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11 - Financial Statements for Fiscal Year Ended June 30, 2013Protecting our community's health and the environment by providing solid waste and sewer collection services. www.cmsdca.gov Costa Mesa Sanitary District ….an Independent Special District Memorandum T o: Board of Directors Via: Scott Carroll, General Manager From: Marc Davis, Treasurer Date: January 23, 2014 Subject: Financial Statements for Fiscal Year Ended June 30, 2013 Summary The annual financial audit of the District has been completed. Attached to this report are the audited financial statements, the auditors’ report in accordance with Government Auditing Standards , and the auditors’ required communication for the fiscal year ended June 30, 2013. Nitin Patel, Partner, White Nelson Diehl Evans, LLP, which is the District’s independent audit firm that conducted the annual audit, will be present at the Board meeting to present the results of the audit. S ta ff Recommendation That the Board of Directors receive and file the Comprehensive Annual Financial Report, auditors’ report in accordance with Government Auditing Standards , and the audito rs’ required communication for the fiscal year ended June 30, 2013. Analysis Financial highlights for the fiscal year ended June 30, 2013 included:  Total assets of the District exceeded liabilities by $57,564,829. Of this amount, $17 ,763,784 is unrestricted and available to meet the District’s ongoing obligations to its customers and creditors.  Net position of the Solid Waste Fund decreased $6,168 during the year ended June 30, 2013, which was primarily attributable to a reduction beginning net position in the amount of $197,436 due to a correction of prior year accruals of expenses, offset by an increase in general property tax revenue of $86,467, an increase in other revenue of $20,879 and savings in salaries and benefits due to temporary vacancies in staffing. ITEM NO. 11 Board of Directors January 23, 2014 Page 2 of 2  Net position of the Liquid Waste fund increased $915,296 during the year ended June 30, 2013, which was primarily attributable to an increase in permits and inspections fees of $57,299 and connection fees of 111,032 due to increased development, a decrease in liquid waste disposal expenses of $399,141 due to timing of completion of capital improvement projects, and savings in salaries and benefits due to temporary vacancies in staffing, as well as savings in various maintenance and operations accounts. Strategic Plan Element & Goal This item supports achieving Strategic Element No. 7.0, Finances, by ensuring the short and long-term fiscal health of the District. Legal Review Legal review is not required. Environmental Review The preparation of financial statements is an administrative action and not a project under CEQA or the District’s CEQA guidelines. Financial Review The cost of the annual audit was $9,340, which was included in the District’s budget. Public Notice Process Copies of this report are on file and will be included with the entire agenda packet for the January 23, 2014 Board of Directors regular meeting at District Headquarters and on District’s website. Alternative Actions 1. Refer the matter back to staff Attachments 1. Comprehensive Annual Financial Report for the Year Ended June 30, 2013 2. Report on Internal Control Over Financial Reporting and on Compliance and Other Matters based on an Audit Performed in Accordance with Government Auditing Standards 3. Required Auditor Communications ITEM NO. 11 Costa Mesa Sanitary District Costa Mesa, California Comprehensive Annual Financial Report For Fiscal Year Ended June 30, 2013 ITEM NO. 11 Costa Mesa Sanitary District Comprehensive Annual Financial Report For the Year Ended June 30, 2013 Costa Mesa Sanitary District 628 W. 19 th Street Costa Mesa, California 92627 Prepared by: Scott Carroll, General Manager Marc Davis, Treasurer ITEM NO. 11 Costa Mesa Sanitary District Annual Financial Report For the Year Ended June 30, 2013 Table of Contents Page No. Introductory Section: Letter of Transmittal i - v Board of Directors vi Organizational Chart vii CSMFO Certificate of Award for Outstanding Financial Reporting viii Financial Section: Independent Auditor’s Report 1 - 3 Management’s Discussion and Analysis (Required Supplementary Information) 4 - 10 Basic Financial Statements: 11 Combined Statement of Net Position 12 - 13 Combined Statement of Revenues, Expens es and Changes in Net Position 14 - 15 Combined Statement of Cash Flows 16 - 19 Notes to the Basic Financial Statements 21 - 38 Required Supplementary Information: 39 Schedule of Funding Progress for Other Post-Employment Benefit Plan 40 Statistical Section: Statistical Section - Table of Contents 41 Changes in Net Position by Compon ent - Last Ten Fiscal Years 42 - 43 Operating Revenues by Source - Last Ten Fiscal Years 44 - 45 Operating Expenses by Activity - Last Ten Fiscal Years 46 - 47 Non-Operating Revenue (Expenses), net - Last Ten Fiscal Years 48 - 49 Sewer and Trash Revenue Rates - Last Ten Fiscal Years 50 - 51 Principal Sewer Customers - Current Fiscal Year and Nine Years Ago 53 Ratio of Outstanding Debt - Last Ten Fiscal Years 54 - 55 Debt Coverage - Last Ten Fiscal Years 56 - 57 Demographics and Economic Statis tics - Last Ten Calendar Years 58 Principal Employers - Current Year and Nine Years Ago 59 Full-Time and Part-Time District Em ployees - Last Nine Fiscal Years 60 Operating Indicators by Functi on - Last Six Fiscal Years 61 Capital Asset Statistics - Last Ten Fiscal Years 62 ITEM NO. 11 INTRODUCTOR Y SECTION ITEM NO. 11 ITEM NO. 11 Protecting our community’s health and the environmen t by providing solid waste and sewer collection services. www.cmsdca.gov - ii - PROFILE OF THE DIST RICT (CONTINUED) The affairs of the District are directed by a five member Board of Direct ors elected at large by the registered voters residing in the District. Th e Board members are also residents and have the same concerns as their constituents. The Board members, who serve four-year staggered terms, are responsible for establishing policy and ordi nances, adopting the annual budget, and hiring the District’s General Manager. The General Mana ger is responsible for carrying out the policies and ordinances of the Board and for overseei ng the day-to-day operations of the District. LOCAL ECONOMY The information presented in the financial statements is pe rhaps best understood when it is considered from the broader perspective of the specific environment within which the District operates. The District continues to benefit fr om its unique geographical location. The local economy is primarily based on retail comme rcial business and light manufacturing of electronics, pharmaceuticals, and pl astics. The District’s service area includes several major regional facilities: John Wayne Airport’s air traffic control tower, Orange Coast College, Whittier Law School, Vanguard University, State of California Fairview Development Center, Orange County Fairgrounds, Segerstrom Perfor ming Arts Center, S outh Coast Repertory Theater, and the South Coast Plaza shopping comp lex. The volume of sales generated by South Coast Plaza, on the strength of over 300 stores, s ecures its place as the highest volume regional shopping center in the nation. As an independent enterprise spec ial district having the ability to adjust service rates as required, the District’s operating revenues are somewhat insulated from the local economy. The recent economic downturn did not have a negative impact on the District’s revenues as it had on other government agencies, whose major source of revenue s are from sales, property and other taxes. The District has a secure revenue stream in the form of an annual charge which is collected on the District’s behalf by the County of Orange via the property tax bills. LONG-TERM FINANCIAL PLANNI NG AND MAJOR INITIATIVES The Board of Directors is keenly aware of the need to ensure the District’s financial stability. Through a coordinated strate gic process, the Board has establis hed a series of policies and plans to effectively meet the District’s anticipated future needs. The cornerstone of these policies is the District’s Strategic Plan, which serves as a framework for planni ng and decision making over the next five years. The Strategic Plan wa s reviewed and updated in May 2013. It documents the following seven strategic elements, and identifies service goals for each year as to how to accomplish the strategic elements.  Sewer infrastructure – Our objective is to co llect and transport wastewater to meet the needs of existing and future customers.  Solid waste – Our objective is to manage the collection and recycling of residential trash in the most economical and environmentally friendly way.   ITEM NO. 11 Protecting our community’s health and the environmen t by providing solid waste and sewer collection services. www.cmsdca.gov - iii - LONG-TERM FINANCIAL PLANNING AND MAJOR INITIATIVES (CONTINUED)  Partnerships – To foster beneficial relations hips to accomplish the goals of the District.  Community outreach and communications – Ou r objective is to inform and establish beneficial relations with the community.  Administrative Management – To create, maintain and implement policies and procedures to ensure sound management of the District.  Personnel/organizational management – To em ploy and retain a high quality, motivated workforce.  Finances – To ensure the short and long-term fiscal health of the District. The District has effectively incorporated its Asset Replacement Fund and Asset Management Fund into the financial plan, system and activitie s. These funds were established for the purpose of segregating and accumulating funds for th e purchase and replacement of equipment and capital improvement projects (CIP), ensuring that equipment and capital projects can be funded when replacement or reha bilitation is required. The purpose of the Asset Management Fund is to accumulate reserves for capital improvement projects. This fund has a reserve requirement of $5,000,000. The financial position of this fund is evaluated each year by staff to ensure there is adequate and sustainable funding for the next thirty years. The financial plan for this Fund is obtained from the Asset Management Model. The Model is a computerized program where the District’s infrastructu re inventory has been entered. The model has the capability to calcula te the yearly amount of estimated replacement costs, or CIP, and the reserve contribution re quired from the Liquid Waste Fund in order to maintain the targeted reserve balance. The Mode l’s objective is to ensure current and future wastewater is continually being collected and transported in a safe and efficient manner. Also key during the year ended June 30, 2013, was the initiation of a Knowledge Transfer Program. Knowledge Transfer is a segment of an overall approach to Succession Planning, which is an on-going process of systematically identifying, asse ssing and developing talent to ensure the leadership and manage ment continuity for all key posi tions in the organization. It ensures that replacements have been prepared to fill key vacancies on short notice, that individuals have the development capacity to assume greater res ponsibility, and that individuals are prepared for exercising increased t echnical proficiency in their work. Generally speaking, the term “knowledge management ” (KM) represents a br oad concept, and is thought of as a system for findi ng, understanding, and using knowledge to ach ieve organizational objectives. The three activitie s of finding, storing and retrie ving are the “organizational memory” of the District. It is more than simp ly moving or transferring files and data from one employee (or department) to another. KM allows others to build upon a person’s professional experience, within the context of the organi zation, in a way that st rengthens not only the employee, but the organization as a whole. ITEM NO. 11 Protecting our community’s health and the environmen t by providing solid waste and sewer collection services. www.cmsdca.gov - iv - LONG-TERM FINANCIAL PLANNING AND MAJOR INITIATIVES (CONTINUED) There are at least tw o types of knowledge – Explicit and Tacit . Explicit can be described as data and is often found in software systems or documents. On the other hand, tacit knowledge includes cognitive skills such as beliefs, images, intuition and mental models as well as technical skills such as craft and know-how. Tactic know ledge is knowledge that people carry in their minds and is, therefore, difficult to access. Of ten, people are not aware of the knowledge they possess or how it can be valuable to others. Tacit knowledge is considered more valuable because it provides context for people, places, ideas , and experiences. Effective transfer of tacit knowledge generally requires extens ive personal contact an d trust. Consequently, the focus of the District’s approach is to implement a process by which the tactic knowledge of key positions/employees is captured and available for transfer. The economic and policy issues the District curre ntly faces are a reflection of the statewide environmental policies, demands for increased tr ansparency, and the ramifications of a sluggish economy. On a statewide level, Assembly Bill 939 (AB939) sets State di version goals at 50% and Assembly Bill 341 (AB341) requires the State to divert 75% by 2020. Currently, the District is diverting over 57% of the solid waste collected from the local landf ills. The District is in the process of evaluating all options to obtain an even higher diversion rate in cooperation with other organizations by the year 2014. The plan include s organic recycling where green and food waste will be converted into renewal natural gas along with educational and public outreach programs that will encourage residents to participate in waste reduction and recycling efforts. FINANCIAL POLICIES AND PROCEDURES Management of the District is responsible for es tablishing and maintaining an adequate internal control structure. Inte rnal accounting controls are designed to ensure that the assets of the District are protected from loss, theft or misuse, and that adequa te accounting data are compiled to allow for the preparation of financial stat ements in conformity with generally accepted accounting principles. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits re quires estimates and judgment by management. AWARDS The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the District for its Comprehensive Annual Financial Report for the fi scal year ended June 30, 2012. This was the second consecutive year that the Dist rict achieved this prestigious award. In order to be awarded a Certificate of Achievement, a governmental entity must publish an easily readable and efficiently organized Comprehensive Annual Fina ncial Report. This report must satisfy both generally accepted accounting pr inciples (GAAP) and applicab le legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement’s Program’s requirements and we are submitting it to the GFOA to determine it eligibility for another certificate. ITEM NO. 11 ITEM NO. 11 - vi - Our Mission Statement “Protecting our community’s health and the environment by providing solid waste and sewer collection services.” Costa Mesa Sanitary District Board of Directors as of June 30, 2013 Elected/ Current Name Title Appointed Term James Ferryman President Elected 12/12 – 12/16 Michael Scheafer Vice Pres ident Elected 12/10 – 12/14 Arthur Perry Secretary Elected 12/12 – 12/16 Robert Ooten Assistan t Secretary Elected 12/10 – 12/14 Arlene Schafer Director Appointed 12/10 – 12/14 Costa Mesa Sanitary District Scott Carroll, General Manager 628 W. 19 th Street Costa Mesa, California 92627 (949) 645-8400 www.cmsdca.gov ITEM NO. 11 - vii - COSTA MESA SANITARY DISTRICT ORGANIZATIONAL CHART JULY 2013 General Manager/ District Clerk Finance Manager Admin Manager Mgt Analyst Maint Supervisor District Engineer Associate Accountant Maint Worker III Maint Assistant (PT) Maint Worker III Inspector Maint Worker II Maint Worker I Admin Assistant Mgt Assistant Mgt Intern Volunteer Contracted Employees Maint Intern Volunteer Deputy Clerk Code Enforce (PT) District Counsel District Treasurer Board of Directors New positions ITEM NO. 11 ITEM NO. 11 FINANCIAL SECTION ITEM NO. 11 2875 Michelle Drive, Suite 300, Irvine , CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties -1-IN DEPENDENT A UDITORS’ REPOR T Board of Directors Costa Mesa Sanitary District Costa Mesa, California Report on Financial S tatements We h ave audited the accompany ing financial statements of the Costa Mesa Sanit ar y District (the District) as of and for the ye ar ended June 30, 2013 ,and the related notes to the financial statements, which collectively comprise the District’s basic financial stat ements 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 acc epted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.Auditors’ Responsibility Our responsibility i s to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally a ccepted in the United States of America ,the standards applicable to financial audits contained in Government Auditing Standards , issued by t he Comptroller General of the United States and the State Controller ’s M inimum Audit Requirements for California Special Districts. Those standards require that we plan a nd 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 auditors ’ 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 auditors consider internal control r elevant 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 i nternal control. Accordingl y, 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 m anagement, as well as evaluating the overall pre sentation 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.ITEM NO. 11 -2-Opinion In o ur opinion, the basic financial statements referred to above present fairly , in all material respects, the financial position of the Costa Mesa Sanitary D istrict as of June 30, 2013 and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generall y accepted in the United St ates of America, as well as the accounting sy stems prescribed b y the State Controller ’s Office and State Regulations governing Special Districts.Emphasis of Matters As discus sed in Note 1eto the basic financial statements, the District incorporated deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure of net position due to the adoption of Gove rnmental Accounting Standards Board’s Statement No. 63, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position ”. The adoption of this standard also provides a new statement of net position format to report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Our opinion is not modified with respect to this matter.As discussed in Note 1e to the basic financial statements, the District has changed its met hod for accounting and reporting certain items previously r eported as assets or liabilities during fiscal ye ar 2012 -2013 due to the earl y adoption ofGovernmental Accounting Standards Board’s Statement No.65, “Items Previously Reported as Assets and Liabi lities”.Our opinion is not modified with respect to this matter.Other Matters Summarized Comparative Information The financial statements include partial prior ye ar comparative information. S uch information does not include all of the information req uired to constitute a presentation in accordance with accounting principles generally a ccepted in the United States of America. A ccordingly , such information should be read in conjunction with the District ’s financial statements for the ye ar ended June 30 ,2012, from which such partial information was derived.We have previously a udited the Costa Mesa Sanitary D istrict’s2012 financial statements, and our report dated November 26, 2012 , ex pressed an unmodified opinion on those audited financial statements . I n our opinion, the partial summarized comparative information presented herein as of and for the ye ar ended June 30,2012, is consistent, in all material respects, with the audited financial statements from which it has been derived.ITEM NO. 11 -3-Other M atters (Continued)Requir ed Supplementary Information Accounting principles generall y accepted in the United States of America require that the management’s discussion and analy sis and schedule of funding progress, identified as required supplementary i n formation in the accompan yi ng table of contents, be presented to supplement the basic financial statements. S uch 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. W e have applied certain limited procedures to the required supplementary information in accordance with auditing standards generall y 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 w ith management’s responses to our inquirie s, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. W e do not express an opinion or provide an y assurance on the required supplementary information because the limited procedures do not pr ovide us with sufficient evidence to express an opinion or provide an y assurance on them.Other Information Our audit was conducted for the purpose of forming an opinion on the District’s basic financial statements as a whole. The I ntroductory Section an d S tatistical S ection are presented for purposes of additional analy sis and are not a required part of the basic financial statements. The I ntroductory Section and S tatistical S ection have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly , we do not express an opinion or provide an y assurance on them.Other Reporting Required by Government Auditing Standards In a ccordance with Government Auditing Standards , we have also issued our report dated January 15,2014,on our consideration of the District ’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an inte gral part of an audit performed in accordance with Government Auditing Standards in considering the District ’s internal control over financial reporting and compliance.Irvine, California January 15, 2014 ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis June 30, 2013 See independent auditors’ report. - 4 - The following discussion and analysis of the financia l performance of the Costa Mesa Sanitary District (the District) provides an overview of the District’s financial activities for the fiscal year ended June 30, 2013. It should be read in conjunction with the financial statements identified in the accompanying table of contents. Financial Highlights Financial highlights during the fiscal year ended June 30, 2013 included:  Total assets of the District exceeded its liabilities as of June 30, 2013 by $58,478,333. Of this amount, $18,684,743 is unrestricted and available to meet the District’s ongoing obligations to its customers and creditors.  Net position of the Solid Waste Fund decreased $6,168 during the year ended June 30, 2013, which was primarily attributab le to a reduction beginning net position in the amount of $197,436 due to a correction of prior year accruals of expe nses, offset by an increase in general property tax revenue of $86,467, an increase in other re venue of $20,879 and savings in salaries and benefits due to temporary vacancies in staffing.  Net position of the Liquid Waste fund incr eased $915,296 during the year ended June 30, 2013, which was primarily attributable to an increas e in permits and inspec tions fees of $57,299 and connection fees of $111,032 due to increased development, a decr ease in liquid waste disposal expenses of $399,141 due to timing of completion of capital improvement projects, and savings in salaries and benefits due to temporary vacancies in staffing, as well as savings in various maintenance and operations accounts. Overview of the Financial Statements This Management’s Discussion and Analysis (MD&A) serves as an introduction to the District’s financial statements. The District’s basic financia l statements are comprised of four components: (1) Statement of Net Position; (2) Statement of Revenues, Expenses, and Changes in Net Position; (3) Statement of Cash Flows; and (4 ) Notes to Financial Statements. The financial statements accompanyi ng this MD&A present the financia l position, results of operations, and changes in cash flow during the fiscal year e nded June 30, 2013. These fina ncial statements have been prepared using accounting methods similar to those used by private sector companies. Statement of Net Position – The Statement of Net Position presents information on the District’s assets (investment in resources) and liabilities (obligations to creditors), with the difference between the two reported as net position. Over time, increases a nd decreases in net position may serve as a useful indicator of whether the financial position of the Dist rict is improving or deteriorating. However, other factors such as changes in economic conditions, population grow th, zoning and new or changed legislation or regulations also need to be considered when establishing financial position. ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 5 - Statement of Revenues, Expenses, and Changes in Net Position – The Statement of Revenues, Expenses and Changes in Net Position presents information showing how th e District’s net position changed during the fiscal year. All of the fiscal y ear’s revenues and expenses are accounted for in the Statement of Revenues, Expenses and Changes in Net Position. This statement measures the results of the District’s operations for the fiscal year and can be used to determine whether the District has successfully recovered all of its costs through its ra tes and other charges. Statement of Cash Flows – The Statement of Cash Flows presents information regarding the District’s use of cash during the year. It re ports cash receipts, cash payments , and net changes in cash resulting from operations, investing, non-capita l financing, and capital and rela ted financing activities. The Statement of Cash flows provides answers to such questions as; where did cash come from, what was cash used for, and what was the change in the cash balance during the reporting period. Notes to Financial Statements – The financial statements also include Notes to Financial Statements that provide important narrative deta ils about the information contained in the financial statements. Information contained in the Notes to Financial Statements is essential to a reader’s full understanding of the data provided in the financial statements. Financial Analysis of the District One of the most important questions asked about the Di strict’s finances is, “Is the District better off or worse off as a result of the year’s activities?” The Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Net Position repor t information about the District in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private-se ctor companies. All of the current fiscal year’s revenues and expenses are taken into account regardless of when cash is received or paid. ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 6 - Statement of Net Position Condensed Statement of Net Position 2013 2012 Change Assets: Current assets $19,862,554$19,090,049$772,505 Capital assets, net 39,793,590 39,792,929 661 Total assets 59,656,144 58,882,978 773,166 Liabilities: Current liabilities 1,141,3311,259,385(118,054) Non-current liabilities 36,480 58,764 (22,284) Total liabilities 1,177,811 1,318,149 (140,338) Net Position: Net investment in capital assets 39,793,59039,792,929661 Restricted for capital outlay -8,116(8,116) Unrestricted 18,684,743 17,763,784 920,959 Total net position $58,478,333 $57,564,829 $913,504 As noted earlier, net position may serve over time as a useful indicator of a government’s financial position. Net position of the District wa s $58,478,333 and $57,564,829 for the fiscal years ended June 30, 2013 and June 30, 2012, respectively. One of the largest portions of the District’s net positio n reflects the District’s net investment in capital assets less any related debt used to acquire those assets th at is still outstanding. Investments in capital assets represent $39,793,590, or 68%, of the total $58,478,333 net position. The Distri ct uses the capital assets to provide services to customers within the District’s area; consequently, these assets are not available for future spending. Unrestricted net position represents 32% of the District’s net position, which comprises assets that may be used to meet the District’s on going obligations to citizens a nd creditors in accordance with the District’s fiscal policies. As of June 30, 2013, net position increased to $58,478,333 from $57,564,829 in the prior fiscal year, or a $913,504 increase. The incr ease in net position is pr imarily attributable to capital improvement projects for which funding is bei ng received in the annual charge, but will not be constructed until future years. ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 7 - Statement of Revenues, Expenses and Changes in Net Position Condensed Statement of Revenues, Expenses and Changes in Net Position 2013 2012 Change Revenues: Operating revenues $10,636,733$10,759,564$(122,831) Non-operating revenues 253,459 826,870 (573,411) Total revenues 10,890,192 11,586,434 (696,242) Expenses: Operating expenses 7,953,5698,303,399(349,830) Depreciation 1,715,9911,607,841108,150 Non-operating expenses 114,692 86,798 27,894 Total expenses 9,784,252 9,998,038 (213,786) Net income/change in net position 1,105,9401,588,396(482,456)Capital contributions 5,000-5,000 Net position, beginning of year 57,564,82955,976,4331,588,396 Restatement of net position (197,436) -(197,436) Net position, end of year $58,478,333 $57,564,829 $913,504 The statement of revenues, expenses and changes in net position shows how the District’s net position changed during the fiscal years. In the case of the District, net pos ition increased by $913,504 and $1,588,396 for the fiscal years ended June 30, 2013 and 2012, respectively. A closer examination of the sources of changes in net position reveals that:  General property tax revenues increased by $86,467 pr imarily attributable to the elimination of redevelopment agencies throughout the State of California and the reallocation of tax increment revenue to other jurisdictions;  Permits and inspections fees increased by $57,299 and connection fees increased by $111,032 due to increased development;  Liquid waste disposal expenses decreased by $399,141 due to timing of completion of capital improvement projects; and  Savings in salaries and benefits were genera ted due to temporary vacancies in staffing. ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 8 - Total District Revenues 2013 2012 Change Operating revenues: Trash assessments $ 4,921,705 $ 5,180,748$(259,043) Sewer assessments 5,133,674 5,117,37716,297 Permits and inspection fees 140,536 83,23757,299 Connection fees 189,262 78,230111,032 Other services 251,556 299,972 (48,416) Total operating revenues 10,636,733 10,759,564 (122,831) Non-operating revenues: Investment income (loss) (144,970)188,000(332,970) Taxes 301,046 214,57986,467 Other revenues 97,383 424,291 (326,908) Total non-operating revenues 253,459 826,870 (573,411) Total revenues $10,890,192 $11,586,434 $(696,242) Some of the more significant changes consisted of the following:  The annual trash assessment decreased $259,043 as a result of the Board’s reduction in rates.  Connection fees increased $111,032 due to increased development.  Investment income decreased $332,970 as a result of a reduction in the market value of the District’s investments.  Other revenue decreased $326,908 as a result of the elimination of one-time revenue received in the prior fiscal year. ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 9 - Total District Expenses 2013 2012 Change Operating expenses: Solid waste disposal $2,365,389$2,366,360$ (971) Liquid waste disposal 1,295,0291,694,170(399,141) Recycling and disposal charges 2,102,0462,080,48721,559 Administration and other 2,030,9851,940,11590,870 Repairs and maintenance 160,120222,267(62,147) Depreciation 1,715,991 1,607,841 108,150 Total operating revenues 9,669,560 9,911,240 (241,680) Non-operating expenses: Loss on disposal of assets 114,692 86,798 27,894 Total non-operating expenses 114,692 86,798 27,894 Total expenses $9,784,252 $9,998,038 $(213,786) Liquid waste disposal expenses decreased by $399,141 due to the timing of completion of capital improvement projects. This was somewhat offset by an increase in depreciation expense of $108,150 due to assets acquired during the pr ior fiscal year for which a full y ear of depreciati on is incurred. Capital Asset Administration Changes in capital assets for the year ended June 30, 2013 were as follows: Balance July 1, 2012 Additions Transfers/ Deletions Balance June 30, 2013 Non-depreciable assets $ 1,149,384 $1,376,130 $(1,213,941) $ 1,311,573 Depreciable assets 89,359,448 1,686,928 (255,399) 90,790,977 Accumulated depreciation (50,715,903)(1,715,991) 122,934 (52,308,960) Total capital assets, net $39,792,929 $1,347,067 $(1,346,406) $39,793,590 ITEM NO. 11 COSTA MESA SANITARY DISTRICT Management’s Discussion and Analysis (Continued) See independent auditors’ report. - 10 - Changes in capital assets for the year ended June 30, 2012 were as follows: Balance July 1, 2011 Additions Transfers/ Deletions Balance June 30, 2012 Non-depreciable assets $ 1,365,298 $ 145,225 $(361,139) $ 1,149,384 Depreciable assets 86,890,237 2,580,695 (111,484) 89,359,448 Accumulated depreciation (49,132,748)(1,607,841) 24,686 (50,715,903) Total capital assets, net $39,122,787 $1,118,079 $(447,937) $39,792,929 At the end of fiscal year 2013 and 2012, the District ’s investment in capital assets were $39,793,590 and $39,792,929 (net of accumulated deprecia tion), respectively, an increase of $661. The investment in capital assets includes land, proper ty rights, subsurface sewer lines, pump stations, buildings and structures, equipment, vehicles a nd construction in progress, etc. Additional information on the District’s capital assets can be found in Note 3 of the Notes to Financial Statements. Long-Term Debt As of June 30, 2013, the Distri ct had no long-term debt. Economic Factors and Next Year’s Budgets Due to the District’s health position in its So lid Waste Fund, the Board of Directors reduced the assessment for trash collection servi ces from $228 per year to $216 per y ear. There is no change in the sewer rate. The District is anticipating slightly hi gher property tax revenue due to the dissolution of the redevelopment agencies throughout the State. Ne w programs to be funded during the year ending June 30, 2014 include the inspection of all 4,560 manhole c overs to ensure their st ructural integrity is meeting industry standards, a Solid Waste Academy wh ere residents will learn all about the solid waste industry, and events celebr ating the District’s 70 th anniversary. The budget also includes funding to purchase a new utility truck with a crane capable of removing the District’s larg est pumps. Funding for capital improvement projects has reduced from $2,170,000 to $1,810,000. Request for Information The financial report is designed to provide our Board of Directors, citizens, customers, ratepayers, investors and creditors with a ge neral overview of the District’s finances and to demonstrate the District’s accountability for the funds it receives. If you have questions about the report or need additional financial information, contact the Di strict’s Finance Department at 628 W. 19 th Street, Costa Mesa, California 92627. ITEM NO. 11 -11 -BASIC FINANCIAL ST AT EMENTS ITEM NO. 11 Solid Liquid Waste Waste ASSETS:CURRENT ASSETS:Cash and cash equivalents (Note 2)2,403,433 $ 5,045,850 $ Investments (Note 2)3,729,147 7,829,100 Accounts receivable 45,831 3,402 Interest receivable 8,061 16,899 Assessments receivable 169,785 193,558 Inventory - 67,274 Due from other governments - - TOTAL CURRENT ASSETS 6,356,257 13,156,083 NONCURRENT ASSETS:Capital assets (Note 3):Non-depreciable - 1,311,573 Depreciable, net of accumulated depreciation 30,668 38,451,349 TOTAL NONCURRENT ASSETS 30,668 39,762,922 TOTAL ASSETS 6,386,925 52,919,005 LIABILITIES:CURRENT LIABILITIES:Accounts pay able 625,385 306,730 Accrued liabilities 15,420 33,741 Deposits payable - 100,000 Unearned revenue 31,455 - Due to other governments - - Compensated absences 10,010 18,590 TOTAL CURRENT LIABILITIES 682,270 459,061 NON-CURRENT LIABILITIES:Compensated absences 5,749 11,260 Other post-employment benefits (Note 5)6,458 13,013 TOTAL NON-CURRENT LIABILITIES 12,207 24,273 TOTAL LIABILITIES 694,477 483,334 NET POSITION:Net investment in capital assets 30,668 39,762,922 Restricted for capital outlay - - Unrestricted 5,661,780 12,672,749 TOTAL NET POSITION 5,692,448 $ 52,435,671 $ See independent auditors' report and notes to financial statements.- 12 -COSTA MESA SANITARY DISTRICT COMBINED STATEMENT OF NET POSITION June 30, 2013 (With prior year data for comparison only)ITEM NO. 11 Other Enterprise Fund 2013 2012 137,118 $ 7,586,401 $ 7,238,957 $ 212,751 11,770,998 11,029,560 - 49,233 26,220 345 25,305 38,598 - 363,343 371,138 - 67,274 33,359 - - 352,217 350,214 19,862,554 19,090,049 - 1,311,573 1,149,384 - 38,482,017 38,643,545 - 39,793,590 39,792,929 350,214 59,656,144 58,882,978 - 932,115 985,264 - 49,161 67,656 - 100,000 100,000 - 31,455 62,596 - - 43,869 - 28,600 - - 1,141,331 1,259,385 - 17,009 38,979 - 19,471 19,785 - 36,480 58,764 - 1,177,811 1,318,149 - 39,793,590 39,792,929 - - 8,116 350,214 18,684,743 17,763,784 350,214 $ 58,478,333 $ 57,564,829 $ - 13 -To tals ITEM NO. 11 Solid Liquid Waste Waste OPERATING REVENUES:Trash assessments 4,921,705 $ -$ Sewer assessments - 5,133,674 Permits and inspection fees - 140,536 Connection fees - 189,262 Other services 101,634 4,322 TOTAL OPERATING REVENUES 5,023,339 5,467,794 OPERATING EXPENSES:Solid waste disposal 2,365,389 - Liquid waste disposal - 1,295,029 Recy cling and disposal charges 2,102,046 - Administration and other 687,230 1,343,755 Repairs and maintenance 16,545 143,575 Depreciation 8,976 1,707,015 TOTAL OPERATING EXPENSES 5,180,186 4,489,374 OPERATING INCOME (LOSS)(156,847) 978,420 NONOPERATING REVENUES (EXPENSES):Investment income (loss)(45,884) (95,862) Taxes 301,046 - Other revenues 92,953 4,430 Loss on disposal of assets - (114,692) TOTAL NONOPERATING REVENUES (EXPENSES)348,115 (206,124) INCOME BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS 191,268 772,296 CAPITAL CONTRIBUTIONS AND TRANSFERS:Capital contributions - 5,000 Transfers in - 138,000 Transfers out - - TOTAL CAPITAL CONTRIBUTIONS AND TRANSFERS - 143,000 CHANGES IN NET POSITION 191,268 915,296 NET POSITION - BEGINNING OF YEAR, AS ORIGINALLY REPORTED 5,698,616 51,520,375 RESTATEMENT OF NET POSITION (NOTE 7)(197,436) - NET POSITION - BEGINNING OF YEAR, AS RESTATED 5,501,180 51,520,375 NET POSITION - END OF YEAR 5,692,448 $ 52,435,671 $ See independent auditors' report and notes to financial statements.