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HomeMy WebLinkAbout06.a. Audited financial statements for fiscal year ended June 30, 2013Central Contra Costa Sanitary District BOARD OF DIRECTORS 'a• POSITION PAPER Board Meeting Date: October 17, 2013 Subject: ACCEPT THE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2013 Submitted By. Initiating DeptJDiv.: Thea Vassallo, CPA, CMA Administrative / Finance & Accounting Finance Manager REVIEWED AND RECOMMENDED FOR BOARD ACTION: �} 9 � e K. Alm R. Baile Counsel for the District General Man ger ISSUE: The audited financial statements of the Central Contra Costa Sanitary District for the Fiscal Year (FY) ended June 30, 2013, are being submitted to the Board of Directors. RECOMMENDATION: Accept the audited financial statements for the FY ended June 30, 2013. FINANCIAL IMPACTS: None. ALTERNATIVES /CONSIDERATIONS: None. BACKGROUND: The firm of Maze & Associates has completed its first examination of the District's financial statements for the FY ended June 30, 2013, and has submitted the audited financial statements and auditor's opinion thereon. The objective of the audit is the expression of an opinion as to whether the basic financial statements are fairly presented, in all material respects, in conformity with United States generally accepted accounting principles and to report on the fairness of the supplementary information in relation to the financial statements taken as a whole. The audit is conducted in accordance with auditing standards generally accepted in the United States of America and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and includes tests of the accounting records of the District and other procedures considered necessary to express such an opinion. The independent auditor's report for the FY ending June 30, 2013 expresses an unqualified (clean) opinion. In the performance of their examination of the financial statements, the auditors evaluate the District's internal accounting controls related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements as required by Government Auditing Standards. Based on their Page 1 of 2 POSITION PAPER Board Meeting Date: October 17, 2013 subject: ACCEPT THE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2013 observations during the course of the examination, the auditors advise District management of any significant deficiencies or material misstatements and any recommendations to improve the system of internal accounting controls. See attached "Memorandum on Internal Control and Required Communications" for the current year recommendations and management's responses to the prior year significant deficiencies. In accordance with Government Code Section 53891, information from the audit will be used to prepare a report to the State Controller's office. The report will be sent electronically by the annual deadline of October 18, 2013. The audited financial statements are also sent to the County Auditor - Controller, Contra Costa County Board of Supervisors, and the Bond Rating Agencies. The original contract with Maze & Associates is for a four -year term. This report from Maze & Associates is their first audited financial statement report. COMMITTEE RECOMMENDATION: The audited financial statements were reviewed by David Alvey from Maze & Associates at the Budget and Finance Committee meeting on September 30, 2013. The Committee recommends Board acceptance. See Attachment 1. The Memorandum on Internal Control and Required Communications will be reviewed at the Committee meeting on October 14, 2013. See Attachment 2 and 3. RECOMMENDED BOARD ACTION: Accept the basic audited financial statements and memorandum on internal control and required communications for the FY ended June 30, 2013. Attached Supporting Documents: 1. Basic (audited) Financial Statements for the Year Ended June 30, 2013 2. Memorandum on Internal Control and Required Communications for the Year Ended June 30, 2013 3. Internal Audit of Material Supplies Building (MSB) and Cycle Counting for the Fiscal Year 2012 -13 Page 2 of 2 Attachment 1 Basic (audited) Financial Statements for the Year Ended June 30, 2013 Central Contra Costa Sanitary District October 17, 2013 TO: HONORABLE BOARD OF DIRECTORS VIA: ROGER BAILEY, GENERAL MANAGER (�'A FROM: THEA VASSALLO, FINANCE MANAGER SUBJECT: JUNE 30, 2013 AUDITED FINANCIAL STATE ENTS AND MEMORANDUM OF INTERNAL CONTROL AND REQUIRED COMMUNICATIONS (AUDIT MANAGEMENT LETTER) Attached is the final draft of the June 30, 2013 audited financial statements and the memorandum on internal control and required communications as prepared by Maze & Associates. The results of the audit and management letter were presented by David Alvey of Maze & Associates at the Budget and Finance Committee meeting on September 30, 2013. Subsequent, to the Committee meeting, there was one minor receivables classification change to the Statement of Cash Flows. The memorandum on internal control and required communications will be reviewed at the Budget and Finance Committee meeting on October 14, 2013. Vikki Rodriguez of Maze & Associates will also provide a brief review of the results with the full Board on October 17, 2013. Please contact me if you have any questions or concerns at Extension 740. C: \Users \danderson\AppData \Local \Microsoft \Windows \Temporary Internet Files \Content.Outlook \LNU4C6EA \Cover memo June 30 2013 Audited Financial Statements 10- 17- 13.doc Attachment 1 CENTRAL CONTRA COSTA SANITARY DISTRICT BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 This Page Left Intentionally Blank CENTRAL CONTRA COSTA SANITARY DISTRICT BASIC FINANCIAL STATEMENTS For the Year Ended June 30, 2013 Table of Contents INTRODUCTORY SECTION Tableof Contents ............................................................................................ ............................... i FINANCIAL SECTION INDEPENDENT AUDITOR'S REPORT .............................................................. ..............................1 MANAGEMENT'S DISCUSSION AND ANALYSIS ....................................... ............................... 3 BASIC FINANCIAL STATEMENTS Statementof Net Position ................................................................................... .............................10 Statement of Revenues, Expenses and Changes in Net Position ..................... .............................11 Statementof Cash Flows .................................................................................... .............................12 NOTES TO BASIC FINANCIAL STATEMENTS ............................................ .............................15 SUPPLEMENTARY INFORMATION Combining Schedule of Net Position — EnterpriseSub - Funds ................................................................................ .............................41 Combining Schedule of Revenues, Expenses and Changes in Net Position — Enterprise Sub -Funds ......... ............................... 42 Schedule of Running Expenses, Comparison of Budget and Actual Expenses by Department ......................................................................... ............................... 43 Running Expense — Schedule of Supplemental Net Position Analysis ....................................................... ............................... 44 This Page Left Intentionally Blank tj MAZE & ASSOCIATES INDEPENDENT AUDITOR'S REPORT To the Board of Directors Central Contra Costa Sanitary District Martinez, California Report on Financial Statements We have audited the accompanying financial statements of the business -type activities of the Central Contra Costa Sanitary District (District) as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the Table of Contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business -type activities of the Central Contra Costa Sanitary District as of June 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. T 925.930.0902 Accountancy Corporation F 925.930.0135 3478 Buskirk Avenue, Suite 215 e maze @mazeassociates.com Pleasant Hill, CA 94523 w mazeassociates.com Emphasis of a Matter Management adopted the provisions of Governmental Accounting Standards Board Statement No. 63- Financial Reporting of Deferred Ouews of Resources, Deferred Inflows of Resources, and Net Position, which became effective during the year ended June 30, 2013 and required certain title changes to the Statement of Net Position and Statement of Changes in Net Position. See Note 1L to the financial statements for relevant disclosures. The emphasis of this matter does not constitute a modification to our opinion. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that Management's Discussion and Analysis be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District's financial statements as a whole. The Supplementary Information listed in the Table of Contents is presented for purposes of additional analysis and is not a required part of the financial statements. The Supplementary Information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Supplementary Information is fairly stated in all material respects in relation to the financial statements as a whole. Pleasant Hill, California September 18, 2013 2 Jl Central Contra Costa Sanitary District MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the District's annual financial report presents an analysis of the District's financial performance during the fiscal year ended June 30, 2013. This information is presented in conjunction with the audited financial statements, which follow this report. FINANCIAL HIGHLIGHTS The District's 2012 -13 financial highlights are listed below. These results are discussed in more detail later in the report. • The District's total ending net position increased by $9.1 million or 1.45% in 2012 -13 when compared to fiscal year 2011 -12; when comparing 2012 -13 to 2010 -11, net position have increased by $12.9 million or 2.07 %. This is mainly due to capital project asset additions. • Total revenues in 2012 -13 increased by $8.8 million or 11.64% when compared to 2011 -12; when comparing 2012 -13 to 2010 -11, total revenue has increased by $10.9 million or 14.85 %. The total Sewer Service Charge (SSC) rate increased by 8.8 %; a larger portion of the internal SSC allocation was shifted from Capital Contributions to Operating Revenues. • Total 2012 -13 expenses increased by $3.1 million or 3.60% compared to 2011 -12; when comparing 2012 -13 to 2010 -11, total expenses increased by $9.1 million or 11.23 %. This is mainly due to higher cost of total labor and technical services. • Capital Contributions decreased in 2012 -13 compared to 2011 -12 by -$0.4 million or - 2.42 %. Capital Contributions increased by $6.0 million or 65.78% comparing 2012 -13 to 2010 -11. The decrease in 2012 -13 was due to the SSC rate increase, with more being allocated to Operations and Maintenance, and higher connection fees when comparing 2012 -13 to 2011 -12. The volatile housing and construction markets caused swings in connection fee revenue. (Connection fee revenue of $6.1 million in 2012 -13, $5.7 million in 2011 -12 and $3.5 million in 2010 -11). OVERVIEW OF THE FINANCIAL STATEMENTS This annual report includes the management's discussion and analysis report, the independent auditor's report and the basic financial statements of the District. The financial statements also include notes that explain information in the financial statements in more detail. This report also contains other supplementary information in addition to the basic financial statements. REQUIRED FINANCIAL STATEMENTS The Financial Statements of the District report information utilizing methods similar to those used by private sector companies. These statements offer short and long -term financial information about its activities. ® Recycled Paper Statement of Net Position — reports the District's current financial resources (short-term spendable resources) with capital assets and long -term obligations • Statement of Revenues, Expenses and Changes in Net Position — reports the District's operating and non - operating revenues by major source along with operating and non - operating expenses and capital contributions • Statement of Cash Flows — reports the District's cash flows from operating activities, non- capital financing activities, capital and related financing activities, investing activities, and non- cash activities STATEMENT OF NET POSITION The following table shows the condensed statement of net position of the Central Contra Costa Sanitary District for the past three years: Condensed Statement of % Increase Net Position Fiscal Year Ended June 30 (Decrease) FY 12 -13 FY 12 -13 vs. vs. 2012 -13 2011 -12 2010 -11 FY 11 -12 10 -11 Current Assets $ 78,006,233 $ 78,506,812 $ 80,407,120 -0.64% -2.99% Capital Assets 603,985,469 597,689,744 593,461,791 1.05% 1.77% Other Non - current Assets 9,454,886 9,332,364 12,456,011 1.31% - 24.09% Total Assets 691,446,588 685,528,920 686,324,922 0.86% -0.75% Current Liabilities 11,704,101 11,128,540 10,682,746 5.17% 9.56% Non - Current Liabilities 44,027,490 47,797,407 52,844,305 -7.89% - 16.68% Total Liabilities 55,731,591 58,925,947 63,527,051 -5.42% - 12.27% Invested in Capital Assets, Net of Related Debt 559,523,642 549,462,506 541,613,208 1.83% 3.31% Restricted - Debt Service 4,730,837 4,663,601 4,612,103 1.44% 2.57% Unrestricted 71,460,518 72,476,866 76,572,560 -1.40% -6.68% Total Net Position $ 635,714,997 $ 626,602,973 $ 622,797,871 1.45% 2.07% The total net position of the District increased from $622.8 million in 2010 -11 to $626.6 million in 2011 -12 and to $635.7 million in 2012 -13. The increase in net position over the 3 -year period totals $12.9 million and is the result of the combination of net income and capital contributions; comparing 2012 -13 to 2011 -12 net position increases by $9.1 million. By far the largest portion of the District's net position (88.01% percent) reflects its investment in capital assets (e.g. land, buildings, machinery, equipment, intangible assets, and sewer line infrastructure), less any related debt used to acquire those assets that are still outstanding. The District uses these capital assets to provide services to its ratepayers; consequently, these assets are not available for future spending. Although the District's investment in its capital assets is reported net of debt, it should be noted that the funds needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. There is currently $4.7 million restricted for debt service. The remaining balance of $71.5 million in unrestricted net position may be used to meet the District's ongoing obligations to its ratepayers and creditors. The unrestricted net position may also be used for payment of long -term unfunded liabilities. 