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Home My WebLink AboutCC Agenda 0110/2012 L.E. Redevelopment Agency Component Unit Financial StatementsLAKE ELSINORE REDEVELOPMENT AGENCY COMPONENT UNIT FINANCIAL STATEMENTS WITH REPORT ON AUDIT BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS JUNE 30, 2011 LAKE ELSINORE REDEVELOPMENT AGENCY TABLE OF CONTENTS June 30, 2011 Page NnrnhPr Independent Auditors' Report 1 - 2 Basic Financial Statements: 3 Statement of Net Assets 4 Statement of Activities 5 Balance Sheet - Governmental Funds 6 - 7 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 9 Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds 10 - 11 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities 12 Statement of Fiduciary Assets and Liabilities - Agency Fund 13 Notes to Basic Financial Statements 15 -55 Required Supplementary Information: 57 Budgetary Comparison Schedule: Rancho Laguna Special Revenue Fund 58 Note to Required Supplementary Information 59 Supplementary Information: 61 Combining Balance Sheet - Other Governmental Funds 62-63 Combining Schedule of Revenues, Expenditures and Changes in Fund Balances - Other Governmental Funds 64-65 Computation of Housing Set -Aside Fund Excess Surplus 66 Independent Auditors' Report on Compliance and on Internal Control Over Compliance 67-69 INDEPENDENT AUDITORS' REPORT The Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California We have audited the accompanyvlg financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Lake Elsinore Redevelopment Agency (a component unit of the City of Lake Elsinore), as of and for the year ended June 30, 2011, which collectively comprise the Agency's basic financial statements, as listed in the table of contents. These basic financial statements are the responsibility of the Agency's management. Our responsibility is to express opinions on these basic financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Agency's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the basic financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the Lake Elsinore Redevelopment Agency as of June 30, 2011, and the respective changes in financial position thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Agency will continue as a going concern. As explained further in Note 15, on December 29, 2011, the California Supreme Court upheld California Assembly Bill 1 x 26 which provides for the dissolution of redevelopment agencies and invalidated Assembly Bill lx 27 which allowed an alternative for redevelopment agencies to continue operations. The California Supreme Court's decisions raise substantial doubt about the Agency's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As described in Note 8 to the basic financial statements, the Agency has implemented the provisions of Governmental Accounting Standards Board Statement Number 54, "Fund Balance Reporting and Governmental Fund Type Definitions ", for the year ended June 30, 2011. -1- 287D :yticnelle Drive, Suire 31;0, lrvute, CA. 92606 • Tel: 714.978.1300 • NX: 714 9713.7893 )J` cu loca!eil in Ortnge wid San Diego Cmtnties In accordance with Government Auditing Standards, we have also issued our report dated December 30, 201 l on our consideration of the Lake Elsinore Redevelopment Agency's internal control over financial reporting and our tests of its compliance with certain provisions of laws; regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Management has not presented the management's discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing 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. Our opinion on the basic financial statements is not affected by this missing information. The budgetary comparison schedule, identified as required supplementary information in the table of contents, is not a required part of the basic financial statements but is supplementary information required by the accounting principles generally accepted in the United States of America. This information is an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. The budgetary comparison schedule and related note have been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Our audit was made for the purpose of forming opinions on the financial statements that collectively comprise the Lake Elsinore Redevelopment Agency's basic financial statements. The combining schedules and the computation of the Housing Set -Aside Fund Excess Surplus, identified as supplementary information in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Agency. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. December 30, 2011 Irvine, California -2- BASIC FINANCIAL STATEMENTS -3- LAKE ELSINORE REDEVELOPMENT AGENCY STATEMENT OF NET ASSETS June 30, 2011 ASSETS: Cash and investments (Note 2) Interest receivable Accounts receivable Notes receivable (Note 3) Interest receivable on notes Due from other governments Prepaid expense Land held for resale (Note 5) Deferred charges Restricted assets: Cash and investments with fiscal agents (Note 2) Capital assets; not depreciated (Note 4) Capital assets, depreciated, net (Note 4) TOTAL ASSETS LIABILITIES: Accounts payable Due to other governments Due to the City of Lake Elsinore Interest payable Deferred revenue Noncurrent liabilities (Note 6): Due within one year Due in more than one year TOTAL LIABILITIES NET ASSETS (DEFICIT): Invested in capital assets Restricted for low and moderate income housing Unrestricted (deficit) TOTAL NET DEFICIT See independent auditors' report and notes to basic financial statements. -4- Governmental Activities $ 26,831,272 5,394 1,439 11,837,000 10,361 6,256 60,914 6,136,849 2,793,653 5,272,029 2,426,392 9,140,469 64,622,028 4,632,944 6,526,179 83 ;246 914;643 69,048 1,987,789 66,191,306 80,405,155 11,566,861 58,756,163 (86,106,151) $ (15,783,127) LAKE ELSINORE REDEVELOPMENT AGENCY STATE=MENT OF ACTIVITIES For the year ended June 30, 2011 Functions/programs Expenses Governmental activities: Revenue and General government $ 1,430,893 Pass - through payments 7,655,170 SERAF payments 1,436,411 Project improvements 10,148,315 Interest on long -term debt 1,687,818 Total governmental $ (1;430,893) activities $ 22,358,607 General revenues: Tax increment Investment income Other income Total general revenues Change in net assets NET DEFICIT - BEGINNING OF YEAR NET DEFICIT - END OF YEAR See independent auditors' report and notes to basic financial statements. -5- 19,004,495 934,921 161,128 20,100,544 (1,368,042) (14,415,085) $ (15,783,127) Net (Expense) Revenue and Changes in Program Revenues Net Assets Charges Operating Capital for Grants and Grants and Governmental Services Contributions Contributions Activities $ (1;430,893) (7,655,170) - (1,436,411) 890,021 (9,258,294) - - (1,687,818) $ - $ 890 ;021 $ (21,468,586) General revenues: Tax increment Investment income Other income Total general revenues Change in net assets NET DEFICIT - BEGINNING OF YEAR NET DEFICIT - END OF YEAR See independent auditors' report and notes to basic financial statements. -5- 19,004,495 934,921 161,128 20,100,544 (1,368,042) (14,415,085) $ (15,783,127) LAKE ELSINORE REDEVELOPMENT AGENCY BALANCESHEET GOVERNMENTAL FUNDS June 30, 2011 Special Revenue Fund Debt Service Funds FUND BALANCES (DEFICITS) (NOTE 11): Nonspendable: Prepaid expense Advances to other funds Land held for resale Restricted for: Low and moderate income housing Debt service Capital projects Unassigned TOTAL FUND BALANCES (DEFICITS) TOTAL LIABILITIES AND FUND BALANCES - - - 60,914 18,040,438 - - - 48,369 - 6,900,601 - - - 1,452,640 2,085,652 5,860,245 199,684 - (12,372,836) - (16,973,494) 26,4421048 (10,287,184) 5,860,245 (16,712,896) $ 58,756,163 $ 11,154,830 $ 27,758,272 $ 881,532 See independent auditors' report and notes to basic financial statements. -6- Rancho Rancho Rancho Rancho Laguna Laguna I Laguna I1 Laguna 111 ASSETS Cash and investments (Note 2) $ 7,345,685 $ 4,258,351 S 13,991,757 $ 620,396 Cash and investments with fiscal agents (Note 2) 1,452,640 2,085,652 1,534,053 199,684 Interest receivable 1,605 - 3,251 538 Accounts receivable - 1,439 - - Notes receivable (Note 3) 11,837,000 - Interest receivable on notes 110,361 - - Due from other governments 6,256 - - - Due from other funds (Note 9) - 4,809,388 12,229,211 - Prepaid expense - - - 60,914 Advances to other funds (Note 9) 37,954,247 - - Land held for resale (Note 5) 48,369 - - TOTAL ASSETS $ 58,756,163 $ 11,154,830 $ 27,758,272 $ 881,532 LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable S 452,945 $ 1,403,039 $ 1,838.457 $ 900,090 Deferred revenue interest on advance to other funds 16,163,809 - - - Defeired revenue for property tax 3,750,000 - Deferred revenue for notes receivable 11,837,000 - Defetred revenue interest on notes receivable 110,361 - - Deferred revenue other - - - Due to other governments - 4,110,589 2392,883 22,707 Due to the City of Lake Elsinore - 83,246 - - Due to other funds (Note 9) - - - 12,229,211 Advances from other funds (Note 9) - 15,845,140 17,666,687 4,442,420 TOTAL LIABILITIES 32,314,115 21,442,014 21,898,027 17,594,428 FUND BALANCES (DEFICITS) (NOTE 11): Nonspendable: Prepaid expense Advances to other funds Land held for resale Restricted for: Low and moderate income housing Debt service Capital projects Unassigned TOTAL FUND BALANCES (DEFICITS) TOTAL LIABILITIES AND FUND BALANCES - - - 60,914 18,040,438 - - - 48,369 - 6,900,601 - - - 1,452,640 2,085,652 5,860,245 199,684 - (12,372,836) - (16,973,494) 26,4421048 (10,287,184) 5,860,245 (16,712,896) $ 58,756,163 $ 11,154,830 $ 27,758,272 $ 881,532 See independent auditors' report and notes to basic financial statements. -6- Other Total Governmental Governmental $ 615,083 $ 26,831,272 - 5,272,029 - 5,394 - 1,439 - 11,837,000 - 110,361 - 6,256 - 17,038,599 - 60,914 - 37,954,247 6,088,480 6,136,849 $ 6,703,563 $ 105,254,360 $ 38,413 $ 4,632,944 - 16,163,809 3,750,000 11.837.000 - 110,361 69,048 69,048 - 6.526,179 - 83,246 4,809,388 17,038,599 - 37,954,247 4,916,849 98,165,433 - 60,914 - 18,040,438 6,088,480 6,136,849 6,900,601 - 9,598,221 493,883 493,883 (4,795,649) (34,141,979) 1,786,714 7,088,927 $ 6,703,563 $ 105,254,360 -7- THIS PAGE INTENTIONALLY LEFT BLANK -8- LAKE ELSINORE REDEVELOPMENT AGENCY RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS June 30, 2011 Fund balances for governmental funds Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. Interest on interfund loans, interest on notes receivables and property tax reported in the special revenue funds are not available to pay for current- period expenditures, and therefore, they are reported as deferred revenue in the funds. Balance at June 30, 2011 are: Property tax Interest on interfund loans Interest on notes receivable Long -tern notes receivable used in governmental activities are not financial resources and therefore are not reported in the funds. Long -term liabilities and related items are not due and payable in the current period and are not reported as fund liabilities. All liabilities, both current and lonb tern, are reported in the Statement of Net Assets. Balances as of June 30, 2011 are: Noncurrent liabilities Less: Deferred amount on refunding, net of accumulated amortization Less: Bond discount, net of accumulated amortization Accrued liabilities in the Statement of Net Assets differ from the amounts reported in governmental funds due to accrued interest on the tax allocation bonds payable. Deferred charges in the Statement of Net Assets differ from the amounts reported in governmental funds due to issuance costs net of related amortization on the tax allocation bonds. Net deficit of governmental activities See independent auditors' report and notes to basic financial statements. -9- $ 7,088,927 11,566,861 3,750,000 16,163,809 110,361 11,837,000 (71,552,999) 2,618,872 755,032 (914,643) 2,793,653 $(15,783,127) LAKE ELSINORE REDEVELOPMENT AGENCY ST ATE1vfENT OF REVENUES, L-XPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the year ended June 30, 2011 Special Revenue Fund Debt Service Funds FUND BALANCES (DEFICITS) BEGINNING OF YEAR 34,320,899 (8,719,546) 6,212,092 (14,686,308) FUND BALANCES (DEFICITS) - END OF YEAR $ 26,442,048 $ (10,287,184) $ 5,860,245 $ (16,712,896) See independent auditors' report and notes to basic financial statements. -10- Rancho Rancho Rancho Rancho Laguna Laguna 1 Laguna H Laguna III REVENUES: Tax increment $ 3,821,776 $ 5,415,697 $ 7,745,068 S 2,021,954 Investment income 106,865 49,376 96,000 19,733 Grant income 285,243 - - - Sale of property 604,778 - - Other income 141,198 - - TOTAL RE-VENUES 4,959,860 5,465,073 7,841,068 2,041,687 EXPENDITURES: Current: Professional services 322,018 219,418 410,631 110,179 Pass - through payments - 2,135,628 4,164,658 1,354,884 SERAF payments - 492,689 732,570 211,152 Project costs 11,238,401 4,978,453 3,628,494 1,538,654 Debt service: Payment to refunding bond escrow agent - 1,007,520 824,560 - Bond issue costs - 884,496 477,259 - Principal retirement 725,800 2,895,181 920,980 1,839,907 Interest and fiscal charges 552,492 1,257,759 1,420,810 173,797 TOTAL EXPENDITURES 12,838,711 13,871,144 127579,962 5,228,573 EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (7,878,851) (8,406,071) (4,738,894) (3,186,886) OTHER FINANCING SOURCES (USES): Discount on bonds - (410,913) (210,389) - Refunding bonds issued - 16,189,250 13,245,750 - Tax allocation bonds issued - 5,550,000 3,260,000 1,350,000 Payment to refunding