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HomeMy Public PortalAboutAudit Report - District- FY07MIDPENINSULA REGIONAL OPEN SPACE DISTRICT ANNUAL FINANCIAL REPORT MARCH 31, 2007 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT TABLE OF CONTENTS MARCH 31, 2007 FINANCIAL SECTION Independent Auditors' Report 1 Management's Discussion and Analysis 3 Basic Financial Statements Government -Wide Financial Statements Statement of Net Assets 8 Statement of Activities 9 Fund Financial Statements Governmental Funds - Balance Sheet 10 Governmental Funds - Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 11 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balance 12 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the District -Wide Statement of Activities 13 Notes to Financial Statements 14 REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 32 Note to Supplementary Information 34 INDEPENDENT AUDITORS' REPORT Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 35 FINANCIAL SECTION Vavrinek, Trine, Day & Co., LLP Certified Public Accountants INDEPENDENT AUDITORS' REPORT Board of Directors Midpeninsula Regional Open Space District Los Altos, California We have audited the accompanying financial statements of the governmental activities and each fund of the Midpeninsula Regional Open Space District (the "District") as of and for the year ended March 31, 2007, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District'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; 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 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 opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each fund of the Midpeninsula Regional Open Space District, as of March 31, 2007, and the respective changes in financial positions and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated June 25, 2007, on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe die 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 conjunction with this report in considering the results of our audit. 1 260 Sheridan Avenue, Suite 440 Palo Alto, CA 94306 Tel: 650.462,0400 Fax: 650.462.0500 www.vtdcpa.com FRESNO • LAGUNA HILLS • PALO ALTO • PLEASANTON • RANCHO CUCAMONGA The required supplementary information, such as management's discussion and analysis on pages 3 through 7 and budgetary comparison information on pages 32 through 34, are not a required part of the basic financial statements, but are supplementary information required by the accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Palo Alto, California June 25, 2007 2 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS MARCH 31, 2007 This section of the Midpeninsula Regional Open Space District's (the District) basic financial statements presents a narrative overview and analysis of the District's financial activities for the fiscal year ended March 31, 2007. We encourage readers to consider the information presented here in conjunction with our basic financial statements. FINANCIAL HIGHLIGHTS The most significant outside financial event for the District in the 2007 fiscal year was the end of ERAF III, the imposition by the State of California of a two year shift of property tax revenue from local government to state -funded programs, in order to plug gaps in the state budget. The District share of this "take -away" was $3.47 million over the 24 months ending June 30, 2006. In January 2007, the District completed the sale of $59.2 million of its 2007 Revenue Bonds through the Midpeninsula Regional Open Space District Financing Authority (the Authority). These bonds refinanced the Authority's 1996 and 1999 (second issue) Revenue Bonds. The objectives of this financing were to [1] reduce the present value of future debt service, [2] reduce debt service payments in the peak debt service years of 2016-2020, and [3] position the District to more easily issue future debt if and when needed to support future land purchase opportunities. The 2007 Bonds were sold with an average life of 13.4 years and a total interest cost of 4.41%. The present value savings were approximately $6.2 million, or 10.5% of the refunded debt. Underlying tax revenue growth, before subtractions due to ERAF III, continued to be above average in fiscal 2007, about 9.2%, compared to 8.5% in fiscal 2006. Actual property tax revenue increased by 18.6% due to the favorable impact of the end of ERAF III in June 2006. The District added a record $41.6 million of land in fiscal 2007. This dollar increase was over double that of any prior fiscal year. Over half of the value of these additions, $22.4 million, was funded by gifts. The Peninsula Open Space Trust (POST) contributed $20.2 million of these land gifts. The District also received $4.3 million of state grants to support land acquisitions. Net of grants and gifts, the District expended $14.9 million on new land purchases in fiscal 2007. The assets of the District exceeded liabilities at the close of the 2007 fiscal year by $217.9 million (net assets). Of this amount, $174.5 million is invested in capital assets, net of related debt, $0.7 million is restricted by the terms of existing District debt, and the remaining $42.6 million is unrestricted. The District's total net assets increased by $37.9 million in fiscal 2007, mostly due to gifts of land and land acquisition grants. The District's total long-term obligations were reduced by $3.8 million to $127.3 million. 3 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS MARCH 31, 2007 OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the District's basic financial statements. The District's basic financial statements consist of three components: (1) government -wide financial statements; (2) fund financial statements and (3) notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. This is the third year the District has presented its financial statements under the new reporting model required by the Governmental Accounting Standards Board Statement No. 34 (GASB 34), Basic Financial Statements — and Management's Discussion and Analysis (MD&A) — for State and Local Governments. NET ASSETS Statement of Net Assets — March 31, 2006 and 2007 2007 2006 Change Assets: Current assets $ 46,441,203 $ 54,461,959 $ (8,020,756) Capital assets 300,272,448 257,597,399 42,675,049 Total assets 346,713,651 312,059,358 34,654,293 Liabilities: Accounts payable and other liabilities 1,482,505 886,376 596,129 Long-term liabilities 127,262,284 131,057,193 (3,794,909) Total liabilities 128,744,789 131,943,569 (3,198,780) Net assets: Invested in capital assets, net of related debt 174,598,403 128,199,050 46,399,353 Restricted 738,627 2,759,76Q (2,021,133) Unrestricted 42,631,832 49,156,979 (6,525,147) Total net assets $ 217,968,862 $ 180,115,789 $ 37,853,073 Analysis of Net Assets The District's assets at the close of this fiscal year are $218.0 million more than its liabilities. This is the result of the District's inventory of capital assets. The investment in capital assets, $174.6 million, consists primarily of the District's 52,000 acres of land in 25 open space preserves protected for public enjoyment. The investment in capital assets is offset by long-term debt obligations on promissory notes and lease revenue bonds. The net assets subject to external restrictions are composed of $0.7 million for debt service. Unrestricted net assets are used to finance additional land acquisition projects. The District's budget for fiscal year 2008 includes $26.3 million for land acquisitions, net of related projected grants. 