certain Redevelopment Agency functions. Community Development includes Public Works, certain Redevelopment Agency and Special Revenue funds functions. Public Safety includes Police and Fire services. Government Other includes interest on long-term debt. Business-type activities totaled $20.6 million, or 17% of total expenses. Business-type activities are also grouped by functional activity. These typically represent activities performed in exchange for a fee. Wastewater and Water utility services are provided to over 20,000 customers. Recreation services are mostly paid by those requesting participation in a certain program. About 69% of the recreation activities are not paid by charges for services. These costs are covered through general governmental revenue sources. Business other includes Airport and Cemetery services. Significant variances in expenses over last fiscal year were CHART 3 FUNCTIONAL EXPENSES For Fiscal Year $121.9 Million found in General Government, Community Development, and Public Safety. General Government decreased by $1.1 million due to reductions in personnel costs and contracts with vendors. Personnel cost decreased as a result of retirements and Memorandum of Understanding (MOU) contract negotiations. Community Development decreased by $15.6 million mostly due the RDA Supplemental Educational Revenue Augmentation Fund (SERAF) payment to the State in prior year of about $6.7 million versus $1.4 million paid in FY11, a reduction of $5.3 million from last fiscal year s payment. Also, RDA Property Held for Resale loss of valuation of $10 million was recorded in FY10; no adjustment was required in FY11, a reduction of $10 million from prior fiscal year. Public Safety increased by $3.4 million due to increases in overtime from Fire department of $745 thousand and Police department of $245 thousand, coupled with the increase in retirement cost of $1.7 million. The cost for enhanced retirement started on the latter half of the fiscal year. TABLE 3 FUNCTIONAL EXPENSES Expenses Governmental Activities 8 CHG % % OF TOTAL EXPENSES General Government $16,018,176 $14,861,332 ($1,156,844) -7.2% 12% Community Development 52,083,959 36,471,039 (15,612,920) -30.0% 30% Public Safety 36,649,311 40,089,330 3,440, % 33% Government Other 10,863,244 9,863,803 (999,441) -9.2% 8% Government Sub Total $115,614,690 $101,285,504 ($14,329,186) -12.4% 83% Business Type Activities INCREASE / (DECREASE) Wastewater $8,806,799 $9,618,767 $811, % 8% Water 7,663,647 7,807, , % 6% Recreation 3,146,916 2,960,934 (185,982) -5.9% 3% Business Other 349, ,365 (86,979) -24.9% 0% Business Sub Total $19,966,706 $20,649,463 $682, % 17% Total Expenses $135,581,396 $121,934,967 ($13,646,429) -10.1% 100%

17 , CALIFORNIA FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS, CONTINUED GOVERNMENTAL ACTIVITIES Most of the City s basic services are classified as Governmental activities, such as police, fire, public works, redevelopment, and general government. Governmental activities are financed by taxes, revenues from other government agencies, state/federal grants, and charges for services. The increase in net assets (net income) for governmental activities was $1.4 million. The increase is a result of total revenues of governmental activities of $103 million that exceeded total expenses of governmental activities of $101 million. MANAGEMENT S DISCUSSION AND ANALYSIS There was $18 million received in program revenues, which represents charges for services, grants, and contributions. These program revenues were generated directly by governmental activities and are depicted in Chart 4. Chart 4 compares the total cost of each of the City s major functions, to the related program revenue. General Government includes most City functions that are reported in the General Fund with the exception of Public Safety, which is shown separately. It also includes certain Redevelopment Agency expenses. Community Development includes public works, certain Redevelopment Agency and Special Revenue funds functions. In Table 4, the Governmental Activities net cost deficit of $83 million (expenses in