bond escrow agent - (14,114,606) (11,548,314) - Transfers in (Note 9) - - - 15,298 Transfers out (Note 9) - (375,298) (360,000) (205,000) TOTAL OTHER FINANCING SOURCES (USES) - 6,838,433 4,387,047 1,160,298 NET CHANGE IN FUND BALANCES (7,878,851) (1,567,638) (351,847) (2,026,588) FUND BALANCES (DEFICITS) BEGINNING OF YEAR 34,320,899 (8,719,546) 6,212,092 (14,686,308) FUND BALANCES (DEFICITS) - END OF YEAR $ 26,442,048 $ (10,287,184) $ 5,860,245 $ (16,712,896) See independent auditors' report and notes to basic financial statements. -10- Other Total Governmental Governmental Funds Funds $ - $ 19,004,495 94 272,068 - 285,243 - 604,778 319,930 461,128 320,024 20,627,712 1,062,246 7,655,170 - 1,436,411 945,401 22,329,403 1,832,080 1,361,755 - 6,381,868 3,404,858 945,401 45,463,791 (625,377) (24,836,079) 925,000 925,000 299,623 1,487,091 (621,302) 29,435,000 10,160,000 (25,662,920) 940,298 (940,298) 13,310,778 (11,525,301) 10 11 A 110 $ 1,786,714 $ 7,088,927 - 11 - LAKE ELSINORE REDEVELOPMENT AGENCY RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES For the year ended June 30, 2011 Net change in fund balances - total governmental funds Amounts reported for governmental activities in the Statement of Activities are different because: Governmental funds report capital outlay as an expenditure in the full amount as current financial resources are used. However, in the Statement of Activities the cost of these assets is allocated over the estimated useful life as depreciation expense. Capital outlay Depreciation The issuance of long term debt and related items provides current financial resources to governmental funds, while the repayment of the principal of long term -debt and related items consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. These amounts are the net effect of these differences in the treatment of long -term debt. Principal payments Principal added on note payable Refunding bonds issued Tax allocation bonds issued Payment to refund bond escrow agent Deferred amount on refunding Issuance costs Discount on bonds Some expenses reported in the Statement of Activities do not require the use of current financial resources and are not reported as governmental fund expenditures. Interest and fiscal charges Amortization of issuance costs Amortization of deferred amount on refunding Amortization of bond discount Project costs Some revenues reported in the Statement of Activities do not provide the use of current financial resources and are not reported as governmental fund expenditures. Investment income on interfund loans Investment income on notes Change in net assets of governmental activities See independent auditors' report and notes to basic financial statements. -12- $(11,525,301) 44,088 (368,649) 6;480,207 (98,339) (29;435,000) (10,160,000) 27,495,000 1,900,311 1,361,755 621,302 77,178 (127,368) (102,689) (30,390) 11,837,000 552,492 110,361 $ (1,368,042) LAKE ELSINORE REDEVELOPMENT AGENCY STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES AGENCY FUND June 30, 2011 ASSETS Crash and investments (Note 2) Cash and investments with fiscal agents (Note 2) Account receivable "TOTAL ASSETS LIABILITIES Due to City of Lake Elsinore Due to bondholders TOTAL LIABILITIES See independent auditors' report and notes to basic financial statements -13- 16,520 5,421,665 $ 5,438,188 $ 4,800 5,433,388 $ 5,438,188 THIS PAGE INTENTIONALLY LEFT BLANK -14- NOTES TO BASIC FINANCIAL STATEMENTS -15- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES: A. Description of the Reporting Entity: The Lake Elsinore Redevelopment Agency (the Agency) was established by City Council ordinance and adopted July 15, 1980, pursuant to the State of California Health and Safety Code, Section 33000, entitled Community Redevelopment Law. As such, the Agency acts as a legal entity, separate and distinct from the City of Lake Elsinore (the City), even though the City Council of the City has the authority to appoint the Agency's governing board. The actions of the Agency are binding, and business, including the incurrence of long -term debt, is routinely transacted in the Agency's name by its appointed representatives. The Agency is broadly empowered to engage in the general economic revitalization and redevelopment of the City through acquisition and development of property in those areas of the City determined to be in a declining condition. The Lake Elsinore City Council has declared itself to be the Agency's governing board pursuant to the Community Redevelopment Law. The Agency has no employees, and all Agency duties and functions are performed by employees of the City. The City is reimbursed for the cost of these and other services. The Agency is a component unit of the City and, accordingly, the financial statements of the Agency are included in the financial statements of the City_ The Agency is an integral part of the reporting entity of the City. The funds of the Agency have been blended within the financial statements of the City because the City Council of the City is the governing board of the Agency and exercises control over the operations of the Agency. Only the funds of the Agency are included herein, therefore, these financial statements do no purport to represent the financial position or results of operations of the City. The Agency is currently administering the following redevelopment projects: Rancho Laguna I The Rancho Laguna Redevelopment Project No. I was established in 1980 and includes noncontiguous areas that aggregate 1,910 acres which are primarily concentrated in the northwestern portion of the community. The need for redevelopment was established as a result of severe flooding in early 1980 and an inability to provide needed public facilities in the development of vacant portions of the City and rehabilitation of areas for residential and commercial use. See independent auditors' report. -16- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): A. Description of the Reporting Entity (Continued): The Agency's Redevelopment Projects (Continued): Rancho Laguna II The Rancho Laguna Redevelopment Project No. II was established in 1983 and includes noncontiguous areas that aggregate 4,859 acres. The Agency plans to develop the project area primarily for new and rehabilitated residential and commercial use. Rancho Laguna III The Rancho Laguna Redevelopment Project No. III was established in 1987 and includes 4 noncontiguous parcels that aggregate 3,541 acres. The project areas are being developed to alleviate blighting conditions. These include the existence of deteriorated, dilapidated, or obsolescent structures which the Agency may selectively acquire and either rehabilitate or remove substandard structures and develop for residential, commercial or industrial use. B. Measurement Focus, Basis of Accounting and Financial Statement Presentation: Financial Statement Presentation The basic financial statements of the Agency are composed of the following: • Government -wide financial statements • Fund financial statements • Notes to the basic financial statements Government -wide Financial Statements The government -wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the activities of the Agency. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business -type activities, which rely to a significant extent on fees and charges for support. The Agency has no business -type activities. See independent auditors' report. -17- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Measurement Focus; Basis of Accounting and Financial Statement Presentation (Continued): Government -wide Financial Statements (Continued) The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include 1) charges to customers who purchase, use, or directly benefit from goods, services, or privileges provided by a given function and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements The accounting system of the Agency is organized and operated on the basis of separate funds, each of which is considered to be a separate accounting entity. Each fund is accounted for by providing a separate set of self - balancing accounts that constitute its assets, liabilities, fund equity, revenues, and expenditures. Governmental resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. Fund financial statements for the Agency's governmental funds are presented after the government -wide financial statements. These statements display information about major funds individually and other governmental funds in the aggregate for governmental funds. The Agency reports the following major governmental funds: The Rancho Laguna Special Revenue Fund is used to account for low and moderate income housing activities within the project areas. The Rancho Laguna I Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long -term debt principal, interest and related costs within this project area. The Rancho Laguna II Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long -term debt principal, interest and related costs within this project area. The Rancho Laguna III Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long -term debt principal, interest and related costs within this project area. See independent auditors' report -18- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued): Fund Financial Statements (Continued) Additionally, the Agency reports the following fund types: The Cost Recovery System Special Revenue Fund is used to account for receipts of deposits made by McMillin Summerly, LLC to reimburse the Agency for professional service costs associated with a disposition and development agreement. The Capital Proiects Funds are used to account for financial resources to be used for the acquisition or construction of redevelopment projects and administrative expenses within the Stadium Capital Projects, Rancho Laguna I, Rancho Laguna II and Rancho Laguna III project areas. The Agency Fund is used to account for money received by the Agency as an agent for individuals, other governments and other entities. Measurement Focus Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements. On the government -wide Statement of Net Assets and the Statement of Activities, activities are presented using the economic resources measurement focus. Under the economic resources measurement focus, all (both current and long -term) economic resources and obligations of the government are reported. In the fund financial statements, all governmental funds are accounted for on a spending or "financial flow" measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. Their reported fund balances (net current assets) are considered a measure of "available spendable resources ". Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets. Accordingly, they are said to present a summary of sources and uses of available spendable resources during a period. See independent auditors' report. 1WE LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued): Measurement Focus (Continued) Noncurrent portions of long -term receivables due to governmental funds are reported on their balance sheets in spite of their measurement focus. However special reporting treatments are used to indicate that they should not be considered "available spendable resources ", since they do not represent net current assets. Recognition of governmental fund type revenue represented by noncurrent receivables are deferred until they become current receivables. Noncurrent portions of other long -term receivables are offset by fund balance reserve accounts. Revenues, expenses, gains, losses, assets, and liabilities resulting from nonexchange transaction are recognized in accordance with the requirements of GASB Statement No. 33. Because of their spending measurement focus, expenditure recognition for governmental fund types excludes amounts represented by noncurrent liabilities. Since they do not affect net current assets, such long -teen amounts are not recognized as governmental fund type expenditures or fund liabilities. Amounts expended to acquire capital assets are recorded as expenditures in the year that resources were expended, rather than as fund assets. The proceeds of long -term debt are recorded as other financing sources rather than as a fund liability. Amounts paid to reduce long -term indebtedness are reported as fund expenditures. When both restricted and unrestricted resources are combined in a fund, expenses are considered to be paid first from restricted resources, and then from unrestricted resources. Basis of Accounting Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. In the government -wide Statement of Net Assets and Statement of Activities, the governmental activities are presented using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used, regardless of the timing of related cash flows. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange -like transactions are recognized when the exchange takes place. See independent auditors' report. -20- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 I. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued): Basis of Accounting (Continued) In the fund financial statements, governmental funds are presented using the modified - accrual basis of accounting. Their revenues are recognized when they become measurable and available as net current assets. Measurable means that the amounts can be estimated, or otherwise determined. Available means that the amounts were collected during the reporting period or soon enough thereafter to be available to finance the expenditures accrued for the reporting period. Revenue recognition is subject to the measurable and availability criteria for the goverrunental funds in the fund financial statements. Exchange transactions are recognized as revenues in the period in which they are earned (i.e., the related goods or services are provided). Locally imposed derived tax revenues are recognized as revenues in the period in which the underlying exchange transaction upon which they are based takes place. Imposed nonexchange transactions are recognized as revenues in the period for which they were imposed. If the period of use is not specified, they are recognized as revenues when and enforceable legal claim to the revenues arises or when they are received, whichever occurs first. Government- mandated and voluntary nonexchange transactions are recognized as revenues when all applicable eligibility requirements have been met. Revenues accrued by the Agency include property taxes levied and collected within 60 days from the end of the fiscal year. C. Investments: Investments are reported at fair value. Investment income includes interest earnings, changes in fair value, and any gains or losses related to the liquidation or sale of the investment. D. Restricted Net Assets: The Agency is required by California Law to set aside a portion of the property tax increments it receives to increase and improve the City's supply of Low and Moderate Income Housing, and therefore such assets are restricted for that purpose. See independent auditors' report. -21- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): E. Property Taxes: Property taxes are assessed and collected each fiscal year according to the following property tax calendar: Lien Date: Levy Date: Due Date: Delinquent Date: January I July 1 to June 30 First Installment - November 1 Second Installment - February First Installment - December 10 Second Installment - April 10 Under California law, property taxes are assessed and collected by the counties up to I% of assessed value, plus other increases approved by the voters. The property taxes go into a pool, and are then allocated to the agencies based on complex formulas prescribed by the state statutes. F. Interfund Activity: In the governmental fund financial statements, activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either "due to /from other funds" (i.e. the current portion of interfund loans) or "advances to /from other funds" (i.e. the noncurrent portion of interfund loans). In the government -wide financial statements, these activities have been eliminated. Noncurrent portions of long -term interfund loan receivables are reported as advances and such amounts are offset equally by a fund balance reserve account which indicates that they do not constitute expendable available financial resources and therefore are not available for appropriation. G. Capital Assets: Capital assets, which include land, structures, equipment, and infrastructure assets, are reported in the government -wide financial statements. Capital assets are recorded at cost where historical records are available and at an estimated historical cost where no historical records exist. Assets purchased in excess of $5,000 are capitalized if they have an expected useful life of 2 years or more. Donated capital assets are valued at their estimated fair market value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset's lives are not capitalized. See independent auditors' report. -22- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): G. Capital Assets (Continued): Major capital outlay for capital assets and improvements are capitalized as projects are constructed. For debt - financed capital assets, interest incurred during the construction phase is reflected in the capitalization value of the asset constructed, net of interest earned on the invested proceeds over the same period. There is no interest expense capitalized by the Agency for the year ended June 30, 2011. Capital assets used in operations are depreciated over their estimated useful lives using the straight -line method in the government -wide financial statements. Depreciation is charged as an expense against operations and accumulated depreciation is reported on the Statement of Net Assets. The range of lives used for depreciation purposes for each capital asset class is as follows: Buildings 40 years Improvements other than buildings 25 years Machinery and equipment 5 - 8 years Furniture and fixtures 5 years H. Long -Term Obligations: In the government -wide financial statements, long -tem debt and other long -term obligations are reported as liabilities in the applicable governmental activities. Bond premiums and discounts, deferred amount on refunding, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount and deferred amount on refunding. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the governmental fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. See independent auditors' report. -23- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): I. Fund Balance: In the governmental fund financial statements, governmental fund types report nonspendable and restricted fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Assigned fund balance represent tentative management plans that are subject to change. J. Tax Increment: The Agency follows a policy of contractual obligations for the purpose of spending tax increment revenue. This policy holds that all expenditures of the Capital Projects Funds (i.e. salaries, goods and supplies, professional services, etc.) are contractual obligations. Monies are therefore transferred from the Debt Service Funds to cover the costs of the expenditures from the Capital Projects Funds. The Agency has no power to levy and collect taxes, and any legislative property tax reduction might necessarily reduce the amount of tax revenues that would otherwise be available. Broadened property tax exemptions could have a similar effect. Conversely, any increase in the tax rate or assessed valuation, or any reduction or elimination of present exemptions would necessarily increase the amount of tax revenues that would be available. K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement of Net Assets: The "total fund balances" of the Agency's governmental funds $7,088,927 differs from "net assets" of governmental activities $(15,783,127) reported in the Statement of Net Assets. This difference primarily results from the long -term economic focus of the Statement of Net Assets versus the current financial resources focus of the Governmental Fund Balance Sheets. Capital Assets Capital assets are recorded as expenditures in the full amount as current financial resources are used in the governmental funds. However, the Statement of Net Assets allocates these capital assets as financial resources over their estimated useful life. Capital assets, net of depreciation $ 11.566.861 See independent auditors' report. -24- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30; 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement of Net Assets (Continued): Interest on Interfund Loans and Notes Receivable Interest on interfund loans and interest on notes receivables reported in the special revenue funds are not available to pay for current -period expenditures, and therefore, they are reported as deferred revenue in the funds. Interest on inter-fund loans $ 16,163,809 Interest on notes receivable 110,361 x,170 Property "fax Property tax reported in the special revenue funds are not available to pay for current - period expenditures, and therefore, they are reported as deferred revenue in the funds. Property tax Notes Receivable $ 3,75U00 Long -term notes receivable used in governmental activities are not financial resources and therefore are not reported in the funds. Long -term notes receivable See independent auditors' report. -25- :C lil LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1 _ REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement of Net Assets (Continued): Long -Term Debt Transactions Long -term liabilities and related items such as deferred amount on refunding, bond discount and the interest payable on these liabilities applicable to the Agency's governmental activities are not due and payable in the current period and accordingly are not reported as governmental fund liabilities. All liabilities (both current and long -term) are reported in the Statement of Net Assets. Balances at the end of this fiscal year were: Noncurrent liabilities $ (71,552,999) Deferred amount on refunding, net of accumulated amortization 2;618,872 Bond discount, net of accumulated amortization 755,032 Accrued interest payable on long -term liabilities (914,643) Long -term debt transactions $ (69 093,7 38) Deferred Charges Bond issuance costs are recorded as expenditures in the full amount as current financial resources are used in the governmental funds. However, the Statement of Net Assets defers these charges and amortizes them over the terms of the related debt. Bond issuance costs, net of related amortization $ 2 793.653 See independent auditors' report. -26- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June' 0, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): L. Explanation of Differences between Governmental Funds Operating Statements and the Statement of Activities: The "net change in fund balances" for governmental funds $(11,525,301) differs from the "change in net assets" for governmental activities $(1,368,042) reported in the Statement of Activities. The differences arise primarily from the long -term economic focus of the Statement of Activities versus the current financial resources focus of the governmental funds. The effect of the differences is illustrated below. Depreciation of Capital Assets Capital assets are expensed in full in the year of acquisition as current financial resources are used in governmental funds. However, the costs of these capital assets are allocated over their estimated useful life in the Statement of Activities through depreciation. Capital outlay $ 44,088 Depreciation on capital assets (368,649) Capital asset transactions S (324,561) Long -Term Debt Transactions Some revenues and expenses reported in the Statement of Revenues, Expenditures and Changes in Fund Balances are included as an addition or deletion of long -term liabilities in the Statement of Net Assets. Refunding bonds issued $ (29,435,000) Tax allocation bonds issued (10,160,000) Principal added on note payable (98,339) Payment to refund bond escrow agent 27,495,000 Principal payments 6,480,207 Issuance costs 1,361,755 Deferred amount on refunding 1,900,311 Discount on bonds 621,302 Long -term debt transactions $ (1,834,764) See independent auditors' report. -27- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): L. Explanation of Differences between Governmental Funds Operating Statements and the Statement of Activities (Continued): Interest on Long -Term Debt Interest payable on lonb term debt does not require the use of current financial resources and is not reported as governmental fund expenditures. However, these expenses are reported in the Statement of Activities. Interest and fiscal charges Deferred Revenue S 77,178 Some revenues reported in the Statement of Activities do not provide the use of current financial resources and are not reported as governmental fund expenditures. Investment income on interfund loans $ 552,492 Interest on notes receivable 110,361 $ 662,853 Other Expenses Some expenditures reported in the Statement of Revenues, Expenditures and Change in Fund Balances utilize current financial resources, but are not considered expenditures in the Statement of Activities. Project costs Deferred Amounts $ 11,837.000 Bond issuance costs, bond discount and deferred amount on refunding are recorded as expenditures in the Statement of Revenues, Expenditures and Changes in Fund Balances. However, these expenses are amortized over the terms of the related debt in the Statement of Activities. Amortization of issuance costs Amortization of deferred amount on refunding Amortization of bond discount Deferred amounts See independent auditors' report. -28- $ (127,368) (102,689) (30,390) $ (260,447) LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): M. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures /expenses during the reporting period. Actual results could differ from those estimates. 