STEGE SANITARY DISTRICT

Transcription

1 STEGE SANITARY DISTRICT FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION WITH INDEPENDENT AUDITORS REPORT

2 7500 SCHMIDT LANE EL CERRITO, CALIFORNIA Tel: (510) Fax: (510) BOARD OF DIRECTORS Elected Officials Name Dwight Merrill Graham Brand Paul Gilbert-Snyder Alan C. Miller Beatric O'Keefe Office President Vice President Board Member Board Member Board Member DISTRICT MANAGEMENT Rex W. Delizo District Manager Kary Richardson Administrative Supervisor

3 TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT.. 1 MANAGEMENT S DISCUSSION AND ANALYSIS 3 FINANCIAL STATEMENTS Statement of Net Position June 30, Statement of Revenues, Expenses and Changes in Net Position For the Year Ended June 30, Statement of Cash Flows For the Year Ended June 30, NOTES TO FINANCIAL STATEMENTS 12 SUPPLEMENTARY INFORMATION Comparison of Budget to Actual For the Year Ended June 30, Schedules of Operating Expenses before Depreciation For the Year Ended June 30, PAGE

4 INDEPENDENT AUDITORS' REPORT To the Board of Directors Stege Sanitary District Report on the Financial Statements We have audited the accompanying financial statements of the Stege Sanitary District (the District), as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax: FRESNO LAGUNA HILLS PALO ALTO PLEASANTON RANCHO CUCAMONGA RIVERSIDE SACRAMENTO

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Stege Sanitary District as of June 30, 2014, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America, as well as accounting systems prescribed by the State Controller s office for special districts. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Stege Sanitary District's basic financial statements. The supplementary information is presented for the purpose of additional analysis and is not a required part of the basic financial statements. The supplementary information, as listed in the table of contents, is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 6, 2014, on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Stege Sanitary District's internal control over financial reporting and compliance. Pleasanton, California November 6,

6 MANAGEMENT S DISCUSSION AND ANALYSIS The following discussion and analysis of the Stege Sanitary District's (District) financial performance provides an overview of the District's financial activities for the fiscal year ended June 30, Please read it in conjunction with the District financial statements FINANCIAL HIGHLIGHTS Current assets increased by $747,610, or 25.2 percent as a result of this year's operations. Noncurrent assets increased by $653,220, or 1.9 percent. This increase is mainly the result of the annual pipe replacement project. Long-term liabilities decreased by $115,457, or 9.6 percent since debt service payments were paid and no additional loans were taken. Total operating revenues decreased by $2,355, over the previous year, or 0.1 percent. There was no change to the sewer service charge. Operating expenses increased by $122,613, or 4.3 percent. This increase is a result of increases in salaries and benefits. Connection fee revenues increased $91,872, or percent from the previous year. The revenue increase is due to the development of Ohlone Gardens, a 57 unit apartment building. Other revenues income increased by $2,681 or 0.7 percent. DISTRICT HIGHLIGHTS The District completed another major sewer renewal project in fiscal year and this is represented on financial statements as a conversion of cash to capital assets. This annual project for the cyclical replacement and/or rehabilitation of sewer lines is anticipated to be typical of future ones with an expense of at least $1.4M per year. This may be increased significantly in the future depending upon the details of future discharge permits and orders from regulatory agencies. 3