4 REVIEW OF REVENUES EXPENSES AND CHANGES IN NET POSITION The table below shows the condensed statement of revenues, expenses, and changes in net position for the Central Contra Costa Sanitary District for the past 3 years: Condensed Statement of Revenues, Expenses, and % Increase Changes in Net Position Fiscal Year Ended June 30 (Decrease) FY 12 -13 FY 12 -13 vs. vs. 2012 -13 2011 -12 2010 -11 FY 11 -12 10 -11 Sewer Service Charges SSC $ 67,254,405 $ 59,771,237 $ 58,320,822 12.52% 15.32% Other Service Charges and Miscellaneous 1,828,281 1,845,402 1,575,738 - 0.93% 16.03% Total Operating Revenue 69,082,686 61,616,639 59,896 560 12.12% 15.34% Property Tax 13,010,477 12,047,169 12,213,624 8.00% 6.52% Permit & Inspection Fees 1,169,809 903,810 895,825 29.43% 30.58% Interest and All Other 1,356,574 1,226,598 673,990 10.60% 101.28% Total Non - Operating Revenues 15,536,860 14,177,577 13,783,439 9.59% 12.72% Total Revenues 84 619,546 75,794,216 73,679 999 11.64% 14.85% Total Labor and Benefits 49,811,218 45,562,430 41,705,131 9.33% 19.44% Chemicals & Utilities 5,420,789 6,090,408 5,664,360 - 10.99% -4.30% Repairs and Maintenance 3,151,127 3,068,604 2,972,395 2.69% 6.01% Professional, Legal and Outside Services 2,836,638 4,099,876 2,425,612 - 30.81% 16.95% Materials & Supplies 1,980,314 2,031,401 1,944,767 -2.51% 1.83% Hauling and Disposal 1,088,294 1,009,137 944,394 7.84% 15.24% Self - Insurance Expense 2,380,466 810,849 1,003,115 193.58% 137.31% All Other 472,630 1,612,482 1,575,905 - 70.69% - 70.01% Depreciation Expense 21,596,266 21,190,059 20,580,061 1.92% 4.94% Total Operating Expenses 88,737,742 85,475,246 78,815 740 3.82% 12.59% Non - Operating Expense - Interest Expense 1,802,084 1,919,375 2,585,112 -6.11% - 30.29% Total Expenses 90,539,826 87,394 621 81,400,852 3.60% 11.23% Income Before Capital Contributions 5,920,280 11,600,405 7,720,853 - 48.96% - 23.32% Customer Contributions SSC 8,001,147 8,888,663 5,018,092 -9.98% 59.45% Contributed Sewer Lines 939,628 792,011 533,616 18.64% 76.09% Capital Contributions - Connection Fees 6,091,529 5,724,833 3,515,804 6.41% 73.26% Total Capital Contributions 15,032,304 15,405,507 9,067,512 -2.42% 65.78% Change in Net Position 9,112,024 3,805102 1,346,659 139.47% 576.64% Beginning Net Position 626,602,973 622,797,871 621,451,212 0.61% 0.83% Ending Net Position $ 635,714,997 $ 626,602 973 $ 622,797,871 1.45% 2.07% In 2012 -13, operating revenues increased by $7.5 million or 12.12% compared to 2011 -12 and increased by $9.2 million or 15.34% comparing 2012 -13 to 2010 -11. Total non - operating revenue increased in 2012 -13 compared to 2011 -12 by $1.4 million or 9.59% and increased by $1.8 million or 12.72% comparing 2012 -13 to 2010 -11. The change in total revenue resulted in an increase of $8.8 million or 11.64% comparing 2012 -13 to 2011 -12 and increased by $10.9 million or 14.85% comparing 2012 -13 to 2010 -11. There was an 8.8% SSC rate increase in 2012 -13, 9.65% SSC rate increase in 2011 -12 and no increase in SSC for 2010 -11. Property Tax revenue increased in 2012 -13 and basically remained flat during 2011 -12 and 2010 -2011 due to housing values remaining low. In 2012 -13, total expenses increased by $3.1 million or 3.60% compared to 2011 -12. Comparing 2012- 13 to 2010 -11, total expenses were $9.1 million or 11.23% higher. Increases are mainly due to higher labor and benefit costs along with technical services for temporary staff. Labor costs increased due to employee benefit costs (primarily pension and healthcare costs), cost -of- living adjustments, merit increases, and filling of vacant positions. Depreciation expense increased due to new capital additions. Non - Operating Expense is mainly driven by debt service interest expense. Total income before capital contributions went from -$7.7 million in 2010 -11 to -$11.6 million in 2011 -12 and -$5.9 million in 2012 -13. Total capital contributions in 2012 -13 were $15.0 million compared to $15.4 million in 2011 -12 and $9.1 million in 2010 -11. This was mainly due to higher customer contributions (SSC) in 2012 -13 due to the 8.8% rate increase, shift of the internal SSC revenue allocation, and volatility in connection fees due to the fluctuation of the housing and construction markets. The total change in net position increased by $7.8 million or 576.64% when comparing 2012 -13 to 2010 -11. CAPITAL ASSETS Capital assets include the District's entire major infrastructure including wastewater treatment facilities, sewers, land, buildings, pumping stations, vehicles, intangible assets and furniture and equipment exceeding our capitalization policy limit of $5,000, net of depreciation. As of June 30, 2013, the District's investment in capital assets totaled $604.0 million, which is an increase of $6.3 million or 1.05% over the capital asset balance of $597.7 million at June 30, 2012. Capital Assets increased by $10.5 million or 1.77% comparing 2012 -13 to 2010 -11. A comparison of the District's capital assets over the past 3 fiscal years is presented below: % Increase Capital Assets Fiscal Year Ended June 30 (Decrease) FY 12 -13 FY 12 -13 VS. vs. 2012 -13 2011 -12 2010 -11 11 -12 10 -11 Land $ 17,262,249 $ 17,114,720 $ 17,114,720 0.86% 0.86% Sewage Collection System 311,633,989 303,693,519 290,317,724 2.61% 7.34% Contributed Sewer Lines 150,834,930 149,895,302 149,110,351 0.63% 1.16% Outfall Sewers 11,338,935 8,518,443 8,518,443 33.11% 33.11% Sewage Treatment Plant 299,830,466 292,432,883 287,537,513 2.53% 4.28% Recycled Water Infrastructure 13,515,026 13,335,295 12,300,131 1.35% 9.88% Pumping Stations 54,412,730 54,412,730 54,412,730 - - Buildings 36,120,720 34,477,124 31,317,466 4.77% 15.34% Intangible Assets 4,596,467 2,463,834 2,058,921 86.56% 123.25% Furniture & Equipment 15,651,212 14,031,564 13,243,330 11.54% 18.18% Motor Vehicles 6,558,065 6,010,773 6,038,527 9.11% 8.60% Construction In Progress 24,533,254 22,469,694 22,632,142 9.18% 8.40% Subtotal 946,288 043 918,855 881 894,601 998 2.99% 5.78% Less Accumulated Depreciation 342,302,574 321,166,137 301,140,207 6.58% 13.67% Total Capital Assets net of depreciation) $ 603 985,469 $ 597,689,744 $ 593 461,791 1.05% 1.77% 6 The major reasons for the increase in capital assets, net of depreciation, of $6.3 million from 2011 -12 to 2012 -13 and $10.5 million from 2010 -11 to 2012 -13, are as follows: • Sewer pipe ongoing renovations, upgrades, expansion, pumping station improvements, and contributed sewer lines increased by $8.9 million comparing 2012 -13 to 2011 -12 and $23.0 million comparing 2012 -13 to 2010 -11. • Treatment plant infrastructure renovations, upgrades, equipment, and improvements increased by $7.4 million comparing 2012 -13 to 2011 -12 and $12.3 million comparing 2012 -13 to 2010 -11. • Buildings increased by $1.6 million comparing 2012 -13 to 2011 -12 and $4.8 million comparing 2012 -13 to 2010 -11. • All other asset categories, including construction in progress, increased by $9.5 million comparing 2012 -13 to 2011 -12 and increased by $11.5 million comparing 2012 -13 to 2010 -11. • Capital Asset increases are offset by an increased subtraction of accumulated depreciation of $21.1 million comparing 2012 -13 to 2011 -12 and $41.2 million comparing 2012 -13 to 2010 -11 due to our increasing capital asset investment and its associated depreciation expense. See Note 5 in the audited fmancial statements. DEBT ADMII-IISTRATION The District has the following outstanding debt as of June 30, 2013: Revenue Bonds $ 43,595,000 Water Reclamation Loan 866,827 $ 44,461,827 See Note 6 in the audited financial statements. ECONOMIC AND OTHER FACTORS The Federal and State of California economies continue to slowly recover from the 2008 recession. The Federal economic challenges have resulted in budget sequestration. The State Budget Act reflects California's most stable budget in years. With the State's tough spending, cuts enacted and new temporary revenues provided by the passage of Proposition 30, the State's budget is projected to remain balanced for the foreseeable future. However, substantial risks, uncertainties, and liabilities still remain. Changes in the state budget have a significant impact on the District. Federal and State economic challenges will continue into the future and will have a trickle -down effect on local government. Items impacting the District are: • Current Employee Memorandum of Understanding contracts end as of December 17, 2017. • Current and future legislation impacting public employee pensions is in play, also calling for higher employee contributions and lower pensions by eliminating spiking. A significant number of anticipated early retirements may occur depending on the legislated changes to public employee salary and benefits. • Increased cost of employee benefits, mainly due to pension costs and healthcare. • Housing market is still recovering and continues to impact development and user fees. • Regulatory requirements becoming more stringent, causing the District to spend more on compliance, both for operations and maintenance costs and capital projects. This may require debt financing for large capital projects. • Continued low interest rates negatively impact interest earnings for District temporary investments as well as OPEB trust and pension plan assets. In addition to making efforts to reduce spending and improve process efficiencies, the District has the ability to raise the SSC to meet our long -term commitments. The District has a Standard and Poors AAA rating, and can obtain bond financing if necessary. FINANCIAL CONTACT The financial report is designed to provide our customers and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact: Finance Manager Thea Vassallo, Central Contra Costa Sanitary District, 5019 Imhoff Place, Martinez, CA 94553. This Page Left Intentionally Blank CENTRAL CONTRA COSTA SANITARY DISTRICT STATEMENT OF NET POSITION JUNE 30, 2013 ASSETS CURRENT ASSETS Cash and cash equivalents (Note 2) $46,714,788 Short term investments (Note 2) 10,498,624 Accounts receivable, net (Note 3) 16,517,549 Interest receivable 65,321 Parts and supplies 2,005,741 Prepaid expenses 2,204,210 Total current assets 78,006,233 NON - CURRENT ASSETS Restricted cash and equivalents (Notes I.E. and 2) 100,000 Restricted investments (Note 2) 5,412,500 Assessment Districts receivable (Note 4) 2,089,461 Net OPEB asset (Note 10) 1,537,638 Revenue bonds issuance costs, net of amortization 315,287 Capital assets: Nondepreciable (Note 5) 41,795,503 Depreciable, net of accumulated depreciation (Note 5) 562,189,966 Total capital assets, net 603,985,469 Total non - current assets 613,440,355 TOTAL ASSETS 691,446,588 LIABILITIES CURRENT LIABILITIES Accounts payable and accrued expenses 5,376,935 Interest payable 718,147 Refunding Water Revenue Bonds - current portion (Note 6) 3,720,000 Water Reclamation Loan Contract - current portion (Note 6) 164,582 Accrued compensated absences - current portion (Note M.) 383,000 Liability for uninsured claims (Note 7) 1,000,000 Refundable deposits 341,437 Total current liabilities 11,704,101 NON - CURRENT LIABILITIES Refunding Water Revenue Bonds, noncurrent portion (Note 6) 39,875,000 Water Reclamation Loan Contract, noncurrent portion (Note 6) 702,245 Accrued compensated absences, noncurrent portion (Note 1.1.) 3,450,245 Total non - current liabilities 44,027,490 TOTAL LIABILITIES 55,731,591 NET POSITION (Note 11) Net investment in capital assets 559,523,642 Restricted for debt service 4,730,837 Unrestricted 71,460,518 TOTAL NET POSITION $635,714,997 See accompanying notes to financial statements 10 CENTRAL CONTRA COSTA SANITARY DISTRICT STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2013 OPERATING REVENUES Sewer service charges (SSC) $56,770,984 Service charges - City of Concord 10,483,421 Other services charges 1,076,401 Miscellaneous charges 751,880 Total operating revenues 69,082,686 OPERATING EXPENSES Sewage collection and pumping stations 14,327,933 Sewage treatment 23,035,943 Engineering 8,680,934 Administrative and general 21,096,666 Depreciation 21,596,266 Total operating expenses 88,737,742 OPERATING INCOME (LOSS) (19,655,056) NONOPERATING REVENUES (EXPENSES) Taxes 13,010,477 Permit and inspection fees 1,169,809 Interest earnings 405,474 Interest expense (1,802,084) Other income (expense) 951,100 Total nonoperating revenues (expenses), net 13,734,776 INCOME (LOSS) BEFORE CAPITAL CONTRIBUTIONS (5,920,280) CAPITAL CONTRIBUTIONS City of Concord contributions to capital costs 3,616,771 Customer contributions to capital cost (SSC) 4,384,376 Contributed sewer lines 939,628 Capital contributions - connection fees 6,091,529 Total capital contributions 15,032,304 CHANGE IN NET POSITION 9,112,024 NET POSITION, BEGINNING OF YEAR 626,602,973 NET POSITION, END OF YEAR $635,714,997 See accompanying notes to financial statements 11 CENTRAL CONTRA COSTA SANITARY DISTRICT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2013 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers Payments to employees and related benefits Net Cash Provided by Operating Activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Receipt of taxes Inspection/permit fees and other non - operating income Cash Flows from Noncapital Financing Activities $67,716,388 (36,581,237) (29,929,031) 1,206,120 13,010,477 2,120,909 15,131,386 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital contributions 8,940,775 Connection fees 6,091,529 Acquisition and construction of capital assets (27,891,991) Interest paid on long -term debt (1,838,134) Principal payments on long -term debt (3,448,341) Cash Flows (used for) Capital and Related Financing Activities (18,146,162) CASH FLOWS FROM INVESTING ACTIVITIES Redemption and acquisition of investments, net $5,606,506 Interest received 395,301 Cash Flows from Investing Activities 6,001,807 NET INCREASE (DECREASE) IN CASH 4,193,151 Cash, beginning of year 42,621,637 Cash, end of year $46,814,788 (Continued) See accompanying notes to financial statements 12 CENTRAL CONTRA COSTA SANITARY DISTRICT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2013 Reconciliation of operating (loss) to net cash provided by operating activities: Operating (loss) ($19,655,056) Adjustments to reconcile operating loss to cash flows from operating activities: Depreciation 21,596,266 Change in assets and liabilities: Receivables, net (1,366,298) Parts and supplies 1,704 Prepaid expenses 296,495 Accounts payable and accrued expenses 472,291 Accrued payroll and related expenses 122,665 Refundable deposits 12,149 Net OPEB asset (274,096) Net cash provided by operating activities $1,206,120 SCHEDULE OF NON CASH ACTIVITY Developer pipe contributions $713,525 Change in fair value of investments 395,301 Total non cash activity $1,108,826 CASH AND CASH EQUIVALENTS, AS PRESENTED ON STATEMENT OF NET POSITION: Unrestricted cash and cash equivalents $46,714,788 Restricted cash and cash equivalents 100,000 Total cash and cash equivalents at end of year $46,814,788 See accompanying notes to financial statements 13 This Page Left Intentionally Blank CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The Central Contra Costa Sanitary District (District), a special district and a public entity established under the Sanitary District Act of 1923, provides sewer service for the incorporated and unincorporated areas under its jurisdiction. A Board of Directors comprised of five elected members governs the District. As required by accounting principles generally accepted in the United States of America, these basic financial statements present the financial statements of Central Contra Costa Sanitary District and its component unit. The component unit discussed in the following paragraph is blended in the District's reporting entity because of the significance of its operational and financial relationship with the District. Blended Component Unit - Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. For financial reporting purposes, the component unit discussed below is reported in the District's financial statements because of the significance of its relationship with the District. The component unit, although a legally separate entity, is reported in the financial statements using the blended presentation method as if it were part of the District's operations because the Governing Board of the component unit is the same as of Governing Board of the District and because its purpose is to finance facilities to be used for the direct benefit of the District. The Central Contra Costa Sanitary District Facilities Financing Authority (Authority) was organized solely for the purpose of providing financial assistance to the District. The Authority does this by acquiring, constructing, improving and financing various facilities, land and equipment purchases, and by leasing or selling certain facilities, land and equipment for the use, benefit and enjoyment of the public served by the District. The Authority has no members and the Board of Directors of the Authority consists of the same persons who are serving as the Board of Directors of the District. There are no separate basic financial statements prepared for the Authority. B. Basis ofAccounting The District's financial statements are prepared on the accrual basis of accounting. The District applies all applicable Governmental Accounting Standards Board (GASB) pronouncements for certain accounting and financial reporting guidance. 