2. CASH AND INVESTMENTS: Cash and Investments Cash and investments at June 30, 2011 are classified in the accompanying financial statements as follows: Cash and investments at June 30, 2011 consisted of the following: Deposits with financial institutions Investments Total Cash and Investments See independent auditors' report. -29- $ 645,485 36.896,001 $ 37.541.486 Government- Fiduciary Wide Fund Statement of Statement of Net Assets Net Assets Total Cash and investments S 26,831,272 $ 16,520 S 26,847,792 Restricted assets: Cash and investments with fiscal agents 5,272,029 5,421,665 10,693,694 Total Cash and Investments $ 32.103,301 $ 5,438,185 $ 37,541 486 Cash and investments at June 30, 2011 consisted of the following: Deposits with financial institutions Investments Total Cash and Investments See independent auditors' report. -29- $ 645,485 36.896,001 $ 37.541.486 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2. CASH AND INVESTMENTS (CONTINUED)- Investments Authorized by the California Government Code and the Agency's Investment Policy The table below identifies the investment types that are authorized for the Agency by the California Government Code (or the Agency's investment policy, where more restrictive). The table also identifies certain provisions of the Califomia Government Code (or the Agency's investment policy, where more restrictive) that address interest rate risk; credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the Agency, rather than the general provisions of the California Government Code or the Agency's investment policy. Maximwn Authorized Investment Type Maturity United States Treasury Obligations 5 years United States Government Sponsored Agency Securities State and Local Agency Obligations Banker's Acceptances Insured or Collateralized Time Certificate of Deposits Commercial Paper Negotiable Certificates of Deposit Repurchase Agreements Reverse Repurchase Agreements Medium -Term Corporate Notes Local Agency Investment Fund (LAIF) California Asset Management Program (CAMP) Money Market Fund N/A - Not Applicable 5 years 5 years 180 days Maximum Percentage of Portfolio* None None None 40% Maximum Investment in One Issuer None 40% None 10% 5 years None None 270 days 15% 10% 5 years 30% None 30 days None None 92 days 10% None 5 years 30% None N/A None S 50,000,000 N/A None None 5 years 20% None * - Excluding amounts held by bond trustee that are not subject to California Government Code restrictions. See independent auditors' report. -30- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2_ CASH AND INVESTMENTS (CONTINUED): Investments Authorized by Debt Agreements Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the Agency's investment policy. Investments authorized for funds held by bond trustee include, United States Treasury Obligations, United States Government Sponsored Agency Securities, Guaranteed Investment Contracts, Commercial Paper, Local Agency Bonds, Banker's Acceptance and Money Market Mutual Funds. There were no limitations on the maximum amount can be invested in one issuer, maximum percentage allowed or the maximum maturity of an investment, except for the maturity of Commercial Paper which is limited to 92 days and of Banker's Acceptances which are limited to one year. Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Agency manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer tenn investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of the Agency's investments (including investments held by bond trustee) to market interest rate fluctuations is provided by the following table that shows the distribution of the Agency's investments by maturity: See independent auditors' report. -31- Remaining Maturity (in Months) 12 Months Investment Type or Less United States Treasury Obligations $ 7,232,855 United States Government Sponsored Agency Securities 7,911, Local Agency Investment Fund 11,007,2271 71 California Asset Management Program 50,668 Money Market Mutual Funds 10 693,693 $ 36.896.01 See independent auditors' report. -31- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2. CASH AND INVESTMENTS (CONTINUED): Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assign rent of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the Agency's investment policy, or debt agreements, and the actual rating by Standard and Poor, as of year end for each investment type: N/A - Not Applicable Subsequent to June 30, 2011, Standards and Poor's reduced the rating of the United States Government Sponsored Agency Securities from AAA to AA +. Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial 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 party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (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. See independent auditors' report. -32- Not Total Minimum Required as of Legal to be Investment Type June 30, 2011 Rating AAA Rated Unrated United States Treasury $ 7,232,855 N/A $ - $ 7,232,855 $ Obligations United States Government Sponsored Agency Securities 7,91 l ,514 N/A 7,911,514 - Local Agency Investment Fund 11,007,271 N/A - - 11,007,271 California Asset Management Program Pool 50,668 N/A 50,668 - - Money Market Mutual Funds 10,693,693 A 10 693,693 - - $ 36 896.001 $ 18.655.875 $ 7232.855 11 OOZ,27I N/A - Not Applicable Subsequent to June 30, 2011, Standards and Poor's reduced the rating of the United States Government Sponsored Agency Securities from AAA to AA +. Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial 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 party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (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. See independent auditors' report. -32- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2. CASH AND INVESTMENTS (CONTINUED): Custodial Credit Risk (Continued) The California Government Code and the Agency's investment policy do not contain legal or policy requirements 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 state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the goverrumental unit). The market value of the pledged securities in the collateral pool must equal at least 110 % of the total amount deposited by the public agencies. California law also allows financial institutions to secure the Agency's deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. At June 30, 2011, the Agency's deposits (bank balances) were fully insured by the Federal Depository Insurance Corporation. Investment in State Investment Pool The Agency is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the Agency's investment in this pool is reported in the accompanying financial statements at amounts based upon the Agency's pro -rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Investment in California Asset Management Program The California Asset Management Program (the CAMP) is a public joint powers authority which provides California Public Agencies with investment management services for surplus funds and comprehensive investment management, accounting and arbitrage rebate calculation services for proceeds of tax - exempt financings. The CAMP currently offers the Cash Reserve Portfolio, a short-term investment portfolio, as a means for Public Agencies to invest these funds. Public Agencies that invest in the Pool (Participants) purchase shares of beneficial interest. Participants may also establish individual, professionally managed investment accounts (individual Portfolios) by separate agreement with the Investment Advisor. The Agency has a separate account with the Investment Advisor to manage part of the CAMP portfolio which consists of $7,911,514 of United States Government Sponsored Agency Securities and $7,232,855 of United States Treasury Obligations. See independent auditors' report. -33- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 2. CASH AND INVESTMENTS (CONTINUED): Investment in California Asset Management Program (Continued) Investments in the Pools and Individual Portfolios are made only in investments in which Public Agencies generally are permitted by California statute. The CAMP may reject any investment and may limit the size of a Participant's account. The Pool seeks to maintain, but does not guarantee, a constant net asset value of $1.00 per share. A Participant may withdraw funds from its Pool accounts at any time by check or wire transfers. Requests for wire transfers must be made by 9:00 a.m. that day. Fair value of the Pool is determined by the fair value per share of the Pool's underlying portfolio. 3. NOTES RECEIVABLE: A note receivable in the amount of $9,737,000 from Pottery Court Housing Associates, L.P. dated March 10, 2011. The purpose of the loan is to assist with the acquisition of property and development of the Pottery Court Affordable Housing Project. The loan is to be repaid with interest in arrears in annual installments on July 1, commencing on July I in the calendar year immediately following the calendar year in which the deed of trust securing the pennanent loan is recorded in the official records of Riverside County. Absent prepayment or acceleration, the Borrower agrees to pay the loan in annual payments equal to 67.5 percent of the residual receipts as defined in the loan agreement. Notwithstanding any other provision, unless the loan is paid earlier, the outstanding principal and accrued unpaid interest is payable 55 years from the date of recording of the Release of Construction Covenants. As of June 30, 2011 the release of construction has not been recorded. At June 30, 2011, the total outstanding balance of $9,810,028 included interest of $73,028. A note receivable in the amount of $1,000,000 from Pottery Court Housing Associates, L.P. dated December 9, 2009. The purpose of the loan is to assist with the development of the Pottery Court Affordable Housing Project. This loan was funded with HOPE VI grant funds from the United States Department of Housing and Urban Development. The loan is to be repaid with interest in arrears in annual installments on July 1, commencing on July 1 in the calendar year immediately following the calendar year in which the deed of trust securing the permanent loan is recorded in the official records of Riverside County. Absent prepayment or acceleration, the Borrower agrees to pay the loan in annual payments equal to 75 percent of the residual receipts as defined in the loan agreement. Notwithstanding any other provision, unless the loan is paid earlier, the outstanding principal and accrued unpaid interest is payable 55 years from the date of recording of the deed of trust. As of June 30, 2011 the deed of trust has not been recorded . At June 30, 2011, the total outstanding balance of $1,030,000 included accrued interest of $30,000. See independent auditors' report. -34- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 3. NOTES RECEIVABLE (CONTINUED): A note receivable in the amount of $1,100,000 from LMV II Affordable, LP dated October 12, 2010. The purpose of the loan is to assist with the rehabilitation of 64 units of affordable housing for families the Lakeview II Affordable Housing Project. The loan is to be repaid with interest in arrears in annual installments on July 1, commencing on July 1 in the calendar year immediately following the calendar year in which the deed of trust securing the second permanent loan is recorded in the official records of Riverside County. Absent prepayment or acceleration, the Borrower agrees to pay the loan in annual payments equal to 30 percent of the residual receipts as defined in the loan agreement. Notwithstanding any other provision, unless the loan is paid earlier, the outstanding principal and accrued unpaid interest is payable 55 years from the date of recording of the release of construction covenants evidencing completion of the rehabilitation. As of June 30, 2011 the deed of trust has not been recorded. At June 30, 2011, the total outstanding balance of $1,107,333 included accrued interest of $7,333. 4. CAPITALASSETS: A summary of changes in the capital assets for the year ended June 30, 2011 is as follows: Capital assets, not being depreciated: Land Total capital assets, not being depreciated Capital assets, being depreciated: Buildings and structures Improvements other than buildings Machinery and equipment Furniture and fixtures Total capital assets being depreciated Balance at Balance at June 30. 2010 Additions Deletions June 30, 2011 $ 2,426,392 $ - $ - $ 2,426,392 2,426.392 - - 2,426,392 14,045,415 44,088 - 14,089,503 349,940 - - 349,940 972,376 - - 972,376 996 - 996 15 368,727 44,088 - 15,412,815 Less accumulated depreciation for: Buildings and structures (4,767,918) (355,216) - (5,123,134) Improvements other than buildings (162,409) (13,431) - (175,840) - (972,376) Machinery and equipment Furniture and fixtures (972,376) (996) - - - (996) Total accumulated depreciation (5,903,699) (368,647) - (6,272,346) Total capital assets being depreciated, net 9,465,028 (324,559) - 9,140,469 Total capital assets, net $ 11.891.420 $ (324.559) $ - $ 11.566.861 Depreciation expense was charged to governmental activities, general government program. See independent auditors' report. -35- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONUNUED) June 30, 2011 5. LAND HELD FOR RESALE: The cost of land acquired by the Agency and held for resale is recorded as an asset at the time of purchase. The property is being carried in the Rancho Laguna I Special Revenue Fund and Other Government Funds (Rancho Laguna I Capital Projects Fund) at the lower of cost or estimated net realizable value. 