excess of program revenues) has been funded by general revenues (tax revenues, other state and local agency revenue and investment income) of $85 million which also is reflected in the Statement of Activities. CHART 4 GOVERNMENTAL ACTIVITIES TABLE 4 GOVERNMENTAL ACTIVITIES Revenue Expenses Net Cost Governmental Activities % of Chg % of Chg % of Chg General Government $2,113,805 $1,142, % $16,018,176 $14,861, % ($13,904,371) ($13,719,300) -1.3% Community Development 12,420,798 12,994, ,083,959 36,471,039 (0) (39,663,161) (23,476,386) -40.8% Public Safety 3,875,044 4,100, ,649,311 40,089,330 0 (32,774,267) (35,988,684) 9.8% Interest on Long-Term Debt ,863,244 9,863,803 (0) (10,863,244) (9,863,803) -9.2% Subtotal Governmental Activities $18,409,647 $18,237, % $115,614,690 $101,285, % ($97,205,043) ($83,048,173) -14.6% General Revenues $75,682,426 $84,529, % % $75,682,426 $84,529, % Total Governmental Activities $94,092,073 $102,766, % $115,614,690 $101,285, % ($21,522,617) $1,481, % 9

18 , CALIFORNIA FINANCIAL ANALYSIS OF THE GOVERNMENT-WIDE STATEMENTS, CONTINUED BUSINESS-TYPE ACTIVITIES Certain services provided by the City are funded by customer fees. Among these are the City's water, wastewater, airport, recreation, and cemetery services. The decrease in net assets for business activities was approximately $13.7 million. The decrease is a result of total expenses of business activities of $34.2 million exceeding total revenues of $20.5 million. The $20.5 million received in program revenues consists of charge for services. This is a reduction of $188 thousand when compared to last year, which is attributable to lower consumption in the Water funds and lower participants in Recreation programs due to the economy and foreclosures. These revenues are depicted in Chart 5. CHART 5 BUSINESS-TYPE ACTIVITIES MANAGEMENT S DISCUSSION AND ANALYSIS In FY10, a net revenue incurred due to a one-time receipt of $4.0 million from Sothern California Gas Company for the Fuel Cell System at the Waste Water Treatment Plant. In FY11, a $13.5 million net expense incurred due mostly to a $13.7 million allowance of bad debt in the Airport fund. Originally there was an advance from the Airport fund to the Redevelopment Agency to record the conveyance of land for the Redevelopment project with Lewis- Hillwood LLC. However, due to the adoption of AB1X26 (refer to footnote 17(b) for further discussion) the Redevelopment Agency ceased to exist on February 1, On January 26, 2012 the City took action to rescind this advance/loan and require the Redevelopment Agency to return the land to the Airport fund. The RDA successor agency will have to ratify this action in FY Due to the complexities of new legislations, the Airport fund wrote off the $13.7 million advance/loan to RDA because RDA will not likely be able to purchase the land from the Airport fund and collectability of the advance/ loan is very low. The City s objective now is to have Airport land returned to the Airport fund by the newly formed RDA successor agency. If approved, the allowance will be reversed and the land will be reflected in the Airport fund. The Wastewater revenues exceeded expenses by $1.4 million. When compared to last year s $2.1 million, this is a decrease of 33%. This is due to an increase in expenses of $812 thousand primarily from cost of sales and services and administration. The Water revenues exceeded expenses by $619 thousand. When compared to last year s $916 thousand, this is a decrease of 32%. This is due to an increase in expenses of $144 thousand primarily from cost of sales and services and administration. TABLE 5 BUSINESS-TYPE ACTIVITIES Revenue Expenses Net Cost Business-Type Activities % of Chg % of Chg % of Chg Airport $133,063 $105, % $308,245 $216, % ($175,182) ($110,598) -36.9% Cemetery 24,379 27, ,099 46,258 0 (16,720) (19,122) 14.4% Recreation 1,000, ,450 (0) 3,146,916 2,960,934 (0) (2,146,100) (2,046,484) -4.6% Wastewater 10,954,088 11,030, ,806,799 9,618, ,147,289 1,411, % Water 8,579,227 8,426,108 (0) 7,663,647 7,807, , , % Sub Total Business-Type Activities $20,691,573 $20,503, % $19,966,706 $20,649, % $724,867 ($145,830) % Business-Type General Revenues $4,091,474 $ % $0 $13,567, % $4,091,474 ($13,567,065) % Total Business-Type Activities $24,783,047 $20,503, % $19,966,706 $34,216, % $4,816,341 ($13,712,895) % 10

