ANNUAL FINANCIAL REPORT 2002 MEASURE G GENERAL OBLIGATION BOND FUND
INDEPENDENT AUDITORS REPORT Board of Trustees And Citizen s Bond Oversight Committee East Side Union High School District We have audited the accompanying balance sheet of the 2002 Measure G General Obligation Bond Fund (the Fund), of the East Side Union High School District, as of June 30, 2004, and the related statement of revenues, expenditures and changes in fund balance for the two years ended June 30, 2004. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion 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. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 opinion. As discussed in Note 1, the financial statements present the financial activity of the Fund only, and do not purport to, and do not, present the financial position and results of operations of the East Side Union High School District as a whole, in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund, as of June 30, 2004, and the results of its operations for the two year period then ended, in conformity with accounting principles generally accepted in the United States of America. San Jose, California April 26, 2005
BALANCE SHEET ASSETS Cash and investments $ 39,857,675 Total Assets $ 39,857,675 LIABILITIES AND FUND EQUITY LIABILITIES Accounts payable $ 4,342,459 Total Liabilities 4,342,459 FUND BALANCE Fund balances Undesignated 35,515,216 Total Fund Equity 35,515,216 Total Liabilities and Fund Equity $ 39,857,675 The accompanying notes are an integral part of these financial statements.
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE FOR THE TWO YEARS ENDED REVENUES AND OTHER SOURCES Net proceeds from issuance of bonds $ 59,542,000 Total Revenues 59,542,000 EXPENDITURES Current Expenditures Supplies 1,070,165 Services and operating expenditures 8,904,492 Capital outlay 14,052,127 Total Expenditures 24,026,784 EXCESS OF REVENUES OVER EXPENDITURES 35,515,216 FUND BALANCE, JULY 1, 2002 - FUND BALANCE, $ 35,515,216 The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the 2002 Measure G General Obligation Bond fund (the Fund) of the East Side Union High School District conform to accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants. The Fund accounts for financial transactions in accordance with the policies and procedures of the California School Accounting Manual. Financial Reporting Entity The financial statements include the financial activity of the 2002 Measure G General Obligation Bond Fund only. The Fund was established to account for the expenditures of general obligation bonds issued under the Measure G Bond Election of 2002. These financial statements are not intended to present the financial position and results of operations of the East Side Union High School District as a whole, in conformity with accounting principles generally accepted in the United States of America. The authorized issuance amount of the bonds is $298,000,000. The first series of bonds in the amount of $30,000,000 were sold on June 19, 2002. The second series of bonds were sold on March 19, 2003, in the amount of $30,000,000. The District has reflected $59,542,000 in proceeds from the sale of these two bond issuances. $458,000 was held by an outside trustee to pay issuance costs and is not reflected in the financial statements. Basis of Accounting Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of measurement made, regardless of the measurement focus applied. The financial statements of the Fund are accounted for using the flow of current financial resources measurement focus and the modified accrual basis of accounting. Using this measurement focus, only current assets and current liabilities are included in the balance sheet. Long-term debt is not included as a liability of the Fund, but is disclosed separately in the notes to financial statements. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current fiscal period. Expenditures are recognized in the accounting period in which the liability is incurred. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.
NOTES TO FINANCIAL STATEMENTS NOTE 2 - INVESTMENTS Deposits with the County Treasury and investments in the State Treasurer s Investment Pool are not categorized because they do not represent securities, which exist in physical or book entry form. The deposits with the County Treasury are valued using the amortized cost method (which approximates fair value). The fair value was provided by the County sponsor of its pool. The investments at June 30, 2004 had reported and fair values as follows: Reported Fair Amount Value Deposits with county treasurer $ 39,857,675 $ 39,667,554 NOTE 3 ACCOUNTS PAYABLE Payables at June 30, 2004 consisted of vendor payables of $4,342,459. NOTE 4 GENERAL LONG-TERM DEBT The outstanding general obligation bonded debt is as follows: Issue Maturity Interest Original Date Date Rate Issue June 19, 2002 August 1, 2026 3.25% - 5.75% $ 30,000,000 March 19, 2003 August 1, 2028 2.50% - 5.00% 30,000,000
NOTES TO FINANCIAL STATEMENTS The bonds mature through 2028 as follows: Interest to Fiscal Year Principal Maturity Total 2005 $ 1,040,000 $ 3,188,183 $ 4,228,183 2006 1,545,000 2,690,247 4,235,247 2007 1,625,000 2,622,172 4,247,172 2008 1,690,000 2,554,410 4,244,410 2009 1,765,000 2,484,048 4,249,048 2010-2014 10,130,000 11,437,461 21,567,461 2015-2019 12,575,000 8,984,678 21,559,678 2020-2024 15,715,000 5,683,817 21,398,817 2025-2028 13,295,000 1,550,250 14,845,250 Total $ 59,380,000 $ 41,195,266 $ 100,575,266 Repayment of the Bonds will be funded by a separate property tax override levied on property residing within the District boundaries. Property tax revenues will be collected and disbursed out of a separate Bond Interest and Redemption Fund under the control of the Santa Clara Controller s Office. This fund is not included as part of these financial statements. General school district revenues will not be required to fund the debt service on the bonds.