6. LONG -TERM LIABILITIES: * - Principal only Date of Years of Rate of Amount Due Issue Maturity Interest Authorized Loans Payable: Public Financing Authority Various Various Various $ 60,320,000 EVMWD (Amber Ridge) 2/95 1999 -2014 2.70% -6.00% 867,574 Subordinate Tax Allocation Revenue Bonds 4/11 2011-2038 Various 4,6]0;000 Developer Agreements: Deferred amount on 7.00% 2,200;000* Wal -Mart Stores, Inc. 3/93 1995 -2014 (821,250) (1,900,311) Oakgrove Equities 3/93 1997 -2016 7 .0 1,800,000* Outlet Center 12/89 1996 -2015 N/A A 2,140,000 * - Principal only Outstanding Outstanding Due June 30, June 30, Within 2010 Additions Retirements 2011 One Year Loans Payable: Public Financing Authority $ 54,545,000 $ 34,985,000 $ 29,450,000 $ 60,080,000 $ 1,500,000 Deferred amount on refunding (821,250) (1,900,311) (102,689) (2,618,872) - Discount on bonds (164,120) (621,302) (30,390) (755,032) - EVMWD (Amber Ridge) 256,720 - 52,674 204,046 53,436 Subordinate Tax Allocation Revenue Bonds - 4,610,000 - 4,610,000 - Developer Agreements: Wal -Mart Stores, Inc. 445,094 - 181,732 263,362 181,732 Oak Grove Equities 2,294,892 98,339 - 2,393,231 - Outlet Center 523,588 - 109,416 414,172 109,416 Advances from the City of Lake Elsinore 7,671.236 - 4,083,048 3,588,] 88 143,205 64,751,160 $ 37.171.726 1 .221_ 33.743 $68179,025 $ 1,987.789 See independent auditors' report. -36- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): A. Loans Payable: Public Financing Authority The City of Lake Elsinore's Public Financing Authority (the Authority) has issued Tax Allocation Revenue Bonds for financing projects of the Agency and to provide funds for the various debt obligations of the Agency. The Agency has entered into loan agreements with the Authority which mirror the bonds issued by the Authority. Concurrent with the execution and delivery of the loan agreements, the Authority issued the aggregate principal amount of its Tax Allocation Revenue Bonds. The loans were made from the proceeds of the bonds. The principal and interest are payable in installment payments payable not less than three business days prior to each interest payment date on the bonds. At June 30, 2011, loan agreements between the Agency and Authority totaled $60,080,000 based on 2010 Series A Tax Allocation Revenue Bonds, 2010 Series B Tax Allocation Revenue Bonds, 2010 Series C Tax Allocation Revenue Bonds and the 2011 Series A Tax Allocation Revenue Bonds issued by the Authority with proceeds disbursed as follows: Public Financing Authority - 1999 Series A In February 1999, $33,450,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issuance, the principal amount was loaned to the Agency through the release of the net proceeds of the financing. The net proceeds were used to advance refund $34,825,000 of outstanding 1992 Tax Allocation Revenue Bonds and to provide funds for the acquisition and construction of certain public Improvements within the Rancho Laguna Redevelopment Project Areas I and II. The Bonds were refunded by the 2010 Series C Tax Allocation Revenue Bonds in October 2010. Public Financing Authority - 2010 Series A In February 2010, S15,435,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issuance, the principal amount was loaned to the Agency through the release of the net proceeds of the financing. The net proceeds were used to advance refund $13,170,000 of outstanding 1999 Series C Tax Allocation Revenue Bonds. Tax revenue from Project Areas 1, 2, 3 and the Low and Moderate Income Housing Fund are pledged for repayment of the loan. In the event that tax revenue is not sufficient, the Agency has covenanted to make an interfund loan from other Project Areas. The loan is payable in annual installments of $305,000 to $2,910,000 from September 1, 2010 through September 1, 2033; interest at 2.00% to 5.25 %. The loan balance at June 30, 2011 is $14,755,000. At June 30, 2011, the Agency has a cash reserve balance for debt service of $1,472,778 which is sufficient to cover the Bond Indenture Reserve Requirement. See independent auditors' report. -37- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): A. Loans Payable (Continued): Public Financing Authority - 2010 Series B In May 2010, $10,855,000 principal amount of Tax Allocation Revenue Bonds, Series B, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency through the release of the net proceeds of the financing. The net proceeds were used to advance refund $10,065,000 of outstanding 1995 Series A Tax Allocation Revenue Bonds. Tax revenues from the Low and Moderate Income Housing Fund are pledged for the repayment of the loan. The loan is payable in annual installments of $515,000 to $895,000 from September 1, 2010 through September 1, 2025; interest at 2.00% to 4.75 %. The loan balance at June 30, 2011 is $10,340,000. At June 30, 2011, the Agency has a cash reserve balance for debt service of $939,806 which is sufficient to cover the Bond Indenture Reserve Requirement. Public Financing Authority - 2010 Series C In October 2010, $29,435,000 principal amount of Tax Allocation Revenue Bonds, Series C, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency through the release of the net proceeds of the financing. The net proceeds were used to advance refund $27,495,000 of outstanding 1999 Series A Tax Allocation Revenue Bonds. Tax revenues from Project Areas 1 and 2 are pledged for the repayment of the loan. In the event that tax revenues are not sufficient from Project Areas l and 2, the Agency has covenanted to make interfund loans from Project Area 3 and the Low and Moderate Income Housing Fund to make the loan payment. The loan is payable in annual installments of $605,000 to $2,115,000 from September 1, 2011 through September 1, 2030; interest at 2.00% to 5.00 %. The loan balance at June 30, 2011 is $29,435,000. At June 30, 2011, the Agency has a cash reserve balance for debt service of $2,223,028 which is sufficient to cover the Bond Indenture Reserve Requirement. The advance refunding resulted in an economic gain of $1,653,015 and a decrease in cash flows of $2,252,722. Proceeds from the 2010 Series C bonds were invested in an escrow fund with a trustee which together with earnings will pay interest and principal on the bonds until fully retired. The 1999 Series A bonds are legally defeased and are no longer a liability of the Agency. See independent auditors' report. -38- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): A. Loans Payable (Continued): Public Financing Authority - 2011 Series A In January 2011, $5,550,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency through the release of the net proceeds of the financing. The net proceeds were used to provide funding for a boat launch ramp project benefitting Project Area 1. Tax revenues from Project Area 1 are pledged for repayment of the loan. In the event that tax revenues are not sufficient from Project Area 1, the Agency has covenanted to make interfund loans from Project Areas 2 and 3 to make the loan payment. The pledge of Project Area 1 revenues to the loan is on a subordinate basis with respect to the 2010 Series C loan and on a parity basis with the 2010 Series A loan. The loan is payable in annual installments of $445,000 to $700,000 from September 1, 2012 through September 1, 2021; interest at 4.00% to 6.00 %. The loan balance at June 30, 2011 is $5,550,000. At June 30, 2011, the Agency has a cash reserve balance for debt service of $539,738 which is sufficient to cover the Bond Indenture Reserve Requirement. Future debt requirements for the loans payable to the Public Financing Authority are as follows: Year Ending June 30. 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027-2031 2032-2036 Totals Principal $ 1,500,000 2,455,000 2,520,000 2,590,000 2,660,000 14,705,000 14,855,000 12,515,000 6,280,000 $ 60 080.000 See independent auditors' report. -39- Interest $ 2,478,817 2,402,558 2,333,745 2,262,351 2,287,611 9,462,309 6,291,513 3,224,471 431,025 $ 31,174,400 Total $ 3,978,817 4,857,558 4,853,745 4,852,351 4,947,611 24,167,309 21,146,513 15,739,471 6,711,025 $ 91.254.400 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): A. Loans Payable (Continued): Elsinore Valley Municipal Water District ( EVMWD) - Amber Ridge In February 1995, the City and the Agency entered into an agreement with the EVMWD whereby the Agency would reimburse the EVMWD's annual loan payment related to project costs of the EVMWD and a loan payable to the State Resources Control Board. The Agency's annual installments of $60,740 are due July 1, 1999 to July 1, 2014; interest from 2.70% to 6.00 %. Future debt requirements for the loans are as follows: Year Ending June 30, 2012 2013 2014 2015 Totals Principal $ 53,436 55,412 57,474 37,724 Interest $ 7,304 5,328 3,266 1,113 Total $ 60,740 60,740 60,740 38,837 $ 204,046 S 17 011 $ 221,057 B. Subordinate Tax Allocation Revenue Bonds: 2011 Series Project Area II In April 2011, $3,260,000 principal amount of Subordinate Tax Allocation Revenue Bonds, Series 2011 Project Area II was issued to reimburse infrastructure costs to McMillin Summerly LLP under an Amended and Restated Disposition and Development Agreement dated March 8, 2011. The bonds were issued as a private placement offering to the developer. In connection with the bonds, the Agency has entered into a loan agreement with the Lake Elsinore Public Financing Authority to provide for funds for the Agency to purchase the bonds held by the developer. As of June 30, 2011, the loan was not funded. The term bonds are due in annual installments of $70,000 to $285,000 from September 1, 2012 through September 1, 2033; interest at 3.60% to 7.65 %. The bonds are subject to call and redemption prior to their stated maturity at specified redemption prices. See independent auditors' report. -40- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): B. Subordinate Tax Allocation Revenue Bonds (Continued): 2011 Series Project Area II (Continued) Future debt requirements for the Subordinate Tax Allocation Revenue Bonds Series 2011 Project Area II are as follows: Year Ending June 30, 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027-2031 2032-2034 Totals Principal 70,000 75,000 80,000 80,000 485,000 685,000 990,000 795,000 $ 3,260,000 2011 Series Project Area III Interest $ 208,515 234,055 231,107 227,380 223,180 1,029,748 821,029 504,518 94.286 $ 3 573.818 Total $ 208,515 304,055 306,107 307,380 303,180 1,514,748 1,506,029 1,494,518 889,286 $ 6.833,818 In April 2011, $1,350,000 principal amount of Subordinate Tax Allocation Revenue Bonds, Series 2011 Project Area III was issued to reimburse infrastructure costs to McMillin Surnmerly LLP under an Amended and Restated Disposition and Development Agreement dated March 8, 2011. The bonds were issued as a private placement offering to the developer. In connection with the bonds, the Agency has entered into a loan agreement with the Lake Elsinore Public Financing Authority to provide for funds for the Agency to purchase the bonds held by the developer. As of June 30, 2011, the loan was not funded. The term bonds are due in annual installments of $20,000 to $110,000 from September 1, 2012 through September 1, 2038; interest at 3.60% to 7.75 %. The bonds are subject to call and redemption prior to their stated maturity at specified redemption prices. See independent auditors' report. -41 - LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): B. Subordinate Tax Allocation Revenue Bonds (Continued): 2011 Series Project Area III (Continued) Future debt requirements for the Subordinate Tax Allocation Revenue Bonds Series 2011 Project Area III are as follows: Year Ending June 30, 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027 -2031 2032-2036 2037-2039 Totals C. Developer Agreements: Principal S - 20,000 20,000 20,000 20,000 135,000 180,000 265,000 380,000 310,000 $ l .350.000 Interest $ 88,573 99,597 98,788 97,827 96,778 460,075 403,928 319,684 198,075 37,200 $ 1 900.525 Total $ 88,573 119,597 118,788 117,827 116,778 595,075 583,928 584,684 578,075 347,200 $ 3,250,525 The Agency has entered into several developer agreements to attract new business to the City. The following represents the Agency's significant commitments with certain developers: Wal -Mart Stores, Inc. On March 12, 1993, the Agency entered into a Disposition and Development Agreement (DDA) with Wal -Mart Stores, Inc. Pursuant to the DDA, Wal -Mart Store, Inc. loaned the Agency 52,200,000 to purchase certain property from Oak Grove Equities. The property was then sold to Wal -Mart Stores, Inc. The $2,200,000 accrues interest at 7.00% per annum. Installment payments are to be made each year on January 30'' for approximately 20 years, continuing 19 years after the first installment date. Installment payments are calculated to be (1) in the amount of 100% of the sales tax in excess of $200,000, but not to exceed $200,000 and (2) 50% of the amount of any additional sales tax received in excess of $400,000. Sales tax is not pledged for repayment. The obligation is a general obligation of the Agency and tax increment is not specifically pledged. As of June 30, 2011, the Agency owes $263,362 to Wal -Mart Stores, Inc., which has been included in the long -term obligations. See independent auditors' report. -42- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): C. Developer Agreements (Continued): Oak Grove Equities On March 12, 1993, the Agency entered into an Owner Participation Agreement with Oak Grove Equities. The Agency has agreed to reimburse the developer $1,800,000 for certain public improvements that were installed at the Lake Elsinore City Center. The $1,800,000 accrues interest at 7.00% per annum. Installment payments are to be made each year on January 301h for approximately 20 years, continuing 19 years after the first installment date. Installment payments are calculated to be (1) in the amount of 100% of the sales tax in excess of $200,000, but not to exceed $200,000 and (2) 50% of the amount of any additional sales tax received in excess of $400,000. Sales tax is not pledged for repayment. The obligation is a general obligation of the Agency and tax increment is not