4 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS MARCH 31, 2007 Changes in Net Assets — Fiscal Years Ending March 31, 2007 and 2006 2007 2006 Change % Change Revenues: Program revenue: Charges for services $ 837,248 $ 826,156 $ 11,092 1.3% Grants and contributions 26,827,098 8,941,897 17,885,201 200.0% General revenue: General property tax 23,909,402 20,153,853 3,755,549 18.6% Investment income 2,064,013 1,560,206 503,807 32.3% Other 249,495 311,821 (62,326) -20.0% Total Revenues 53,887,256 31,793,933 22,093,323 69.5% Expenses Change in net assets 16,034,183 17,037,053 (1,002,870) -5.9% $ 37,853,073 $ 14,756,880 $ 23,096,193 156.5% Analysis of Change in Net Assets For the year ended March 31, 2007, the District's net assets increased by $37.9 million. The reduction in overall expenses was due to lower interest charges. Salaries and benefits represented 49% of expenses compared to 43% in fiscal 2006. Salaries and benefits increased 9.5% over the prior fiscal year. Salaries increased by 7.6% while benefits, principally retirement and group insurance costs, rose by 15.4%. The ratio of benefit costs to salaries increased from 32.3% to 35.7%. Program revenues include rental income, grants, gifts of land, and donations. The major contributor of current year program revenue was POST, which provided gifts of land totaling $20.2 million. Overall tax revenue in fiscal 2007 increased by 18.6% due to another strong local real estate market in residential property and the end of the ERAF III tax shift in June 2006. Investment income increased by $0.5 million, due to higher interest rates. GENERAL FUND The General Fund balance sheet includes all District accounts except for debt and capital assets. At March 31, 2007, the General Fund had a fund balance of $42.6 million, down $6.5 million from the prior year-end. All but $0.3 million of this fund balance is unreserved and designated for future land acquisitions, including $30.0 million budgeted for land purchases in fiscal year 2008. Land purchases represented 60.0% of total General Fund expenditures in fiscal year 2007, up from 28.6% in fiscal year 2006. This percentage varies significantly from year to year due to the uncertain timing of completing complicated land purchase transactions, ranging from 25% to 76% during this decade. 5 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS MARCH 31, 2007 DEBT SERVICE FUND The only asset in the Debt Service Fund, $1.4 million, is a reserve fund required by the terms of the District's 2004 Revenue Bonds. The funds are held by the bond trustee and will be used to make the final debt service payment on this issue. The District receives the interest earned on this reserve fund, and this is shown on the Statement of Revenues, Expenditures and Changes in Fund Balance --Governmental Funds. Total debt service in fiscal year 2007 was approximately $6.6 million, consisting of $3.5 million of principal and $3.1 million of interest. CAPITAL ASSETS As of March 31, 2007, the District's investment in capital assets is $300.3 million, net of accumulated depreciation. The District added $41.6 million of land in fiscal year 2007, representing 98% of the total increase in capital assets and has committed $1.3 million of its fund balance for various uncompleted capital projects included in construction in progress. Additional information on the District's capital assets can be found in Note 5 in the Notes to the Basic Financial Statements. LONG-TERM OBLIGATIONS As of March 31, 2007, the District's long-term liabilities consist of $0.9 million in compensated absences, $1.7 million of subordinated notes issued to sellers in District land purchase transactions, $116.5 million of Authority revenue bonds sold to the public in 1999, 2004, and 2007 and rated AAA by Moody's and Standard and Poor's based on the municipal bond insurance policies purchased by the District issued by Ambac Assurance Corporation and MBIA, $4.5 million of Refunding Promissory Notes sold to the public in 2005 and rated AAA by Moody's and Standard and Poor's and insured by Ambac, and $3.6 million of accreted interest, unamortized premium and unamortized loss on refunding. Additional information on the District's long-term obligations can be found in Note 6 in the Notes to the' Basic Financial Statements. BUDGETARY PERFORMANCE The Budgetary Comparison Schedule —General Fund shows how the District financial results compared to the original budget adopted in March 2006 and the final budget adjusted in December 2006. Total District revenue in fiscal 2007 was $1.9 million (6.5%) above budget, mostly due to higher secured, unsecured and supplemental tax revenue from Santa Clara County. In addition, higher interest rates on cash investments, which were larger than expected due to slower land purchases, largely offset delays in receipt of grant income. Acquisitions of land, $18.9 million, were $11.9 million below budget. This shortfall has been rolled forward into the fiscal 2008 budget. 6 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS MARCH 31, 2007 Excluding land purchases and debt service, fiscal year 2007 expenditures were approximately $0.8 million, or 6.2%, below the final budget. Salaries and benefits were $0.3 million, or 3%, below budget, services and supplies cost $0.6 million, or 19%, less than budget, and non -land capital spending was $0.1 million, or 3%, over budget. This budget performance was at the top end of the normal range of recent years (89% to 94% of budget). ECONOMIC FACTORS AND NEXT YEAR'S BUDGET The Board of Directors adopted the District's budget for fiscal year 2008 on March 28, 2007. This budget assumes lower growth in underlying property tax revenue, about 3%, due to slower turnover of residential property in both Santa Clara and San Mateo County portions of the District. The District receives about 2/3 of its tax revenue from Santa Clara County and 1/3 from San Mateo County. The total land acquisition budget is $30.0 million in fiscal 2008, partially covered by $3.7 million of associated acquisition -related grant income. Debt service requirements are $7.4 million. If all revenues and expenditures occur as budgeted, the District's cash position would decrease by $21.2 million in fiscal year 2008. With the final approval of the Coastside Protection Program in September 2004, the District's boundary was extended to the Pacific Ocean in San Mateo County, from the southern borders of Pacifica to the San Mateo/Santa Cruz County line. This annexation increased the size of the District from 331 to 556 square miles. This expansion is expected to have only a minor impact on the District's operational spending in the next few years. However, the District has begun purchasing land in the foothills of the coastside area. The District is currently pursuing potential land acquisition projects which would use up all undesignated reserves within three years. ADDITIONAL FINANCIAL INFORMATION This financial report is designed to provide a general overview of the District's finances for all those with an interest in the District's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the District Clerk, 330 Distel Circle, Los Altos, CA 94022. 7 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT STATEMENT OF NET ASSETS MARCH 31, 2007 Governmental Assets Activities Cash and investments $ 34,101,825 Receivables Taxes 7,020,321 Interest 266,277 Grant 2,027,818 Restricted cash and investments 1,433,108 Note receivable 249,510 Prepaid expense 3,615 Deferred charges 1,338,729 Capital assets Nondepreciable Land 289,669,096 Construction in progress 739,428 Depreciable, net of accumulated depreciation Structures and improvements 5,586,297 Infrastructure 2,827,627 Equipment 387,528 Vehicles 1,062,472 Total assets 346,713,651 Liabilities Accounts payable 624,876 Interest payable 694,481 Other accrued liabilities 108,674 Deposits payable 54,474 Long-term liabilities Due within one year 1,691,432 Due in more than one year 125,570,852 Total liabilities 128,744,789 Net Assets Invested in capital assets, net of related debt 174,598,403 Restricted for debt service 738,627 Unrestricted 42,631,832 Total net assets $ 217,968,862 The accompanying notes are an integral part of these financial statements. 