- 14 -COSTA MESA SANITARY DISTRICT COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the y ear ended June 30, 2013 (With prior y ear data for comparison only )ITEM NO. 11 Other Enterprise Fund 2013 2012 -$ 4,921,705 $ 5,180,748 $ - 5,133,674 5,117,377 - 140,536 83,237 - 189,262 78,230 145,600 251,556 299,972 145,600 10,636,733 10,759,564 - 2,365,389 2,366,360 - 1,295,029 1,694,170 - 2,102,046 2,080,487 - 2,030,985 1,940,115 - 160,120 222,267 - 1,715,991 1,607,841 - 9,669,560 9,911,240 145,600 967,173 848,324 (3,224) (144,970) 188,000 - 301,046 214,579 - 97,383 424,291 - (114,692) (86,798) (3,224) 138,767 740,072 142,376 1,105,940 1,588,396 - 5,000 - - 138,000 - (138,000) (138,000) - (138,000) 5,000 - 4,376 1,110,940 1,588,396 345,838 57,564,829 55,976,433 - (197,436) - 345,838 57,367,393 55,976,433 350,214 $ 58,478,333 $ 57,564,829 $ - 15 -Totals ITEM NO. 11 Solid Liquid Waste Waste CASH FLOWS FROM OPERATING ACTIVITIES:Receipts from customers 5,099,700 $ 5,794,674 $ Pay ments to suppliers (4,600,276) (2,570,531) Pay ments to employees (334,374) (788,936) NET CASH PROVIDED BY OPERATING ACTIVITIES 165,050 2,435,207 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:Taxes received 301,046 - Cash received from other funds - 138,000 Cash paid to other funds - - NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES 301,046 138,000 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:Acquisition and construction of capital assets - (1,844,117) Proceeds from sale of assets - 17,773 NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES - (1,826,344) CASH FLOWS FROM INVESTING ACTIVITIES:Interest on cash and investments 42,318 89,611 Increase (decrease) in investments (367,008) (630,739) NET CASH USED BY INVESTING ACTIVITIES (324,690) (541,128) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 141,406 205,735 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,262,027 4,840,115 CASH AND CASH EQUIVALENTS - END OF YEAR 2,403,433 $ 5,045,850 $ See independent auditors' report and notes to financial statements.COSTA MESA SANITARY DISTRICT COMBINED STATEMENT OF CASH FLOWS For the year ended June 30, 2013 (With prior year data for comparison only)- 16 -ITEM NO. 11 Other Enterprise Fund 2013 2012 145,600 $ 11,039,974 $ 10,826,475 $ - (7,170,807) (6,959,134) - (1,123,310) (1,063,008) 145,600 2,745,857 2,804,333 - 301,046 214,579 - 138,000 - (138,000) (138,000) - (138,000) 301,046 214,579 - (1,844,117) (2,364,781) - 17,773 - - (1,826,344) (2,364,781) 1,857 133,786 195,838 (9,154) (1,006,901) (1,522,170) (7,297) (873,115) (1,326,332) 303 347,444 (672,201) 136,815 7,238,957 7,911,158 137,118 $ 7,586,401 $ 7,238,957 $ (Continued)- 17 -To tals ITEM NO. 11 Solid Liquid Waste Waste RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:Operating income (loss)(156,847)$ 978,420 $ Adjustments to reconcile operating income to net cash provided by operating activities:Depreciation 8,976 1,707,015 Other revenues 92,953 4,430 Changes in assets and liabilities:(Increase) decrease in accounts receivable (19,611) (3,402) (Increase) decrease in assessments receivable 34,160 (26,365) (Increase) decrease in inventory - (33,915) (Increase) decrease in due from other governments - 352,217 Increase (decrease) in accounts pay able 230,762 (481,347) Increase (decrease) in accrued liabilities 803 (19,298) Increase (decrease) in unearned revenue (31,141) - Increase (decrease) in due to other governments - (43,869) Increase (decrease) in compensated absences 5,047 1,583 Increase (decrease) in OPEB liabilities (52) (262) To tal adjustments 321,897 1,456,787 NET CASH PROVIDED BY OPERATING ACTIVITIES 165,050 $ 2,435,207 $ NONCASH CAPITAL FINANCING ACTIVITIES:Capital assets of $5,000 were acquired through contributions from developers.NONCASH INVESTMENT ACTIVITIES:Fair market value of investments decreased $265,463.See independent auditors' report and notes to financial statements.(CONTINUED)For the year ended June 30, 2013 (With prior year data for comparison only)COSTA MESA SANITARY DISTRICT COMBINED STATEMENT OF CASH FLOWS - 18 -ITEM NO. 11 Other Enterprise Fund 2013 2012 145,600 $ 967,173 $ 848,324 $ - 1,715,991 1,607,841 - 97,383 424,291 - (23,013) 49,618 - 7,795 (44,902) - (33,915) 4,579 - 352,217 (327,017) - (250,585) 219,963 - (18,495) 13,299 - (31,141) (35,079) - (43,869) 43,280 - 6,630 (19,649) - (314) 19,785 - 1,778,684 1,956,009 145,600 $ 2,745,857 $ 2,804,333 $ To tals - 19 -ITEM NO. 11 -20 -THIS PAGE INTEN TIONALL YLEFT BLANK ITEM NO. 11 See independent auditors’ report.-21-COST A MESA SANIT AR Y DI STRICT NOTES TO FINANCIAL ST AT EMENTS June 30, 2013 1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES:a.The Organization:The Costa Mesa Sanitary District (the District) was incorporated in February1944 pursuant to Division VI , Part 1 of the Health and Safet y Code of the State of California (sometimes referred to as the Sanitary D istrict Act of 1923). A t the present time, the boundaries o f the District extend into the Cities of Costa Mesa and Newport Beach as well as unincorporated areas within the County of Orange.b.Uniform Accounting S ys tem:The accounts of the District are organized on the basis of funds, each of which is considered a separate accounting entity . The operations of each fund are accounted for with a separate set of self -balancing accounts that comprise its assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund equity , revenues and exp enses. This sy stem permits separate accounting for each established fund ,for purposes of comply ing with : (a )applicable legal provisions, (b)Board of Director ’s ordinances and resolutions and (c)other requirements. Also, the accounts have been maintaine d in accordance with the California State Controller ’s uniform sy stem of accounts.c.Basis of Presentation:The accounts of the District are presented as enterprise fund s. A n enterprise fund is a p roprietary t ype fund used to account for operations (a)that are financed and operated in a manner similar to private business enterprises -where the intent of the governing body i s that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily t hrough user charges; or (b)where the governing body h as decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy , management control , accountability or other purposes.The District reports the following major enterprise funds:Solid Wa ste -This fund is used to account for the collection of trash charges, the cost of managing the refuse collection and recy cling processes, and the cos t of contract services provided to the District.Liquid Wa ste -This fund is used to account for the collection of sewer charges, the cost of construction, maintaining sewer lines and pump stations, and the cost of contract services provided to the Distri ct. T his fund also account s for the collection of charges paid by o r on behalf of the propert y owner for the construction of street sewers, and cost of acquisition, construction, and reconstruction of sewage facilities within the District.ITEM NO. 11 COSTA MES A SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-22-1.SUMMAR Y OF SI GNI FI CANT A CCOUNTING POLICIES (CONTINUED):c.Basis of Presentation (Continued):Other Enterprise Fund:The o ther e nterprise fund accounts for the accumulation of reserves for the purchase of new or replacement vehicles, equipment and computers. R eve nues are recorded as charges for rental of assets to the Solid and Liquid W aste Funds.d .Measurement Focus and Basis of Accounting:Measurement focus is a term used to describe “which” transactions are recorded within the various financial statements. Basis of accounting refers to “when” transactions are recorded regardless of the measurement focus applied. T he accompan yi ng financial statements are reported using the economic resources measurement focus, and the accrual basis of accounting. Under the economic resources measurement focus all assets , deferred outflows of resources, liabilities and deferred inflows of resources (whether current or noncurrent) associated with these activities are included on the Statement of Net Position . T he St atement of Revenues, Expenses and Changes in Net Position present increases (revenues) and decreases (expenses)in total net position. Under the accrual basis of accounting, r evenues are recorded when earned and expenses are recorded when a liability i s incurred, re gardless of the timing of related cash flows.e.New Accounting Pronouncements:Implemented:In f iscal year 2012 -2013, the District implemented Governmental Accounting Standards Board (GASB) Statement No.63, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position”. T his statement incorporates deferred outflows of resources and deferred inflows of resources, as defined by G ASB Concepts Statement No.4, “Elements of Financial Statements”into the definition s of the required components of the residual measure of net position, formerly n et assets. T his statement also provides a new Statement of Net Position format to report all assets, deferred outflows of resources, liabilities, deferred inflows of resources , and net position.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-23-1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES (CONTINUED):e.New Accounting Pronouncements (Continued):Implemented (Continued):In fiscal year 2012 -2013, the District earl y implemented GASB Statement No. 65, “Items Previously Reported as Assets and Liabilities”. T his statement established accounting and financial reporting standards that reclassify , as deferred outflows of resources or deferred inflows of resources, certain items that were previously r eported as assets and lia bilities. The implementation of this statement did not result in any r eclassification of assets or liabilities due to deferred outflows of resources or deferred inflows of resources.Pending Accounting Standards:GASB has issued the following statements which may i mpact the District’s financial reporting requirements in the future:GASB 66 -“Technical Corrections ,an amendment of GASB Statement No. 10 and Statement No.62”,effective for period s beginning after December 15,2012.GASB 67 -“Financial R eporting for Pension Plans, an amendment of GASB Statement No.25”, effective for the fiscal years beginning after June 15,2013.GASB 68 -“Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No. 27”, effective for the fiscal y ear sbeginning after June 15, 2014.GASB 69 -“Government Combinations and Disposals of Government Operations”, effective for periods beginning after December 15,2013.GASB 70 -“Accounting and Financial Reporting for Nonexchange Financial Guarantees”, ef fective for the periods beginning after June 15, 2013.f.Deferre d Outflows/Inflows of Resources:In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial s tatement element, deferr ed outflows of re sour ces , represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. T he District does not have deferred ou tflows of resources .ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-24-1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES (CONTINUED):f.Deferre d Outflows/Inflows of Resources (Continued):In addition to liabilities, the statement of net position will sometimes report a separate section for deferred in flows of resources. T his separate financial statement element, deferr ed inflows of re sour ces , represents an acquisition of net position that applies to a future period(s) and will not be recognized as an inflow of resources (revenue) until that time. T heDistrict does not have deferred inflows of resources.g.Net Position Flow As sumption:Sometimes the District will fund outlay s for a particular purpose from both restricted (e.g.,restricted bond or grant proceeds) and unrestricted resources. I n order to calculate the amounts to report as restricted -net position and unrestricted -net position, a flow assumption must be made about the order in which the resources are considered to be applied.It is the District’s policy t o consider restricted -net position to have been depleted before unrestricted -net position is applied.h .Operating Revenues and Expenses:Operating revenues, such as charges for services (solid and liquid waste ),result from exchange transactions associated with the principal activity o f the District. Ex change transactions are those in which each party r eceives and gives up essentiall y equal values. Nonoperating revenues, such as property t axes and assessments, and investment income, result from nonexchange transactions or anci llary a ctivities in which the District gives (receives) value without directly receiving (giving) equal value in exchange .Operating expenses include the cost of services, administrative expenses and depreciation on capital assets.i.Accounts Receivabl e:Management has evaluated the accounts receivable and believes they are all collectible. Management evaluates all accounts receivable and if it is determined that they are uncollectible they are written of f as a bad debt expense.