19 , CALIFORNIA MANAGEMENT S DISCUSSION AND ANALYSIS T he City uses fund accounting to assure and demonstrate compliance with finance-related legal requirements. The fund financial statements focus on individual parts of the City government, reporting the City s operations in more detail than the government-wide statements. The types of Governmental funds reported by the City include the General Fund, Special Revenue Funds, Capital Project Funds, and Debt Service Funds. The fund statements provide information on near-term inflows, outflows and balances of spendable resources. These funds represent the reporting structure of the budget and interim council reports. The City s governmental funds reported combined fund balances at June 30, 2011 of $191.3 million, which is a decrease of $11 million over the previous fiscal year. In accordance with the new Governmental Accounting Standards Board (GASB) Statement No.54, Fund Balance Reporting and Governmental Fund Type Definitions, at June 30, 2011, the City s governmental funds fund balances include the following classifications and balances based from the extent to which the City is bound to observe constraints imposed upon the use of resources reported in the governmental funds: First, non-spendable fund balance is the portion of net resources that cannot be spent because of their form or must be maintained intact. Non-spendable fund balance totaled $43 million, which accounts to 23% of total fund balance. This includes Notes Receivable ($2.7 million), Advance to Other Funds ($5 million), Inventory ($60 thousand) and Property Held for Resale ($35.4 million). F INANCIAL ANALYSIS OF THE FUND STATEMENTS Second, restricted fund balance is the portion of net resources that has external enforceable limitations on use; restrictions may be changed or lifted only with the consent of resource providers. Restricted fund balance totaled almost $62 million, which accounts to 32% of total fund balance. Restrictions are in Debt Service ($19 million), Public Safety ($2 million) and Community Development ($41 million). Third, assigned fund balance is the portion of net resources that have limitations resulting from intended use by the City Council or official to which the City Council has delegated authority to assign amounts to be used for specific purposes. Assigned fund balance for Capital Projects totaled $64 million, which accounts to 33% of total fund balance. Capital projects in the General Fund of $26 million includes $19 million in infrastructure and $5 million for I-10 Riverside project all of which require Council action to decrease or remove. The remaining $2 million is assigned for budget carryovers and encumbrances to the next fiscal year. Also, the Redevelopment Agency (RDA) has assigned $22 million for capital projects and $15.2 million for housing projects, which is available from the 2005 and 2008 bond proceeds. Fourth, the remaining classification is Unassigned Fund Balance which is available for any purpose. Unassigned fund balance totaled $22.4 million, which accounts for 12% of total fund balance. The General Fund amount of $9 million is available for contingencies and a negative $437 thousand from non-major funds that expect grant reimbursements in the next fiscal year. The remaining unassigned $13.7M is recorded in the RDA Capital Projects GENERAL FUND BUDGETARY HIGHLIGHTS The City s Final Budget differs from the Adopted Budget in that it contains carry-forward appropriations and revenues for various programs or projects, supplemental revenues, carry-forward appropriations for open purchase orders from the previous year, and appropriations approved by Council throughout the fiscal year. After taking into account all the adjustments, actual expenditures were $4.3 million lower than the final budget amounts. Capital outlay expenditures were less than the budgeted appropriations