7 MANAGEMENT S DISCUSSION AND ANALYSIS USING THIS ANNUAL REPORT District financial statements report information about the District use of accounting methods similar to those used by private sector companies. The Statement of Net Position includes all District assets and liabilities, and provides information about the nature and amounts of investments in resources (assets) and obligations to creditors (liabilities). It also provides the basis for computing rate of return; evaluating the capital structure of the District; and assessing the liquidity and financial flexibility of the District. All of the current year's revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Net Position. This statement measures the success of District operations over the past year and can be used to determine whether the District has successfully recovered all its costs through its user fees and other charges. The final required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about District cash receipts, cash disbursements and net changes in cash resulting from operations, investing, and capital and noncapital financial activities. It provides answers to questions such as, "Where did the cash come from?", "Cash was used for what purpose?", and "What was the change in cash balance during the reporting period?" FINANCIAL ANALYSIS OF THE DISTRICT One of the most important questions asked about District finances is whether or not the District's overall financial position has improved or deteriorated. The Statement of Net Position and the Statement of Revenues and Expenses and Changes of Net Position report information about District activities in a way that will help answer this question. These two statements report the net position of the District and changes in it. You can think of District net position the difference between assets and liabilities- as one way to measure financial health or financial position. Over time, increases or decreases in District net position are one indicator of whether its financial health is improving or deteriorating. Other factors to consider include changes in economic conditions, population growth, and new or changed legislation. 4

8 MANAGEMENT S DISCUSSION AND ANALYSIS Changes in Net Position District total net position increased from the previous year by $1,249,451, or 3.4 percent. The following condensed financial statements show net position and statement of revenue and expenses and changes in net position, in a comparative format indicating the amount and percentage of change. Table 1 Condensed Statement of Net Position Amount of Percent of Fiscal Year Fiscal Year Increase Increase (Decrease) (Decrease) Current and other assets $ 3,712,766 $ 2,965,156 $ 747, % Noncurrent assets 35,629,702 34,976, , % Total assets 39,342,468 37,941,638 1,400, % Current liabilities 744, , , % Long-term liabilities 1,086,789 1,202,246 (115,457) -9.6% Total liabilities 1,831,122 1,679, , % Net Position: Net investment in capital assets 34,343,140 33,503, , % Unrestricted 3,168,206 2,758, , % Total net position $ 37,511,346 $ 36,261,895 $ 1,249, % 5

9 MANAGEMENT S DISCUSSION AND ANALYSIS Changes in District net position can be determined by reviewing the following condensed Statement of Revenue, Expenses, and Changes in Net Position. Table 2 Condensed Statement of Revenues, Expenses, and Changes in Net Position Amount of Percent of Fiscal Year Fiscal Year Increase Increase (Decrease) (Decrease) Revenues: Operating Revenues $ 3,769,579 $ 3,771,934 $ (2,355) -0.1% Other revenues 367, ,308 2, % Connection fees 111,454 19,582 91, % Total revenues 4,249,022 4,156,824 92, % Expenses: Operating Expenses 2,966,255 2,843, , % Interest Expenses 33,316 40,711 (7,395) -18.2% Total expenses 2,999,571 2,884, , % Increase (Decrease) in net position 1,249,451 1,272,471 (23,020) -1.8% Beginning Net Position 36,261,895 34,989,424 1,272, % Ending Net Position $ 37,511,346 $ 36,261,895 $ 1,249, % Revenues Total revenues increased, $92,198 or 2.2 percent compared to the previous fiscal year. Total revenues increased due to the development of Ohlone Gardens, a 57 unit apartment building. Operating revenues decreased $2,355, or.1 percent from the previous year. Other revenues increased by $2,681, or.7 percent over the previous year. Connection fees increased $91,872, or percent from the previous year. Expenses Operating expenses increased by $122,613, or 4.3 percent in fiscal year compared to fiscal year