8 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED MARCH 31, 2007 Program expenses - general government: Salaries $ (5,896,141) Benefits (2,081,870) Directors (25,100) Services and supplies (2,643,561) Depreciation (599,876) Cost of issuance (64,385) Interest (4,723,250) Total program expenses (16,034,183) Program revenues: Charges for services Capital grants and operating contributions Total program revenues Net program expenses 837,248 26,827,098 27,664,346 11,630,163 General revenues: General property tax 23,909,402 Investment income 2,064,013 Miscellaneous 249,495 Total general revenues 26,222,910 Changes in net assets 37,853,073 Net assets - beginning of the year 180,115,789 Net assets - end of the year $217,968,862 The accompanying notes are an integral part of these financial statements. 9 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT GOVERNMENTAL FUNDS BALANCE SHEET MARCH 31, 2007 ASSETS Cash and investments Receivables Taxes Interest Grant Prepaid expense Restricted cash and investments Note receivable Total assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Accrued liabilities Deposits payable Deferred revenue Total liabilities Fund Balances: Reserved for: Debt service Encumbrances Unreserved, designated for: Budgeted land acquisitions Unreserved Total fund balance Total Liabilities and Fund Balances General Fund Debt Service Fund $34,101,825 $ Total $ 34,101,825 7,020,321 7,020,321 266,277 266,277 2,027,818 - 2,027,818 3,615 3,615 1,433,108 1,433,108 249,510 - 249,510 $43,669,366 $ 1,433,108 $ 45,102,474 $ 624,876 $ 108,674 54,474 249,510 1,037,534 342,221 30,025,000 12,264,611 42,631,832 1,433,108 44,064,940 $ 624,876 108,674 54,474 249,510 1,037,534 1,433,108 1,433,108 342,221 30,025,000 12,264,611 $43,669,366 $ 1,433,108 $ 45,102,474 The accompanying notes are an integral part of these financial statements. 10 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT GOVERNMENTAL FUNDS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS MARCH 31, 2007 Amounts Reported for Governmental Activities in the Statement of Net Assets are Different Because: Total Fund Balance - Governmental Funds Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is Accumulated depreciation is Note receivables are not available to pay for current period expenditures and, therefore, are deferred on the modified accrual basis in the balance sheet of government funds. Bond issuance costs are expended in governmental funds when paid, however, they are capitalized and amortized over the life of the corresponding bonds for purposes of the statement of net assets. Interest payable on long-term debt does not require the use of current financial resources and, therefore, interest payable is generally not accrued as a liability in the balance sheet of governmental funds. Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Long-term liabilities at year end consist of: Promissory notes Lease revenue bonds Accreted interest on capital appreciation bonds Compensated absences (vacations) Total Net Assets - Governmental Activities The accompanying notes are an integral part of these financial statements. $ 307,215,877 (6,943,429) $ 44,064,940 300,272,448 249,510 1,338,729 (694,481) (6,256,563) (112,449,784) (7,606,520) (949,417) (127,262,284) $ 217,968,862 11 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED MARCH 31, 2007 REVENUES Property tax Grant income Investment income Property management - rents Other income Total Revenues EXPENDITURES Current Salaries Benefits Directors Services and supplies Capital outlay New land purchases Land acquisition support costs Structures and improvements Equipment Vehicles Construction in progress Debt service Principal repayment Interest and fiscal charges Total Expenditures Excess (deficiency) of revenues over expenditures Other Financing Sources (Uses): Loss on refunding Transfers in Transfers out Net Financing Sources (Uses) NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending General Fund Debt Service Fund Total $ 23,909,402 $ 4,460,598 1,917,201 837,248 249,495 31,373,944 $ 23,909,402 4,460,598 153,032 2,070,233 837,248 249,495 153,032 31,526,976 5,832,056 2,081,870 25,100 2,643,561 18,906,951 273,293 725,000 119,091 173,727 710,363 3,503,730 3,111,923 6,615,653 38,106,665 5,832,056 2,081,870 25,100 2,643,561 18,906,951 273,293 725,000 119,091 173,727 710,363 3,503,730 3,111,923 31,491,012 (117,068) (6,408,079) (6,408,079) (6,525,147) 49,156,979 (6,462,621) (6,579,689) (1,669,264) (1,669,264) 6,408,079 6,408,079 (6,408,079) 4,738,815 (1,669,264) (1,723,806) (8,248,953) 3,156,914 52,313,893 $ 42,631,832 $ 1,433,108 The accompanying notes are an integral part of these financial statements. $ 44,064,940 12 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE DISTRICT -WIDE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED MARCH 31, 2007 Total Net Change in Fund Balances - Governmental Funds $ (8,248,953) Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures, however, for governmental activities, those costs are shown in the statement of net assets and allocated over their estimated useful lives as annual depreciation expenses in the statements of activities. This is the amount by which capital outlays and donations exceed depreciation in the period. Depreciation expense $ (599,876) Donation of capital assets 22,366,500 Capital outlays 20,908,425 42,675,049 Repayment of notes receivable is reported as revenue in governmental funds, and thus, has the effect of increasing fund balance because current financial resources have been received. However, the loan payments reduce the receivables in the statement of net assets and do not generate revenue in the statement of activities. (6,220) Loss on refunding is recorded as an expenditure in governmental funds, but is deferred and amortized over the life of the new debt in the governmen-wide financial statements. 1,669,264 Accrued interest on long-term debt is reported in the government -wide statement of activities, but does not require the use of current financial resources. Amortization of bond premiums, amortization of loss on debt refunding are expensed as a component of interest expense on the statement of activities, but they are not recognized in the governmental fund financial statements. This amount represents the net accrued interest expense and the amortization not reported in governmental funds. Changes in accrued interest expense on current interest bonds (291,703) Amortization of bond premium 56,009 Accreted interest on capital appreciation bonds (1,159,443) Amortization of deferred amounts (280,575) (1,675,712) Repayment of long-term debt is reported as an expenditure in governmental funds, and thus, has the effect of reducing fund balance because current financial resources have been used. However, the principal payments reduce the liabilities in the statement of net assets and do not result in any expense in the statement of activities. Principal payments in long-term debt are as follows: Promissory notes 399,354 Lease revenue bonds 3,104,376 3,503,730 In the statement of activities, certain operating expenses - compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). Vacation earned was more than the amounts used by $64,085. (64,085) Change in Net Assets of Governmental Activities $ 37,853,073 The accompanying notes are an integral part of these financial statements. 13 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Midpeninsula Regional Open Space District (the District) was formed in 1972 to acquire and preserve public open space land in northern and western portions of Santa Clara County. In June 1976, the southern and eastern portions of San Mateo County were annexed to the District. The District annexed a small portion of the northern tip of Santa Cruz County in 1992. In September 2004, the District completed the Coastside Protection Program, which extended the District boundaries to the Pacific Ocean in San Mateo County, from the southern borders of Pacifica to the San Mateo/Santa Cruz County line. A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. Blended Component Unit The District and the County of Santa Clara entered into a joint exercise of powers agreement dated May 1, 1996, creating the Midpeninsula Regional Open Space District Financing Authority (the Authority), pursuant to the California Government Code. The District is financially accountable for the Authority, as it appoints a voting majority of the governing board; is able to impose its will in the Authority; and the Authority provides specific financial benefits to, and imposes specific financial burdens on, the District. The Authority was formed for the sole purpose of providing financing assistance to the District to fund the acquisition of land to preserve and use as open space. As such, the Authority is an integral part of the District, and accordingly, all of the Authority's activity is blended within the accompanying debt service fund. NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self -balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. 