15 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The District is a proprietary entity; it uses an enterprise fund format to report its activities for financial statement purposes. Enterprise funds are used to account for operations that are fmanced and operated in a manner similar to private business enterprises, where the intent of the governing body is that the cost and expenses, including depreciation, of providing, goods or services to its customers be financed or recovered primarily through user charges; or where the governing body has decided that periodic determination of revenues earned, expense incurred, and net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. Enterprise funds are used to account for activities similar to those in the private sector, where the proper matching of revenues and costs is important and the full accrual basis of accounting is required. With this measurement focus, all assets and liabilities of the enterprise are recorded on its statement of net position, all revenues are recognized when earned and all expenses, including depreciation, are recognized when incurred. Enterprise funds distinguish operating revenues and expenses from non - operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with an enterprise fund's principal ongoing operations. The principal operating revenues of the District are charges to customers for services. Operating expenses for the District include the costs of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non - operating revenues and expenses. For internal operating purposes, the District's Board of Directors has established four separate sub - funds, each of which includes a separate self - balancing set of accounts and a separate Board approved budget for revenues and expenses. These sub -funds are combined into the single enterprise fund presented in the accompanying financial statements. The nature and purpose of these sub -funds are as follows: Running Expense - Running Expense accounts for the general operations of the District. Substantially all operating revenues and expenses are accounted for in this sub -fund. Sewer Construction - Sewer Construction accounts for non - operating revenues, which are to be used for acquisition or construction of plant, property and equipment. Self - Insurance - Self- Insurance accounts for interest earnings on cash balances in this sub -fund and cash allocations from other sub - funds, as well as for costs of insurance premiums and claims not covered by the District's insurance coverage. Debt Service - Debt Service accounts for activity associated with the payment of the District's long term bonds and loans. That portion of the District's net position which is allocable to each of these sub -funds has been shown separately in the accompanying supplementary information to the financial statements. The District's Board of Directors adopts annual budgets on a basis consistent with accounting principles generally accepted in the United States of America. 16 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR TBE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Investments Investments held at June 30, 2013 with original maturities greater than one year, are stated at fair value. Fair value is estimated based on quoted market prices at year -end. All investments not required to be reported at fair value are stated at cost or amortized cost. D. Prepaid Expenses Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in the fmancial statements. E. Bank Escrow Deposit An escrow agreement was formed between the District and the National Park Service for the right- of -way through the John Muir National Historic Site, in lieu of issuing a performance bond. The current right -of -way permit is 10 years, but is renewable and must remain in effect so long as there is sewage running through the area; therefore, it is unlikely that the escrow funds will ever be released to the District. These funds are listed as restricted cash in the financial statements. F. Parts and Supplies Parts and supplies are valued at average cost and are used primarily for internal purposes. G. Property, Plant, and Equipment Purchased capital assets are stated at historical cost. Capital assets contributed to the District are stated at estimated fair value at the time of contribution. The capitalization threshold for capital assets is $5,000. Expenditures which materially increase the value or life of capital assets are capitalized and depreciated over the remaining useful life of the asset. The term depreciation includes amortization of intangible assets. Depreciation of exhaustible capital assets has been provided using the straight -line method over the asset's useful life as follows: Sewage Collection Facilities Intangible Assets Sewage Treatment Plant and Pumping Plants Buildings Furniture and Equipment Motor Vehicles 17 Years 75 75 40 50 5 -15 6 -15 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) H. Property Taxes Property tax revenue is recognized in the fiscal year for which the tax is levied. The County of Contra Costa levies, bills and collects property taxes for the District; all material amounts are collected by June 30. General County taxes collected are the same as the amount levied since the County participates in California's alternative method of apportionment called the Teeter Plan. The Teeter Plan as provided in Section 4701 at seq. of the State of Revenue and Taxation Code establishes a mechanism for the County to advance the full amount of property tax and other levies to taxing agencies based on the tax levy, rather than on the basis of actual tax collections. Although this system is a simpler method to administer, the County assumes the risk of delinquencies. The County in return retains the penalties and accrued interest thereon. Secured property tax bills are mailed once a year, during the month of October on the current secured tax roll, to the owner of the property as of the lien date (January 1). Payments can be made in two installments, and are due on November 1 and February 1. Delinquent accounts are assessed a penalty of 10 percent. Accounts which remain unpaid on June 30 are charged an additional 1% percent per month. Unsecured property tax is due on July 1 and becomes delinquent on August 31. The penalty percentage rates are the same as secured property tax. L Compensated Absences The liability for vested vacation, compensatory time, and sick pay is recorded as an expense when earned. District employees have a vested interest in 100 percent of accrued vacation time and 85 percent of accrued sick time for employees hired before May 1, 1985. Employees hired after May 1, 1985 have a vested interest in up to 40 percent of their sick time, based upon length of employment with the District. The changes in compensated absences were as follows for fiscal year ended June 30, 2013: Beginning Balance Additions Payments $3,710,580 783,906 (661,241) Ending Balance $3,833,245 Current Portion $383,000 The current portion of the liability to be used within the next year is estimated by management to be approximately 10% of the ending balance. 18 CENTRAL CONTRA COSTA SANITARYDISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) J. Statement of Cash Flows For purposes of the statement of cash flows, all highly liquid investments, including restricted assets, with maturities of three months or less when purchased, are considered to be cash equivalents. Included therein are petty cash, bank accounts, and the State of California Local Agency Investment Fund (LAIF). Restricted assets are debt service amounts maintained by fiduciaries and not available for general expenses. K. 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. L. Implementation of Governmental Accounting Standards Board (GASB) Pronouncements GASB Statement No. 60 — In November 2010, the GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. The objective of this Statement is to improve financial reporting by addressing issues related to service concession arrangements (SCAB), which are a type of public - private or public - public partnerships. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2011. This Statement had no impact on the District's financial statements for fiscal year ending June 30, 2013. GASB Statement No. 61 — In November 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus — an amendment of GASB Statements No. 14 and No. 34. The objective of this Statement is to improve financial reporting for a governmental financial reporting entity. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2012. This Statement did not have a material impact on the District's financial statements for fiscal year ending June 30, 2013. GASB Statement No. 62 — In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting guidance Contained in Pre - November 30, 1989 FASB and AICPA Pronouncements. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the FASB and AICPA pronouncements, which does not conflict with or contradict GASB pronouncements. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2011. This Statement did not have a material impact on the District's financial statements for fiscal year ending June 30, 2013. 19 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR TBE YEAR ENDED JUNE 30, 2013 NOTE 1– DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 63 – In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. In addition to assets, the statement of financial position or balance sheet will sometimes report`a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position or fund balance that applies to a future period(s) and so will not be recognized as an outflow of resources (expense /expenditure) until then. In addition to liabilities, the statement of financial position or balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position or fund balance that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The provisions of this Statement are effective for financial statements for periods beginning after December 15, 2011. This Statement changed certain financial statement titles and nomenclature on the District's financial statements for fiscal year ending June 30, 2013. GASB Statement No. 65 – In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. The provisions of this Statement are effective for financial statements for periods beginning after December 15, 2012. This Statement will not have a material effect on the financial statements. GASB Statement No. 66 – In March 2012, the GASB issued Statement No. 66, Technical Corrections-2012—an amendment of GASB Statements No. 10 and No. 62. The objective of this Statement is to improve accounting and financial reporting for a governmental financial reporting entity by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre - November 30, 1989 FASB and AICPA Pronouncements. The provisions of this Statement are effective for financial statements for periods beginning after December 15, 2012. This Statement will not have a material effect on the financial statements. GASB Statement No. 67 – In June 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans —an amendment of GASB Statement No. 25. The requirements of this Statement will improve financial reporting primarily through enhanced note disclosures and schedules of required supplementary information that will be presented by the pension plans that are within its scope. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2013. This Statement will not have a material effect on the financial statements. 20 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 1— DESCRIPTION OF DISTRICT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 68 — In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions --an amendment of GASB Statement No. 27. The requirements of this Statement will improve the decision - usefulness of information in employer and governmental nonemployer contributing entity financial reports and will enhance its value for assessing accountability and interperiod equity by requiring recognition of the entire net pension liability and a more comprehensive measure of pension expense. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2014, therefore, the District will implement this Statement in fiscal year ending June 30, 2015. This Statement will have a material effect on the financial statements. NOTE 2 — CASH AND INVESTMENTS A. Summary of Cash and Investments Investments as of June 30, 2013, are classified in the accompanying financial statements as follows: Cash and cash equivalents $46,714,788 Short term investments 10,498,624 Restricted cash and cash equivalents 100,000 Restricted investments 5,412,500 Total Cash and Investments $62,725,912 B. Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State: U.S. Treasury instruments, registered State warrants or treasury notes, securities of the U.S. Governments, or its agencies, commercial paper, certificates of deposit placed with commercial banks and/or savings with loan companies, and certificates of participation. State code and the District's investment policy prohibit the District from investing in investments with a rating of less than A or equivalent. 21 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 2 — CASH AND INVESTMENTS (Continued) C. General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: California State Limits Maximum Maximum Remaining Percentage Authorized Investment Type Maturity of Portfolio District Policy Maximum Maximum Investment Percentage In One Issuer of Portfolio District Policy Minimum Legal Quality U.S. Treasury Obligations 5 years None None 100% N/A Banker's Acceptances 180 40% 40% 10% N/A Commercial Paper (1) 270 25% 10% 10% Aaa Collateralized Certificates of Deposit (2) 5 years 30% None 10% Aaa County Pooled Investment Funds N/A None None 100% N/A Local Agency Investment Fund (LAIF) N/A None None 100% N/A (1) Prime quality; limited to corporations with assets over $500,000,000 (2) Prior approval of the Board of Directors must be obtained to acquire maturities beyond one year, excluding Treasury Notes and LAIF. D. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment; generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. It is the District's policy to manage 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. District policy is that investment maturities do not exceed one year, with the exception of Treasury Notes or Local Agency Investment Fund; however, investments can be held longer with Board approval. The District's investments at year end with the exception of the U.S. Treasuries and Commercial Paper below are held in external investment pools which are liquid investments. 22 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 2 — CASH AND INVESTMENTS (Continued) E. F. 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 investments by maturity, as of June 30, 2013: 12 Months Investment Type or less Maturity Certificates of Deposit $7,000,136 Certificates of Deposit - Debt Reserve 5,412,500 Commercial Paper 3,498,488 California Local Agency Investment Fund 43,011,748 Total Investments 58,922,872 Cash in bank 3,803,040 Total Cash and Investments $62,725,912 Credit Risk 7/26/13 4/30/14 7/26/13 Not applicable 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 actual rating as of the June 30, 2013 of each investment type: Investment Type Certificates of Deposit Commercial Paper Totals Not rated.