10 MANAGEMENT S DISCUSSION AND ANALYSIS Budgetary Highlights The District is not required by statute to adopt a budget; however, in its commitment to fiscal responsibility, the District adopts an annual budget each year which outlines the major elements of forthcoming operations and capital improvements. The District maintains an ongoing capital improvement program which is updated annually at the same time the operating budget is approved. The program includes an ongoing sewer renewal program, whose purpose is to replace and/or rehabilitate aging District sewer main lines that may cause overflows and result in expensive, unplanned repairs. The program, which includes repairs, replacement, rehabilitation and condition assessment, currently costs approximately $1.4 million annually and will be financed on a pay-as-you-go system. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the end of fiscal year 2014, the District had $35,541,123 (net of accumulated depreciation) invested in a variety of capital assets. The assets included: land; collection system subsurface lines and pump stations; administration building and vehicles. The total increase in District capital assets for the current fiscal year was $652,353 or 1.9 percent more than last year. The major capital asset event during the fiscal year is completion of a sewer construction project, the "Standard Pipebursting Project". The following table summarizes District capital assets at historical costs and accumulated depreciation for fiscal years ended June 30, 2014, and June 30, 2013: Table 3 Historical Cost and Accumulated Depreciation Balance at Balance at June 30, 2014 June 30, 2013 Land easements $ 134,475 $ 134,475 Subsurface lines, buildings, vehicles/equipment 48,136,587 46,712,668 Total Capital Assets 48,271,062 46,847,143 Accumulated Depreciation (12,729,939) (11,958,373) Total Capital Assets (Net of Depreciation) $ 35,541,123 $ 34,888,770 More detailed information regarding capital assets can be found in footnote #2. 7

11 MANAGEMENT S DISCUSSION AND ANALYSIS Long Term Liabilities At the end of the current reporting period, the District's long term portion in State revolving fund loans outstanding was $1,080,004 versus $1,197,983 last year a decrease of $117,979 or 9.8 percent as shown below: Balance at Balance at June 30, 2014 June 30, 2013 Long term debt, net of current portion $ 1,080,004 $ 1,197,983 The District has previously used State revolving fund loans to finance previous sewer upgrade projects. The interest rate on these loans is one-half of the rate of the most recent issuance of State general obligation (GO) bonds. Additional information on Long Term Liabilities can be found in footnote #4. ECONOMIC AND OTHER FACTORS The District is governed in part by provisions of the State Water Resources Control Board (SWRCB) that require rate-based revenues that must cover the costs of operation, maintenance and recurring capital replacement (OM&R). The District is not subject to general economic conditions such as increases or declines in property tax values or other types of revenues that vary with economic conditions such as sales taxes. Accordingly, the District sets its rates to its users to cover the costs of OM&R and debt financed capital improvements, plus any increments for known or anticipated changes in program costs. Increases in operating costs have been kept at or below inflationary levels in recent years. Medical premiums have risen dramatically and may continue to do so in the near future. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our customers and creditors with a general overview of District finances, and demonstrate District accountability for the money it receives. If you have any questions about this report, or need additional financial information, contact the District Manager at 7500 Schmidt Lane, El Cerrito, CA or (510)

12 STATEMENT OF NET POSITION 2014 CURRENT ASSETS Cash and cash equivalents $ 3,623,702 Accounts receivable 54,583 Prepaid insurance 34,481 Total current assets 3,712,766 NONCURRENT ASSETS Capital Assets Non depreciable capital assets: Land and easements 134,475 Depreciable assets Sewer lines, building, vehicles and equipment 48,136,587 Less: Accumulated depreciation (12,729,939) Net capital assets 35,541,123 OTHER ASSETS OPEB asset 88,579 Total other assets 88,579 Total non-current assets 35,629,702 TOTAL ASSETS 39,342,468 CURRENT LIABILITIES Accounts payable and accrued expenses 512,620 Accrued payroll and related expenses 9,615 Interest payable 12,536 Current portion of accrued compensated absences 91,583 Current portion of long-term debt 117,979 Total current liabilities 744,333 LONG-TERM LIABILITIES Accrued compensated absences, net of current portion 6,785 Long-term debt, net of current portion 1,080,004 Total long-term liabilities 1,086,789 TOTAL LIABILITIES 1,831,122 NET POSITION Net investment in capital assets 34,343,140 Unrestricted 3,168,206 TOTAL NET POSITION $ 37,511,346 The accompanying notes are an integral part of these financial statements. 9