AGREED-UPON PROCEDURES REPORT
INDEPENDENT ACCOUNTANTS REPORT ON APPLYING AGREED-UPON PROCEDURES Board of Trustees And Citizens Bond Oversight Committee East Side Union High School District We have performed the agreed-upon procedures, which were agreed to by the management of the East Side Union High School District (the District) and the Citizen s Bond Oversight Committee of the East Side Union High School District (the Committee), to review expenditures of the 2002 Measure G General Obligation Bond Fund (the Fund), covering a minimum of 80% of the total Fund expenditures for the years ended June 30, 2003 and 2004, for the purpose of verifying if the use of the funds is within the scope of the published election materials specifying the intended use of bond proceeds. We used the election documents and District resolutions as the guidance for the intended use of the bond proceeds. Management of the District and the Committee are responsible for the compliance with the election documents and District resolutions. This engagement to perform agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants and meets the compliance requirements to perform a performance audit as referred to in Proposition 39 and outlined in Subparagraph (C) of paragraph (3) of subdivision (b) of section 1 of Article XIII A of the California Constitution. The sufficiency of these procedures is solely the responsibility of those specified parties in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. Financial Summary 1. The 2002 Measure G General Obligation Bonds were authorized by an election of the registered voters of the East Side Union High School District held on November 5, 2002. The total amount authorized was $298,000,000. The proceeds are to be used for the financing of site improvements and modernization of school facilities. The first series of bonds in the amount of $30,000,000 were sold on June 19, 2002. The second series of bonds were sold on March 19, 2003, in the amount of $30,000,000. 2. Total expenditures, exclusive of transfers out and bond issuance costs, for the two years ended June 30, 2004, were $24,026,784.
Agreed Upon Procedures Performed 1. Verify that the expenditures of funds were accounted for separately in the accounting records to allow for accountability. 2. Verify that the net funds from the sale of the 2002 Measure G General Obligation Bond were deposited in total into the District s accounts by obtaining the settlement statement for the new bond issue and verifying that the amounts were appropriately deposited into the building and debt service funds, as required. 3. Test expenditures covering a minimum of 80% of the total capital project expenditures, exclusive of issuance costs and transfers out, and verify that the funds expended complied with the purpose that was specified to the registered voters of the District through election materials or District resolutions or the project priority list that was distributed to the voters. Results of Procedures 1. The 2002 Measure G General Obligation Bond Fund expenditures were accounted for separately as Program 819 in Fund 21 (the Building Fund) of the District. We believe the Measure G activity should have its own separate fund. See Findings 1 and 2 below. 2. The net proceeds from the sale of the general obligation bonds aggregated $59,542,000. This entire amount was deposited into the District s Building Fund. The net original issue premium of $857,001 is not available to fund construction projects. This amount is required to be deposited into a separate debt service sinking fund. The District complied with this requirement. See Finding #3. 3. We examined expenditures aggregating $20,056,660, which is 83% of the total Measure G Bond expenditures, net of transfers out and estimated issuance costs, for the years ended June 30, 2003 and 2004. Our review did not reveal any items that were paid from the Measure G Bond proceeds that did not comply with the intended use of bond proceeds approved by the voters of the District on November 5, 2002. Findings 1. The Measure G activity should be segregated into a separate Capital Projects Fund and not commingled with the rest of the Fund 21 activity. The Measure G activity needs to be audited separately and recording its activity in a separate fund would greatly enhance accountability. See also Finding #2. 2. Because the Measure G activity is not recorded in a separate fund, there is no separate allocation of interest income to the Measure G activity. All interest income earned off the Measure G bond proceeds is recorded in the Building Fund (Fund 21). We have performed a calculation on the cumulative amount of interest income earned from the Measure G cash balances, and that amount aggregates approximately $1,642,000. The District needs to put a mechanism in place to separately track interest earned. Placing all Measure G activity into a separate fund (see Finding #1) would accomplish this task. The additional interest can be used to fund Measure G modernization projects. We recommend that the District reflect the $1,642,000 as part of the Measure G Fund after setting up the separate Measure G Capital Projects Fund.
3. Part of the proceeds from the sale of bonds was segregated into a separate proceeds account which is supposed to be used for costs of issuance. The amount in question is $458,000. The District has not reflected this amount in their financial statements because the funds were deposited to an outside trustee account and bypassed the District s accounting system. In addition, there has been no accounting for how these funds have been spent and what amount, if any, is unspent at June 30, 2004. The District needs to perform an accounting for these funds and reflect the activity in their financial statements. We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on compliance. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the Board of Trustees and the Committee and is not intended to be and should not be used by anyone other than those specified parties. San Jose, California April 27, 2005