• California Local Agency Investment Fund Cash in Bank Total Cash and Investments Concentration of Credit Risk Aaa Total $12,412,636 $12,412,636 3,498,488 3,498,488 $15,911,124 15,911,124 43,01 1,748 3,803,040 $62,725,912 The District is a voluntary participant in LAIF which is regulated by the California Government Code under the oversight of the Treasurer of the State of California. LAIF is not registered with the Securities and Exchange Commission. The fair value of the District's investment in this pool is reported in the accompanying financial statements at amounts based upon the District's pro - rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. At June 30, 2013 these investments matured in an average of 278 days. 23 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 2 — CASH AND INVESTMENTS (Continued) Investments in County Treasury — The District is considered to be a voluntary participant in an external investment pool. The fair value of the District's investment in the pool is reported in the financial statements in cash and cash equivalents 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 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. G Custodial Credit Risk - Investments Custodial risk for investments is the risk that, in the event of the failure of the counterparty (e.g. the broker - dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code does not contain legal or policy requirements that would limit the exposure to custodial credit risk. The District's policy is to use the services of the Treasurer's Office of the County of Contra Costa, which will transact the District's investment decisions in compliance with the requirements of the District's policy. The County Treasurer's Office will execute the District's investments through such broker - dealers and financial institutions as are approved by the County Treasurer, and through the State Treasurer's Office for investment in the Local Agency Investment Fund. NOTE 3 — ACCOUNTS RECEIVABLE Accounts receivable are comprised of the following at June 30, 2013: City of Concord (see Note 8) $14,100,192 Household Hazardous Waste Partners 837,802 All Other 1,579,555 Total Accounts Receivable $16,517,549 NOTE 4 — ASSESSMENT DISTRICTS RECEIVABLE The District established the Contractual Assessment District (CAD) program to help homeowners finance the cost of connecting to the District. The construction costs associated with the project within the program are capitalized and depreciated. Individual homeowners are assessed at an amount equal to their share of the construction costs and connection fee. The assessments, plus interest, are generally payable over 10 years. At June 30, 2013, the CAD receivable balance was $434,396. The District also established the Alhambra Valley Assessment District (AVAD) to provided services to residents in the Alhambra Valley in Martinez. Residents have the choice to pay cash or finance the construction costs and connection fees. At June 30, 2013, the AVAD receivable balance was $1,655,065. The total receivable balance at June 30 2013 for CAD and AVAD was $2,089,461, and is shown as a non - current asset on the Statement of Net Position. 24 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 5 — CAPITAL ASSETS Property, plant and equipment, and construction in progress are summarized below for the year ended June 30, 2013: NOTE 6 — LONG -TERM DEBT A. 2009 Wastewater Revenue Certificates of Participation On November 12, 2009 and December 3, 2009 the District issued two Certificates of Participation (COP). The 2009 Wastewater Revenue Certificates of Participation, Series A and Series B were issued for $19,635,000 and $34,490,000, respectively. The Series A COP are federally taxable "Build America Bonds" which have a direct 35% interest rate subsidy from the Federal Government. Yields on this series range from 3.45% to 3.78 %, net of the subsidy. The Series B COP are tax exempt bonds that were used to refund the 1998 and 2002 bond issues and raise an additional $30 million in new proceeds with yields ranging from .40% to 3.79 %. 25 Balance at Transfer Balance at June 30, 2012 Additions Retirements from CIP June 30, 2013 Capital assets not being depreciated: Land $17,114,720 $147,529 $17,262,249 Construction in Progress 22,469,694 $27,185,118 (25,121,558) 24,533,254 Total nondepreciated assets 39,584,414 27,185,118 (24,974,029) 41,795,503 Capital assets being depreciated: Sewage collection system 303,693,519 7,940,470 311,633,989 Contributed sewer lines 149,895,302 706,873 232,755 150,834,930 Outfall sewers 8,518,443 2,820,492 11,338,935 Sewage treatment plant 292,432,883 ($200,000) 7,597,583 299,830,466 Recycled water infrastructure 13,335,295 179,731 13,515,026 Pumping stations 54,412,730 54,412,730 Buildings 34,477,124 1,643,596 36,120,720 Intangibles 2,463,834 2,132,633 4,596,467 Furniture and equipment 14,031,564 (10,001) 1,629,649 15,651,212 Motor vehicles 6,010,773 (249,828) 797,120 6,558,065 Total depreciated assets 879,271,467 706,873 (459,829) 24,974,029 904,492,540 Less accumulated depreciation: Sewage collection system 48,955,471 4,148,192 53,103,663 Contributed sewer lines 49,109,345 2,017,935 51,127,280 Outfall sewers 2,880,325 132,156 3,012,481 Sewage treatment plant 170,703,542 10,167,282 (200,000) 180,670,824 Recycled water infrastructure 5,362,386 535,957 5,898,343 Pumping stations 22,167,742 2,175,187 24,342,929 Buildings 7,019,734 1,039,434 8,059,168 Intangibles 88,247 47,069 135,316 Furniture and equipment 10,818,661 1,042,928 (10,001) 11,851,588 Motor vehicles 4,060,684 290,126 (249,828) 4,100,982 Total accumulated depreciation 321,166,137 21,596,266 (459,829) 342,302,574 Total capital assets being depreciated, net 558,105,330 (20,889,393) 24,974,029 562,189,966 Capital assets, net $597,689,744 $6,295,725 $603,985,469 NOTE 6 — LONG -TERM DEBT A. 2009 Wastewater Revenue Certificates of Participation On November 12, 2009 and December 3, 2009 the District issued two Certificates of Participation (COP). The 2009 Wastewater Revenue Certificates of Participation, Series A and Series B were issued for $19,635,000 and $34,490,000, respectively. The Series A COP are federally taxable "Build America Bonds" which have a direct 35% interest rate subsidy from the Federal Government. Yields on this series range from 3.45% to 3.78 %, net of the subsidy. The Series B COP are tax exempt bonds that were used to refund the 1998 and 2002 bond issues and raise an additional $30 million in new proceeds with yields ranging from .40% to 3.79 %. 25 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 6 — LONGTERM DEBT (Continued) The two bonds total $54,125,000, and are secured by a pledge of revenue. Principal payments began annually on September 1, 2010 with semi -annual payments due on September 1 and March 1 of each year. Both bonds will be fully amortized as of September 1, 2029. The refunded portion of the original bonds will be paid off based on the original amortization schedule. B. Summary of Activity The changes in the District's long -term obligations during the year consisted of the following: 2009 Series A Certificates of Participation Wastewater Revenue 3.45 - 3.78 %, due 9/1/2029 2009 Series B Certificates of Participation Wastewater Revenue .40- 3.79 %, due 9/1/2029 1999 State Water Resources Control Board Water Reclamation Loan 2.60 %, due 3/31/2018 Total Long -Term Debt Less current portion C. Debt Service Requirements Original Amount Issue Balance Balance due within Amount June 30, 2012 Retirements June 30, 2013 one year $19,635,000 $19,635,000 $19,635,000 - 34,490,000 27,565,000 $3,605,000 23,960,000 $3,720,000 2,916,872 1,027,238 160,411 866,827 164,582 48,227,238 $3,765,411 (3,765,411) $44,461,827 The 2009 Revenue COP debt service requirements are as follows: 44,461,827 $3,884,582 (3,884,582) $40,577,245 Fiscal Year Series A Ending Series Series Total 35 %Tax Net June 30, Principal Interest Principal Interest Principal Interest Subsidy Total 2014 $1,190,840 $3,720,000 $851,683 $3,720,000 $2,042,523 ($416,794) $5,345,729 2015 1,190,840 3,865,000 700,467 3,865,000 1,891,307 (416,794) 5,339,513 2016 1,190,840 2,210,000 601,033 2,210,000 1,791,873 (416,794) 3,585,079 2017 1,190,840 2,300,000 501,300 2,300,000 1,692,140 (416,794) 3,575,346 2018 1,190,840 2,405,000 424,175 2,405,000 1,615,015 (416,794) 3,603,221 2019-2023 $5,150,000 5,460,060 8,280,000 924,558 13,430,000 6,384,618 (1,911,021) 17,903,597 2024 -2028 9,920,000 2,931,816 1,180,000 9,833 11,100,000 2,941,649 (1,026,135) 13,015,514 2029 -2030 4,565,000 202,450 4,565,000 202,450 (70,858) 4,696,592 Total $19,635,000 $14,548,526 $23,960,000 $4,013,049 $43,595,000 $18,561,575 ($5,091,984) $57,064,591 As part of the Federal budget sequestration, the Internal Revenue Service (IRS) has announced that as of March 1, 2013, credit payments claimed by issuers of certain tax credit bonds, including Build America Bonds, may be subject to a reduction of 8.7 %. 26 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 6 — LONGTERM DEBT (Continued) D. Water Reclamation Loan Contract The District entered into a contract with the State of California State Water Resources Control Board (Board), which advanced the District $2,916,872 for design and construction costs for projects related to recycled water treatment programs. The District must repay advances from the Board over a 20 -year period beginning March 31, 1999, with an interest rate of 2.60 %. Debt service requirements are as follows: Fiscal Year Ending June 30 Principal Interest Total 2014 $164,582 $22,537 $187,119 2015 168,861 18,258 187,119 2016 173,251 13,868 187,119 2017 177,756 9,363 187,119 2018 182,377 4,742 187,119 Total $866,827 $68,768 $935,595 NOTE 7 — RISK MANAGEMENT The District is exposed to various risks of loss including torts, theft of, damage to, and destruction of assets, errors and omissions, injuries to employees, and natural disasters. To manage these risks, the District joined with other entities to form the California Sanitation Risk Management Authority (CSRMA), a public entity risk pool currently operating as a common risk management and insurance program for the member entities. The purpose of CSRMA is to spread the adverse effects of losses among the member entities and to purchase excess insurance as a group, thereby reducing its cost. Through CSRMA, the District purchases property insurance and workers' compensation insurance. 27 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 7 — RISK MANAGEMENT (Continued) A. Insurance Coverage The District's insurance coverage is as follows: Type of Coverage Insurer All -Risk Property: Fire Public Entity Property Insurance Program ( PEPIP) Boiler and Machinery PEPIP (Shared Limits per Occurrence) Crime Travelers Liability: Errors and Omissions Employment Practices Liability Employment Practices Liability General Liability Auto Liability Pollution (General Aggregate) General Liability (Occurrence) Pollution (Legal Liability Aggregate) Fiduciary Liability Insurance Company of the State of Pennsylvania Chartis Hiscox Insurance Company Chartis Chartis Chartis Specialty Insurance Co. Chartis Specialty Insurance Co. RLI Insurance Company Workers' Compensation: CSRMA Excess Workers' Compensation Safety National Casualty Corporation B. Liability for Uninsured Claims Self Insured Deductible Per Limits Occurrence $556,015,744 $250,000 100,000,000 250,000 1,000,000 15,000,000 15,000,000 1,000,000 15,000,000 15,000,000 5,000,000 25,000 1,000,000 1,000,000 35,000 1,000,000 1,000,000 5,000 10,000,000 50,000 1,000,000 0 750,000 0 Statutory 750,000 The Governmental Accounting Standard Board (GASB) requires state and local governments to record their liability for uninsured claims in their financial statements. The District's uninsured claims activity and exposure relates primarily to its general and automobile liability program. The District records its estimated liability for uninsured claims in this area based on the results of periodic actuarial evaluations. The actuarial evaluations are typically performed every two years. For intervening years, the liability for uninsured claims is reviewed for adequacy based on claims activity during the intervening period. 28 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 7 — RISK MANAGEMENT (Continued) For fiscal years ended June 30, 2013, 2012, and 2011, settlements have not exceeded insurance coverage. Changes in the District's estimated liability for uninsured claims are summarized as follows as of June 30: 2013 2012 2011 Beginning balance $1,000,000 $1,000,000 $1,000,000 Provisions for claims incurred in the current year and changes in the liability for uninsured - claims incurred in prior years (1,659,291) 72,606 240,844 Claims paid and/or adjustments 1,659,291 (72,606) (240,844) Ending balance $1,000,000 $1,000,000 $1,000,000 In March 2012, the District had an explosion in its Plant Operations Department Cogeneration (Cogen) Unit. Expenses for the investigation, recovery, repair, extra energy, and staff time were tracked by Risk Management and totaled $1,793,221. Of that $250,000 was charged to the District's self-insurance and the balance was submitted to insurance as claims. After disallowing $179,024 in claims, the District received $1,364,197 in recovery payments. All expenses and reimbursements were completed in FY 2012 -13. NOTE 8 — AGREEMENT WITH THE CITY OF CONCORD In 1974, the District and the City of Concord (the City) entered into a cost - sharing agreement under which the District became responsible for providing sewage treatment facilities and services to the City. Under this agreement, the City pays a service charge for its share of operating, maintenance and administrative costs and makes a contribution for its share of facilities and makes a contribution for its share of facilities capital costs expended. Service charges and contributions to capital costs from the City totaled $10,483,421 and $3,616,771, respectively, for the year ended June 30, 2013, for a total of $14,100,192. 29 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 9 — PENSION PLANS A. Contra Costa County Employee's Retirement Association Plan Plan Description Substantially all District permanent employees are required to participate in the Contra Costa County Employees' Retirement Association (CCCERA), a cost - sharing multiple employer public defined benefit retirement plan (Plan), governed by the County Employee's Retirement Law of 1937, as amended. The latest available actuarial and financial information for the Plan is for the year ended December 31, 2012. The Contra Costa Employees' Retirement Association issues a publicly available financial report that includes financial statements and supplemental information of the Plan. That report is available by writing to Contra Costa County Employees' Retirement Association, 1355 Willow Way, Suite 221, Concord, CA 94520 -5728 or by calling (925) 521 -3960. The Plan provides for retirement,. disability, and death and survivor benefits. Annual cost of living (COL) adjustments to retirement allowances can be granted by the Retirement Board as provided by State statutes. Retirement benefits are based on age, length of service, date of membership and final average salary. Subject to vested status, employees can withdraw contributions plus interests credited, or leave them as a deferred retirement when they terminate, or transfer to a reciprocal retirement system. Plan Contribution Requirement The Plan requires employees to pay a portion of the basic retirement benefit and a portion of future COL costs. However, the District has paid the majority of the employees' basic contributions in accordance with the Memorandum of Understanding (MOU). Employees must pay the COL portion of the employee rate. The contribution requirement and payment from the District for the plan years ended June 30, 2013, 2012 and 2011 was as follows: The District pension plan covered 251 participants as of June 30, 2013. 