specifically pledged. As of June 30, 2011, the Agency owes $2,393,231 to Oak Grove Equities, which has been included in the long -term obligations. Any unpaid obligation on the 20`h payment date, which is January 31, 2016, is to be forgiven and discharged. Outlet Center The Agency entered into an Owner Participation Agreement with NG /Chelsea Lake Elsinore Limited Partnership pertaining to the development of a factory retail outlet. The factory outlet center is located in Redevelopment Project Area 1. Pursuant to the Agreement, the Agency is required to pay the annual special assessment levied by Assessment District 86 -1. The bonds issued by Assessment District 86 -1 mature in the year 2015 and the annual special assessment is approximately $108,000. As of June 30, 2011, the Agency owes $414,172 which has been included in the long -term obligations. D. Advances from the City of Lake Elsinore: The City advanced the Agency $8,158,238 from 1997 through 2002 and $903,250 for the fiscal year ended June 30, 2003. These advances are to cover certain administrative costs and a legal settlement related to the Agency. Payments of $214,968 are to be made on an annual basis through fiscal year 2032. Interest is accrued cumulatively on the advances at a rate of 2 %. See independent auditors' report. -43- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 6. LONG -TERM LIABILITIES (CONTINUED): D. Advances from the City of Lake Elsinore (Continued): Future debt requirements for the advances from the City of Lake Elsinore are as follows: Year Ending June 30, 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027 - 2031 2032 Total s Principal Interest Total $ 143,205 $ 71,764 $ 214,969 146,069 68,900 214,969 148,991 65,978 214,969 151,970 62,998 214,968 155,010 59,959 214,969 822,810 252,032 1,074,842 908,449 166,395 1,074,844 1,003,002 71,843 1,074,845 108,682 2,175 110,857 $ 3.588.188 S 822.044 $ 4 410,232 7. COMMUNITY FACILITIES DISTRICT BONDS: These bonds are authorized pursuant to the Mello -Roos Community Facilities District Act of 1982, as amended, and are payable from special taxes levied on property within the Community Facility Districts according to a methodology approved by the voters within the District and by the Board of the Agency. Neither the faith and credit nor taxing power of the Agency is pledged to the payment of the bonds. Reserves have been established from the bond proceeds to meet delinquencies should they occur and amounted to $1,447,238 at June 30, 2011. if delinquencies occur beyond the amounts held in those reserves, the Agency has no duty to pay the delinquency out of any available funds of the Agency. The Agency acts solely as an agent for those paying taxes levied and the bondholders. Therefore, the outstanding balances of these bonds are not reflected in these financial statements. See independent auditors' report. -44- Original Bonds Issue Outstanding at Amount June 30, 2011 Community Facilities District 90 -2 Tuscany Hills Public Improvements 2002 Series A $ 14,470,000 S 7,545,000 Community Facilities District 90 -2 Tuscany Hills Public Improvements 2007 Series A 7,340,000 7,340,000 Total Community Facilities District Bonds $ 14,885,000 See independent auditors' report. -44- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 8. GOVERNMENTAL FUND BALANCE CLASSIFICATIONS: The Agency has implemented Governmental Accounting Standards Board Statement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions ", for the year ended June 30, 2011. The fund balances reported on the fund statements now consist of the following categories: Nonspendable Fund Balance - This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. Restricted Fund Balance - This classification includes amounts that can be spent only for specific purposes stipulated by constitution, external resource providers or through enabling legislation. Committed Fund Balance - This classification includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision - making authority. Assigned Fund Balance - This classification includes amounts to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds, other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. Unassigned Fund Balance - This classification includes all spendable amounts not contained in other classifications. The unassigned classification is used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed or assigned. When an expenditure is incurred for purposes for which both restricted and unrestricted fund balances are available, the Agency's policy is to apply restricted fund balance first. When an expenditure is incurred for purposes for which committed, assigned or unassigned fund balances are available, the Agency's policy is to apply committed fund balance first, then assigned fund balance, and finally unassigned fund balance. See independent auditors' report. -45- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 9. INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS: During the course of normal operations, the Agency entered into numerous transactions between funds, including expenditures and transfers of resources to provide services, construct assets and service debt. Due to and from other fur Receivable Fund Rancho Laguna I Debt Service Fund Rancho Laguna II Debt Service Fund ids at June 30, 2011 are as follows: Payable Fund Other Governmental Funds Rancho Laguna III Debt Service Fund Advances to and from other funds at June 30, 2011 are as follows: Advances To Rancho Laguna I Debt Service Fund Rancho Laguna II Debt Service Fund Rancho Laguna III Debt Service Fund Advances From Rancho Laguna Special Revenue Fund Rancho Laguna Special Revenue Fund Rancho Laguna Special Revenue Fund Amount $ 4,809,388 12,229,211 Amount $ 15,845,140 17,666,687 4,442,420 $ 37 954,247 The advances from the Rancho Laguna Special Revenue Fund to the Rancho Laguna I, II and III Debt Service Funds were made from the 1995 Series A and 1999 Series C bond proceeds deposited in the Rancho Laguna Special Revenue Fund. The 1995 Series A and 1999 Series C bonds were refunded in fiscal year 2010 with the issuance of the 2010 Series A and 2010 Series B bonds. The advances payable include an original loan amount of 518,040,439 and accrued interest of $16,163,809. Advances in the amount of $3,750,000 were a result of suspending a portion of the 20% set aside requirement to assist in the payment of the SERAF obligation for fiscal year 2010. This advance is to be repaid in installments by fiscal year 2014 -2015. See independent auditors' report. -46- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 9. 1NTERFUND RECEIVABLES, PAYABLES AND TRANSFERS (CONTINUED): Transfers in and out representing normal operations at June 30, 2011 are as follows: Transfers In Transfers Out Amount Rancho Laguna III Rancho Laguna I Debt Service Fund Other Governmental Funds 10. PASS - THROUGH AGREEMENTS: Debt Service Fund $ 15,298 Rancho Laguna I Debt Service Fund 360,000 Rancho Laguna II Debt Service Fund 360,000 Rancho Laguna III Debt Service Fund 205,000 $ 940.298 In order to lessen the fiscal impact of the tax increment financing of redevelopment projects on other units of local governments, the Agency has entered into pass - through agreements with various governmental agencies to "pass- through" portions of tax increment funds received by the Agency, attributable to the area within the territorial limits of other agencies. 11. FUND BALANCE DEFICITS AND TENTATIVE PLAN TO ELIMINATE THE DEFICITS: The Rancho Laguna I and III Debt Service Funds have accumulated fund deficits of $10,287,184 and $16,712,896, respectively, at June 30, 2011. These deficits are due to interfund loans and interest related to loans from the Housing Fund and in Rancho Laguna III, an interfund loan from Rancho Laguna II. In fiscal year 1995/96 Lake Elsinore Finance Authority issued tax allocation revenue bonds the proceeds of which were deposited into the Agency's Low and Moderate Income Housing Fund ( "Housing Fund "). For purposes of the bond documents, this account was designated as the "Rancho Laguna Special Revenue Fund ". The proceeds of these bonds were then transferred via interfund loans to the three project areas to cover debt service on prior notes and bonds. In November 1995, a Riverside Superior Court validated the bond issue and use of bond proceeds. The Interfund Loan Agreements were part of the validation action. These agreements include loans for debt service among project area accounts as well as the Housing Fund (Rancho Laguna Special Revenue Fund). The Agency tracks the amount to /from the various accounts in accordance with the Interfund Loan Agreements. See independent auditors' report. -47- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 11. FUND BALANCE DEFICITS AND TENTATIVE PLAN TO ELIMINATE THE DEFICITS (CONTINUED): The Interfund Loan Agreement legally creates the debt and allows for repayment from available funds as determined by the Agency. Refunding of the bonds does not necessitate revision of the underlying Interfund Loan Agreements. The Agency accounts for all payments into and out of the Housing Fund (Rancho Laguna Special Revenue Fund) in accordance with the Interfund Loan Agreement. All payments from the Housing Fund are reported as debt to the Housing Fund and the Agency has recognized its obligation to repay these funds. When the State Department of Housing and Community Development conducted its 2000 audit of the Agency's Housing Fund, it recognized the protection of the validation action and found that the Agency has properly tracked and recognized its debt to the Housing Fund. The Housing Fund debt has been discussed with the Agency Board and is addressed in several contexts. From a budgetary standpoint, the Agency has balanced repayment of the City Loan and repayment of the Housing Fund debt with its other obligations. A repayment schedule to retire the Agency's Housing Fund debt was prepared during the negotiations of the 2002 Civic Laing DDA. The 2002 DDA recognized the Housing Fund deficit as a priority obligation with a repayment schedule of up to $500,000 /year commencing in year 11. The 2011 Amended and Restated DDA maintains the priority designation of the Agency Housing Fund repayment obligation and allows payments from the Developer's and Master Developer's Tax Increment up to $833,333 /year. The Agency's 2005 -2009 and 2009 -2014 Implementation Plans also recognized the Housing Fund debt and proposal to establish a repayment plan /schedule. To date the Agency has had insufficient funds to maintain debt reduction payments. In July 2010, the Agency Board approved an Interfund Loan Promissory Note dated as of July 2008 to document advances from the Project Area II Special Fund to cover Project Area III Special Fund debt service obligations. The plan to eliminate the fund balance deficits is tentative due to the uncertainties surrounding the continuation of redevelopment agencies in California and the availability of tax increment revenues. In light of the California Supreme Court's decision upholding AB I x 26 and invalidating AB Ix 27 and the consequential elimination of tax increment revenues to be allocated to the Agency and dissolution of the Agency itself, the Agency has no current ability to plan for the retirement of the debt to the Housing Fund. In the event circumstances change by way of some future legislative act and the Agency continues to exist and to receive tax increment, we may recommend adoption of a more formal Housing Deficit Reduction Plan which is permitted, but not required by law. See independent auditors' report. -48- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 12. MULTI- FAMILY MORTGAGE REVENUE BONDS: The Agency has entered into a bond and loan program to finance low and moderate income multi - family residential development projects within the City limits. Although the Agency issued the bonds these debts are not payable from any revenues or assets of the Agency. Neither the faith and credit nor the taxing power of the Agency, or any political subdivision of the Agency, is pledged to repay the indebtedness. Bond obligations are paid by project revenues. Accordingly, since these debts do not constitute an obligation of the Agency, they are not reflected in the accompanying financial statements. They are as follows: Original Bonds Issue Outstanding at Amount June 30, 2011 Lakeside Village Project - Due January 1, 2031 $ 5,000,000 $ 4,146,704 13. LITIGATION: The Agency is a defendant in several other pending lawsuits of a nature common to may similar jurisdictions. Agency management estimates that the potential claims against the Agency not covered by insurance resulting from such litigation would not materially affect the basic financial statements of the Agency. 