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-25-1.SUMMAR Y OF SIGN IF ICANT ACCOUNTING POLICIES (CONTINUED):j.Capital Assets:Capital assets purchased by t he District are capitalized at cost. D ata reflected in the District’s capital asset records include estimates of original cost as determined by knowledgeable Distr ict personnel. C ontributed capital assets, consisting primaril y of donated subsurface lines dedicated to the District by c ontractors, or other governmental agencies are recorded as contributed capital assets, which increases the net position of the Distri ct. S uch contributed capital assets are recorded at their fair market value at the time of donation.Any s ingle item purchased by t he District with a cost greater than or equal to $5 ,000 and an estimated useful life of greater than one year is capitalize d and depreciated. D epreciation is charged to operations using the straight -line method based on the estimated useful life of the asset. The estimated useful lives a r e as follows:Buildings 2 0 -50 ye ars Improvements 20 y ears Subsurface sewer lines 60 y ears Equipment 5 -20 y ears Ve hicles 5 -10 y ears Other 5 -20 y ears k .Capital Contributions:Capital contributions represent cash and capital asset additions contributed to the District by propert y owners or real estate developers desiring services th at require capital expenditures or capacity commitment.l.Property T axes:The Orange County A ssessor ’s Of fice assesses all real and personal property w ithin the County each ye ar . T he Orange County T ax Collector ’s O ffice bills and collects the District ’s s hare of propert y taxes and assessments. T he Orange County T reasurer ’s O ffi ce remits current and delinquent property t ax collections to the District throughout the ye ar . P ropert y taxes in California are levied in accordance with Article XIIIA o f the S tate Constitution at 1% of county wide assessed valuations. T his levy i s allocated pursuant to state law to the appropriate units of local governments.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-26-1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES (CONTINUED):l.Property T axes (Continued):Property taxes receivable at ye ar -end are related to property t axes collected by t he Orange County T ax Collector which have not been credited to the District’s cash balance as of June 30. The propert y tax calendar is as follows:Lien Date:January 1 Lev y Date:July 1 Due Dates:First Installment -November 1 Second Installment -March 1 Collection Dates:First Installment -December 10 Second Installment -April 10 m.Maintenance Costs:All expen ses for maintenance and repairs of property , including renewals of minor items, are charged to the appropriate maintenance expense accounts. A b etterment or replacement of a unit of propert y is accounted for as an addition and retirement of capital assets.n .Compensated Absences:Accumulated unpaid vacation and o ther employ ee benefit amounts are accrued when vested. At June 30, 2013 , compensated absences pay able amount ed to $45,609 , the total of which is considered a long -term liability .Compen sated absences are comprised of unpaid vacation leave which is accrued when benefits are full y vested. The District’s liability for compensated absences is determined annually .Changes to compensated absences for 201 3 , were as follows:Balance Balance Current Long -Te rm June 30,2012 Earned Ta ken June 30, 2013 PortionPortion Compensated a bsences $38,979 $34,956 $(28,326 )$45,609 $28,600 $17,009 ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-27-1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES (CONTINU ED):o .Claims and Judgments:When it is probable that a claim liability h as been incurred at ye ar -end, and the amount of the loss can be reasonabl y estimated, the District records the estimated loss, net of an y insurance coverage under its participatio n in the J oint P ower I nsurance A uthority p rogram. At June 30, 2013 , in the opinion of the District’s legal counsel, the District had no material claims which would require loss provisio n in the financial statements. S mall dollar claims and judgments are recorded as expen s es when paid.p .Investments:Investments are stated at fair value (quoted market price or the best available estimates thereof). N et increase (decrease) in the fai r value of investments, which consists of realized gains (losses) and the unrealized gains (losses), is shown as investment income (loss)in the statement of revenues, expenses and changes in net position .q .Cash and Cash Equivalents:For purposes of t he statement of cash flows, cash equivalents are defined to include an investment in the District’s cash and investment pool, as well as any d irect investment in short -term, highl y liquid investments that are both readily c onvertible to known amounts of ca sh or so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and have an original maturity d ate of three months or less. Investments in United States Go vernment S ponsored Agency S ecurities are not considered to be cash equivalents as defined above and, therefore, are excluded from the statement of cash flows.r.Prior Ye ar Data:Selected information regarding the prior year has been included in the accompany ing financial statements. This info rmation has been included for comparison purposes only a nd does not represent a complete presentation in accordance with generall y accepted accounting principles. Accordingl y, such information should be read in conjunction with the District ’s prior ye ar fi nancial statements, from which this selected financial data was derived.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-28-1.SUMMAR Y OF SIGNIFICANT A CCOUNTING POLICIES (CONTINUED):s.Use of Estimates:The preparation of financial statements in conformity w ith accounting principles generally accep ted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly , actual results could dif fer from those estimates.2.CASH AND INVESTMENTS:Cash and Investments:Cash and investments as of June 30, 2013 are reported in the accompany ing combined statement of net position a s follows:Cash and cash equivalents $7 ,586,401 Investments 11 ,770,99 8 To tal $19,357,399 Cash and investments as of June 30, 201 3 consisted of the following:Demand Deposits:Cash deposits $164,76 6 Petty cash 700 To tal demand deposits 165,46 6 Investments:United States Government Sponsored Agency Securities 11 ,770,999 California Local Agency I nvestment Fund (LAIF)7,217,123 Money Market Mutual Funds 203,811 To tal investments 19,191,933 To tal cash and investments $19,357,399 ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-29-2.CASH AND INVESTMENTS (CONTINUED):Investments Authorized by the Ca lifornia Government Code and the District’s Investment Policy:The table below identifies the investment ty pes that are authorized for the District by the California Government Code (or the District’s investment policy , where more restrictive). T he table also identifies certain provisions of the California Government Code (or the District’s investment policy , where more restrictive) that address interest rate risk, credit risk, and concentration of credit risk.MaximumMaximum Maximum Percentage Investment Authorized Investment Ty pe Maturity of Portfolio in One Issuer United States Tr easury Obligations 5 y ears NoneNone Federal Agencies (United States Government Sponsored Agency Securities )5 y ears NoneNone Banker ’s A cceptances 180 day s25 %1 5 %Commercial Paper 270 day s2 5%10%Negotiable Certificates of Deposit 5 y ears 25 %10%Medium -Te rm Corporate Notes 5 y ears 2 0 %10%Money Market Mutual Funds 5 y ears 20%None Local Agency I nvestment Fund (LAIF)N/A None $ 40 million Disclosur es Relating to Inter est Rate Risk:Interest rate risk is the risk that changes in market interest rates will adversely a ffect the fair value of an investment. G enerally , the longer the maturity of an investment the greater the sensitivity o f its fair value to changes in market interest rates. O ne of the way s that the District manages its exposure to interest rate risk is by p urchasing a combination of shorter term and longer term investments an d by t iming cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity e venl y over time as necessary t o provide the cash flow and liquidity needed for operations.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-30-2.CASH AND INVESTMENTS (CONTINUED):Disc losur es Relating to Inter est Rate Risk (Continued):In formation about the sensitivity o f the fair values of the District’s investments to market interest rate fluctuations is provided by t he following table that shows the distribution of the District’s in vestments by maturityas of June 30, 2013 .Remaining Maturity (in Months)12 M onths 13-2425 -60 Investment T ype or Less MonthsMonths To tal United S tates Government Sponsored Agency Securities $-$-$11 ,770,999 $11 ,770,999 Local Agency Investment Fund 7,217,123 --7,217,123 Money Market Mutual Funds 203,81 1 --203,81 1 $7,420,934 $-$11 ,770,999 $19,191,933 Disclosur es Relating to Cr edit Risk:Generally , credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. T his is measured by t he assignment of a rating by a n ationally recognized statistical rating organization. P resented below is the California Government Code, the District’s investment policy a nd the actual rating by S tandards and Poor as of ye ar end for each investment ty pe:Minimum Legal Investment T ype To tal Rating AAA AA+Unrated United S tates Government S ponsored A gency Sec urities $11 ,770,999 N/A $-$11 ,770,999 $-Local Ag ency Investment Fund 7,217,123 N/A --7,217,123 Money Market Mutual Funds 203,81 1A 203,81 1 --$19,191,933 $203,81 1$11 ,770,999 $7,217,123 ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-31-2.CASH AND INVESTMENTS (CONTINUED):Concentration of Cr edit Risk:The investment policy o f the District contains no limitations on the amount that can be invested in any one issuer bey ond that stipulated by t he California Government Code. I nvestments in an y one issuer that re presents 5% or more of total District’s investments are as follows:Reported Percent of Issuer Investment T ype Amount Investment Federal Home Loan Bank United S tates Government Sponsored Agency Securities $3,919,220 20.42 %Federal National Mortgage United S tates Government Sponsored Association Agency Securities 4,909,539 25.58 %Federal Home Loan Mortgage United S tates Government Sponsored Corporation Agency Securities 1,961,170 10.22 %Federal Farm C redit Bank United S tates Government Sponsored Agency Securities 981,070 5.1 1%Custodial Cr edit Risk:Custodial credit risk for deposits is the risk that, in the event of the failure of a depository f inancial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside part y. The custodial credit risk for investments is the risk that, in the event of the failure of the counterpart y (e.g., 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 and the District ’s investment policy d o not contain legal or policy r equirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by s tate or local governmental units by p ledging securities in an undivided collateral pool held by a d epository r egulated under state law (unless so waived by t he governmental unit). The market value of the pledged securities in the collateral pool must equal at leas t 110% of the total amount deposited by t he public agencies. California law also allows financial institutions to secure District deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. The District’s de posits were collateralized as required b y California Law.Investment in S tate Investment Pool:The District is a voluntary participant in the Local Agency I nvestment Fund (L AI F) that is regulated by C alifornia Government Code Section16429 under the over sight of the Tr easurer of the State of California. T he fair value of the District’s investment in this pool is reported in the accompan yi ng financial statements at amounts based upon the District’s pro -rata share of the fair value provided by L AI F for the entire LA IF portfolio (in relation to the amortized cost of that portfolio). T he balance available for withdrawal is based on the accounting records maintained by LA IF , which are recorded on an amortized cost basis.