13 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEAR ENDED 2014 OPERATING REVENUE Sewer service charges $ 3,738,534 Other operating revenues 31,045 Total operating revenue 3,769,579 OPERATING EXPENSES Sewage collection 1,676,508 General and administration 518,181 Depreciation 771,566 Total operating expenses 2,966,255 Operating income 803,324 NON-OPERATING REVENUES (EXPENSES) Interest and investment income 6,674 Interest Expense (33,316) Other Income 361,315 Total non-operating revenue (expense) 334,673 INCOME BEFORE CONTRIBUTED CAPITAL 1,137,997 Connection fees 111,454 CHANGE IN NET POSITION 1,249,451 Net position, beginning of year 36,261,895 NET POSITION, END OF YEAR $ 37,511,346 The accompanying notes are an integral part of these financial statements. 10

14 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 2014 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 3,810,571 Payments to suppliers (413,079) Payments to employees and directors (1,443,403) Cash flows provided (used in) by operating activities 1,954,089 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal payments on long-term debt (187,726) Interest paid on long-term debt (35,277) Acquisition and construction of capital assets (1,423,919) Connection fees 111,454 Cash flows provided by (used in) capital and related financing activities (1,535,468) CASH FLOWS FROM NON CAPITAL FINANCING ACTIVITIES Other Income 361,315 Cash flows provided by (used in) non capital financing activities 361,315 CASH FLOWS FROM INVESTING ACTIVITIES Interest and investment income 6,674 Cash flows provided by (used in) investing activities 6,674 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 786,610 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,837,092 CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,623,702 RECONCILIATION OF OPERATING INCOME TO NET CASH FROM OPERATING ACTIVITES Operating income $ 803,324 Adjustments to reconcile operating income to cash flows provided by operating activities Depreciation 771,566 (Increase) decrease in accounts receivable and prepaids 39,000 Increase (decrease) in accounts payable and accrued expenses 341,066 (Increase) decrease in other assets (867) Cash flows provided by operating activities $ 1,954,089 The accompanying notes are an integral part of these financial statements. 11

15 NOTES TO THE FINANCIAL STATEMENTS NOTE #1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Stege Sanitary District (the "District") was formed in May 1913 and provides a service of sanitary sewage collection to over 33,000 residents in El Cerrito, Kensington, and portions of the Richmond Annex. Treatment and disposal of the sewage is the responsibility of the East Bay Municipal Utility District (EBMUD) which maintains a pumping station on Point Isabel to receive the sewage from the Stege Sanitary District service areas. Reporting Entity For financial reporting purposes, and in conformity with the Governmental Accounting Standards Board (GASB) Codification Section 2100, which defines the governmental entity, the District includes all funds that are controlled by, or are dependent on the Board of Directors of the District. Since no other entities are controlled by, or rely upon the District, the reporting entity consists solely of the District. Fund Accounting Classification The financial statements of the District are presented as those of an enterprise fund under the broad category of funds called proprietary funds. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprise, where the intent is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The acquisition and capital improvement of the physical plant facilities required to provide these goods and services are financed from existing cash resources, cash flow from operations, the issuances of bonds, and contributed capital. Basis of Accounting Enterprise funds are accounted for using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized when they are incurred. The District applies all applicable GASB pronouncements for accounting and financial reporting guidance. 12

16 NOTES TO THE FINANCIAL STATEMENTS The District distinguishes operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with the District's principal ongoing operations. The principal operating revenues of the District are charges to customers for sales and services. Operating expenses for the District include the costs of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Budgetary Policy and Control The District adopts an operations and maintenance budget at the beginning of each year for the following fiscal year. Capital budgets are adopted on a project basis. Formal budgetary integration is employed as a management control device. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash-on-hand, Local Agency Investment Funds, and "Cash in County Treasury". The State Treasurer's Investment Pool operates in accordance with appropriate state laws and regulations. The reported value of the pool is the same as the fair value of the pool shares. Investments for the District are reported at fair value. Property, Plant and Equipment Property, plant and equipment are recorded at historical cost, or estimated historical cost if actual cost is not available. Contributed assets are recorded at estimated fair value on the date contributed. Depreciation is recognized on buildings, furniture, fixtures, equipment, and subsurface lines by the straight-line method over their estimated useful lives. The District uses a minimum cost of $1,500 for equipment, structures, and improvements as the basis for capitalization of assets and expenses to current operations all additions under $1,500. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend lives are also expensed in the current period. Property, plant, and equipment assets are depreciated using the straight-line method and estimated useful lives are determined as follows: Sewage Collection Building Vehicles Equipment 75 years 30 years 5-10 years 5-15 years Compensated Absences The District records employees' vacation and sick leave benefits in the period in which they accumulate and become vested. 13