by $2.1 million due to several capital projects/purchases that were not completed or purchased by the end of FY 11. These included Public Safety and Public Works budget for vehicles and equipment, City maintenance projects for park improvement and City owned buildings, Police main station remodel, which were all carried over to FY 12. General Government expenditures were less than the budgeted appropriations by $959 thousand, 32% of this savings was due to salary savings from vacancies and 68% of this savings was found in service and supplies cost. Actual revenues received exceeded their estimates by $377 thousand mostly due to increases in property tax, sales tax, and motor vehicle in lieu tax. 11

20 , CALIFORNIA CAPITAL ASSETS C APITAL ASSET & DEBT ADMINISTRATION Police Vehicles and related equipment MANAGEMENT S DISCUSSION AND ANALYSIS As of June 30, 2011, the City had $262.8 million in capital assets, including land and land improvements, construction in progress, buildings, vehicles, police and fire equipment, improvements, water and wastewater transmissions and distribution systems, and infrastructure. Total Capital Assets increased $7.1 million. The increase was largely due to additions to the distribution systems of $1.1 million, other improvements of $1.0 million, infrastructure of $1.3 million and net additions to construction in progress of $10.7 million, which was partially offset by depreciation in the amount of $7.9 million. Some of the major capital projects from the Capital Improvement Plan that were completed in FY 11 are: Non-Transportation related projects City Well No.3 Replacement Project, Phase I Well Drilling and Development Water System Improvements on Arrowhead Avenue and Easton Street First Phase Citywide Bus Stop Enhancement Rialto Park Electronic Reader Board Sign Rialto Park Baseball Snack Bar Frisbie Park Monument Sign and Shade Structure Rialto City Park Monument Sign Street related projects Traffic Signal at intersection of Sycamore and Merrill Avenues Foothill Boulevard Pavement Street Widening on Cactus Avenue and Willow Avenue Some major capital projects under construction at the end of FY 2011 and expected to be completed by the next fiscal year are: I-10 Riverside Interchange Improvements, which is estimated at over ($30 million) Relocation of the Fire Station No.202 to Riverside Avenue 12 acres expansion of the Fergusson Park to include a skate park and other general improvements Energy facility improvements using the Department of Energy stimulus grant to replace aged air conditioning units citywide Other major projects that are in Design, Environmental and Right of Way Acquisition Phases are: Ayala Drive Extension $1.92M Metrolink Parking Lot Expansion-$8.15M Pepper Avenue Extension -$15.37M Other various storm drain and channel improvements TABLE 6 CAPITAL ASSETS Capital Assets GOVERNMENTAL BUSINESS TYPE TOTAL PRIMARY ACTIVITES ACTIVITES GOVERNMENT TOTAL % CHANGE LAND $66,626,103 $66,686,103 $1,767,770 $1,767,770 $68,393,873 $68,453,873 0% LAND EASEMENTS 7,086,730 7,086, ,086,730 7,086,730 0% LAND IMPROVEMENTS 32,912 32,912 7,191,588 7,191,588 7,224,500 7,224,500 0% CONSTRUCTION IN PROGRESS 3,720,678 13,441,556 17,811,488 18,744,447 21,532,166 32,186,003 49% BUILDINGS 21,951,150 21,982,750 2,348,791 2,348,791 24,299,941 24,331,541 0% OTHER IMPROVEMENTS 25,292,517 26,341, ,292,517 26,341,268 4% DISTRIBUTION SYSTEMS ,624,395 68,783,774 67,624,395 68,783,774 2% WASTEWATER TRMT PLANT ,800,796 57,800,796 57,800,796 57,800,796 0% MACHINERY AND EQUIP. 2,853,513 3,132, ,853,513 3,132,765 10% INFRASTRUCTURE 135,701, ,027, ,701, ,027,127 1% VEHICLES 10,367,120 10,704, ,367,120 10,704,632 3% OFFICE FURN, COMPUTERS, EQUIP. 2,888,345 2,916,698 2,502,623 2,390,647 5,390,968 5,307,345-2% $276,520,624 $289,352,541 $157,047,451 $159,027,813 $433,568,075 $448,380,354 ACCUMULATED DEPRECIATION (127,023,228) (131,905,683) (50,884,235) (53,707,867) (177,907,463) (185,613,550) 4% TOTAL CAPITAL ASSETS $149,497,396 $157,446,858 $106,163,216 $105,319,946 $255,660,612 $262,766,804 3% 12