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-32-3.CAPI TA L A SSETS:Changes in capita l assets for the y ear ended June 30, 2013 are as follows:Balance at Balance at July 1, 2012 Additions Deletions June 30, 2013 Capital assets, not being depreciated:Land $979,655$-$-$979,655 Property rights 4,025 --4,025 Construction in progress 165,7041,376,130(1,213,941 )327,893 To tal capital assets, not being depreciated 1,149,3841,376,130(1,213 ,941 )1,311,573 Capital assets, being depreciated:Subsurface sewer lines 84,381,1921,215,431(1,413 )85,595,210 Building and improvements 3,895,87020,634 -3,916,504 Equipment 821,192 11 6,368 (160,202)777,358 Ve hicles 261,194334,49 5 (93,784 )501,905 To tal capital assets, being depreciated 89,359,4481,686,92 8(255,399 )90,790,97 7 Less accumulated depreciation :Subsurface sewer lines (50,083,055 )(1,498,805 )1,345(51,580,515 )Building and improvements (249,235 )(78,178 )-(327,413 )Equipment (226,515 )(92,372 )61,411(257,476 )Ve hicles (157,098 )(46,636 )60,178(143,556 )To tal accumulated depreciation (50,715,903 )(1,715,991 )122,934(52,308,960 )To tal capital assets being depreciated, net 38,643,545 (29,06 3)(132,465)38,482,017 To tal capital assets, net $39,792,929$1,347,06 7$(1,346,406 )$39,793,5 90 Depreciation expense was charged to functions of the District as follows:Solid waste $8,976 Liquid waste $1,707,015 ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-33-4 .PENSI ON PLAN:a.Plan Description:The Costa Mesa Sanitary District contributes to the California Public Employ ees Retirement Sy stem (CalPERS), a cost -sharing multiple -empl oy er public employ ee defined benefit pension plan. I t participates in the 2% at 55 (Tier I) and 2% at 60 (Tier II) Risk Pools of CalPERS, effective July 1 , 2004 and October 1, 2011, respectivel y.The Miscellaneous 2% at 62 Risk Pool was created by Califor nia Employ ees’ Pension Reform Act (PEPRA) as of January 1,2013 and is open to all new employ ees who do not qualify f or the Miscellaneous 2% at 55 Risk Pool. CalPERS provides retirement and disability b enefits, annual cost -of-living adjustments, and death benefits to plan members and beneficiaries. CalPERS acts as a common investment and administrative agent for participating public agencies within the State of California. B enefit provisions and all other requirements are established by s tate statute and District ordinance. C opies of CalPERS annual financial report may b e obtained from their executive office: 400 P Street, Sacramento, CA 95814. b.Funding Policy :The contribution rate for plan members of both Tier I and Tier II is 7% of their covere d salary , of which, the District pays 7% for Tier I and 0% (zero percent) for Tier II on behalf of the employ ee. A lso, the District is required to contribute the actuarially d etermined remaining amounts necessary to fund the benefits for its members.Acti ve plan members of Miscellaneous 2% at 62 Risk Pool are required to contribute 6.25% of their annual covered salary . T he required employ er contribution rate of the fiscal year ended June 30, 2013 for the Miscellaneous 2% at 62 Risk Pool was 6.25%. P EPRA does not allow the District to pay a ny portion of the employ ee required contribution on behalf of the employ ee. The required employ er contribution rates are equal to the annual pension costs (APC) percentage of pay roll for fiscal ye ars 2013, 2012,and 201 1 as noted below. T he contribution requirements of the plan members are established by State statute, and the employ er contribution rate is established and may be amended by CalPERS. For fiscal ye ars 2013, 2012,and 2011 , the District’s annual employ er c ontributions for the CalPERS plan were equal to the District’s required and actual contributions for each fiscal y ear as follows:Three -Ye ar T rend Information for CalPERS Annual Fiscal Pension Cost Percentage Net Ye ar (APC) T ot al of APC Pension Ended Ti ers I & II Contributed Obligation 6/30/1 1$108,525100%$-6/30/12 104,790100%-6/30/13 91,941100%-ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-34-4.PENSI ON PLAN (CONTINUED):c.Funding Status:As of July 1 , 2005, the District misc ellaneous plan became part of a CalPERS Risk Pool for employ ers with less than 100 active plan members. T he risk pool combines the assets and liabilities across employers of the same risk pool to provide a method to spread the risk of uncertain gains and losses over a large base of members. A s part of a cost -sharing multiple -employ er defined benefit plan, disclosure of the schedule of funding progress is not required as information is not specific to the District.5.OTHER POST -EMPL OYMENT BENEFITS (OPEB)PL AN :a.Plan Description :Eligibility :The District, through an agent multiple -employ er plan, provides post -employ ment health care benefits. T he plan is part of the Public Agenc y portion of the California Employ ers’ Retiree Benefit Trust Fund (CERBT), an agent multiple -employ er plan administered by C alifornia Public Employ ees’ Retirement Sy stem (CalPERS), which acts as a common investment and administrative agent for participating public employ ers within the State of California. T he following require ments must be satisfied in order to be eligible for lifetime post employ ment medical benefits: (1) Attainment of age 50, and 5 y ears of CalPERS service (or disability ), and (2) Retirement from CalPERS and from the District (the District must be the last e mploy er prior to retirement). C urrently , there are six retired employ ees who have met these eligibility requirements and four of which have elected to receive the benefits. T he total pay ments made for these benefits for retired employ ees for the y ear end ed June 30, 201 3 were $17,000 .Membership in the OPEB plan consisted of the following members as of June 30 , 2013:Active plan members 13 Retirees and beneficiaries receiving benefits 4 Separated plan members entitled to but not ye t receiv ing benefits 2 Total plan membership 19 ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-35-5.OTHER POST -EMPL OYMENT BENEFITS (OPEB)PL AN (CONT INUED):a.Plan Description (Continued):Benefits:The District offers post employ ment medical benefits to retired employ ees who satisfy t he eligibili ty r ules. R etirees may e nroll in an y plan available through the District’s CalPERS medical plan. T he contribution requirement of the Plan members and the District are established and may b e amended by t he Board of Directors. A s a member of the CalPERS m edical plan the District is required to participate in its post employ ment medical benefit plan. The District currentl y pay s the CalPERS minimum required employ er contribution on an “Unequal” basis ($115 per month in 201 3 , Equal being $11 5 , and indexed to medical CPI p lus amortized factor, becoming equal in 2024). The District currentl y has one retiree with a special agreement receiving $350 per month. T he special agreement was a Board approved policy issued to maintain the benefits offered to former Cit y of Costa Mesa employ ees accepting to become District emplo ye es.b.Funding Policy :The District is required to contribute the Annual Required Contribution of the Employ er (ARC), an amount actuarially d etermined in accordance with the parameters of GASB Statement No. 45. T he ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each ye ar and amortize any u nfunded actuarial liability (or funding excess) over a period not to exceed twenty -five ye ars. T he current ARC rat e is 1.8 % of the annual covered pay roll.The District will pay 1 00% of the cost of the post employ ment benefit plan. T he District is currentl y funding the plan on a pay -as -you -go basis, through fiscal ye ar 2013 and records a liability f or the difference between pay -as -you -go and the ac tuariall y determined ARC cost. c.Annual OPEB Cost and Net OPEB Obligation:The District’s annual OPEB cost (expense) is calculated based on the annual required contribution of the employ er (ARC), an am ount actuarially d etermined in accordance with parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each ye ar and to amortize any u nfunded liabilities of the plan over a period not to exceed twenty -five ye ars .ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-36-5.OTHER POST -EMPL OYMENT BENEFITS (OPEB)PL AN (CONT INUED):c.Annual OPEB Cost and Net OPEB Obligation (Continued):The following table shows the component of the District’s annual OPEB costs for the ye ar, the amount actuall y contributed to the plan, and changes in the District’s net OPEB obligation .Annual required contribution (ARC)$17 ,000 Interest on Net OPEB obligation 1,38 4 Adjustment to ARC (1,698 )Annual OPEB cost 16,68 6 Contribution made, net of adjustment (17,000 )De crease in Net OPEB obligation (31 4 )Net OPEB obligation at June 30, 2012 19,785 Net OPEB obligation at June 30, 2013 $19,47 1 d .Trend Information:The District’s annual OPEB cost, the actual contribution, the percentage of annual OPEB costs contributed to the plan, and the net OPEB obligation for the two ye ars ended June 30, 2013 were as follows:Actual Percentage Fiscal Annual Contribution of Annual Net Ye ar OPEB (Net of OPEB Costs OPEB Ended Cost Adjustments)Contributed Obligation 6/30/12 $21,000$1,215 5.79%$19,785 6/30/13 $16,68 6$17,000101.88%$19,47 1 e.Funded Status and Funding Progress:As of June 30 ,20 12 , the first actuarial valuation date, the plan was zero percent funded. T he actuarial a ccrued liability (AAL) f or benefits was $131 ,000 , and the actuarial value of assets (AVA)was zero, resulting in an unfunded actuarial accrued liability (U A AL) of $131 ,000 . The covered pay roll (annual payroll of active employees covered by the plan) was $8 9 7 ,000 and the ratio of the UAAL to the covered pay roll was 14.60 %.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-37-5.OTHER POST -EMPL OYMENT BENEFITS (OPEB)PL AN (CONT INUED):f.Actuarial Methods and Assumptions:Projections of benefits for financial reporting purposes are based on the substantive plan and include the ty pes of benefits provided at the time of each valuation. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short -term volatility i n actuarial accrued liabilities and the actuaria l value of assets consistent with the long -term perspective of the calculations. A ctuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality , and the healthcare cost trend. A mounts determined regarding the funded status of the plan and the annual required contributions of the District are subject to continual revision as actual r esults are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary i nformation following the notes to basic financial statements, presents multi -year trend informat ion about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.In t he June 30, 2012 actuarial investment valuation, the entry a ge normal cost method was used. T he act uarial assumptions included an inflation rate of 3.0% per annum, an investment return of 4% per annum, for fiscal ye ar 2011 -12 and 7% per annum after 2011 -12, a projected salary increase of 3.25% per annum and a health inflation rate of 8.5% per annum grad ed down in approximately o ne-half percent increments to an ultimate rate of 5%. T he District is using the level percentage of pay roll method to allocate amortization cost by y ear and a closed 30 ye ar period for the initial unfunded actuarial accrued liabi lity (fiscal ye ar 2011 -12) and a closed 25 ye ar amortization (beginning fiscal year 2012 -2013) for an y residual unfunded actuarial accrued liabilities.6 .JOINT POWERS I NSURANCE AUTHORITY:The District is a member of the Special District Risk Management Authority .Description of the Authority:The Authority i s a risk -pooling self -insurance authority , created under provisions of California Government Code Section 6500 et. seq. T he Authority ’s p urpose is to arrange and administer programs of insurance fo r the pooling of self -insured losses and to purchase excess insurance coverage.ITEM NO. 11 COSTA MESA SANI TARY DI STRICT NOTES TO FINANCIAL STATEMENTS (CONTINUED)June 30, 2013 See independent auditors’ report.