17 NOTES TO THE FINANCIAL STATEMENTS Estimates Management uses estimates and assumptions in preparing the financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported revenues and expenses. Accordingly, actual results could differ from those estimates. New Governmental Accounting and Reporting Standards In March 2012, the GASB issued GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This Statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. The provisions of this Statement are effective for financial statements for periods beginning after December 15, The District implemented the provisions of this Statement in fiscal year June 30, 2014, with no impact on the financial statements. In March 2012, the GASB issued GASB Statement No. 66, Technical Corrections 2012 an amendment of GASB Statements No. 10 and No. 62. The objective of this Statement is to improve accounting and financial reporting for a governmental financial reporting entity by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements. This Statement amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, by removing the provision that limits fund-based reporting of an entity s risk financing activities to the general fund and the internal service fund type. As a result, governments should base their decisions about fund type classification on the nature of the activity to be reported, as required in Statement 54 and Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. This Statement also amends Statement 62 by modifying the specific guidance on accounting for (1) operating lease payments that vary from a straight-line basis, (2) the difference between the initial investment (purchase price) and the principal amount of a purchased loan or group of loans, and (3) servicing fees related to mortgage loans that are sold when the stated service fee rate differs significantly from a current (normal) servicing fee rate. These changes clarify how to apply Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, and result in guidance that is consistent with the requirements in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, respectively. The provisions of this Statement are effective for financial statements for periods beginning after December 15, The District implemented the provisions of this Statement in fiscal year June 30, 2014 with no impact on the financial statements. 14

18 NOTES TO THE FINANCIAL STATEMENTS In June 2012, the GASB issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. Distinctions are made regarding the particular requirements for employers based on the number of employers whose employees are provided with pensions through the pension plan and whether pension obligations and pension plan assets are shared. This Statement is effective for fiscal years beginning after June 15, Earlier application is encouraged. The District will be required to implement the provisions of this Statement in the fiscal year ending June 30, 2015, and is currently evaluating the impact on the financial statements. 15

19 NOTES TO THE FINANCIAL STATEMENTS NOTE #2 CAPITAL ASSETS Capital asset activity for the year ended June 30, 2014 is summarized as follows: NOTE 2 - CAPITAL ASSETS Balance Balance June 30, 2013 Additions Deletions Transfers June 30, 2014 Capital assets, not being depreciated: Land $ 134,475 $ - $ - $ - $ 134,475 Construction in progress - 1,153,872 - (1,153,872) - Total Capital assets, not being depreciated: 134,475 1,153,872 - (1,153,872) 134,475 Capital assets, being depreciated: Sewage collection facilities 42,574, ,321-1,153,872 43,993,198 Buildings and equipment 2,822,994 4, ,827,720 Maintenance equipment 417, ,583 Vehicles 898, ,086 Total Capital assets, being depreciated: 46,712, ,047-1,153,872 48,136,587 Less: Accumulated depreciation Sewage collection facilities 10,982, , ,556,406 Buildings and equipment 202,129 96, ,251 Maintenance equipment 303,344 35, ,795 Vehicles 470,551 65, ,487 Total Accumulated depreciation: 11,958, , ,729,939 Total capital assets, being depreciated, net 34,754,295 (501,519) - 1,153,872 35,406,648 Total Capital Assets, net $ 34,888,770 $ 652,353 $ - $ - $ 35,541,123 Construction work in progress consists primarily of the direct construction costs associated with numerous District projects plus related construction overhead. 16