14 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Major Governmental Funds General Fund The General Fund accounts for all financial resources and activities except those required to be accounted for in another fund. The General Fund balance is available to the District for any purpose provided it is expended or transferred according to the general laws of California. Other Non -Major Governmental Funds Debt Service Fund The Debt Service Fund is used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest, and related costs. Basis of Accounting - Measurement Focus Government -Wide Financial Statements The government -wide statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of commercial entity financial statements, but differs from the manner in which governmental fund financial statements are prepared. The government -wide statement of activities presents a comparison between expenses, both direct and indirect, and program revenues of the District. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District. Net assets should be reported as restricted when constraints placed on net asset use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net assets restricted for other activities result from special revenue funds and the restrictions on their net asset use. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. The District has no non -major funds. 15 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Governmental Funds All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in find balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government -wide statements are prepared. Governmental fund financial statements therefore include reconciliations with brief explanations to better identify the relationship between the government -wide statements and the governmental funds financial statements. Revenues — Exchange and Non -Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, available means expected to be received within 60 days of fiscal year-end. Non -exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are earned and become measurable and available. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non -exchange transactions must also be available before it can be recognized. Under the modified accrual basis, the following revenue sources are considered to be both measurable and available at fiscal year-end: Property taxes, interest, certain grants, and other local sources. Deferred Revenue Deferred revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed from the combined balance sheet and revenue is recognized. Certain grants received before the eligibility requirements are met are recorded as deferred revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as deferred revenue. 16 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable. Principal and interest on general long-term debt, which has not matured, are recognized when paid in the governmental funds. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds. Cash and Investments Restricted cash and investments are held by the District or outside fiscal agent under provisions of debt agreements. The District's investments are reported at fair value. The fair value of investments is determined annually and is based on current market prices. Capital Assets and Depreciation Capital assets (including infrastructure) are recorded at historical cost or at estimated historical cost if actual cost is not available. Contributed capital assets are valued at their estimated fair market value on the date contributed. Capital assets include public domain (infrastructure). The District's infrastructure consist of improvements including roadways, trails, parking lots, bridges and culverts. Effective April 1, 2003, the District increased its capital assets capitalization threshold from $500 to $5,000. Capital assets used in operations are depreciated using the straight-line method over their estimated useful lives in the government -wide statements. Estimated useful lives of the various classes of depreciable capital assets are as follows: structures/improvements, 10 to 30 years; infrastructure, 30 to 40 years; equipment, 5 to 20 years, vehicles, 10 to 20 years. The cost of normal maintenance and repairs that do not add to the value of the assets or materially extend the useful lives is not capitalized. Improvements are capitalized and, for government -wide statements, are depreciated over the remaining useful lives of the related capital assets. Bond Issuance Costs, Original Issue Discounts and Premiums, Deferred Losses on Refunding In the fund financial statements, the District recognizes bond premiums and discounts as other financing sources or uses and issuance costs as expenditures in the period the bond proceeds are received. Bond premiums/discounts and issuance costs for the government -wide statement of net assets are deferred and amortized over the life of the bonds using a method that approximates the interest method. In the government - wide statements, bond premiums/discounts are presented as an increase/reduction of the face amount of bonds payable whereas issuance costs are recorded as deferred charges. Gains or losses occurring from advance refundings, completed subsequent to April 1, 2003, are deferred and amortized into expenses for governmental activities. 17 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Compensated Absences In accordance with the District's memorandum of understanding with various employee groups, employees accrue fifteen days of vacation during the first nine years of service, twenty days between service years ten and fourteen, twenty-one days between service years fifteen and nineteen, twenty-three days between service years twenty and twenty-four, and twenty-five days after twenty-five years of service. An employee may accumulate vacation time earned to a maximum of two times the amount of his/her annual vacation time. Full-time employees accrue twelve days of sick leave annually from the date of employment. An employee may accumulate sick leave time earned on an unlimited basis. Upon resignation, separation from service, or retirement from District employment, workers in good standing with ten or more years of District employment shall receive a cash payment of the equivalent cash value of accrued sick leave as follows: Years of Employment Percentage of equivalent cash value of accrued sick leave 10-15 20% 16-20 25% 21 or more 30% Workers who retire from the District and elect to continue CalPERS medical coverage during retirement may elect 1) apply the equivalent cash value of 100% of accrued sick leave toward their cost of the retiree medical plan premiums, or 2) receive a cash payment of the percentage of equivalent cash value of accrued sick leave based on years of employment as described above, and apply the remainder of the equivalent cash value toward their cost of retiree medical plan premiums. In all cases the equivalent cash value of accrued sick leave will be based on current rate of pay as of the date of separation from District employment. The District accrues for all salary -related items in the government -wide statements for which they are liable to make a payment directly and incrementally associated with payments made for compensated absences on termination. Property Tax Levy, Collection and Maximum Rate The State of California (the State) Constitution Article XIIIA provides that the combined maximum property tax rate on any given property may not exceed one percent of its assessed value unless voters have approved an additional amount for general obligation debt. Assessed value is calculated at 100 percent of market value as defined by Article XIIIA and may be increased by no more than two percent per year unless the property is sold or transferred. The State Legislature has determined the method of distribution of receipts from the one percent tax levy among the counties, cities, school districts and special districts. The District receives property tax revenues from Santa Clara and San Mateo Counties. 