21 , CALIFORNIA CAPITAL ASSET & DEBT ADMINISTRATION, CONTINUED LONG TERM DEBT At June 30, 2010 and 2011 respectively, the City had $226.9 million and $220.6 million in long-term debt outstanding. The City s long-term debt consists of tax allocation bonds, certificates of participation and other equipment financing, notes payable and advances, due to other MANAGEMENT S DISCUSSION AND ANALYSIS governments, and compensated absences, as shown below in Table 7. There were no significant new debt financings issued in FY11. The reduction in total debt outstanding is due to the principal paid for FY11. More detail about the City s long-term liabilities is presented in Note 10 of the Notes to Financial Statements. TABLE 7 OUTSTANDING DEBT OUTSTANDING DEBT GOVERNMENTAL BUSINESS TYPE TOTAL PRIMARY ACTIVITES ACTIVITES GOVERNMENT TOTAL % CHANGE TAX ALLOCATION BONDS $170,350,722 $167,557,629 $0 $0 $170,350,722 $167,557,629-2% CERTIFICATES OF PARTICIPATION 2,640,000 2,455,000 3,971,231 3,613,684 6,611,231 6,068,684-8% NOTES PAYABLE /ADVANCES 13,890,186 13,828,186 28,201,119 26,535,032 42,091,305 40,363,218-4% DUE TO OTHER GOVERNMENTS 780, , , ,029 1,235,578 1,194,496-3% DEFERRAL ON REFUNDING (28,717) (26,106) - - (28,717) (26,106) -9% EQUIPMENT FINANCING 20, , % COMPENSATED ABSENCES 6,166,431 5,215, , ,826 6,602,872 5,469,804-17% $193,820,094 $189,770,154 $33,063,820 $30,857,571 $226,883,914 $220,627,725-3% TABLE 8 BOND RATINGS Dated Date Debt Issue Name Issue Amount Standard & Poors Ratings Fitch 4/22/1998 Association of Bay Area Governments Water and Wastewater Revenue Bonds (Pooled $23,025,000 Total Issue $7,220,000 City of Rialto Share AA- Not Rated 4/8/2003 Redevelopment Agency of the City of Rialto Tax Allocation Refunding Binds (Merged Project Area) 2003 Series A $31,000,000 A- BBB+ 6/8/2005 Redevelopment Agency of the City of Rialto Tax Allocation Bonds (Merged Project Area) 2005 Series A (Tax Exempt) $25,320,000 A- BBB+ 6/8/2005 6/8/ /19/2007 3/13/2008 4/29/2008 4/29/2008 Redevelopment Agency of the City of Rialto Tax Allocation Housing Set-Aside Bonds (Merged Project Area) 2005 Series B (Taxable) $11,285,000 A- BBB+ Redevelopment Agency of the City of Rialto Tax Allocation Bonds (Merged Project Area) 2005 Series C (Taxable) $19,870,000 A- BBB+ City of Rialto Refunding Certificates of Participation Series 2007 $3,500,000 Not Rated Not Rated Redevelopment Agency of the City of Rialto Tax Allocation Bonds (merged Project Area) 2008 Series A $42,185,000 A- BBB+ Redevelopment Agency of the City of Rialto Tax Allocation Housing Set-Aside Bonds (Merged Project Area) 2008 Series B (Taxable) $29,600,000 A- BBB+ Redevelopment Agency of the City of Rialto tax Allocation Bonds (Merged Project Area) 2008 Series C (Taxable) $21,965,000 A- BBB+ 13

22 , CALIFORNIA MANAGEMENT S DISCUSSION AND ANALYSIS A E CONOMIC FACTORS & OUTLOOK FOR FUTURE YEARS s the current recession enters into the fourth year, the Nation, State of California and the City of Rialto try to deal with the additional burden as revenues continue to decline. There were additional revenue reductions in the areas of taxes, charges for services, revenue from other agencies, and investment income. Total Assets decreased by $12 million, while Total Liabilities increased by $103 thousand. Overall, the City s financial condition worsened with the loss of $12.2 million towards Net Assets. Fiscal Year 2012 Budget The budget was prepared conservatively with the participation of all of the departments. Key services have been preserved. The revised operating budget for fiscal year 2012 in the General fund is a deficit of $11.6 million including FY11 carryovers to FY12. The strategies to reduce costs have included: maintaining vacant positions as frozen and removing the related funding from the budget; reducing capital to extremely low levels; reducing other services and supplies; obtaining compensation concessions from employee groups; obtaining discounts or price freezes from vendors; utilizing volunteers and grant funded staff and interns; and proposing new fees for cost recovery of certain City activities. Due to the recession and continued economic downturn, future economic