2013 2012 2011 Covered Payroll for fiscal years ended June 30 $24,752,463 $24,305,548 $24,709,477 Employer required contributions to pension 14,029,374 10,961,853 8,950,938 Employee (COL) required contributions to pension 1,289,095 922,520 930,648 Total required contributions $15,318,469 $11,884,373 $9,881,586 Percentage of payroll 62% 49% 40% The District pension plan covered 251 participants as of June 30, 2013. CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 9 — PENSION PLAN (Continued) CCCERA determines contribution requirements using a modification of the Entry Age Normal Method. Under this method, the District's total normal benefit cost for each employee from date of hire to date of retirement is expressed as a level percentage of the related total payroll cost. Normal benefit cost under this method is the level amount the employer must pay annually to fund an employee's projected retirement benefit. This level percentage of payroll method is used to amortize any unfunded actuarial liabilities. The actuarial assumptions used to compute contribution requirements are also used to compute the actuarially accrued liability. The District uses the actuarially determined percentages of payroll to calculate and pay contributions to CCCERA. This results in no net pension obligations or unpaid contributions. Annual Pension Costs, representing the payment of all actuarially required contributions required by CCCERA, for the last three years were as follows: *Please note that CCCERA's fiscal year ends December 31. The following is a summary of the actuarial assumptions and methods: Valuation date Annual Actuarial cost method Percentage Amortization method Pension Cost Actual of APC - Fiscal Year* (APC) Contribution Contributed 12/31/2011 $9,881,586 $9,881,586 100% 12/31/2012 11, 884,373 11,884,373 100% 12/31/2013 15,318,469 15,318,469 100% *Please note that CCCERA's fiscal year ends December 31. The following is a summary of the actuarial assumptions and methods: Valuation date December 31, 2012 Actuarial cost method Entry Age Normal Cost Method Amortization method Level percent of payroll for total unfunded liability (4.00% payroll growth assumed) Remaining amortization period Remaining balance of December 31, 2007 UAAL is amortized over a fixed (decreasing or closed) period with 10 years remaining as of December 31, 2012. Any changes in UAAL after December 31, 2007 will be separately amortized over a fixed 18 -year period effective with that valuation. Assets valuation method Market value of assets less unrecognized returns in each of the last of the last nine semi - annual accounting periods. Unrecognized return is equal to the difference between the actual market return and the expected return on the market value, and is recognized semi - annually over a five -year period. The Actuarial Value of Assets is reduced by the value of the non - valuation reserves and designations. Actuarial assumptions: Investment rate of return 7.75% Inflation rate 3.25% Cost -of- living adjustments 3.00% 31 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 9 — PENSION PLANS (Continued) The schedule of funding progress presents multi -year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. CCCERA's latest actuarial value and funding progress for the pool are shown below: The CCCERA Board took a depooling action in October, 2009 which yielded 12 separate cost groups by employer, with the exception of smaller employers (those with less than 50 active members) who continue to be pooled with the applicable county tier. The depooling action affected employer rates effective July 1, 2011. Public Employees' Pension Reform Act (PEPRA) Assembly Bill 340 (AB 340) created the Public Employees' Pension Reform Act (PEPRA) that implemented new benefit formulas and final compensation periods, as well as new contribution requirements for most new employees with a membership date on or after January 1, 2013, who meet the definition of new member under PEPRA. The table below provides the details of the new provisions. Benefit Formula Final Compensation Period Employer Contribution Rate as a percentage payroll Member Contribution Rate as a percentage of payroll 2.5% at Age 67 Average of last 3 years 10.19% of Reportable Compensation 10.25% of Reportable Compensation The employer contribution rate listed above is in effect until June 30, 2014. In accordance with the provisions of AB 340, the member contribution rate shown above was set at 50 percent of expected total normal cost rate, rounded to the nearest' /4 percent, for the benefits that will apply to new members on January 1, 2013. 32 Unfunded Unfunded (Overfunded) (Overfunded) Actuarial Accrued Actuarial Liability as a Entry Age Accrued Percentage of Actuarial Actuarial Asset Actuarial Accrued Liability (B -A), Funded Covered Covered Payroll Valuation Date Value (A) Liability (B) (C) Ratio (A/B) Payroll (D) (C/D) 12/31/2010 $5,341,821,711 $6,654,036,801 $1,312,215,090 80.28% $687,443,206 190.88% 12/31/2011 5,426,719,066 6,915,311,649 1,488,592,583 78.47% 666,394,146 223.38% 12/31/2012 5,482,257,062 7,761,315,535 2,279,058,473 70.64% 652,312,180 349.38% The CCCERA Board took a depooling action in October, 2009 which yielded 12 separate cost groups by employer, with the exception of smaller employers (those with less than 50 active members) who continue to be pooled with the applicable county tier. The depooling action affected employer rates effective July 1, 2011. Public Employees' Pension Reform Act (PEPRA) Assembly Bill 340 (AB 340) created the Public Employees' Pension Reform Act (PEPRA) that implemented new benefit formulas and final compensation periods, as well as new contribution requirements for most new employees with a membership date on or after January 1, 2013, who meet the definition of new member under PEPRA. The table below provides the details of the new provisions. Benefit Formula Final Compensation Period Employer Contribution Rate as a percentage payroll Member Contribution Rate as a percentage of payroll 2.5% at Age 67 Average of last 3 years 10.19% of Reportable Compensation 10.25% of Reportable Compensation The employer contribution rate listed above is in effect until June 30, 2014. In accordance with the provisions of AB 340, the member contribution rate shown above was set at 50 percent of expected total normal cost rate, rounded to the nearest' /4 percent, for the benefits that will apply to new members on January 1, 2013. 32 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 9 — PENSION PLANS (Continued) B. Deferred Compensation Plan District employees may defer a portion of their compensation under a District sponsored Deferred Compensation Plan created in accordance with Internal Revenue Code Section 457. Under this plan, participants are not taxed on the deferred portion of their compensation until it is distributed to them; distributions may be made only at termination, retirement, death, or in an emergency as defined by the plan. The District does not make contributions to the plan. The plan's 457 assets are held in trust for the exclusive benefit of the participants and are not included in the District's financial statements. C. 401 (a) Defined Contribution Plan The District also contributes to a money purchase plan created in accordance with Internal Revenue Code section 401(a). Contributions to the plan are made in accordance with a memorandum of understanding stating that in lieu of making payments to Social Security, the District contributes to the 401(a) Plan an amount equal to that which would have been contributed to Social Security on behalf of its employees as long as the District is not required to participate in Social Security. The assets are held in trust and are not recorded on the books of the District. The District contributed $1,546,318 to the Plan during the year ended June 30, 2013. NOTE 10 — POST EMPLOYMENT HEALTH CARE BENEFITS A. Plan Description The District's defined benefit post employment healthcare plan (DPBP) provides medical benefits to eligible retired District employees and beneficiaries. DPBP is part of the Public Agency portion of the Public Agency Retirement System (PARS), an agent multiple- employer plan administered by PARS, which acts as a common investment and administrative agent for participating public employees within the State of California. A menu of benefit provisions as well as other requirements is established by the State statute with the Public Employees' Retirement Law. DPBP selects optional benefit provisions from the benefit menu by contract with PARS and adopts those benefits through District resolution. PARS issues a separate Comprehensive Annual Financial Report. Copies of the PARS annual financial report may be obtained from PARS, 4350 Von Karman Ave., Suite 100, Newport Beach, CA 92660, by calling 1(800) 540 -6369, or by emailing info @pars.org. B. Funding Policy GASB Statement No. 45 set rules for computing the employer's expense for retiree benefits other than pension, called OPEB. The expense, called the annual OPEB Cost (AOC), is determined similarly to pensions. The annual required contribution (ARC) of the employer, represents a level of funding that, if paid on an ongoing basis, is projected to cover normal annual costs each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. 33 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 10 — POST EMPLOYMENT HEALTH CARE BENEFITS (Continued) When an agency contributes more than the ARC, there is a net OPEB asset (NOA); when the contribution is less than the ARC, a net OPEB obligation (NOO) results. The District had a net OPEB asset of $1,537,638 as of June 30, 2013. Because of the volatility of the investment market, the District Board voted to make monthly installments into the OPEB Trust to take advantage of dollar- cost - averaging. C Annual OPEB Cost and Net OPEB Asset For 2013, the District's annual OPEB cost (expense) was equal to the ARC of $8,300,000. The District contributed $4,823,096 for retiree health care premiums and $3,767,000 to the PARS trust for a total of $8,590,096. The following table summarizes the changes in the District's net OPEB (Asset) at June 30, 2013: Annual Required Contribution (ARC) $8,300,000 Interest on NOA (82,000) Adjustment to ARC 98,000 Annual OPEB Cost (AOC) 8,316,000 Contributions Made: June 30, 2012 Health care premiums paid (4,823,096) Contributions to PARS trust (3,767,000) Increase (decrease) in net OPEB obligation (274,096) Net OPEB Obligation (Asset) - Beginning of Year (1,263,542) Net OPEB Obligation (Asset) - End of Year ($1,537,638) The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the OPEB asset for the past three years are presented below: 34 Percentage of AOC Contributed 102% 104% 103% Current Year AOC Obligation (Asset) ($169,805) (346,806) (274,096) Net OPEB Obligation (Asset) ($916,736) (1,263,542) (1,537,638) Annual OPEB Actual Fiscal Year Cost (AOC) Contribution June 30, 2011 $6,976,364 $7,146,169 June 30, 2012 8,300,000 8,646,806 June 30, 2013 8,316,000 8,590,096 34 Percentage of AOC Contributed 102% 104% 103% Current Year AOC Obligation (Asset) ($169,805) (346,806) (274,096) Net OPEB Obligation (Asset) ($916,736) (1,263,542) (1,537,638) CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 10 — POST EMPLOYMENT HEALTH CARE BENEFITS (Continued) D. Funded Status and Funding Progress Per PARS, actuarial assets as of June 30, 2013 and 2012, including trust contributions and interest, total $29,352,833 and $22,718,524, respectively. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the health care cost trend. The funded status of the plan and the annual required contributions of the employer are subject to continual revision, as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented below presents multiyear trend information that shows whether the actuarial value of the plan assets is increasing or decreasing over time, relative to the actuarial liabilities for benefits. Projections for benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation as well as the historical pattern of sharing benefit costs between the employer and plan members. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and actuarial value of assets, consistent with the long -term perspective of the calculations. The District's most recent actuarial valuation was prepared as of July 1, 2012 and was finalized on May 31, 2013. The June 30, 2012 actuarial valuation results will be budgeted in fiscal years 2013- 14 and 2014 -15. The ARC decreased from $8,300,000 to $8,103,000. 35 Unfunded Unfunded (Overfunded) Cost Method (Overfunded) Actuarial Actuarial Actuarial Actuarial Covered Payroll Liability as Actuarial Value of Accrued Accrued Funded (Active Plan Percentage of Valuation Assets Liability Liability Ratio Members) Covered Payroll Date (A) (B) (A — B) UAAL (A/B) (C) ((A — B) /Cl June 30, 2009 $2,341,251 $68,769,305 ($66,428,054) 3.40% $25,080,233 265% June 30, 2010 9,404,000 90,337,000 (80,933,000) 10.41% 25,080,233 323% July 1, 2012 22,481,000 100,498,000 (78,017,000) 22.37% 24,305,548 321% E. Actuarial Methods and Assumptions Projections for benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation as well as the historical pattern of sharing benefit costs between the employer and plan members. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and actuarial value of assets, consistent with the long -term perspective of the calculations. The District's most recent actuarial valuation was prepared as of July 1, 2012 and was finalized on May 31, 2013. The June 30, 2012 actuarial valuation results will be budgeted in fiscal years 2013- 14 and 2014 -15. The ARC decreased from $8,300,000 to $8,103,000. 35 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 10 — POST EMPLOYMENT HEALTH CARE BENEFITS (Continued) The following is a summary of the actuarial assumptions and methods: Valuation Date Actuarial Cost Method Amortization Method Average Remaining Period Actuarial Assumptions: Investment Rate of Return Inflation Rate NOTE 11— NET POSITION July 1, 2012 Entry Age Normal Cost Method Level Dollar /Closed 26 Years fixed 6.25% 3.00% Medical - 9.4% grading to 5% in 2021 - 22 Medicare Part B - same as medical trend Dental - 4% Net Position is the excess of all the District's assets over all its liabilities, regardless of fund. Net Position is divided into three captions: Net Investment in Capital Assets describes the portion of Net Position which is represented by the current net book value of the District's capital assets, less the outstanding balance of any debt issued to finance these assets. Restricted describes the portion of Net Position which is restricted as to use by the terms and conditions of agreements with outside parties, governmental regulations, laws, or other restrictions which the District cannot unilaterally alter. Unrestricted describes the portion of Net Position which is not restricted as to use. NOTE 12 — LEASE COIVIlVIITMENT5 The District leases various facilities and equipment under operating leases. Following is a summary of operating lease commitments as of June 30, 2013: Fiscal Year Ending 2014 2015 2016 2017 Thereafter Total Office Eauinment Facilities Total $249,924 $58,416 $308,340 249,924 60,096 310,020 249,924 61,827 311,751 - 63,610 63,610 - 33,922 33,922 $749,772 $277,871 $1,027,643 Total rental expense for the fiscal year ended June 30, 2013 was $306,708. 36 CENTRAL CONTRA COSTA SANITARY DISTRICT NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 NOTE 13 — COMNITTMENTS AND CONTINGENCIES Commitments and contingencies, undeterminable in amount, include normal recurring pending claims and litigation. In the opinion of management, based upon discussion with legal counsel, there is no pending litigation which is likely to have a material adverse effect on the fmancial position of the District. Claims and losses are recorded when they are reasonably probable of being incurred and the amount is estimable. Insurance proceeds and settlements are recorded when received. The District has a number of purchase commitments for ongoing operating and capital projects that involve multi -year contracts. Purchase commitments related to these multi -year contracts are approximately $11,808,184 as of June 30, 2013. 