18 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 The Counties assess properties and bill for the collection of property taxes as follows: Santa Clara Secured Unsecured Valuation/lien January 1 dates Levy dates October 1 Due dates Delinquent after 50% on November 1 50% on February 1 December 10 (for November) April 10 (for February) January 1 July 1 Upon receipt of billing August 31 San Mateo Secured January 1 On or before November 1 50% on November 1 50% on February 1 December 10 (for November) April 10 (For February) Unsecured January 1 July 1 July 1 August 31 Fund Equity/Net Assets In the fund financial statements, governmental funds report fund balance reserved for amounts that are not appropriate for expenditure or legally or contractually segregated for a specific future use. Fund balance designations result from District management or Board action. Such designations are at the discretion of management or Board and may be changed by future management or Board action. In government -wide statements equity is classified as net assets and displayed in three components: • Invested in capital assets, net of related debt consist of capital assets net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvements of those assets. • Restricted net assets consist of net assets with constraints placed on the use either by 1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments; or 2) law through constitutional provisions or enabling legislation. • Unrestricted net assets consist of all other net assets that do not meet the definitions of "restricted" or "invested in capital assets, net of related debt." Use of Estimates The District's management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues, expenditures and expenses and the disclosure of contingent liabilities to prepare these basic financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 19 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Changes in Accounting Principles In March 2003, the Governmental Accounting Standards Board (GASB) issued GASBS No. 40, Deposit and Investment Risk Disclosures an amendment of GASB Statement No. 3. This Statement addressed common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in the Statement also should be disclosed. As such, the District has made the applicable required disclosures. New Accounting Pronouncements In July 2004, GASB issued GASBS No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement will require local governmental employers who provide other postemployment benefits (OPEB) as part of the total compensation offered to employees to recognize the expense and related liabilities (assets) in the government -wide financial statements of net assets and activities. This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of State and local governmental employers. Current financial reporting practices for OPEB generally are based on pay-as-you-go financing approaches. They fail to measure or recognize the cost of OPEB during the periods when employees render the services or to provide relevant information about OPEB obligations and the extent to which progress is being made in funding those obligations. This Statement generally provides for prospective implementation - that is, that employers set the beginning net OPEB obligation at zero as of the beginning of the initial year. The District will be required to implement the provisions of this Statement for the fiscal year ended March 31, 2009. In December 2004, GASB issued GASBS No. 46, Net Assets Restricted by Enabling Legislation. This Statement clarifies that a legally enforceable enabling legislation restriction is one that a party external to a government - such as citizens, public interest groups, or the judiciary - can compel a government to honor. The Statement states that the legal enforceability of an enabling legislation restriction should be reevaluated if any of the resources raised by the enabling legislation are used for a purpose not specified by the enabling legislation or if a government has other cause for reconsideration. Although the determination that a particular restriction is not legally enforceable may cause a government to review the enforceability of other restrictions, it should not necessarily lead a government to the same conclusion for all enabling legislation restrictions. This Statement also specifies the accounting and financial reporting requirements if new enabling legislation replaces existing enabling legislation or if legal enforceability is reevaluated. Finally, this Statement requires governments to disclose the portion of total net assets that is restricted by enabling legislation. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2005. The District has implemented this pronouncement. 20 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 NOTE 3 — CASH AND INVESTMENTS Total cash and investments are as follows: Governmental Carrying Amount Cash and cash equivalents $ 1,222,685 Investments 32,879,140 Restricted cash and investments 1,433,108 $ 35,534,933 Cash on hand $ 800 Deposits 1,221,885 Investments 34,312,248 $ 35,534,933 The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investment in County Treasury The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro -rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: 21 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Authorized Investment Type Local Agency Bonds, Notes, Warrants Registered State Bonds, Notes, Warrants U.S. Treasury Obligations U.S. Agency Securities Banker's Acceptance Commercial Paper Negotiable Certificates of Deposit Repurchase Agreements Reverse Repurchase Agreements Medium -Term Notes Mutual Funds Money Market Mutual Funds Mortgage Pass -Through Securities County Pooled Investment Funds Local Agency Investment Fund (LAIF) Joint Powers Authority Pools Interest Rate Risk Maximum Remaining Maturity 5 years 5 years 5 years 5 years 180 days 270 days 5 years 1 year 92 days 5 years N/A N/A 5 years N/A N/A N/A Maximum Percentage of Portfolio None None None None 40% 25% 30% None 20% of base 30% 20% 20% 20% None None None Maximum Investment In One Issuer None None None None 30% 10% None None None None 10% 10% None None None None 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 purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Specific Identification Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investment by maturity: Investment Type U.S. Treasuries Money Market Mutual Funds County Pool State Investment Pool Total Fair Value $ 13,523,169 35,534 16,650,862 4,082,154 $ 34,291,719 22 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by the California Government Code, the Districts' investment policy, or debt agreements, and the actual rating as of the year-end for each investment type. Minimum Not Required Investment Type U.S. Treasuries Money Market Mutual Funds County Pool State Investment Pool Total Custodial Credit Risk - Deposits Fair Value $13,523,169 35,534 16,650,862 4,082,154 $ 34,291,719 Legal Rating N/A N/A N/A N/A To Be Rated $13,523,169 35,534 16,650,862 4,082,154 $34,291,719 This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. Investments The District's investment policy, consistent with the Government Code of California authorizes the District to invest in the County of Santa Clara Treasurer's investment pool, obligations of the U.S. Treasury or its agencies, certificates of deposit, bankers' acceptances, guaranteed and bank investment contracts, commercial paper and mutual funds invested in U.S. Government securities. The District did not enter into any reverse repurchase agreements during the year ended March 31, 2007. Information is not available on whether the various mutual funds and the County of Santa Clara Treasurer's investment pool in which the District has invested used, held or wrote derivative financial products during the year ended March 31, 2007. The County of Santa Clara Treasurer's investment pool is subject to regulatory oversight by the County's Treasury Oversight Committee, as required by California Government Code Section 27134. The fair value of the District's position in the pool is approximately the same as the value of the pool shares. 