20 NOTES TO THE FINANCIAL STATEMENTS NOTE #3 CASH AND INVESTMENTS A. Summary of Cash and Cash Equivalents and Investments Cash and cash equivalents and investments at June 30, 2014 are detailed as follows: 2014 Cash on hand and in financial institutions $ 248,000 Investments 3,375,702 Total Cash and Cash Equivalents $ 3,623,702 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. B. Authorized Investments by the District Limitations as they relate to interest rate risk and concentration of credit risk are indicated in the schedule 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 Obligations (a) 5 years None None Bankers Acceptance (b) 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements (c) 1 year None None Revrse Repurchase Agreements 92 days 20% of base None Medium Term Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Funds N/A 20% 10% Mortgage Pass-through and Asset Backed Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Agency Authority Pools N/A None None 17

21 NOTES TO THE FINANCIAL STATEMENTS C. 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 depositing the majority of its funds with the State Local Agency Investment Fund (LAIF). At June 30, 2014, LAIF had a weighted average maturity of 232 days. 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: Maturities of 12 months or less LAIF $ 3,375,702 D. 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 measure by the assignment of a rating by a nationally recognized statistical rating organization. LAIF is not required to, and does not, have a credit rating. E. 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's policy for custodial credit risk, as well as the California Government Code, requires that a financial institution secure deposits by pledging securities in an undivided collateral pool held by a depository regulated under state law. The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105% of the secured deposits. As of June 30, 2014, the District's cash deposit at Mechanic's Bank was $338,733 and was covered by federal depository insurance or by collateral held in an undivided collateral pool, as described above (before reduction for outstanding checks). 18

22 NOTES TO THE FINANCIAL STATEMENTS Investments This is the risk that, in the event of the failure of the counterparty transaction, the District will not be able to recover the value of its investments or collateral securities that are in possession of an outside party. It is the District's policy that all securities held, be secured through third-party custody for safekeeping. The District was not holding any securities at year end. F. Investments in the State Pool The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California government code Section under the oversight of the Treasurer of the State of California. The fair value of the District's investment in the pool is reported in the accompanying financial statement at amounts based upon the District's pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which is recorded on the amortized cost basis. NOTE #4 LONG-TERM LIABILITIES The District has secured State Revolving fund loans from the State Water Control Board. Each loan is payable in annual principal and interest payments. Loan C for an original amount of $1,122,256 under agreement dated October 1, 1993, has an interest rate of 2.9 percent and maturity date of January 31, Loan C for an original amount of $1,586,165 under agreement dated October 2, 2000, has an interest rate of 2.6 percent and maturity date of February 21, Loan C for an original amount of $706,004 under agreement dated June 13, 2006, has an interest rate of 2.4 percent and maturity date of December 21, Long-Term Debt Balance Balance July 1, 2013 Additions Deductions June 30, 2014 Loan C $ 72,674 $ - $ 72,674 $ - Loan C ,303-82, ,532 Loan C ,732-32, ,451 Total $ 1,385,709 $ - $ 187,726 1,197,983 Less Current Portion (117,979) Long Term Portion $ 1,080,004 Compensated absences $ 97,652 $ 50,749 $ (50,033) $ 98,368 Less Current Portion (91,583) Long Term Portion $ 6,785 19

23 NOTES TO THE FINANCIAL STATEMENTS Maturities for the next five years and thereafter on the loans are as follows: Year Ended June 30 Principal Interest Total 2015 $ 117,979 $ 30,241 $ 148, ,980 27, , ,058 24, , ,214 21, , ,451 17, , ,490 40, , ,811 3,065 87,876 Totals $ 1,197,983 $ 163,527 $ 1,361,510 NOTE #5 PENSION PLAN Plan Description. The District's cost-sharing multiple-employer defined benefit pension plan, (Miscellaneous Plan), provides retirement and disability benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries. The Miscellaneous Plan is part of the Public Agency portion of the California Public Employees Retirement System (CalPERS), an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. A menu of benefit provisions as well as other requirements is established by State statues within the Public Employees' Retirement Law. The District selects optional benefit provisions from the benefit menu by contract with CalPERS and adopts those benefits through local ordinance or resolution. CalPERS issues a separate comprehensive annual financial report. Copies of the CalPERS's annual financial report may be obtained from the CalPERS Investment Office, 400 Q Street, Suite E4800, Sacramento, California or via the web at Funding Policy. Active plan members in the Miscellaneous Plan are required to contribute seven percent of their annual covered salary. The District is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. The employer contribution rate for fiscal year 2014 was percent. The contribution requirements of the plan members are established by State statute and the employer contribution rate is established and may be amended by CalPERS. Annual Pension Cost. For Fiscal Year 2014, the District's annual pension cost was $191,932 and was equal to the District's required and actual contributions. The required contribution for Fiscal Year 2014 was determined as part of the June 30, 2011 actuarial valuation using the entry age normal actuarial cost method with the contributions determined as a percent of pay. 20