37 This Page Left Intentionally Blank SUPPLEMENTARY INFORMATION This Page Left Intentionally Blank ASSETS CURRENT ASSETS: Cash and cash equivalents Short term investments Accounts receivable Interest receivable Due from other sub -funds Parts and supplies Prepaid expenses Total current assets NON - CURRENT ASSETS: Restricted cash and equivalents Restricted investments Assessment Districts receivable Net OPEB asset Revenue bonds issuance costs, net of amortization CAPITAL ASSETS Nondepreciable Depreciable, net of accumulated depreciation Total capital assets, net Total non - current assets TOTAL ASSETS LIABILITIES CURRENT LIABILITIES: Accounts payable and accrued expenses Due to other sub -funds Interest payable Refunding Water Revenue Bonds - current portion Water Reclamation Loan Contract - current portion Accrued compensated absences - current portion Liability for uninsured claims Refundable deposits Total current liabilities NON - CURRENT LIABILITIES: Refunding Water Revenue Bonds, noncurrent portion Water Reclamation Loan Contract, noncurrent portion Accrued compensated absences, noncurrent portion Total noncurrent liabilities TOTAL LIABILITIES NETPOSITION Net investment in capital assets Restricted for debt service Unrestricted TOTAL NET POSITION CENTRAL CONTRA COSTA SANITARY DISTRICT COMBINING SCHEDULE OF NET POSITION ENTERPRISE SUB -FUNDS JANE 30, 2013 Running Sewer Self Debt 5,376,935 Expense Construction Insurance Service Elimination Total 718,147 $2,970,387 $39,891,572 $3,872,274 ($19,445) $46,714,788 10,498,624 10,498,624 11,789,066 3,760,182 968,301 16,517,549 26,488 2,349 36,484 1,000,000 65,321 118,416,830 89,775,752 1,700,940 55,110,409 ($265,003,931) - 2,005,741 341,437 133,626,086 119,942,733 2,861,223 2,005,741 2,204,210 11,704,101 2,204,210 137,386,234 143,952,618 6,543,864 55,127,448 (265,003,931) 78,006,233 100,000 2,089,461 1,537,638 41,795,503 562,189,966 603,985,469 5,412,500 315,287 100,000 5,412,500 2,089,461 1,537,638 315,287 41,795,503 562,189,966 603,985,469 605,623,107 2,089,461 5,727,787 613,440,355 743,009,341 146,042,079 6,543,864 60,855,235 (265,003,931) 691,446,588 2,782,414 2,540,088 54,433 5,376,935 130,277,654 117,244,226 1,806,790 15,675,261 (265,003,931) 718,147 718,147 3,720,000 3,720,000 164,582 164,582 383,000 383,000 1,000,000 1,000,000 183,018 158,419 341,437 133,626,086 119,942,733 2,861,223 20,277,990 (265,003,931) 11,704,101 39,875,000 39,875,000 702,245 702,245 3,450,245 3,450,245 3,450,245 - 40,577,245 44,027,490 137,076,331 119,942,733 2,861,223 60,855,235 (265,003,931) 55,731,591 603,985,469 (44,461,827) 559,523,642 4,730,837 4,730,837 1,947,541 26,099,346 3,682,641 39,730,990 71,460,518 $605,933,010 $26,099,346 $3,682,641 $635,714,997 41 CENTRAL CONTRA COSTA SANITARY DISTRICT COMBINING SCHEDULE OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION ENTERPRISE SUB -FUNDS FOR THE YEAR ENDING JUNE 30, 2013 OPERATING REVENUES Sewer service charges (SSC) Service charges - City of Concord Other services charges Miscellaneous charges Total operating revenues OPERATING EXPENSES Sewage collection and pumping stations Sewage treatment Engineering Administrative and general Depreciation Total operating expenses OPERATING INCOME (LOSS) NONOPERATING REVENUES (EXPENSES) Taxes Permit and inspection fees Interest earnings Interest expense Other income (expense) Total nonoperating revenues NET INCOME (LOSS) BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS CAPITAL CONTRIBUTIONS AND TRANSFERS City of Concord contributions to capital costs Customer contributions to capital cost (SSC) Contributed sewer lines Capital contributions - connection fees Transfers In (Out) Total capital contributions and transfers CHANGE IN NET POSITION NET POSITION, BEGINNING OF YEAR NET POSITION, END OF YEAR Running Sewer Self Debt Expense Construction Insurance Service Elimination Total $56,770,984 $56,770,984 10,483,421 10,483,421 1,076,401 1,076,401 751,880 751,880 69,082,686 69,082,686 14,327,933 14,327,933 23,035,943 23,035,943 8,680,934 8,680,934 20,936,705 $2,380,466 ($2,220,505) 21,096,666 21,596,266 21,596,266 88,577,781 2,380,466 (2,220,505) 88,737,742 (19,495,095) (2,380,466) 2,220,505 (19,655,056) $7,471,518 $5,538,959 13,010,477 967,576 202,233 1,169,809 131,614 230,054 15,269 28,537 405,474 (1,802,084) (1,802,084) 665,939 285,161 2,220,505 (2,220,505) 951,100 1,765,129 8,188,966 2,235,774 3,765,412 (2,220,505) 13,734,776 (17,729,966) 8,188,966 (144,692) 3,765,412 (5,920,280) 3,616,771 3,616,771 4,384,376 4,384,376 939,628 939,628 6,091,529 6,091,529 27,185,118 (23,419,706) (3,765,412) 28,124,746 (9,327,030) - (3,765,412) 15,032,304 10,394,780 (1,138,064) (144,692) 9,112,024 595,538,230 27,237,410 3,827,333 626,602,973 $605,933,010 $26,099,346 $3,682,641 $635,714,997 42 CENTRAL CONTRA COSTA SANITARY DISTRICT Schedule of Running Expenses Comparison of Budget and Actual Expenses by Department June 30, 2013 Less Capitalized Overhead and Benefits Total Salaries and Benefits Directors' Fees and Expense Chemicals Utilities Repairs and Maintenance Hauling and Disposal Professional and Legal Services Outside Services Self Insurance Materials and Supplies w Other (21,699) Sewage (49,878) Variance Sewage Treatment Pumping Favorable Administration Engineering Collection Plant Stations Total Budget (Unfavorable) Salaries and Wages $4,412,199 $5,594,312 $5,074,422 $8,357,973 $894,930 $24,333,836 $23,891,546 ($442,290) Employee Benefits 12,493,141 4,596,838 4,365,835 6,781,830 686,147 28,923,791 28,879,748 (44,043) Less Capitalized Overhead and Benefits Total Salaries and Benefits Directors' Fees and Expense Chemicals Utilities Repairs and Maintenance Hauling and Disposal Professional and Legal Services Outside Services Self Insurance Materials and Supplies w Other (21,699) (3,255,448) (49,878) (119,384) - (3,446,409) (3,756,000) (309,591) 16,883,641 6,935,702 9,390,379 15,020,419 1,581,077 49,811,218 49,015,294 (795,924) 115,880 - - - - 115,880 161,960 46,080 - _ - - 1,144,675 430,279 1,574,954 1,581,000 6,046 149,283 67,422 136,388 3,013,348 479,394 3,845,835 3,906,150 60,315 429,567 81,522 623,001 1,614,895 402,142 3,151,127 3,644,811 493,684 - 570,665 109,788 388,707 19,134 1,088,294 1,039,800 (48,494) 549,980 122,722 2,036 3,307 - 678,045 590,900 (87,145) 1,094,797 534,715 58,230 417,899 52,952 2,158,593 3,248,970 1,090,377 850,000 - - - - 850,000 850,000 - 149,507 203,936 784,056 790,840 51,975 1,980,314 1,970,805 (9,509) 714,050 164,250 174,781 641,853 32,321 1,727,255 2,296,774 569,519 $20,936,705 $8,680,934 $11,278,659 $23,035,943 $3,049,274 $66,981,515 $68,306,464 $1,324,949 CENTRAL CONTRA COSTA SANITARY DISTRICT RUNNING EXPENSE SCHEDULE OF SUPPLEMENTAL NET POSITION ANALYSIS FOR THE FISCAL YEAR ENDED JUNE 30, 2013 Prior Year Balance 2012 -2013 Revenue 2012 - 2013 Expense Add Back Depreciation Expense Net Position Attributed to General Operations Net Position Attributed to All Other Running Expense Net Position 44 $70,847,815 (88,577,781) 21,596,266 $8,706,410 3,866,300 12,572,710 593,360,300 $605,933,010 Attachment 2 Memorandum on Internal Control and Required Communications for the Year Ended June 30, 2013 Attachment 2 CENTRAL CONTRA COSTA SANITARY DISTRICT MEMORANDUM ON INTERNAL CONTROL AND REQUIRED COMMUNICATIONS FOR THE YEAR ENDED JUNE 30, 2013 This Page Left Intentionally Blank CENTRAL CONTRA COSTA SANITARY DISTRICT MEMORANDUM ON INTERNAL CONTROL AND REQUIRED COMMUNICATIONS For the Year Ended June 30, 2013 Table of Contents Page Memorandum on Internal Control ..................................................................... ..............................1 Scheduleof Other Matters .................................................................................. ............................... 3 Schedule of Current Status of Prior Year Significant Deficiencies ................ ............................... 5 Schedule of Current Status of Prior Year Other Matters ................................. ............................... 7 Required Communications ................................................................................. ............................... 9 Significant Audit Findings ........................................................................... ............................... 9 AccountingPolicies .................................................................................. ............................... 9 Unusual Transactions, Controversial or Emerging Areas ...................... ............................... 9 Estimates................................................................................................... .............................10 Disclosures................................................................................................ .............................10 Difficulties Encountered in Performing the Audit ................................. .............................10 Corrected and Uncorrected Misstatements ............................................. .............................10 Disagreements with Management ........................................................... .............................10 Management Representations .................................................................. .............................10 Management Consultations with Other Independent Accountants ....... .............................11 Other Audit Findings or Issues ................................................................ .............................11 OtherMatters ............................................................................................ .............................11 This Page Left Intentionally Blank J\J MAZE & ASSOCIATES MEMORANDUM ON INTERNAL CONTROL To the Board of Directors Central Contra Costa Sanitary District Martinez, California We have audited the financial statements of the Central Contra Costa Sanitary District (District) for the year ended June 30, 2013, and have issued our report thereon dated September 18, 2013. In planning and performing our audit of the financial statements of the Central Contra Costa Sanitary District as of and for the year ended June 30, 2013, in accordance with auditing standards generally accepted in the United States of America, we considered the District's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we do not express an opinion on the effectiveness of the District's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses and, therefore, there can be no assurance that all such deficiencies have been identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. We did not identify any deficiencies in internal control that we consider to be a material weaknesses. However, material weaknesses may exist that have not been identified. Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we believe to be of potential benefit to the District. The District's written responses included in this report have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. This communication is intended solely for the information and use of management, Board of Directors, others within the organization, and agencies and pass - through entities requiring compliance with generally accepted government auditing standards, and is not intended to be and should not be used by anyone other than these specified parties. September 18, 2013 T 925.930.0902 Accountancy Corporation a 925.930.0135 3478 Buskirk Avenue, Suite 215 e maze@rnazeassociates.corn Pleasant Hill, CA 94523 w mazeassociates.com This Page Left Intentionally Blank CENTRAL CONTRA COSTA SANITARY DISTRICT SCHEDULE OF OTHER MATTERS FOR THE YEAR ENDED JUNE 30, 2013 2013 -01 Inventory — Procedures and Reconciliations We did not enter into an audit contract with the District until July 2, 2013, and therefore, we were not able to participate in or observe the annual physical inventory count that occurred on June 30, 2013. We did, however, review the policies and procedures related to inventory, as well as the results of an internal review performed by accounting staff. While all of the findings in the internal report should be addressed, we wanted to focus on a few of the key issues that are of particular concern. In reviewing that counters are signing and entering counts on count sheets, the internal review noted 17 instances in which the count sheet line items had been left blank. The internal review also noted that 6 out of 36 samples did not include exception reports. In order to be able to rely on the inventory counts, the counter must sign off on all count sheets and make notations when there are discrepancies, and never leave blanks; also, there must always be an exception report, or at least a notation that there were no exceptions. The Materials Services Cycle Count Inventory Procedures currently state that a monetary threshold of negative $500 will be resolved by the supervisor. Shortages that exceed $500 must be reviewed and signed by the Purchasing Manager and or the Director of Administration. The internal review found an instance where a negative adjustment exceeding the $500 threshold was not approved or signed off by the Purchasing Manager. It is important that all procedures are followed and the Purchasing Manager is paying close attention to inventory adjustments. We agree with the recommendations made in the internal audit to have + or - $500 adjustments be approved by the Purchasing Manager because it provides for better separation of duties, thereby, increasing internal controls. We also noted a recommendation was made to install additional security cameras in the warehouse. Due to the nature of the assets being protected, which exceed $2 million in value as of June 30, 2013, we concur with this recommendation. We understand the District has not reviewed its obsolete inventory in two to three years, and therefore, the value on the fmancial statements may be overstated as a result. We also understand the District has budgeted for an outside party to conduct an evaluation of the inventory and warehouse procedures. We recommend the District contract with an outside party to complete this evaluation, and in the meantime, District staff outside of the inventory process should perform sample counts on a rotational basis. This would provide better inventory controls as it would provide a separation of duties of warehouse personnel (i.e. staff responsible for operating, recording, and maintaining the warehouse will not be the same staff responsible for inventory taking). Management's Response. Procedural changes have been implemented so that warehouse staff is required to sign off on all count sheets and make notations to items that cannot be located. Staff has been instructed not to leave blanks by either indicating counts or making a notation for all line items on count sheets. The Warehouse Supervisor will print exception reports or make a notation of why there is no exception report. 2. Effective July 1, 2013 inventory adjustments +/- $500 are reviewed by the Warehouse Supervisor. The exception reports with the +/- $500 adjustments will be forwarded to the Purchasing Manager on a monthly basis for approval. 3. The District is in the process of working with Safety and Risk Management to determine the cost, benefit, and location of cameras needed to safeguard and secure District inventory. 4. The Warehouse Supervisor and the maintenance division are in the process of reviewing the inventory for potential obsolete items. The District plans to evaluate inventory and warehouse processes and procedures which may include hiring a consultant during the current fiscal year. Management is also considering possibly rotating staff quarterly to perform counts. Effective July 2013 an Accounting Technician goes out to the warehouse monthly to review the prior month cycle counts and exception reports to ensure open items are reviewed, cleared and updated on a timely basis. We will follow up with you in detail during the 2014 -15 audit fieldwork. 