14. LIABILITY, PROPERTY AND PROTECTION: A. Description Self- Insurance Pool Pursuant to Joint Powers Agreement: The City is a member of the California Joint Powers Insurance Authority (Authority). The Authority is composed of 121 California public entities and is organized under a joint powers agreement pursuant to California Government Code §6500 et seq. The purpose of the Authority is to arrange and administer programs for the pooling of self - insured losses, to purchase excess insurance or reinsurance, and to arrange for group purchased insurance for property and other- coverages. The Authority's pool began covering claims of its members in 1978. Each member government has an elected official as its representative on the Board of Directors. The Board operates through a 9- member Executive Cornmittee. See independent auditors' report. -49- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 14. LIABILITY, PROPERTY AND PROTECTION (CONTINUED): B. Self - Insurance Programs of the Insurance Authority: A revised cost allocation methodology was introduced in 2010 -11, however it retains many elements of the previous cost allocation methodology. Each member pays an annual contribution (formerly called the primary deposit) to cover estimated losses for the coverage period. This initial funding is paid at the beginning of the coverage period. After the close of the coverage period, outstanding claims are valued. A retrospective deposit computation is then conducted annually thereafter until all claims incurred during the coverage period are closed on a pool -wide basis. This subsequent cost re- allocation among members based on actual claim development can result in adjustments of either refunds or additional deposits required. The total funding requirement for self - insurance programs is estimated using actuarial models and pre - funded through the annual contribution. Costs are allocated to individual agencies based on exposure (payroll) and experience (claims) relative to other members of the risk - sharing pool. Additional information regarding the cost allocation methodology is provided below. General Liability Insurance. In the liability program claims are pooled separately between police and non - police exposures. (1) The payroll of each member is evaluated relative to the payroll of other members. A variable credibility factor is determined for each member, which establishes the weight applied to payroll and the weight applied to losses within the formula. (2) The first layer of losses includes incurred costs up to $30,000 for each occurrence and is evaluated as a percentage of the pool's total incurred costs within the first layer. (3) The second layer of losses includes incurred costs from 530,000 to $750,000 for each occurrence and is evaluated as a percentage of the pool's total incurred costs within the second layer. (4) Incurred costs in excess of $750,000 up to the reinsurance attachment point of $5 million are distributed based on the outcome of cost allocation within the first and second loss layers. (5) Costs of covered claims from $5 million to Sl0 million are paid under a reinsurance contract subject to a $2.5 million annual aggregate deductible. Costs of covered claims from $10 million to $15 million are paid under two reinsurance contracts subject to a combined $3 million annual aggregate deductible. On a cumulative basis for all 2010 -11 reinsurance contracts the annual aggregate deductible is $5.5 million. (6) Costs of covered claims from $15 million up to $50 million are covered through excess insurance policies. The overall coverage limit for each member including all layers of coverage is $50 million per occurrence. See independent auditors' report. -50- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 14. LIABILITY, PROPERTY AND PROTECTION (CONTINUED): B. Self - Insurance Programs of the Insurance Authority (Continued): General Liability Insurance (Continued). Costs of covered claims for subsidence losses are paid by reinsurance and excess insurance with a pooled sub -limit of $35 million per occurrence. This $35 million subsidence sub -limit is composed of (a) $5 million retained within the pool's SIR, (b) $10 million in reinsurance and (c) $20 million in excess insurance. The excess insurance layer has a $20 million annual aggregate. C. Purchased Insurance: All Risk Property Insurance - The City participates in the all -risk property protection program of the Insurance Authority. This insurance protection is underwritten by several insurance companies. The City's property is currently insured according to a schedule of covered property submitted by the City to the Insurance Authority. The City's property currently has all -risk property insurance protection in the amount of $35,808,267. There is a $5,000 deductible per occurrence except for non - emergency vehicle insurance which has a $1,000 deductible. Premiums for the coverage are paid annually and are not subject to retroactive adjustments. Crime Insurance The City purchases crime insurance coverage in the amount of $1,000,000 with a $2;500 deductible. The fidelity coverage is provided through the Insurance Authority. Premiums are paid annually and are not subject to retroactive adjustments. D. Adequacy of Protection: During the past three fiscal (claims) years, none of the above programs of protection have experienced settlements or judgments that exceeded pooled or insured coverage. There were also no significant reductions in pooled or insured liability coverage in 2010 -2011. The aforementioned information is not included in the accompanying financial statements. Complete financial statements for the California Joint Powers Insurance Authority may be obtained from their administrative office located at 8081 Moody Street, La Palma, California 90623. See independent auditors report. -51- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 15_ CONTINGENCIES: Taxes Levied Under provisions of the California Constitutions, taxes levied by any taxing agency on all taxable property in the project area will be divided as follows when collected: a. An amount each year equal to the current tax rates applicable to the assessed valuation (within the project area) prior to the adoption of the Redevelopment Plan will be paid into the funds of the respective taxing agencies, and b. Taxes received over and above that amount will be deposited in the Capital Projects operating funds of the Agency. The Agency has no power to levy and collect taxes, and any legislated property tax reduction might reduce the amount of tax revenues that would otherwise be available to pay the amount due to bondholders. Broadened property tax exemptions would have a similar effect. Conversely, any increase in the tax rate or assessed valuation, or any reduction or elimination of present exemptions would increase the amount of tax revenues that would be available to pay principal and interest on advances from other governments. McMillin Summerly LLC On or about December 26, 2002, the Agency entered into a Disposition and Development Agreement (DDA) with Laing -CP Lake Elsinore LLC and Civic Partners- Elsinore LLC, as developer and master developer, respectively, covering an area of approximately 3,000 acres located in Project Areas II and III. As a result of the bankruptcy of the managing member of Laing -CP Lake Elsinore LLC, Bank of America foreclosed on the property subject to the DDA. Subsequently, Bank of America transferred the ownership of the property subject to DDA to McMillin Summerly LLC, who assumed the rights and obligations of the developer under the DDA pursuant to an Amended and Restated DDA entered into as of March 8, 2011. In the DDA, the Agency pledged 100% of the net tax increment generated by the property subject to the DDA to the developer and master developer, excluding, without limitation, moneys to be set aside in the low and moderate income housing fund and funds payable under existing pass - through agreements. See independent auditors' report. -52- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 15. CONTINGENCIES (CONTINUED): McMillin Summerly LLC (Continued) As of June 30, 2011, the Agency has accrued $3,177,229 of tax increment due to the developer and master developer for payment when due pursuant to the terms of the DDA. A portion of the tax increment pledge reimburses the developer for construction of certain extraordinary infrastructure associated with the project. Developer's reimbursement for construction of certain extraordinary infrastructure is limited to $19,000,000, as adjusted in accordance with the terms of the DDA. The Agency issued two subordinate tax allocation bonds 2011 Series totaling $4,610,000, the proceeds of which will be used to reimburse the developer for construction of certain extraordinary infrastructure. Any unpaid reimbursement of extraordinary infrastructure is to be forgiven upon the expiration of the Agency's right to receive tax increment under its Redevelopment Plans for Project Areas II and III. The DDA prohibits further bonded indebtedness secured by tax increment generated by the project site, other than for specified project purposes. Supplemental Education Revenue Augmentation Fund ( SERAF) Pursuant to AB 26 4x, a budget trailer bill, California redevelopment agencies were required to make Supplemental Education Revenue Augmentation Fund ( SERAF) contributions totaling $1.7 billion for the fiscal year 2009 -2010 and $350 million for the fiscal year 2010 -2011. Under AB 26 4x, agencies may borrow a portion of the required contributions from their low and moderate income housing fund. Alternatively, sponsoring governmental agencies (the cities or counties) may elect to pay the SERAF contributions on behalf of their redevelopment agencies. On October 20, 2009, the California Redevelopment Association filed a class action lawsuit on behalf of all California redevelopment agencies, again challenging the SERAF obligations as unconstitutional. The court ruled that the SERAF obligations were not unconstitutional. The Agency's SERAF contributions are $6,976,853 for the fiscal year 2009 -2010 and $1,436,411 for 2010 -2011. For fiscal year 2009 -2010, the Agency paid $4,663,264 from non - housing funds and the balance of $3,750,000 was from suspending a portion of the 20% set aside amount for fiscal year 2010 as allowed by the legislation. For fiscal year 2010 -2011, the SERAF payment was made by the Agency's Debt Service Funds. See independent auditors' report. -53- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 15. CONTINGENCIES (CONTINUED): Recent Changes in Legislation Affecting California Redevelopment Agencies On June 29, 2011, the Governor of the State of California signed Assembly Bills l x 26 and 27 as part of the State's budget package. Assembly Bill 1 x 26 requires each California redevelopment agency to suspend nearly all activities except to implement existing contracts, meet already - incurred obligations, preserve its assets and prepare for the impending dissolution of the agency. Assembly Bill I x 27 provides a means for redevelopment agencies to continue to exist and operate by means of a Voluntary Alternative Redevelopment Program. Under this program each City would adopt an ordinance agreeing to make certain payments to the County Auditor Controller in fiscal year 2011 -12 and annual payments each fiscal year thereafter. Assembly Bill lx 26 indicates that the City "may use any available funds not otherwise obligated for other uses" to make this payment. The City of Lake Elsinore intends to use available monies of its redevelopment agency for this purpose. The amounts to be paid after fiscal year 2012 -13 have yet to be determined by the state legislature. Assembly Bill lx 26 directs the State Controller of the State of California to review the propriety of any transfers of assets between redevelopment agencies and other public bodies that occurred after January 1, 2011. If the public body that received such transfers is not contractually committed to a third party for the expenditure or encumbrance of those assets, the State Controller is required to order the available assets to be transferred to the public body designated as the successor agency by Assembly Bill 1 x 26. In the event that Assembly Bill lx 26 is upheld, the interagency receivable recognized by funds of the City that had previously loaned or advanced funds to the redevelopment agency may become uncollectible resulting in a loss recognized by such funds. The City might additionally be impacted if reimbursements previously paid by the redevelopment agency to the City for shared administrative services are reduced or eliminated. The League of California Cities and the California Redevelopment Association (CRA) filed a lawsuit on July 18, 2011 on behalf of cities, counties and redevelopment agencies petitioning the California Supreme Court to overturn Assembly Bills lx 26 and 27 on the grounds that these bills violate the California Constitution. On August 11, 2011, the California Supreme Court issued a stay of all of Assembly Bill Ix 27 and most of Assembly Bill lx 26. The California Supreme Court stated in its order that "the briefing schedule is designed to facilitate oral argument as early as possible in 2011, and a decision before January 15, 2012''. A second order issued by the California Supreme Court on August 17, 2011 indicated that certain provisions of Assembly Bills lx 26 and 27 were still in effect and not affected by its previous stay, including requirements to file an appeal of the determination of the community remittance payment by August 15, the requirement to adopt an Enforceable Obligations Payment Schedule (FOPS) by August 29, 2011, and the requirement to prepare a preliminary draft of the initial Recognized Obligation Payment Schedule (ROPS) by September 30, 2011. See independent auditors' report. -54- LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2011 15. CONTINGENCIES (CONTINUED): Recent Changes in Legislation Affecting California Redevelopment Agencies (Continued) Because the stay provide by Assembly Bill lx 26 only affects enforcement, each agency must adopt an EOPS and draft ROPS prior to September 30, as required by the statute. Enforceable obligations include bonds, loans and payments required by the federal or State government; legally enforceable payments required in connection with agency employees such as pension payments and unemployment payments, judgments or settlement; legally binding and enforceable agreements or contracts, and contracts or agreements necessary for the continued administration or operation of the agency that are permitted for purposes set forth in Assembly Bill lx 26. On August 23, 2011, City Ordinance No. 2011 -1293 was adopted, indicating that the City will comply with the Voluntary Alternative Redevelopment Program in order to permit the continued existence and operation of the Agency, in the event Assembly Bills Ix 26 and/or 27 are upheld as constitutional. The initial payment by the City is $7.318 million with on half due on January 15, 2012 and the other half due May 15, 2012. The amounts to be paid after fiscal year 2012 -13 have yet to be determined by the State Legislature. The semi - annual payments will be due on January 15 and May 15 of each year and would increase or decrease with changes in tax increment. Additionally, an increased amount would be due to schools if any "new debt" is incurred. Assembly Bill Ix 27 allows a one -year reprieve on the agency s obligation to contribute 20% of tax increment to the low and moderate income housing fund so as to pen-nit the Agency to assemble sufficient funds to make its initial payments. Failure to make these payments would require agencies to be tenninated under the provisions of Assembly Bill lx 26. On December 29, 2011, the California Supreme Court rendered an opinion upholding Assembly Bill l x 26 and invalidating Assembly Bill 1 x 27. The impact of this decision is not reflected in the accompanying financial statements. See independent auditors' report. -55- TIIIS PAGE INTENTIONALLY LEFT BLANK -56- REQUIRED SUPPLEMENTARY INFORMATION -57- LAKE ELSINORE REDEVELOPMENT AGENCY BUDGETARY COMPARISON SCHEDULE RANCHO LAGUNA SPECIAL REVENUE FUND For the year ended June 30, 2011 REVENUES: Tar; increment Investment income Grant income Sale of property Other income TOTAL REVENUES EXPENDITURES: Current: Professional services Project costs Debt services: Principal retirement Interest and fiscal charges TOTAL EXPENDITURES EXCESS OF REVENUES OVER (UNDER) EXPENDITURES FUND BALANCE - BEGINNING OF YEAR FUND BALANCE - END OF YEAR Variance with Final Budget Budgeted Amounts Positive Original Final Actual (Negative) $ 3,892,800 $ 3,892,000 $ 3,821,776 $ (70;224) 300,000 300,000 106,865 (193,135) - - 285,243 285,243 - - 604,778 604,778 540,000 540,000 141,198 (398,802) 4,732,800 4,732,000 4,959,860 227,860 215,450 215,450 322,018 (106,568) 1,100,000 1,100,000 11,238401 (10,138,401) 515,000 515,000 725,800 (210,800) 781,784 781,784 552,492 229,292 2,612,234 2,612,234 12,838,711 (10,226,477) 2,120,566 2,119,766 (7,878,851) (9,998,617) 34,320,899 34,320,899 34,320,899 $ 36,441,465 $ 36,440,665 $ 26,442,048 $ (9,998,617) See independent auditors' report and note to required supplementary information. -58- LAKE ESLINORE REDEVELOPMENT AGENCY NOTE TO REQUIRED SUPPLEMENTARY INFORMATION June 30, 2011 1. BUDGETS AND BUDGETARY ACCOUNTING: The Agency follows these procedures in establishing the budgetary data reflected in the financial statements: 1) In May, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing July 1. The operating budget includes proposed expenditures and estimated revenues and other means of financing. 2) Public hearings are conducted at City Council meetings to obtain public input. 3) Prior to July 1, the budget is adopted by Council action. 4) The City Manager is authorized to transfer funds appropriated with respect to those classifications designated as other services and material and supplies within the same department. The City Manager may transfer appropriated funds from any classification within other expenditure categories to the capital outlay classification within the same department only. For budgeting purposes, all Special Revenue and Capital Projects budgeted funds are considered a single department. Revenues are budgeted on a line item basis. 5) The legal level of budgetary control is maintained at the departmental level. Formal budgetary integration is employed as a management control device during the year for the Special Revenue Fund types to assist in controlling expenditures and enforcing revenue provisions. Capital Projects Fund types are budgeted on a project by project basis. All appropriations lapse at the end of the fiscal year, except for capital projects which are carried forward until such time as the project is completed or terminated. 6) Budgets for the Special Revenue and Capital Projects Funds are adopted on a basis consistent with accounting principles generally accepted in the United States of America. Budgeted amounts are as originally adopted and as further amended by the City Council. Budgetary data is not presented for Debt Service Funds because the activity within this fund is controlled by the debt agreements. 7) Budget information is presented for each major Special Revenue Fund. Capital Projects Funds are not required to present budgetary comparison schedules and formal budgeting policies are not required for the Debt Services Funds, therefore, the financial statements of these funds are not included in the Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual. See independent auditors' report. -59- THIS PAGE INTENTIONALLY LEFT BLANK •1 SUPPLEMENTARY INFORMATION -61- LAKE ELSINORE REDEVELOPMENT AGENCY ASSETS Cash and investments Land held for resale TOTAL ASSETS COMBINING BALANCE SHEET OTHER GOVERNMENTAL FUNDS June 30, 2011 LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable Deferred revenue Due to other funds TOTAL LIABILITIES FUND BALANCES: Nonspendable: Land held for resale Restricted for: Capital prgjects Unassigned TOTAL FUND BALANCES TOTAL LIABILITIES AND FUND BALANCES See independent auditors' report. -62- Special Revenue Fund Capital Projects Funds Cost Recovery Stadium Rancho System Capital Laguna 1 $ 79,040 $ 484,758 $ 39,302 - - 6,088,480 $ 79,040 $ 484,758 $ 6,127,782 $ 9,992 $ - $ 25,563 69,048 - - - 4,809,388 79,040 4,834,951 6,088,480 484.758 - - (4,795;649) - 484,758 1,292,831 $ 79,040 $ 484,758 $ 6,127,782 Capital Projects Funds (Continued) Total Other Rancho Rancho Governmental Laguna A Lagunalll Funds $ 5,741 $ 6,242 $ 615,083 - - 6,088,480 $ 5,741 $ 6,242 $ 6,703,563 $ 1,429 $ 1,429 $ 38,413 - - 69,048 - - 4,809,388 1,429 1,429 4,916,849 - - 6,088,480 4,312 4,813 493,883 - - (4,795,649) 4,312 4,813 1,786,714 $ 5,741 $ 6,242 $ 6,703,563 -63- LAKE ELSINORE REDEVELOPMENT AGENCY COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - OTHER GOVERNMENTAL FUNDS For the year ended June 30, 2011 REVENUES: Investment income Other revenue TOTAL REVENUES EXPENDITURES: Current: Project costs EXCESS OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES: Transfers in NET CHANGE IN FUND BALANCES FUND BALANCES (DEFICITS) - BEGINNING OF YEAR FUND BALANCES - END OF YEAR See independent auditors' report. !sue Special Revenue Fund Capital Projects Funds Cost Recovery Stadium Rancho System Capital Laguna I $ _ $ - $ 51 - 300,000 19,930 300,000 19,981 50,651 378,161 249,349 (358,180) - 360.000 249,349 1,820 235,409 1,291,011 $ $ 484,758 $ 1,292,831 Capital Projects Funds (Continued) Total Other Rancho Rancho Governmental Laguna H Lagunalrl Funds $ 21 $ 22 $ 94 - - 319,930 21 22 320,024 336,690 179,899 945,401 (336,669) (179,877) (625,377) 360,000 205,000 925,000 23,331 25,123 299,623 (19,019) (20,310) 1,487,091 $ 4,312 $ 4,813 $ 1,786,714 -65- LAKE ELSINORE REDEVELOPMENT AGENCY COMPUTATION OF HOUSING SET -ASIDE EXCESS SURPLUS July 1, 2010 OPENING FUND BALANCE -JULY 1, 2010 LESS UNAVAILABLE AMOUNTS: Cash and investments with fiscal agents (unspent bond proceeds) Land held for resale Advances to other funds Encumbrance for Pottery Court Affordable Housing Project TOTAL UNAVAILABLE AMOUNTS AVAILABLE HOUSING SET -ASIDE FUNDS LIMITATION (GREATER OF $1,000,000 OR FOUR YEARS SET - ASIDE): Set -aside for last four years: 2009-2010 2008-2009 2007-2008 2006-2007 TOTAL SET -ASIDE FOR LAST FOUR YEARS Base limitation GREATER AMOUNT COMPUTED EXCESS SURPLUS -JULY 1, 2010 See independent auditors' report. -66- $ (1,461,936) (2,714,687) (18,040,439) (8,070,681) $ 225,411 4,978,484 5,296,872 4,222,509 S 14,723,276 $ 1,000,000 All Project Areas $ 34,320,899 (30,287,743) 4,033,156 14,723,276 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER COMPLIANCE To the Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California Compliance We have audited the Lake Elsinore Redevelopment Agency's (the Agency) compliance with the California Health and Safety Code as required by Section 33080.1 for the year ended June 30, 2011. Compliance with the requirements referred to above is the responsibility of the Agency's management. Our responsibility is to express an opinion on the Agency's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Guidelines for Compliance Audits of California Redevelopment Agencies, June 2011, issued by the State Controller and as interpreted in the Auditing Procedures for Accomplishing Compliance Audits of California Redevelopment Agencies, August 2011, issued by the Governmental Accounting and Auditing Committee of the California Society of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the Agency has occurred. An audit includes examining, on a test basis, evidence about the Agency's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the Agency's compliance with the requirements referred to in the first paragraph. -67- 2875 Michelle Driw, Suite 30 0,, Irvine, CA 92606 • Tel: 714.974.130% • Fax: 714.974.7893 Offices tocat:d in Grange and San Diego COMIRes Compliance (Continued) As described below, the Agency did not comply with the California Health and Safety Code as required by Section 333080.1. Compliance with such requirements is necessary, in our opinion, for the Agency to comply with the requirements referred to above. The Agency did not include with its annual report, due to the legislative body within six months of the end of the fiscal year, the following items: A fiscal statement for the previous fiscal year Health and Safety Code Section 33080.5. A description of the Agency's activities in the previous fiscal year affecting housing and displacement Health and Safety Code Sections 33080.4 and 3' )080.7. A list of, and status report on, all loans that are $50,000 or more, that in the previous fiscal year were in default, or not in compliance with the terms of the loan. Management's Responses: 1. Previous year fiscal statement. The guidelines for Compliance Audits of California Redevelopment Agencies issued by the State controller's office, is dated June 2011. The previous year report issued to the State Controller's officers was done on December 30, 2010. Management was not aware at the time the report was issued of the requirement to prepare a fiscal statement. In the current year report, a fiscal statement will be included. 2. Description of Agency's activities in the previous year affecting housing and displacement. The Agency will include the required information requested in the current year report. 3. A list of and status report on, all loans that are $50,000 or more in default in the previous fiscal year. The guidelines for Compliance Audits of California Redevelopment Agencies issued by the State controller's office, was dated June 2011. The previous year report issued to the State Controller's officers was done on December 30, 2010. Management was not aware at the time the report was issued of the requirement to include a list of and status report on, all loans that are $50.000 or more that were in default. There were no loans in default in the previous year or in the current year. In the current year report, a report stating the status will be included. In our opinion, except for the noncompliance described in the preceding paragraph, the Agency complied, in all material respects, with the compliance requirements referred to above that are applicable for the year ended June, 30, 2011. .: Internal Control Over Compliance Management of the Agency is responsible for establishing and maintaining effective internal control over compliance with the compliance requirements referred to above. In planning and performing our audit, we considered the Agency's internal control over compliance to determine the auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Agency's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses in internal control over compliance. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. The Agency's responses to the noncompliance identified in our audit are described above. We did not audit the Agency's responses, and accordingly we express no opinion on the responses. This report is intended solely for the information and use of the Agency Members and management of the Lake Elsinore Redevelopment Agency and the State Controller's Office, Division of Accounting and Reporting and is not intended to be and should not be used by anyone other than these specific parties. w ku& Nd-s m D tZQ E v ctrl.S t-00 December 30, 201 l Irvine, California ••