23 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 NOTE 4 — NOTE RECEIVABLE On December 17, 1997, the District sold the title to and possession of a 50 -year fee determinable estate 10 -acre parcel near the Skyline Ridge Open Space Preserve. The District financed the purchase in the amount of $288,800 over 25 years as a rate of 10% per annum. Monthly principal and interest payments of $2,624 are due on the 1st of each month and late if not paid by the 10`x', with the final payment scheduled December 1, 2022. The outstanding balance at March 31, 2007, is $250,001. NOTE 5 - CAPITAL ASSETS Capital asset activity for the fiscal year ended March 31, 2007, was as follows: Governmental Activities Capital Assets not being depreciated: Land Construction in progress Total Capital Assets not being depreciated Capital Assets being depreciated: Structures and improvements Infrastructure Equipment Vehicles Total Capital Assets being depreciated Total Capital Assets Less Accumulated Depreciation: Structures and improvements Infrastructure Equipment Vehicles Total Accumulated Depreciation Governmental Activities Capital Assets, Net Balance March 31, 2006 $ 248,036,353 1,188,853 249,225,206 9,532,150 2,748,346 704,688 1,761,034 Additions $41,632,743 710,362 42,343,105 1,165,936 607,372 144,572 173,727 2,091,607 Balance Deductions March 31, 2007 1,159,787 1,159,787 30,472 30,472 $ 289,669,096 739,428 290,408,524 10,698,086 3,355,718 849,260 1,904,289 16,807,353 14,746,218 263,971,424 44,434,712 1,190,259 307,215,877 4,774,926 433,682 413,482 751,935 6,374,025 336,863 94,409 48,250 120,354 599,876 5,111,789 528,091 461,732 30,472 841,817 30,472 6,943,429 $ 257,597,399 $43,834,836 $1,159,787 $ 300,272,448 Capital Projects Commitments As of March 31, 2007, the District had $884,200 in year-end commitments for active construction projects for the following significant projects: • El Corte de Madera Creek Erosions Control Project • Various road repairs • Various building improvements 24 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Donations of Land The District received various land donations during fiscal year 2006-2007. These gifts were recorded at a total value of $22,366,500. NOTE 6 - LONG-TERM OBLIGATIONS The changes in the District's long-term obligations during the year consisted of the following: Promissory notes Aine property Lazenby property McKannay-Seimers property Dalolia property Hunt property 2005 refunding Total promissory notes Lease revenue bonds 1996 issue 1999 first issue 1999 second issue 2004 issue 2007 A issue 2007 B issue Subtotal lease revenue bonds Unamortized premium Unamortized loss on refunding Total lease revenue bonds Accreted interest on lease revenue bonds 1996 issue 1999 first issue 1999 second issue 2004 issue Total accreted interest Accrued compensated absences Balance April 1, 2006 $ 47,522 23,306 250,000 205,089 1,500,000 4,630,000 $ Balance Due in Additions Deductions March 31, 2007 One Year $ 14,798 7,320 250,000 12,236 $ 32,724 $ 15,834 15,986 7,760 192,853 13,019 1,500,000 115,000 4,515,000 120,000 399,354 6,256,563 156,613 6,655,917 23,080,199 26,303,021 25,786,962 31,890,010 52,415,000 6,785,000 23,080,199 865,000 25,438,021 25,786,962 50,000 31,840,010 52,415,000 6,785,000 970,000 95,000 630,000 107,060,192 59,200,000 49,782,161 886,886 56,009 (951,971) (4,123,343) (216,190) 106,995,107 55,076,657 49,621,980 116,478, 031 1,695,000 830,877 56,009 (4,859,124) (216,190) 112,449,784 1,534,819 4,959,880 6,284,550 5,113,880 162,527 16,520,837 885,332 $ 131,057,193 1,078,056 4,959,880 5,113,880 81,387 1,159,443 10,073,760 64,085 $ 56,300,185 $ 60,095,094 7,362,606 243,91.4 7,606,520 949,417 $ 127,262,284 $ 1,691,432 25 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Promissory Notes Qn June 26, 2003, the District entered into a lease and management agreement between the Peninsula Open Space Trust (POST), where POST is the one-half interest owner of the Hunt Partial Interest Property. In addition to the management, control, and operation of the property, the District entered into a promissory note to pay the Hunt Living Trust a sum of $1,500,000 on April 1, 2023, together with an interest rate of 5.5% through April 1, 2013, in a semi-annual basis, and thereafter at a rate of 5% per annum until the maturity or prior redemption of the note. The remaining three land contract promissory notes aggregate to total debt of $241,563, bears interest at fixed rates from 6.0% to 7%, and matures at different intervals through October 10, 2017. 2005 Refunding Promissory Notes of $4,630,000 were issued June 30, 2005, bearing interest rates range from 3.25% to 5.00%, mature annually from September 1, 2006 through September 1, 2014. The notes were issued to pay off the 1995 promissory notes. Revenue Bonds On July 24, 1996, the Authority, on behalf of the District, issued the 1996 Revenue Bonds. These bonds are comprised at $14,190,000 in current interest bonds, bearing interest at rates ranging from 5.1% to 5.75%, and maturing annually from September 1, 2004 through September 1, 2012. This issue also includes $4,900,000 of current interest term bonds, bearing interest at 5.9% due September 1, 2014 and $9,921,707 of capital appreciation bonds, bearing interest rates ranging from 6.2% to 6.3%, maturing annually from September 1, 2015 through September 1, 2026. These bonds were paid with the proceeds from the 2007 refunding bonds issued December 15, 2006. On January 27, 1999, the Authority, on behalf of the District, issued the 1999 Revenue Bonds, first issue. These bonds are comprised of $13,855,000 of current interest bonds, bearing interest rates ranging from 3.75% to 4.625%, maturing annually from September 1, 2004 through September 1, 2014. This issue also includes $18,207,771 of capital appreciation bonds, bearing interest rates ranging from 5.2% to 5.4%, maturing annually from September 1, 2015 through September 1, 2030. A portion of the proceeds was used to advance refund the 1992 Promissory Notes. These bonds were paid with the proceeds from the 2007 refunding bonds issued December 15, 2006. On August 30, 1999, the Authority, on behalf of the District, issued the 1999 Revenue Bonds, second issue. These bonds comprised of $9,815,000 current interest bonds, bearing interest rates ranging from 4.4% to 5.2% maturing annually from August 1, 2004 through August 1, 2012. This issue also includes $6,185,000 of current interest term bonds, bearing interest at 5.25%, due August 1, 2013 through August 1, 2017, and $14,489,430 of capital appreciation bonds, bearing interest at rates ranging from 6.2% to 6.35%, maturing annually from August 1, 2018 through August 1, 2003. A portion of the proceeds was used to repay the 1990 Promissory Notes. 