24 NOTES TO THE FINANCIAL STATEMENTS The actuary used following actuarial method and assumption: Valuation date: Actuarial Cost Method: Amortization Method: Actuarial Assumptions: Investment Rate of Return: Projected Salary Increases: Inflation: June 30, 2011 Entry Age Normal Cost Method Level percentage of payroll 7.50% (net of administrative expenses) 3.30% % percent based on age, service, and type of employment General-2.75% per year Payroll Growth: 3.0% Individual Salary Growth: A merit scale varying by duration of employment coupled with an assumed annual inflation growth of 3.00% and an annual production growth of 0.25%. Three Year Trend Information for Miscellaneous Plan Fiscal Year Annual Pension Percentage of APC Net Pension Ending Cost (APC) Contributed Obligation 6/30/2014 $ 191, % $ - 6/30/ , % - 6/30/ , % - NOTE #6 - OTHER RETIREMENT BENEFITS Postemployment Healthcare Plan (OPEB) Plan Description. The District provides post-retirement benefits to eligible employees. Eligibility is based upon active employee status of the District at the time of retirement, completion of at least ten years employment with the District, having achieved the age of 55 or older, eligibility to retire under PERS, and not receiving health care benefits from any other source other than Medicare or workers' compensation. During the fiscal year , the District Resolution established the amount of the employer's contribution of retiree health medical benefit at $280 per month per retired employee. That rate is still in effect for the year ended June 30,

25 NOTES TO THE FINANCIAL STATEMENTS California Public Employees' Retirement System (CalPERS) and the California Employers' Retiree Benefit Trust (CERBT). To comply with recommendation of the Governmental Accounting Standards Board (GASB) statement No. 43 and No. 45, the District joined the CalPERS CERBT fund in fiscal During the year ended June 30, 2014, $4,659 was contributed to the trust. The purpose of the CalPERS CERBT Fund is to provide California government employers with a trust through which they may prefund retiree medical costs and other post employment benefits. The objective of the Trust is to seek favorable returns that reflect the broad investment performance. The Trust utilizes the concept of diversification through asset allocation. However, there is no guarantee that the Trust will achieve its investment objective. The Employers who participate in the Trust own units of the Trust's portfolio that invests in accordance with the approved strategic asset allocation, they do not have direct ownership of the securities in the portfolio. The Trust's unit value changes with market condition. The CERBT is a self-funded program, in which the participating employers pay the program costs. The cost charged to participating employers is based on the average daily balance of assets. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the Ca1PERS' annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA Funding Policy. Statement No. 45 sets rules for computing the employer's expense for retiree benefits other than pension, called OPEBs. The expense, called the annual OPEB Cost (AOC), is determined similarly to pensions. The annual required contribution (ARC) of the employer, represents a level of funding that, if paid on an ongoing basis, is projected to cover normal annual costs each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. When an agency contributes more than the ARC, there is a net OPEB asset; when the contribution is less, a net OPEB obligation results. The District has a net OPEB asset of $88,579 as of June 30, Annual OPEB Cost and Net OPEB Obligation (Asset). For 2014, the District's annual OPEB cost (expense) was $20,733. The District contributed $21,600 for retiree health care premiums (including an implied subsidy). The following table shows the components of the District's annual OPEB costs for the 2014, the amount actually contributed to the plan, and changes in the District's net OPEB obligation: ANNUAL OPEB COST 2014 Annual Required Contribution (ARC) $ 21,600 Interest on net OPEB obligation (asset) (6,578) Amortization of net OPEB obligation (asset) 5,711 Annual OPEB cost 20,733 Contributions made 21,600 Change in net OPEB obligation (asset) (867) OPEB obligation (asset) - beginning of year (87,712) OPEB obligation (asset) - end of year $ (88,579) 22