-38-6 .JOINT POWERS I NSURANCE AUTHORITY (CONTINUED):Self -Insurance Pr ograms of the Authority:At June 30, 2013 , the District participated in the Authority ’s self -insurance pro grams as follows:Property L oss -Insured up to insurable value with a$2,0 00 deductible for buildings and personal propert y and a $500 deductible for licensed vehicles .General Li ability -Insured up to $10 ,000,000 per occurrence with no annual aggregat e limits and a $0 deductible , except $500 on propert y damage per occurrence.Auto L iabilit y-Insured up to $10 ,000,000 per occurrence with no annual aggregate limits and a $0 deductible , except $1,000 on propert y damage per occurrence.Wo rkers’ Compensa tion -In sured up to statutory limits.Public Of ficials’ E rrors and Omissions -In sured up to $10 ,000,000 per occurrence with an annual aggregate limit of $10 ,000,000.In addition to the above, the Authorit y has purchased insurance coverage as follows:Employ ee Dishonesty Coverage -Insured up to $400,000 per occurrence.The District pay s annual premiums for these coverages. T hey a re subject to retrospective adjustments based on claims expended. T he nature and amount of these adjustments cannot be est imated and are charged to expense s as invoice d . There were no instances in the past three years where a settlement exceeded the District’s coverage .7 .REST AT EMENT OF NET POSI TI ON :Beginning net position for the Solid Wa ste Enterprise Fund was restated as of July 1,2012 , from $5,698,616 to $5,501,177 to correct the understatement of accounts p ay able in the amount of $197,436 .8.SUBSEQUENT EVENT S:On August 31, 2013, the District experienced a sewage spill and has not been assessed penalties as of Jan uary 15,2014.Based on spills of similar magnitude occurring in other agencies, the District Engineer estimated the potential fine to range from $75,000 to $150,000.ITEM NO. 11 -39 -REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS OTHER POST -EMPLOYMEN T BENEFIT PLAN ITEM NO. 11 Actuarial UAAL as a Accrued Actuarial Value Unfunded Annual Percentage of Actuarial Liability of Assets AAL Funded CoveredCovered Valuation (AAL)(AVA)(UAAL)Ratio PayrollPayroll Date (a)(b)(a) - (b)(b)/(a)(c)[(a)-(b)]/(c)6/30/2012 131,000 $ -$ 131,000 $ 0.00%897,000 $ 14.60%See independent auditors' report.OTHER POST-EMPLOYMENT BENEFIT PLAN - 40 -For the y ear ended June 30, 2013 COSTA MESA SANI TARY DI STRI CT REQUI RED SUPPL EMENTARY I NFORMATI ON SCHEDULE OF FUNDING PROGRESS ITEM NO. 11 ST AT ISTICAL SECTION ITEM NO. 11 COSTA MESA SANI TARY DI STRICT DESCRI PTION OF STATI STICAL SECTION CONTENTS June 30, 2013 -41 -This part of the District’s comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements and the note disclosures say about the go vernment’s overall financial health.Contents:Pages Financial Tr ends these schedules contain trend information to help the reader understand how the District’s financial performance and well -being have changed over time.42-49 Revenue Capacit y thes e schedules contain information to help the reader assess the District’s most significant own source revenues, sewer and trash revenues.50-53 Debt Capacit y these schedules present information to help the reader assess the affordability of the District ’s c urrent levels of outstanding debt and the District’s ability to issue additional debt in the future.5 4-5 7 Demographic and Economic In formation th ese schedule soffer demographic and economic indicators to help the reader understand the environment w ithin which the District’s financial activities take place.5 8-59 Operating Information these schedules contain service and infrastructure data to help the reader understand how the information in the District’s financial report relates to the services the District provides and the activities it performs.60-62 ITEM NO. 11 2004 2005 2006 2007 Changes in net position:Operating revenues 6,367,747 $ 6,792,623 $ 7,532,247 $ 8,209,035 $ Operating expenses (6,147,861) (7,091,449) (7,112,655) (7,371,732) Depreciation and amortization (607,543) (659,881) (681,562) (344,790) Operating income (loss)(387,657) (958,707) (261,970) 492,513 Non-operating revenue(expenses), net 268,620 360,375 189,116 769,752 Net income (loss) before capital contributions(119,037) (598,332) (72,854) 1,262,265 Capital contributions 230,551 961,280 128,822 2,377,046 Chan g es in net p osition 111,514 $ 362,948 $ 55,968 $ 3,639,311 $ Net position:Net investment in capital assets11,347,128 $ 12,178,288 $ 11,965,261 $ 14,363,225 $ Restricted for capital outlay2,515,596 2,632,700 2,732,231 8,157,794 Unrestricted7,441,465 6,939,816 7,109,280 2,925,064 Total net p osition 21,304,189 $ 21,750,804 $ 21,806,772 $ 25,446,083 $ Source: Costa Mesa Sanitary District Fiscal Year Costa Mesa Sanitary District Changes in Net Position and Net Position by Component Last Ten Fiscal Years - 42 -ITEM NO. 11 2010 20082009(As Restated)201120122013 9,606,545 $ 10,144,512 $ 10,460,180 $ 10,731,490 $ 10,759,564 $ 10,636,733 $ (7,762,619) (7,945,850) (7,487,385) (8,160,177) (8,303,399) (7,953,569) (478,763) (573,004) (622,319) (1,540,281) (1,607,841) (1,715,991) 1,365,163 1,625,658 2,350,476 1,031,032 848,324 967,173 751,660 659,472 1,245,767 434,597 740,072 138,767 2,116,823 2,285,130 3,596,243 1,465,629 1,588,396 1,105,940 - 14,000 4,243,681 - - 5,000 2,116,823 $ 2,299,130 $ 7,839,924 $ 1,465,629 $ 1,588,396 $ 1,110,940 $ 17,040,959 $ 17,350,061 $ 40,022,038 $ 39,122,787 $ 39,792,929 $ 39,793,590 $ 6,028,258 6,285,042 7,719,551 381,368 8,116 - 4,493,689 6,226,933 6,769,215 16,472,278 17,763,784 18,684,743 27,562,906 $ 29,862,036 $ 54,510,804 $ 55,976,433 $ 57,564,829 $ 58,478,333 $ Fiscal Year - 43 -ITEM NO. 11 2004 2005 2006 2007 Trash assessments 4,428,648 $ 4,793,693 $ 5,101,835 $ 5,101,054 $ Sewer assessments 1,739,375 1,905,567 2,279,091 2,747,778 Permits and inspection fees 48,260 54,897 71,560 190,412 Connection fees 77,359 38,466 42,133 137,522 Other services and charges 74,105 - 37,628 32,269 Total O p eratin g Revenues 6,367,747 $ 6,792,623 $ 7,532,247 $ 8,209,035 $ Source: Costa Mesa Sanitary District Costa Mesa Sanitary District Operating Revenue by Source Last Ten Fiscal Years Fiscal Year - 44 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 5,136,643 $ 5,168,413 $ 5,176,122 $ 5,185,184 $ 5,180,748 $ 4,921,705 $ 4,254,608 4,632,923 5,124,283 5,116,190 5,117,377 5,133,674 22,552 28,183 22,870 46,222 83,237 140,536 13,687 24,270 11,468 28,865 78,230 189,262 179,055 290,723 125,437 355,029 299,972 251,556 9,606,545 $ 10,144,512 $ 10,460,180 $ 10,731,490 $ 10,759,564 $ 10,636,733 $ Fiscal Year - 45 -ITEM NO. 11 2004 2005 2006 2007 Solid waste disposal 4,230,486 $ 4,441,589 $ 4,650,142 $ 4,568,661 $ Liquid waste disposal 1,248,6911,338,2011,274,9871,384,802 General and administrative 668,6841,311,6591,187,5261,418,269 Total O p eratin g Ex p enses 6,147,861 $ 7,091,449 $ 7,112,655 $ 7,371,732 $ Source: Costa Mesa Sanitary District Costa Mesa Sanitary District Operating Expenses by Activity Last Ten Fiscal Years Fiscal Year - 46 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 4,584,097 $ 4,499,524 $ 4,469,887 $ 4,510,918 $ 4,450,943 $ 4,483,980 $ 1,540,7111,516,3741,047,9771,619,7811,912,3411,438,604 1,637,8111,929,9521,969,5212,029,4781,940,1152,030,985 7,762,619 $ 7,945,850 $ 7,487,385 $ 8,160,177 $ 8,303,399 $ 7,953,569 $ Fiscal Year - 47 -ITEM NO. 11 2004 2005 2006 2007 Investment income (loss)161,587 $ 351,957 $ 165,387 $ 571,489 $ Investment expense (126,082) (58,003) (50,826) (43,941) Taxes 155,726 33,527 64,965 217,796 Other revenues 77,389 32,894 32,280 50,264 Other expenses - - (22,690) - Loss on disposal of assets - - - (25,856) Total non-o p eratin g revenues, net 268,620 $ 360,375 $ 189,116 $ 769,752 $ Source: Costa Mesa Sanitary District Costa Mesa Sanitary District Non-operating Revenue (Expenses), net Last Ten Fiscal Years Fiscal Year - 48 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 469,376 $ 297,158 $ 188,045 $ 154,279 $ 188,000 $ (144,970)$ - - - - - - 226,046 223,789 220,329 212,004 214,579 301,046 66,265 151,007 838,628 69,856 424,291 97,383 (10,027) - - - - - - (12,482) (1,235) (1,542) (86,798) (114,692) 751,660 $ 659,472 $ 1,245,767 $ 434,597 $ 740,072 $ 138,767 $ Fiscal Year - 49 -ITEM NO. 11 2004 2005 2006 2007 Sewer Customer Type Single family residential 26.90 $ 29.05 $ 31.37 $ 37.64 $ Multi-family residential 20.71 22.37 24.16 28.99 Commercial (per 1000 sf)15.65 16.90 18.25 21.90 Industrial (per 1000 sf)46.09 49.78 53.76 64.51 Other (per 1000 sf)13.86 14.97 16.17 19.40 Trash Customer Type Single family residential 209.13 $ 225.86 $ 239.41 $ 239.41 $ Source: Costa Mesa Sanitary District Board of Directors approved rate ordinances and resolutions Costa Mesa Sanitary District Sewer and Trash Revenue Rates Last Ten Fiscal Years Fiscal Year - 50 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 56.47 $ 60.71 $ 66.23 $ 66.23 $ 66.23 $ 66.23 $ 43.49 46.75 51.00 51.00 51.00 51.00 32.85 35.31 38.52 38.52 38.52 38.52 96.77104.03113.50113.50113.50113.50 29.11 31.29 34.14 34.14 34.14 34.14 239.41 $ 239.41 $ 239.41 $ 239.41 $ 239.41 $ 228.00 $ Fiscal Year - 51 -ITEM NO. 11 -52 -THIS PAGE INTENTIONALLYLEFT BLANK ITEM NO. 11 Square FeetPercentageSquare FeetPercentage Industrial Customer Type Assessedof TotalAssessedof Total Commonwealth Ave Apts329,3503.42%72,970 0.84%CJ Sergerstrom & Sons276,7202.88%274,160 3.17%CLA Val Co 252,4802.62%390,170 4.51%Alsenz, Evert C TR 171,6701.78%168,960 1.95%MS Airways LLC 158,0701.64%149,020 1.72%Van Ausdeln, Sandra Ann TR 124,4101.29%124,410 1.44%SCIF Redhill LLC 118,5101.23%1,000 0.01%1650 Sunflower 40 LLC 114,9501.19%- 0.00%Griswold Industries 114,5801.19%103,780 1.20%Orange Grove Properties LLC 109,8701.14%109,870 1.27%Seventeenth Street Realty LLC 98,5801.02%- 0.00%Total square feet: Industrial Principal Customers 1,869,19019.42%1,394,340 16.10%Total square feet : Industrial Customers 9,622,890100.00%8,659,106 100.00%Commercial Customer Type South Coast Plaza 1,108,6303.44%334,2401.41%RREF America REIT II 835,6802.59%- 0.00%Magurie Properties - Pacific Arts Plaza LLC 615,0101.91%130,340 0.55%Interinsurance Exchange of the Auto Club of Ca 750,9102.33%37,2900.16%Coast Community College District 674,0602.09%86,6200.37%Sears Roebuck & Co.536,9801.66%446,150 1.88%Vanguard University of Southern California 528,1701.64%486,3302.05%600 Anton Boulevard 490,3501.52%459,0901.94%Center Tower Associates 415,5501.29%- 0.00%J Ray Sanderson/Cardinal Development Bristol 419,4401.30%419,4401.77%One Town Center Drive Associates 362,7001.12%319,390 1.35%JKS-CMFV LLC 357,4401.11%308,760 1.30%Total square feet: Commercial Principal Customers7,094,92022.00%3,027,650 12.78%Total square feet: Commercial Customers 32,256,260100.00%23,684,480 100.00%HouseholdPercentageHouseholdPercentage Multi-family Residential Customer Type Unitsof TotalUnitsof Total RTS - Sunflower, LLC 8903.47%- 0.00%Casden Lakes LP 7703.00%7703.07%Costa Mesa Partners 7642.97%7643.05%United Dominion Realty LP 7642.97%7643.05%Pincreek Investment Co.6202.41%6202.47%ZMV Partnership 5081.98%5082.03%UDR Harbor Greens LP 3841.50%3841.53%Bay Apartment Communities, Inc.3331.30%273 1.09%Riverville Family Associates LLC 2961.15%- 0.00%Park Mesa Village 2761.07%2761.10%Parkwood Village Ltd 2761.07%2761.10%Total household units: Multi-family Principal Customer s 5,88122.90%4,635 18.50%Total household units assessed: Multi-family Customer s 25,684100.00%25,053 100.00%Source: Costa Mesa Sanitary District 2013 2004 Costa Mesa Sanitary District Principal Sewer Customers Current Fiscal Year and Nine Years Ago - 53 - ITEM NO. 11 2004 2005 2006 2007 Capital leases 1,784,541 $ 1,573,627 $ 1,354,945 $ -$ Total debt 1,784,541 $ 1,573,627 $ 1,354,945 $ -$ Total debt per capita 14 $ 12 $ 13 $ -$ Total debt as a percent of personal income0.04%0.03%0.02%0.00%Source: Costa Mesa Sanitary District Accounting Department Costa Mesa Sanitary District Ratio of Outstanding Debt Last Ten Fiscal Years Fiscal Year - 54 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 0.00%0.00%0.00%0.00%0.00%0.00%Fiscal Year - 55 -ITEM NO. 11 2004 2005 2006 2007 Net Revenues 6,762,449 $ 7,211,001 $ 7,772,189 $ 9,022,728 $ Operating Expenses6,147,861 7,091,449 7,112,655 7,371,732 N et revenues 614,588 $ 119,552 $ 659,534 $ 1,650,996 $ Debt Service:Principal 149,612 $ 210,914 $ 218,682 $ 1,354,945 $ Interest126,082 58,003 50,826 43,941 Total debt service275,694 $ 268,917 $ 269,508 $ 1,398,886 $ Debt coverage ratio2.230.442.451.18 Source: Costa Mesa Sanitary District Fiscal Year Costa Mesa Sanitary District Debt Coverage Last Ten Fiscal Years - 56 -ITEM NO. 11 2008 2009 2010 2011 2012 2013 10,358,205 $ 10,803,984 $ 11,705,947 $ 11,166,087 $ 11,499,636 $ 10,775,500 $ 7,762,619 7,945,850 7,487,385 8,160,177 8,303,399 7,953,569 2,595,586 $ 2,858,134 $ 4,218,562 $ 3,005,910 $ 3,196,237 $ 2,821,931 $ -$ -$ -$ -$ -$ -$ - - - - - - -$ -$ -$ -$ -$ -$ N/AN/AN/AN/AN/AN/A Fiscal Year - 57 -ITEM NO. 11 City of Costa Mesa (a)County of Orange (b)PersonalPersonal District Income Income ServiceUnemployment (thousands per Calendar YearPopulation Rate Populationof dollars)Capita 2003 109,171 4.3%2,940,109 122,427,855 $ 41,641 $ 2004 109,903 3.8%2,956,096 130,321,396 44,086 2005 109,030 3.4%2,957,263 139,408,948 47,141 2006 108,096 3.0%2,953,062 150,598,354 50,997 2007 107,641 3.5%2,957,902 153,446,641 51,877 2008 107,514 4.7%2,989,141 155,068,367 51,877 2009 109,808 8.0%3,026,786 148,372,628 49,020 2010 109,960 8.5%3,017,598 150,467,328 49,863 2011 110,008 7.8%3,055,745 154,131,535 50,440 2012 111,918 6.8%3,090,132 * Data not readily available.Notes: (a)Approximate population of Costa Mesa Sanitary District is the same as the population of the City of Costa Mesa.