26 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 On January 30, 2004, the Authority, on behalf of the District, issued the 2004 Revenue Bonds. These bonds comprised of $9,725,000 of current interest bonds, bearing interest at rates ranging from 2% to 4.5%, maturing annually from September 1, 2005 through September 1, 2023. This issue also includes $20,835,000 of current interest term bonds, bearing interest at 5%, due September 1, 2024 through September 1, 2034, and $1,340,010 of capital appreciation bonds, bearing interest at rates ranging from 5% to 5.53%, maturing annually from September 1, 2019 through September 1, 2027. A portion of the proceeds was used to repay a portion of the 1995 Promissory Notes. On December 15, 2006, the Authority, on behalf of the District, issued the 2007 Series A Revenue Refunding Bonds and the 2007 Series B -T Taxable Revenue Refunding Bonds. The Series A bonds comprised of $52,415,000 of current interest bonds, bearing interest at rates ranging from 4% to 5%, maturing annually from September 1, 2012 through September 1, 2027. The Series B bonds comprised of $6,785,000 of current interest bonds, bearing interest at 5.15%, maturing annually from September 1, 2007 through September 1, 2012. The proceeds from the bonds were used to repay the concurrently District issued 2007 promissory notes. The promissory notes were used to defease the 1996 and 1999 revenue bonds. All debt is payable from limited ad valorem property taxes levied on all taxable property within the District. As of March 31, 2007, annual debt service requirements to maturity are as follows: Promissory Notes Promissory Notes Fiscal Year Principal 2008 2009 2010 2011 2012 2013-2017 2018-2022 2023-2024 Total $ 156,613 178,967 164,738 175,681 796,684 3,265,868 18,012 1,500,000 $ 6,256,563 Interest to Maturity $ 300,977 293,370 285,008 277,865 254,162 659,526 375,566 112,500 $ 2,558,974 Total $ 457,590 472,337 449,746 453,546 1,050,846 3,925,394 393,578 1,612,500 $ 8,815,537 27 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Revenue Bonds Revenue Bonds Fiscal Year 2008 2009 2010 2011 2012 2013-2017 2018-2022 2023-2027 2028-2032 2033-2035 Less unaccreted interest Total NOTE 7 —RENTAL INCOME Principal $ 1,695,000 2,365,000 2,735,000 3,125,000 3,660,000 18,983,271 25,986,857 31,114,219 18,063,684 8,750,000 $ 116,478,031 Accreted Interest $ 2,551,729 9,020,043 13,983,127 13,937,071 (7,606,520) $ 31,885,450 Interest $ 5,265,499 4,750,370 4,634,174 4,499,535 4,343,129 16,890,825 15,103,494 5,532,366 3,157,245 680,000 $ 64,856,637 Total $ 6,960,499 7,115,370 7,369,174 7,624,535 8,003,129 38,425,825 50,110,394 50,629,712 35,158,000 9,430,000 (7,606,520) $ 213,220,118 The District leases (rents) certain land and structures to others under operating leases with terms generally on a month -to -month basis. Rental income of $837,248 was received during the year ended March 31, 2007. NOTE 8 — EMPLOYEES' RETIRMENT PLAN Plan Description The District's defined benefits pension plan, Public Employees' Retirement System (PERS), provides retirement and disability benefits, annual cost -of -living adjustments, and death benefits to plan members and beneficiaries. The PERS is part of the miscellaneous 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 are established by State statutes within the Public Employees' Retirement Law. The District selects optional benefits through District resolution. A separate report for the District's plan is not prepared; however, CalPERS issues a separate comprehensive annual financial report. Copies of the CalPERS' annual financial report may be obtained from the CalPERS Executive Office at 400 P Street, Sacramento, CA 95814. 28 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Funding Policy Active members in the PERS are required to contribute 8% of their annual covered salary, which 7% is currently paid by the District on behalf of its employees and 1% is paid by the employee. The District is required to contribute the actuarial determined remaining amount necessary to fund the benefits for its members. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. The required employer contribution rate for the year ended March 31, 2007, was 11.665%. The contribution requirements of the plan are established by State statute and the employer contribution rate is established and may be amended by CalPERS. Annual Pension Cost For fiscal year 2007, the District's annual pension cost for CalPERS was equal to the District's required and actual contributions, which were determined as part of the June 3Q, 2005, actuarial valuation using the entry age normal actuarial cost method. The actuarial assumption included the following: Investment rate of return 7.75% (net of administrative services) Projected salary increases 3.25% to 14.45% depending on age, service and type of employment Inflation 3.00% Payroll growth 3.25% Individual salary growth A merit scale varying by duration of employment coupled with an assumed annual inflation component of 3.00% and an annual production growth of 0.25% The actuarial value of assets was determined using a technique that smoothes the effect of short-term volatility in the market value of investment over a two to five year period depending on the size of investment gains and/or losses. Unfunded actuarial accrued liability (UAAL) (or excess assets) is being amortized as a level percentage of projected payroll on a closed basis. The amortization period of any unfunded actuarial liabilities of the District end on June 30, 2014. THREE YEAR TREND INFORMATION FOR PERS Fiscal Year Ending 3/31/2005 3/31/2006 3/31/2007 Annual Pension Cost (APC) $ 519,337 785,982 958,262 Percentage of APC Net Pension Contributed Obligation 100% 100% 100% 29 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TQ FINANCIAL STATEMENTS MARCH 31, 2007 Valuation Date 6/30/2003 6/30/2004 6/30/2005* Accrued Liabilities $ 2,597 2,746 579 * Most recent information available SCHEDULE OF FUNDING PROGRESS (In Millions) Unfunded Acturial Liabilities Assets (UL) $ 2,373 $ 224 2,461 285 500 79 Funded Ratio 91.4% 89.6% 86.4% Annual Covered Payroll $ 725 744 129 UL as a% of Payroll 30.9% 38.3% 61.0% Because the Agency's individual plan consists of less than 100 members, it is required to participate in a risk pool, and has done so for the past 2 fiscal years. The above Schedule of Funding Progress presents information on the risk pool as a whole and not on the Agency's individual plan. Data on the funding progress of the pool prior to March 31, 2004 is not available. NOTE 9 — RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; injuries to employees; and natural disasters. Prior to July 1, 2002, the District managed and financed these risks by purchasing commercial insurance. On July 1, 2002, the District joined the California Joint Powers Insurance Authority (CAJPIA). The CAJPIA is composed of 91 California public entities mid is organized under a joint powers agreement pursuant to California Government Code Section 6500 et seq. The purpose of the CAJPIA is to arrange and administer programs for the pooling of self-insurance losses, to purchase excess insurance or reinsurance, and to arrange for group -purchased insurance for property and other coverages. The CAJPIA's pool began covering claims of its members in 1978. Each member government has an elected official as its representative on the Board of Directors. The Board operates through a 9 -member Executive Committee. The District did not have settled claims that exceed the District's insurance coverage in any of the past 3 years. Self -Insurance Programs of the CAJPIA General Liability: Each member government pays a primary deposit to cover estimated losses for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Costs are spread to members as follows: the first $30,000 of each occurrence is charged directly to the member; costs from $30,001 to $750,000 are pooled based on member's share of costs under $30,000; costs in excess of $750,000 are shared by the members based upon each individual member's payroll. Costs of covered claims above $5,000,000 are currently paid by reinsurance. The protection for each member is $5,000,000 per occurrence and $50,000,000 annual aggregate. 