challenges await such as: 14 State Budget and Court Decisions On February 1, 2012 the Redevelopment Agency of the City of Rialto ( Agency ) was eliminated as a result of the December 29, 2011 decision of the California Supreme Court upholding ABX1 26 bill, which dissolved all redevelopment agencies in California. The City of Rialto has elected to serve as the successor agency, which will have the commission of completing contracted obligations and then liquidating all assets for disposition to various taxing jurisdictions. The Successor Agency will be governed by an independent Oversight Board, subject to further review by the County Auditor-Controller and the State of California. The housing functions of the former Redevelopment Agency were assumed by the Rialto Housing Authority on February 1, As a result, the Agency s contribution of approximately $1.6 million to the General fund is eliminated. All Redevelopment Agency programs and projects, except those that are subject to binding contracts, have been terminated. The housing programs formerly funded by the Agency, including home rehabilitation programs, may resume in the future, subject to funding. The State Senate recently approved SB 654, which would allow the Rialto Housing Authority to keep all remaining affordable housing funds of the former Redevelopment Agency for use in creating or improving the housing stock. This cash infusion is a one-time event, and when the cash has been exhausted the programs will once again cease. National & State Economies Certain revenue projections, such as, property taxes, investment income, development impact fees, and charges for services, were reduced due to impacts of the recession on the housing and financial markets. Sales Tax Revenue growth is slowly coming in; however, based on newly discovered information from the City s sales tax consultant, sales tax is expected to drop in FY13 due to a major fuel retailer (Chevron) changing the distribution of their sales to Southwest Airlines from Rialto to the actual airports being served. This will impact the FY13 sales tax revenue by an approximate decrease of $630 thousand. Increase in Public Retirement Costs CalPERS recently changed their actuarial assumptions resulting in rate increases that took effect as of July They also announced additional increases in the future years. These increases were delayed in the last two fiscal years to provide time to agencies to prepare for the impact. It is estimated that the increase will be significant in Fiscal Year Deferred Maintenance and Capital Expenditures Over the past few years, the City has continued to cut the Capital Projects budget in order to support operations. As a result, funds may be unavailable should something come up that needs immediate attention. Capital Projects are an essential and unavoidable cost of doing business and the City can only postpone the inevitable for a short period of time. Eventually, resources will need to be expended to replace aging facilities and equipment, or even greater costs will be incurred with maintenance and repairs. Utility Tax Sunset in June 30,2013 In 2008, the voters of Rialto extended the Utility Users Tax (UUT) until June This revenue represents $11.2 million or 20% of the general fund total revenues in FY11. Staff recommends that Council elect to place the renewal of the Utility Users Tax on the March 2013 special election ballot. If the UUT is not extended before the June 2013 deadline, the General Fund deficit will grow and immediate corrective action will need to occur. The immediate action will include the reduction of staff and programs citywide. CONTACTING THE CITY S FINANCIAL MANAGEMENT This financial report is designed to provide citizens, taxpayers, customers, and investors and creditors with a general overview of the City s finances and to demonstrate the City s accountability for the money it receives. If you have any questions about this report or need additional information, contact the Administrative and Community Services Department, 150 S. Palm Avenue, Rialto, California 92376; (909) , or visit us online at