26 NOTES TO THE FINANCIAL STATEMENTS Trend Information. The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the OPEB obligation for 2014 and the preceding year are presented below: Fiscal Year Annual OPEB Actual Employer Percentage Net OPEB Ending Cost Contributions Contributed Obligation (Asset) 2014 $ 20,733 $ 21, % $ (88,579) ,900 19,632 99% (87,712) ,070 19, % (87,980) Funded Status. The District's actuarial report dated July 1, 2013 estimates an unfunded Actuarial Accrued Liability (UAAL) of $216,000 in order to fund the health medical benefits of retired employees. The funded status of the plan as of July 1, 2013 (most recent available) was as follows: Actuarial UAAL as a Valuation Actuarial Value Actuarial Accrued Unfunded AAL Covered Percentage of Date of Assets Liability (AAL) (UAAL) Funded Ratio Payroll Covered Payroll July 1, 2013 $ 141,300 $ 357,300 $ 216,000 40% $ 876, % Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. 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, presents multiyear trend information that shows whether the actuarial value of the plan assets is increasing or decreasing over time, relative to the actuarial liabilities for benefits. Actuarial Methods and Assumptions. GASB Statement No. 43 requires actuarial reporting by the retiree health benefits trust fund and Statement No. 45 requires that an employer's expense be determined using actuarial methods so that costs accrue over the employees' working lifetimes. In addition, the CERBT trust requires biennial valuation. In order to comply with the above requirements, the Actuarial Analysis of Retiree Health Benefits for the District's, as of July 1, 2013, was performed by enrolled actuary Steven T. Itelson. The actuary used following actuarial method and assumption: Valuation date July 1, 2013 Actuarial cost method Projected Unit Credit Amortization method Level percentage of payroll Amortization Period 30 Years Asset valuation method Market Value of Assets Actuarial Assumptions: Investment rate of return (funded) 7.50% Salary increase 3.00% Inflation Rate 2.75% 23

27 NOTES TO THE FINANCIAL STATEMENTS NOTE #7 - RISK MANAGEMENT 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. The District joined together with other entities to form the California Sanitation Risk Management Authority (CSRMA), a public entity risk pool currently operating as a common risk management and insurance program for 54 member entities. The purpose of CSRMA is to spread the adverse effects of losses among the member entities and to purchase excess insurance as a group, thereby reducing its cost. The District pays annual premiums to CSRMA for its general liability, property damage and workers compensation insurance. CSRMA is governed by a Board composed of one representative from each member agency. The Board controls the operations of CSRMA including selection of management and approval of operating budgets, independent of any influence by member entities. In addition to the primary insurance types provided for through CSRMA listed above, the District also maintains commercial fidelity bonds, public employee dishonesty and public official bonds, to protect against employee theft or defalcation. Settled claims for CSRMA or commercial fidelity bonds have not exceeded coverage in any of the past three fiscal years. The following is a summary of the insurance coverage carried by the District as of June 30, 2014: Insured Value General liability (pooled liability program) Bodily injury, property damage, and personal injury $ 15,000,000 Public entity errors and omissions and other related practices Included above Employment related practices Included above Excess Liability 10,000,000 Public Official Bond 100,000 Special Form Property 1,890,057 Workers compensation Statutory Mobile equipment 606,187 The financial statements of CSRMA are available upon request from: The California Sanitation Risk Management Authority, c/o Alliant Insurance Services, Inc., 100 Pine Street, 11 th Floor, San Francisco, California