4 CENTRAL CONTRA COSTA SANITARY DISTRICT SCHEDULE OF CURRENT STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCES FOR THE YEAR ENDED JUNE 30, 2013 2012 -01 Continuity of Personnel As part of an audit, auditors do many risk assessments including the assessment of environmental controls, which is defined as the tone of management toward controls. We deemed the environmental controls to be very good. That said, this past year has been a year with an unusual amount of change, including numerous management -level retirements. We observed some transitional risk as various long time employees retired and their positions were replaced with other long time employees as well as some new hires. We would expect fiscal 2013 to be a difficult one as job responsibilities are further delineated and inherit risk increases. We recommend the board monitor next year's ongoing transition in the accounting department since it serves as a key role in the success and management of the District. Current Status The current auditors did not experience any difficulties with the current year's transition. 2012 -02 General Ledger System The auditors have worked with the current general ledger for a several years. The system is difficult to work with for the auditors. It is outdated and chunky. The accounting department works well with the system but efficiency is lost as accounting staff members sometimes must use manual workarounds such as pivot tables for inventory and the creation of special reports by the staff to download trial balances. We feel a newer system would enhance the efforts of the newer staff and auditors to drill down into accounts more efficiently. Efficiencies would be gained by both staff and others using or relying on the system. We understand the District is moving to replace the current general ledger system. We implement a new system. We further recommend any system conversion be implemented at the beginning of a new fiscal year and the District run the conversion parallel to the old HTE /SunGard system. Current Status The current auditors did not experience difficulties with the District's general ledger system. 2012 -03 Permit Counter The permit counter receivable process was unknowingly a material problem for many years. The extent of the problem was not known by the accounting department or its Districts auditors. Although we believe that overall, the District has strong environmental controls, the permit collection process and its accounts receivable system module were most likely known at some level of management. We recommend that all District management involve the accounting department management at all levels of internal controls surrounding accrual accounting issues and/or policy. Accounting management is best suited to make judgments concerning the significance to the District's financial processes. Furthermore, we agree with outside consultants that the District's primary control would be requiring homeowners to show evidence of obtaining a sewage connection permit prior to issuing their City permit. Current Status Starting January 1, 2013 staff began collecting fees for projects where there was an existing connection to the CCCSD sewer upon review of plans at the permit counter. Fees for new construction are still collected at the "roof and rough [plumbing]" stage of construction. Staff will review this approach with the Board of Directors along with several proposed changes to CCCSD District Code later this fall. Following the Bartle Wells audit, staff has been meeting regularly with local building departments to review the process of CCCSD plan review and approval as well as the coordination of CCCSD fee collection and final building permit sign -off. Engineering has been working with Accounting to collect and clear the receivables recorded as a result of the Bartle Wells audit. At June 30, 2013 the majority of the receivables had been collected. 6 CENTRAL CONTRA COSTA SANITARY DISTRICT SCHEDULE OF CURRENT STATUS OF PRIOR YEAR OTHER MATTERS FOR THE YEAR ENDED JUNE 30, 2013 2012 -04 Legal Costs As part of our audit, we consult with staff about pending legal problems and review attorney letters to insure that they are properly reserved in the general ledger. At the end of the fiscal year, management was working to determine the total accrual needed for legal costs due to various legal issues the District is currently faced with, but it was unable to accurately estimate the amount during the year end closing process. As part of our audit, we passed a fairly significant journal entry of slightly over $80,000. The journal entry was not recorded in the audited financials because it would have complicated the accounting process in relation to the District's agreement with the City of Concord. We recommend that accounting book all legal invoices (or book an estimate for invoices not received) as part of the year end close to help avoid reconciliation issues with the attorney letters. Furthermore, if applicable, we recommend accounting be updated on risk management estimates for the accrual of necessary legal reserves. Current Status Legal bills payable at year end are accrued as part of the year end accrual process for invoices not receive by the close of the year. 2012 -05 Inventory We have great respect for the accuracy of the inventory counts we do on a rotation basis. However, in the current year we had some fairly significant discrepancies regarding low cost items with high turnover (such as safety glasses) which required us to perform some additional test counts. We have been informed by Warren Gaines, Material Services Supervisor that as a result of our audit he is instituting a procedure to perform more frequent test counts on high turnover items. We recommend that the plan to perform more frequent test counts on the high turnover items should be fully implemented and also recommended that procedures for issuing out inventory items to various departments be tightened to eliminate items being released to departments but not recorded. Current Status As part of the continuous improvement process and in response to the 2012 audit finding and recommendation, the following steps will be practiced and implemented. Cycle count improvement process for low cost high turnover item: 1. Continue to exhort the importance of cycle counts meaning and purpose to Material Coordinators. Ensuring that they recognize that other inventory actions can be triggered by bad and inaccurate counts i.e., unnecessary procurements, bad information to maintenance personnel, recounts, wrong adjustments to potentially several records, and even more important..... Wasted time recounting. 2. Review items which cause errors due to warehouse organizational and unit measure problems. Correcting this could alleviate future errors. Note: root cause analysis is currently applied. 3. Report and discuss overall error rates along with individual error rates monthly. 4. Make sure the nature of the error rate is understood so that appropriate measures can be taken to alleviate repeated miscounts. 5. Discuss inventory targets and goals with staff and brainstorm... again for better acceptance. 6. Finally, identify, review and spot check items issued on a weekly basis. a & MAZE ASSOCIATES REQUIRED COAU�IUNICATIONS To the Board of Directors Central Contra Costa Sanitary District Martinez, California We have audited the basic financial statements of the Central Contra Costa Sanitary District (District) for the year ended June 30, 2013. Professional standards require that we communicate to you the following information related to our audit under generally accepted auditing standards. Significant Audit Findings Accounting Policies Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the District are included in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year. The following Government Accounting Standards Board (GASB) pronouncements became effective, but did not have a material effect on the financial statements: GASB 60 - Accounting and Financial Reporting for Service Concession Arrangements GASB 61 - The Financial Reporting Entity Omnibus, an amendment of GASB Statements No. 14 and No. 34. GASB 62 - Codification ofAcco4nting and Financial Reporting Guidance Contained in Pre - November 30 1989 FASB and AICPA Pronouncements The following pronouncement became effective, and required a format change in the Statement of Net Position and certain nomenclature revisions in the footnotes accompanying the financial statements: GASB 63 - Financial Reporting of Deferred Ou ows of Resources, Deferred Inflows of Resources, and Net Position Unusual Transactions, Controversial or Emerging Areas We noted no transactions entered into by District during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accountancy Corporation 3478 Buskirk Avenue, Suite 215 Pleasant Hill, CA 94523 we T 925.930.0902 F 925.930.0135 E maze @mazeassnciates.com w mazeassociates.com Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the District's financial statements are depreciation, claims liability and actuarial estimates for other post - employment benefits. Management's estimate of depreciation is based on the estimated useful lives of the capital assets, and its estimate of claims is based on the District Attorney's estimates of current and potential litigation, as well as actuary studies provided for the District as of June 30, 2013. We evaluated the key factors and assumptions used to develop the depreciation expense, claims liability and reviewed the current actuary- study and determined that they are reasonable in relation to the basic financial statements taken as a whole. The value of the assets, liability and assumptions used to determine annual required contributions for other post - employment benefits is determined by an actuary study provided to the District as of June 30, 2012. Disclosures The financial statement disclosures are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. Management has corrected all/certain such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to each opinion unit's financial statements taken as a whole. Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in a management representation letter dated September 18, 2013. 10 Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Matters With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements .themselves. This information is intended solely for the use of the Board of Directors and management and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours, September 18, 2013 11 This Page Left Intentionally Blank Attachment 3 Internal Audit of Material Supplies Building (MSB) and Cycle Counting for the Fiscal Year 2012 -13 Attachment 3 Central Contra Costa Sanitary District July 16, 2013 TO CURT SWAN SON, STEPHANIE KING, AND WARREN GAINES FROM: THEA VASSALLO SUBJECT:- AUDIT OF MATERIAL: SUPPLIES BUILDING (MSB) AND CYCLE COUNTING FOR FISCAL YEAR 2012 -13 Accounting Technician Nicole Marshall and I conducted an interim audit of the MSB cycle counting process on Friday, June' 28, 2013, We worked with Materials Services Supervisor (supervisor) Warren Gaines during the audit. Presented below is the audit plan and findings summarized by section. Audit Plan and Findings: 1. Reviewed cycle count files — The files were easily accessible and were organized by month. 2. ,Determined number of counts since July 2012 Determined that cycle counts have been performed from July 2012 — June 2013. There were thirty -six cycle counts done during the year. See Table 1. 3. Reviewed that counters are sianina and enterina counts on the count sheets — Confirmed that the counts sheets are being signed by the counters. It was noted in seventeen instances where the count sheet tine item had been left blank. See Table 1. 4. Verified inventory exception reports are being produced — Exception reports are produced subsequent to the cycle counts. There were thirty -six counts selected during the Fiscal Year and six had missing exception reports. This appeared to be the case in the months August, October, and April. There were no notations made on the inventory cycle count sheets to indicate that there were no exceptions generated for that particular month. See Tables 1 and 3. Exception reports are generated by the system after several steps have been performed by both the supervisor and staff. First, the supervisor submits a cycle inventory request, which then generates cycle inventory worksheets. The supervisor then assigns the sheets to the warehouse staff. The warehouse staff then takes the sheets and conducts their counts. The counters' counts are then input into the system by the supervisor and a Physical Inventory Exception Report is produced based on the differences between the quantity counted and the perpetual system count. The supervisor reconciles the discrepancies and makes adjustments as needed. N:IACC0UNTINGIGMTEMP1IMSB Inventory\MSB cycle Count Audit 12- 13.doc It was noted during our review that the time between when a sample is run and when the sample inventory items are cleared in the system range between 1-22 days. See Table 3. This is significant because the inventory that is selected and sampled is frozen in the system until it is cleared. Consequently, the warehouse staff switches to a manual "Golden Rod System" for those inventory items sampled. Items are then distributed, allocated, or returned upon request prior to the sample clearing in the system. Once the inventory sample is cleared or unfrozen, the warehouse staff then needs to enter the golden rod activity into the system to accurately adjust the inventory in the system. 5. Determined exceptions are being reconciled and exceptions noted — The monthly exception reports are filed with the cycle counts. It was noted that six of the thirty-six cycle counts were missing an exception report as noted in Tables 1 and 3. The supervisor keeps track of the + positive and — negative adjustment on the Excel Monthly Physical Inventory Status Report per Table 4; however, during our review we were unable to trace the total adjustments to the exception reports on file. See Table 3. The supervisor sends Accounting an adjusting journal to adjust for the monthly exception reports generated. The supervisor also sends Accounting the monthly posting of inventory allocations and adjustments. 6. Verified the $500 exception signing limit is being observed — The Materials Services Cycle Count Inventory Procedures are attached, and Item 15. states that a monetary threshold of (-$500) will be resolved by the supervisor. Shortages that exceed $500 must be reviewed and signed by the Purchasing Manager and or the Director of Administration. Based on the exception reports that were on hand and filed with the monthly cycle count folders there was one negative line item adjustment of ($522.54) that met this criteria. This adjustment required sign off and approval by the Purchasing Manager (See Table 2). Nicole Marshall verified that the negative adjustment was not approved or signed off by the Purchasing Manager. The Excel Monthly Physical Inventory Status Report prepared by the supervisor summarizes - negative adjustments as being $15,046.47 for Fiscal Year 2012-13 per Table 4. The difference in - negative adjustments is $14,523.93 and is not supported by the exception reports on file. Table 2 summarizes all the individual line items +/- $500 noted on the filed exception reports. 