30 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTES TO FINANCIAL STATEMENTS MARCH 31, 2007 Workers Compensation: The District also participates in the workers compensation pool administered by the CAJPIA. Pool deposits and retrospective adjustments are valued in a manner similar to the General Liability pool. The District is charged for the first $50,000 of each claim. Costs from $50,001 to $100,000 per claim are pooled based on the member's losses under its retention level. Costs between $100,001 and $500,000 per claim are pooled based on payroll. Costs in excess of $500,000 are paid by excess insurance purchased by the CAJPIA. The excess insurance provides coverage to statutory limits. Purchased Insurance Environmental Insurance: The District participates in the pollution legal liability and remediation legal liability insurance, which is available through the CAJPIA. The policy covers sudden and gradual pollution of scheduled property, streets, and storm drains owned by the District. Coverage is on a claims -made basis. There is a $50,000 deductible. The CAJPIA has a limit of $50,000,000 for the 3 -year period from July 1, 2005 through July 1, 2008, with reinstatement of $50,000,000 if the initial $50,000,000 is depleted. Each member of the CAJPIA has a $10,000,000 limit during the 3 -year term of the policy. Property Insurance: The District participates in the all-risk property protection program of the CAJPIA. This insurance is underwritten by several insurance companies. The District property is currently insured according to a schedule of covered property submitted by the District to the CAJPIA. There is a $5,000 per loss deductible. Premiums for the coverage are paid annually and are not subject to retroactive adjustments. NOTE 10 — COMMITMENTS During May 2000, the District and the County of Santa Clara (the County) entered into an agreement whereby the District would operate and manage the Rancho San Antonio County Park (the Park). The Park encompasses 165 acres owned by the County and serves as a gateway facility to the District's Rancho San Antonio Open Space Preserve (the Preserve). The Preserve includes the Deer Hollow Farm, a homestead and educational center operated by the City of Mountain View. Under the agreement, the District agreed to manage the Park for a term of ten years and to ensure that Deer Hollow Farm receives funding for operations of no less than $50,000 per year. In return, the County contributed $1,500,000 to the District for the purpose of acquiring open space. NOTE 11 — CONTINGENT LIABILITIES The District has entered into numerous agreements, has properties that will require environmental remediation, and is named in certain claims and litigations. In the opinion of management, after consultation with counsel, the liability, if any, resulting there from will not have a material effect on the District's financial position 31 REQUIRED SUPPLEMENTARY INFORMAHON MIDPENINSULA REGIONAL OPEN SPACE DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED MARCH 31, 2007 REVENUES Property tax Grant income Investment income Property management - rents Other income Total Revenues EXPENDITURES Current Salaries Benefits Directors Services and supplies Capital outlay New land purchases Land acquisition support costs Structures and improvements Equipment Vehicles Construction in progress Debt service Principal repayment Interest and fiscal charges Total Expenditures Excess (deficiency) of revenues over expenditures Other Financing Sources (Uses): Loss on refunding Transfers in Transfers out Net Financing Sources (Uses) NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending Budgeted Amounts (GAAP Basis) Original Final $ 21,887,000 5,392,000 1,300,000 825,000 200,000 29,604,000 $ 21,887,000 5,392,000 1,300,000 825,000 200,000 29,604,000 Actual (GAAP Basis) $ 23,909,402 4,460,598 2,070,233 837,248 249,495 31,526,976 Variances - Positive (Negative) Final to Actual $ 2,022,402 (931,402) 770,233 12,248 49,495 1,922,976 5,824,445 5,974,726 5,832,056 142,670 2,041,946 2,193,607 2,081,870 111,737 25,000 25,000 25,100 (100) 3,253,199 3,276,228 2,643,561 632,667 31,250,000 30,758,529 18,906,951 11,851,578 314,000 548,500 273,293 275,207 1,078,500 1,010,500 725,000 285,500 143,000 143,000 119,091 23,909 238,000 238,000 173,727 64,273 710,363 (710,363) 3,259,355 3,259,355 3,503,730 (244,375) 3,902,875 3,902,875 3,111,923 790,952 51,330,320 51,330,320 38,106,665 13,223,655 (21,726,320) (21,726,320) (6,579,689) 15,146,631 (1,669,264) 6,408,079 (6,408,079) (1,669,264) (8,248,953) 49,156,979 (1,669,264) 6,408,079 (6,408,079) (1,669,264) 13,477,367 (21,726,320) 49,156,979 (21,726,320) 49,156,979 $ 27,430,659 $ 27,430,659 The accompanying notes are an integral part of these financial statements. $ 40,908,026 $ 13,477,367 32 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT GENERAL FUND (CONTINUED) BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED MARCH 31, 2007 Explanation of difference between budgetary inflows and outflows and GAAP revenues and expenditures: Total revenues: Actual amounts (budgetary basis) "total revenues" from the budgetary comparison schedule Difference - budget to GAAP: Budget schedule includes results from debt service fund and are reclassified to the debt service fund for GAAP reporting Total revenues as reported on the statement of revenues, expenditures and changes in fund balance - general fund Total expenditures: Actual amounts (budgetary basis) "total expenditures" from the budgetary comparison schedule Difference - budget to GAAP: Budget schedule includes results from debt service fund and are reclassified to the debt service fund for GAAP reporting Total expenditures as reported on the statement of revenues, expenditures and changes in fund balance - general fund See accompanying note to supplementary information. $ 31,526,976 (153,032) $ 31,373,944 $ 38,106,665 (6,615,653) $ 31,491,012 33 MIDPENINSULA REGIONAL OPEN SPACE DISTRICT NOTE TO REQUIRED SUPPLEMENTARY INFORMATION MARCH 31, 2007 Budgets and Budgetary Data The District's Board of Directors adopts an annual operating budget for the District as a whole, which includes both its General and Debt Service Funds on or before March 31, for the ensuing fiscal year. The Board of Directors may amend the budget by resolution during the fiscal year. The legal level of control, the level at which expenditures may not legally exceed the budget, is at the category level. Encumbrances are recorded as reservations of fund balance since they do not constitute expenditures or liabilities. All unencumbered appropriations lapse at the end of the fiscal year. See accompanying note to supplementary information. 34 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Midpeninsula Regional Open Space District Los Altos, California We have audited the financial statements of the governmental activities, and each fund of Midpeninsula Regional Open Space District as of and for the year ended June 30, 2007, which collectively comprise the Midpeninsula Regional Open Space District's basic financial statements and have issued our report thereon dated June 25, 2007. 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. Internal Control Over Financial Reporting In planning and performing our audit, we considered Midpeninsula Regional Open Space District's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide an opinion on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether Midpeninsula Regional Open Space District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 35 260 Sheridan Avenue, Suite 440 Palo Alto, CA 94306 Tel: 650.462.0400 Fax: 650.462.0500 www.vtdepa.com FRESNO • LAGUNA HILLS • PALO ALTO • PLEASANTON • RANCHO CUCAMONGA This report is intended solely for the information and use of the Governing Board, management, the California Department of Education, the State Controller's Office, and pass -through entities and is not intended to be and should not be used by anyone other than these specified parties. 1� 4 LLP Palo Alto, California June 25, 2007 36