(b)The District has chosen to use County data since the District believes that the County data is representative of the conditions and experience of the District.Sources: (a)United States Census Bureau (a)California LaborMarketInfo (b)U.S. Department of Commerce, Bureau of Economic Analysis (b)United States Census Bureau Costa Mesa Sanitary District Demograhpics and Economic Statistics Last Ten Calendar Years - 58 -ITEM NO. 11 Percentage Percentage Numberof TotalNumberof Total of City of City Employer EmployersEmploymentEmployersEmployment Experian Information Solution 3,7005.73%Coast Community College District Foundation 2,9004.49%Orange Coast Community College 1,9002.94%Fairview Developmental Center 1,5002.32%A Clark/McCarthy Joint Venture 1,2501.94%Interinsurance Exchange of the Auto Club 1,2001.86%Pacific Building Care, Inc.8501.32%Filenet Corporation 6000.93%TTM Technologies 5000.77%Nordstrom, Inc.5000.77%Total ten employers tota l 14,90023.07%- 0.00%* - Data not available for the fiscal year 2003- 2004 Sources: City of Costa Mesa, Dunn & Bradstreet, State of California Employment Development Department Costa Mesa Sanitary District Principal Employers Current Fiscal Year and Nine Years Ago 2013 2004 *- 59 - ITEM NO. 11 200520062007200820092010201120122013 Solid Waste0.950.951.101.601.651.313.423.274.60 Liquid Waste4.555.556.909.409.859.949.608.289.40 Total Full-time equivalen t 5.506.508.0011.0011.5011.2513.0211.5514.00 Note: The District had no employees prior to 2005. All operations were provided by contract services.Source: Costa Mesa Sanitary District Accounting Department Costa Mesa Sanitary District Fiscal Year Full-time and Part-time District Employees By Function Last Nine Fiscal Years - 60 -ITEM NO. 11 200820092010201120122013 Solid Waste:Household units serviced21,47121,48221,50121,53121,55921,490 Recycled/landfill tonnage42,26940,90840,37440,86539,84139,800 Recycled %50.45%50.44%50.44%51.92%57.53%58.00%Liquid Waste:Linear feet (LF) of sewer line cleaned350,000411,1504,125890,006650,551708,092 Average of wastewater discharged10.6 MGD10.3 MGD10.1 MGD10.3 MGD10.4 MGD10.5 MGD Sewer lateral financial assistance grants90120128146144169 MGD - Millions of gallons per day Source: Costa Mesa Sanitary District Fiscal Year Costa Mesa Sanitary District Operating Indicators By Function Last Six Fiscal Years - 61 -ITEM NO. 11 Liquid Waste Miles ofNumber of SanitaryPumpNumber of Fiscal YearSewersStationsManholes 2004219 20 4,581 2005220 20 4,599 2006220 20 4,600 2007221 20 4,646 2008221 20 4,646 2009221 20 4,649 201022420 4,703 201122420 4,703 201222420 4,703 201322420 4,560 Source: Costa Mesa Sanitary District Costa Mesa Sanitary District Capital Asset Statistics Last Ten Fiscal Years - 62 -ITEM NO. 11 2875 Michelle Drive, Suite 300, Irvine , CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties -1 -IN DEPENDENT A UDITORS’ REPOR T ON IN TERNAL CONTROL OVER FINANCIAL REPOR TING AND ON COMPLIANCE AND OTHER MA TTERS BASED ON AN AUDIT OF FINANCIAL ST AT EMENTS PERFORMED IN A CCORDANCE WITH GOVERNMENT AUDITING ST ANDARDS Board of Directors Costa Mesa Sanitary Dis trict Costa Mesa, California We h ave audited, in accordance with the auditing standards generall y accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing St andards issued by t he Comptrolle r General of the United States, the financial statements of Costa Mesa Sanitary D istrict(the District ),as of and for the year ended June 30, 2013 and the related notes to the financial statements, which collectivel y comprise the District’s basic financial statements, and have issued our report thereon dated January 15,2014.Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the District’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpos e of expressing an opinion on the effectiveness of the District’s internal control. Accordingly , we do not express an opinion on the ef fectiveness of the District’s internal control. A deficiency in internal contr ol exists when the design or operation of a control does not allow management or employ ees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely b asis. A material weakness is a deficiency , or a combination of deficiencies, in in ternal control, such that there is a reasonable possibility t hat a material misstatement of the District’s financial statements will not be prevented, or detected and corrected on a timely basis . A significant deficiency is a deficiency , or a combination o f deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify a ll deficiencies in internal control that might be material weaknesses or, significant deficiencies. G iven these limitations, during our audit we did not identify any d eficiencies in internal control that we consider to be material weakness. However , material weaknesses may exist that have not been identified.ITEM NO. 11 -2 -Compliance and Other Matters As part of obtaining reasonable assurance about whether the District ’s financial statements are free from material mis statements, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material ef fect on the determination of financial statement amounts. However , p roviding an opinion on compliance with those provisions was not an objective of our audit and, accordingl y, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be report ed under Government Auditing S tandar ds .Purpose of This Report The purpose of this report is solely t o describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectivenes s of the District’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing St andards in considering the District’s internal control and compliance. Accordingly , this communication is not suitable for an y other purpose. Irvine, California January 15, 2014 ITEM NO. 11 2875 Michelle Drive, Suite 300, Irvine , CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties -1 -Board of Directors Costa Mesa Sanitary District Costa Mesa, California We have audited the financial statements of the Costa Mesa Sanitary District (the District) for the year ended Jun e 30, 2013 , and have issued our report thereon dated January 15,2014.Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards,Government Auditing Standards,as well as ce rtain information related to the planned scope and timing of our audit. W e have communicated such information in our engagement letter to you dated June 14, 2013 and in our letter on planning matter s dated August 15,2013 .Professional standards also requ ire that we communicate to you the following information related to our audit.Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Costa Mesa Sanitary District are described in Note 1 to the financial statements.As discussed in Note 1e to the basic financial statements, the District incorporated deferred outflows of resources and deferred inflows of r esources into the definitions of the required components of the residual measure of net position due to the adoption of Governmental Accounting Standards Board’s Statement No. 63, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position”. T he adoption of this standard also provides a new statement of net position format to report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Also discussed in Note 1eto the basic financial statements, the District has changed its method for accounting and reporting certain items previously r eported as assets or liabilities during fiscal year 2012 -2013 due to the early a doption of Governmental Accounting Standards Boar d’s Statement No.65, “Items Previously Reported as Assets and Liabilities”.The adoption of this standard did not result in any r eclassification of assets or liabilities due to deferred outflows of resources or deferred inflows of resources. No other acc ounting policies were adopted and the application of existing policies was not changed during the y ear ended June 30,2013. We noted no transactions entered into by t he District during the ye ar for which there is a lack of authoritative guidance or consen sus. All significant transactions have been recognized in the financial statements in the proper period.Accounting estimates are an integral part of the financial statements prepared by m anagement and are based on management’s knowledge and experience ab out past and current events and assumptions about future events. Certain accounting estimates are particularl y sensitive because of their significance to the financial statements and because of the possibility t hat future events affecting them may differ s ig nificantly from those expected.ITEM NO. 11 -2 -Significant Aud it Findings (Continued)Qualitative Aspects of Accounting Practices (Continued)The most sensitive estimates affecting the financial statements are as follows:a.Management’s estimate of the fair market va lue of investments is based on market values provided b y outside sources.b.The estimated useful lives of capital assets for depreciation purposes are based on industry standards.c.The annual required contribution for the defined benefit pension plan of the District is based on certain actuarial assumptions and methods.d.The annual required contribution and the amount reported for the unfunded actuarial accrued liability f or the District’s Other Post -Employ ment Benefit (OPEB) Plan were based on certain actua rial assumptions and methods.We evaluated the key f actors and assumptions used to develop these estimates in determining that they were reasonable in relation to the financial statements taken as a whole.Certain financial statement disclosures are part icularly s ensitive because of their significance to financial statement users. T he most sensitive disclosure affecting the financial statement was reported in Note4 to the financial statements regarding t he annual required contribution for t he defined be nefit pension plan and in Note 5 regarding the District’s OPEB plan.The financial statement disclosures are neutral, consistent, and clear.Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with man agement in performing and completing our audit.Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely m isstatements identified during the audit, other than those that are trivial, and communicate th em to the appropriate level of management. In a ddition, none of the misstatements detected as a result of audit procedures and corrected by m anagement were material, either individually o r in the aggregate, to the financial statements taken as a whole.Disagreements with Management For purposes of this letter, a disagreement with management as a financial accounting, reporting, or auditing matter, whether or no t resolved to our satisfaction, that could be significant to the financial statements or the a uditor s ’ report. We are pleased to report that no such disagreements arose during the course of our audit.ITEM NO. 11 -3 -Significant Audit Findings (Continued)Management Representations We have requested certain representations from management that are included in the management representation letter dated January 15,2014.Management Consultations with Other Independent Accountants In some cases, management may d ecide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a c onsultation involves application of an accounting principle to the District ’s financial statements or a determination of the ty pe of auditor’s opinion that may b e expressed on those statements, our professiona l 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 generall y discuss a v ariet y of matters, including the application of accounting principles and auditing standards, with management each ye ar prior to retention as the District’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention.This information is intended solely f or the use of the Board of Directors and management of the District and is not intended to be,and should not be,used b y an yone other than these specified part ies.Irvine, California January 15, 2014 ITEM NO. 11