7. Determined to date how many items have been cycle counted — Between July 2012 and June 2013, approximately 7,346 items have been counted. It appeared that the "A" and "B" items had been counted twice. Once through December 2012, and again for the period January through June 2013. The "C" items appeared to have been counted once during the year. It was noted that 65% (2,296) of the "C" items were counted in June. See Table 1. The estimated ABC total class counts per the Monthly Physical Inventory Status Report were used since that is the source document used by the supervisor. See Table 4. N:\ACC0UNTlNG\GMTEMP1\MS8 lnventory\MSB Cycle Count Audit 12-13.doc 8. Reviewed break-down by A, B, and C items — It was noted that 1,352 "A" items, 2,448 "B" items, and 3,546 "C" items had been counted and inventoried as of June 2013. See Table 1, Recommendations: Effective Immediately • An Accounting Technician will go out to the warehouse monthly and review the prior month cycle counts and exception reports. • Any inventory line item adjustment +/- $500 will be signed off by the Purchasing Manager. Providing information on both overages and underages provides for tighter internal controls, review and monitoring of actual inventory adjustments, and accountability of activity through the inventory system. This change will be reviewed on an annual basis. +/- adjustments are caused by the following: + Overages 1. Shipment received that is not entered into the system 2. Issued wrong part #, causes both overage & shortage 3. Inventory returned to shelf by unauthorized staff (as a favor) 4. PCard purchases not entered into the system - Shortages 1. Unauthorized staff took inventory (issuance not entered into the system) 2. Theft 3. Shrinkage Other • Warehouse staff should be reminded periodically and the supervisor needs to make sure all sheets are signed, dated, and counts indicated (including 0 or none). • Exception reports should be run for all cycle counts. • Cycle counts with no exceptions should be noted in the monthly folders. • Material Services Cycle Count Inventory Procedures should be followed and updated for procedural changes. Per subsequent review it appears that items 11. and 14. through 17. are not being followed. See attached procedures. • Cycle counts should be released timely to avoid using the manual Golden Rod System which duplicates work processes. N:\ACC0UNTlNG\GMTElVlP1\lVlSB Inventory\MSB Cycle Count Audit 12-13.doc • The Excel Monthly Physical Inventory Status. Report +/- adjustments should agree or tie to a report from the inventory system. During our review we were not able to verify the + $19,556 (410 items) or the - $15,046 (517 items) adjustments. See Tables 3 and 4. • The Excel Monthly Physical Inventory Status Report inventory value as of June 2013 has a book value of $1,780,823 which should agree or closely tie to the monthly Period 12 financials of $2,003,639. • Final monthly exception reports with detailed explanations on +/- $500 exceptions should be submitted to and approved by the Purchasing Manager on a monthly basis as needed. I verified with Nicole Marshall that the exception report for October 2012 had not been approved; Per discussion with Stephanie and Warren in July of 2011, 1 suggested that Warren email or scan final exception reports with details on a timely basis. Under the current procedures none of the inventory adjustments are being approved. • Current inventory balance is over $2,000,000 and has been increasing over the last several years. These assets should be protected and safeguarded by installing additional security cameras at the entrances, exit and roll up doors. Per discussion with Risk and Safety there is currently one camera at the counter. Need documented written procedures or updates for the following: Items sent to auction Review of obsolete inventory (Chapter 22 Surplus Equipment) Recording of various types of purchases (PCard, PO, vendor donations, etc) Issuance of MSB inventory Open inventory purchases and recording of usage Disposals In conclusion, I have several concerns about the inventory value on the monthly financials, procedures being followed, and completeness of records. As part of my final inquiry with Warren it was discussed that obsolete inventory adjustments had not been done for 2 or 3 years. Per discussion with Purchasing Manager Stephanie King, Purchasing has budgeted for a consultant and warehouse evaluation for several years. I support and recommend contracting a consultant for Fiscal Year 2013 -14 to review the book value, accuracy and completeness of records, provide written procedures, and evaluate processes of the warehouse to improve internal controls, tracking, accountability, and safeguarding of the District's inventory. Please call if you have any questions. Cc: N. Marshall Maze & Associates (audit file) N:\ACCQUNTING\GMTEMPI \MSB Inventory\MSB Cycle Count Audit 12- 13:doc Table 1 Summary of Counts Table 2 Summary of Exception Reports on File +/ -$500 Line Items Month Amount + Ad`imts - Adimts Quantity Item Description 9/2012 $915.29 $915.29 2 Flange, Adapter 9/2012 $679.73 $679.73 1 Flange, Adapter 9/2012 $3,763.86 $3,763.86 2 Motor, Hydraulic Repair 10/2012 ($522.54) ($522.54) 3 Cartridge Housing 10/2012 $1,174.57 $1,174.57 7 Channel, $ -Line 03/2013 $1,666.98 $1,666.98 2 Seal, Assembly - Bottom 03/2013 $513.13 $513.13 4 Valve 04/2013 $985.08 $985.08 14 Battery, Nickel Cadmium 05/2013 $508.31 $508.31 2 Coupling 06/2013 $2,031.62 $2,031.62 4 Driven, Short Shaft Total 41 $11,716.03 $12,238.57 ($522.54) Per Excel Inventory Worksheet 19,555.95 15,046.47 From Table 4 Variance (7,311.38) (15,569.01) Comment Approval Required Table 3 Summary of Sample and Count Dates Summary of Exception Reports on File # Days # pays Total $ Per Step #1 #2 (1 to 2) #3 (1 to 3) Exception Rpt Sannpies „Putted „ l Co ', gomwted Samples Cleared ', _ 7/31%2012 7/31/2012 8/15/2012 16 Partial rpt augus,,t 8/30/2012 8/30/2012 1 8/31/2012 2 (227.43) 8/31/2012 8/31/2012 1 No Exceptn Report None on file 8/31/2012 8/31/2012 1 No Exceptn Report None on file 8/31/2012 8/31/2012 1 No Exceptn Report. - None on file Stenbgr „ 9/28/2012 1015/2012 9 10%9/2012 13 5,890.86 Cl+ctobi 10/22/2012 10/22/2012 1 10/2`6/2'712 5 374.84 10/26/2012 10/26/2012 1 10/30/2012 5 306.63 10/30/2012 10/30/2012 1 No Exceptn Report - None on file 10/31/2012 11/1/2012 2 No Exceptn Report - None on file Nov` rn Table 4 Monthly Physical Inventory Status Report Book to Physical 5185 $1,780,823.15 Book Value $1,785,332.80 Actual Count Value _ - $4,509.65 Net Difference $1,780,823.15 Book Value 2013 June Count Accuracy% 82 Net Accuracy % 99 _Record Accuracy% 99 Record Accuracy Items: 5185 $1,780,823.15 Book Value S 19,555.95 (T Adjustment) 410 S15,046.47 ( - Adjustment) 517 = S34,602.42 Absolute Difference $1,780,823.15 Book Value Total Class Total Count A 678 $1,368,110.36 B 1263 $283,619.48 C 3552 $139,798.77 Total - -> 5493 $1,791,528.61 Class Total Counted Value Counted A 676 $1,368,664.94 B 1263 $284,219.17 C 3246 $132,448.68 Total - -> 5185 $1,785,332.79 Class A B C Total - -> Count Remaining 2 0 306 308 June -13 Physical Count Ad'+ Ad"- A B 133 9 -14 C 2296 232 -313 Prepared By: Materials Services Supervisor Warren Gaines Material Services Cycle Count Inventory, Procedures The cycle count inventory will be used in lieu of the annual physical inventory. The benefits are fourfold: 1) line item accuracy will be updated during the course of the years vs. year -end, preventing stock- outs of frequently used items. 2) Adjustments made against the over /short account can be distributed to expenditure account throughout the year making it more palatable to account custodians. 3) Discrepant counts can be investigated fully without the pressures of a time constraint. 4) By giving the inventory count responsibility back to those who have a stake in its integrity, the district will save money by eliminating outside agencies. MSB personnel will conduct counts and reconcile discrepancies during the daily MSB closure from 11:00 —12:00 pm. However, assistance with material issues will still be addressed by Material, Services Staff. The ABC Analysis Report is critical and is the initial step for the cycle count. The ABC system is based on the presumption that inventoried items follow Pareto's Law for the distribution of value in the population. Commonly known as the 80/20 rule. It states that a majority of the cost of inventory is in a small minority of the items. Typically, 80 percent of the cost of the inventory comes from 20 percent of the items; conversely, 80 percent of the items represent only 20 % of the cost. To establish an ABC system for managing inventory including cycle counts, an analysis of all inventory items should be listed in descending order based on their total annual dollar value. The total annual dollar value is the total quantity used in one year times the unit price. A break point in the dollar values can be used to establish the classification. The good news is that Sungard accomplishes this task in its logical file; therefore, no steps have to be taken by MSB personnel. Step ACTIONS The ABC report is a fantastic management tool used to control the investment in inventory. It can also be used to analyze inventory usage. Note: this report is essential and must be run prior to the execution of any type of inventory in Sungard also an ABC classification code has to be assigned to each line item. 1. On the Purchasing /Inventory Main Menu, select Demand Reports Menu. Then select ABC analysis. N:WDMINSUP\ADMIN\Accounting \Material Services Cycle Count Inventory Procedures 2011.doc 2. Indicate whether you want the rankings on the report based on: • Usage value for the previous 12 months • Value of the inventory • Item unit cost For cycle counts, sort on "Value of inventory 3. In the 'A', 'B', and `C' fields, assign a percentage to the 'A', 'B', and 'C' codes to represent the proportionate amount of the inventory assigned to an 'A', 'B', or 'C' item. Also, indicate the quantity or percentage of which you want the inventory stratified. Incidentally, the following percentages are the exact percentages used for the cycle count process. Example: You base item ranking on total value using the percentage criteria. You assign the following percentage when you print the ABC Analysis Report: A = 80 %, B = 15 % and C = 5 %. With the above percentages set up, the ABC Analysis Report shows you which items are rated in the top 80% for usage; these are your'A' items. The next 15% have moderate usage; these are your'B' items. The bottom 5% for usage is your 'C' items. 4. Indicate Yes in the 'Print the report' field. 5. Do you want PI to update the ABC code assigned to the items in the item description file based on the report? Indicate Yes in the 'Update items with resulting ABC code' field. Result: PI assigns an 'A', 'B' or 'C' code to the item based on its usage, value, or unit cost based on the ABC Analysis Report. (Remember we selected total value as the cycle count criteria). Note: Currently Inventory Items are based upon Total Value. 6. In the 'Com' and 'Sub', 'From' and 'To' fields, indicate the range of commodities and sub commodities for which you want to run an ABC analysis. Note: If you want the report to include information about items in all commodities and sub - commodities, leave these fields blank. 7. In the building range 'From' and 'To' fields, indicate the range of inventory buildings for which you want inventory items analyzed. 2 N: IADMINSUP \ADMIN1AccountingtMaterial Services Cycle Count Inventory Procedures 2011.doc Note: If you want to complete an analysis of items in all inventory buildings, leave these fields blank. 8. Use the 'Submit report' function. Note: To process a cycle inventory of items that PI randomly selected, you must leave those items frozen during the following steps: • Printing cycle inventory worksheets • Entering cycle inventory counts Printing. the Physical inventory Exception Report Changing the count and reprinting the exception report • Adjusting the counts 9. Select Cycle inventory processing from the Physical Inventory Menu and complete the preliminary cycle count information. Specify the quantity of items to inventory and the days between of which these items' should be recounted. Considerations should be based upon item class criteria, total quantity of items, quantity of items already inventoried and current calendar date. Note: When you select Cycle inventory processing from the Physical Inventory Menu, PI randomly selects and freezes the items to be counted. Freezing inventory items prevents users from receiving the items into stock or issuing the items out of stock until you unfreeze the items. 10. Submit the Cycle inventory from the Physical Inventory Menu. The Materials Servicing Supervisor will then distribute the count sheets to the Material Coordinators. The-cycle inventory worksheets are sorted by location, and contain 'Item Numbers', 'description' and 'Unit of Measure'. Each Material Coordinator will fully sign each sheet, first and last name and commence with the count. Entries will be made in blue or black ink only. Annotations that are unclear and /or mistakes will be examined or crossed out and initialed by the Materials Services Supervisor. 11. Before the actual count the Material Services Supervisor will create an issue sheet for items issued during the freeze before the count and items issued after the count. This sheet will be used as part of the reconciliation process when the counts are completed, this will allow for continued support to District personnel during the inventory process. This sheet will also be maintained in the cycle count folder. 12. After all inventory worksheets and issue sheets are collected the Materials Services Supervisor will then begin the reconciliation process by including items 3 N:W DMINSUPWDMIN1AccountingWaterial Services Cycle Count Inventory Procedures 2011.doc issued before the count to items on the actual inventory worksheet. Entries will then be input into the 'Physical inventory count entry screen'; afterwards the Physical Inventory Exception Report will be executed. Discrepant counts will be fully investigated, however, before beginning the research compare worksheet entries to the exception report, as this will in some instances capture data entry errors thereby alleviating the need for further. investigation. 13. Once true discrepancies are identified, the Materials Services Supervisor will then highlight or mark the discrepancy and forward duplicate count sheets with discrepant items highlighted to a different counter. The new counter will again sign or initial their name next to each researched item. These items will again be input by the Materials Services Supervisor into the Physical inventory count entry screen and the Physical inventory exception report will be executed once more. 14. If there is no resolution to the specified line item the Materials Services Supervisor will then review each item beginning with transactional analysis from H T E this includes reviewing: issues, receipts, adjustments, and procurement activities, followed by discussion with Materials Coordinators and Maintenance personnel as appropriate. If discrepancies still. exist after the aforementioned research, the Materials Services Supervisor will create a final exception report with detailed explanations regarding each item. This information will be kept in the cycle count folder by date in descending order, - along with each inventory cycle count performed. 15. A monetary threshold of - $500 will be resolved by the Materials Services Supervisor. Shortages that exceed $500 must be reviewed and signed by the Purchase Manager and or Director of Administration. Note: The $500 limit will be evaluated as needed to determine its appropriateness. 16. After appropriate signatures the Materials Services Supervisor will then go to the Physical Inventory Menu, screen 3 and adjust inventory quantities. 17. A final copy of all adjustments along with exception notes will be sent to accounting with copies maintained in the cycle count folder. 18. The Materials Services Supervisor will then release (unfreeze) the inventory items in the Physical Inventory Menu screen. 4 N: IADM INS UP VIDMIWAccountingWtaterial Services Cycle Count Inventory Procedures 2011.doc