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Home My WebLink AboutItem No. 3 Part 2LAKE ELSINORE PUBLIC FINANCING AUTHORITY COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - OTHER GOVERNMENTAL FUNDS For the year ended June 30, 2012 REVENUE'S: Investment income Other revenues TOTAL REVENUES EXPENDITURES: Current: Professional services Debt service: Bond issuance costs Principal retirement Interest and fiscal charges TOTAL, EXPENDITURES EXCESS OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Local agency bonds issued Payment to refunding bond escrow agent Bond discounts TOTAL OTHER FINANCING SOURCES (USES) CHANGES IN FUND BALANCES FUND BALANCES - BEGINNING OF YEAR FUND BALANCES - END OF YEAR See independent auditors' report. Debt Service Funds 1995 1996 1997 Series A Series E Series F Bonds Bonds Bonds $ 10 $ 93,128 $ 10 93,128 109,376 109.376 10 (16,248) (2,692) (1345,000) Series C Bonds 9 (1,347.692) 10 (1,363,940) - 9 4.120 1,363,940 19 3,591 $ 4,130 $ - $ 19 $ 3,600 -48- Page 56 of 190 24 2 - 6 - 156,566 Debt Service Funds (Continued) 162.469 - Total 1999 2008 2010 2010 2011 2011 2011 Other Series G Series B Series B Series A Series A Series A Series B Governmental Bonds Bonds Bonds Bonds Bonds Bonds Bonds Funds $ 93,425 $ 239,157 $ 384,900 $ 261,195 $ 323,422 $ 299,963 $ 11,483 $ 1,706,692 56,133 45,049 - 223,312 - - 20,287 344,781 149,558 284,206 384,900 484,507 323,422 299,963 31,770 2,051,473 24 2 - 6 - 156,566 5.871 162.469 - - - - - 90,018 148,272 238,290 255,000 - 545,000 - - - - 800.000 76,125 220,486 384900 446,987 323,422 181,312 19,523 1,762,131 331,149 220,488 929,900 446,993 323,422 427,896 173,666 2,962,890 (181,591) 63,718 (545,000) 37,514 - (127,933) (141,896) (911,417) 2,692 2,692 - (2,692) 1,405,000 1,405,000 - (1,345,000) (30,000) (30,000) - - - - - 1,377,692 30,000 (181,591) 61718 (545,000) 37,514 - (127,933) 1,235,796 (881,417) 2,078,316 3,075,162 10,340,000 7,200,276 5,550,000 5,193,050 - 34,808,474 $ 1,896,725 $ 3,138,880 $ 9,795,000 $ 7,237,790 $ 5,550,000 $ 5,065,117 $ 1,235,796 $ 33,927,057 -49- Page 57 of 190 Page 58 of 190 LAKE ELSINORE RECREATION AUTHORITY COMPONENT UNIT FINANCIAL STATEMENTS WITH REPORT ON AUDIT BYINDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS JUNE 30, 2012 Page 59 of 190 LAKE ELSINORE RECREATION AUTHORITY TABLE OF CONTENTS June 30, 2012 Page Number Independent Auditors' Report 1 - 2 Basic Financial Statements: Statement of Net Assets 3 Statement of Activities q Balance Sheet - Governmental Fund g Reconciliation of the Governmental Fund Balance Sheet to the Statement of Net Assets 6 Statement of Revenues, Expenditures and Changes in Fund Balance - Governmental Fund 7 Reconciliation of the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement ofActivities g Notes to Basic Financial Statements 9- 19 Page 60 of 190 INDEPENDENT AUDITORS' REPORT The Board of Directors Lake Elsinore Recreation Authority Lake Elsinore, California We have audited the accompanying financial statements of the governmental activities and the major fund of the Lake Elsinore Recreation Authority (the Authority), (a component unit of the City of Lake Elsinore, California), as of and for the year ended June 30, 2012, which collectively comprise the Authority's basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the Authority's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 Authority's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. As described more fully in Note IA, the basic component unit financial statements present only the Authority and are not intended to present fairly the financial position and results of operations of the City of Lake Elsinore, California in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and the major fund of the Authority as of June 30, 2012, 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. -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Off ces located in Orange and San Diego Counties Page 61 of 190 The Authority 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. r�,F 7Z n1 ,llze:r'�' �.�) Irvine, California March 27. 2013 -2- Page 62 of 190 LAKE ELSINORE RECREATION AUTHORITY STATEMENT OF NET ASSETS June 30, 2012 ASSETS: Restricted assets: Cash and investments with fiscal agents (Note 2) Interest receivable Lease receivable (Note 3) TOTAL ASSETS LIABILITIES: Accounts payable Due to City of Lake Elsinore Restricted liabilities: Interest payable Noncurrent liabilities (Note 4): Due within one year Due in more than one year TOTAL LIABILITIES NET ASSETS (DEFICIT): Restricted for debt service Unrestricted TOTAL NET DEFICIT See independent auditors' report and notes to basic financial statements. -3- Governmental Activities $ 2,341 1,487 12,975,000 12,978,828 676 17,570 1,487 410,000 12,565,000 12,994,733 2,341 (18,246) $ (15,905) Page 63 of 190 LAKE ELSINORE RECREATION AUTHORITY STATEMENT OF ACTIVITIES For the year ended June 30, 2012 Functions /programs Expenses Governmental activities: Interest on long -term debt $ 23,048 Total governmental activities $ 23,048 Net (Expense) General revenues: Investment 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. -4- 19,066 19,066 (3,982) (11,923) $ (15,905) Page 64 of 190 Revenue and Changes in Program Revenues Net Assets Charges Operating Capital for Grants and Grants and Govemmental Services Contributions Contributions Activities $ - $ - $ - $ (23,048) $ - $ - $ - (23,048) General revenues: Investment 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. -4- 19,066 19,066 (3,982) (11,923) $ (15,905) Page 64 of 190 LAKE ELSINORE RECREATION AUTHORITY BALANCESHEET GOVERNMENTAL FUND June 30, 2012 ASSETS Restricted assets: Cash and investments with fiscal agents TOTAL ASSETS LIABILITIES AND FUND BALANCE LIABILITIES: Accounts payable Due to City of Lake Elsinore TOTAL LIABILITIES FUND BALANCE (DEFICIT): Restricted for debt service Unassigned TOTAL FUND BALANCE (DEFICIT) TOTAL LIABILITIES AND FUND BALANCE See independent auditors' report and notes to basic financial statements. -5- Debt Service $ 2,341 $ 2,341 $ 676 17,570 18,246 2,341 (18,246) (15,905) $ 2,341 Page 65 of 190 LAKE ELSINORE RECREATION AUTHORITY RECONCILIATION OF THE GOVERNMENTAL FUND BALANCE SHEET TO THE STATEMENT OF NET ASSETS June 30, 2012 Fund balance (deficit) for governmental fund $ (15,905) Amounts reported for governmental activities in the Statement of Net Assets are different because: Long -term assets which are not considered to be current financial resources are not reported in the governmental fund: Lease receivable 12,975,000 Interest receivable 1,487 Long -term liabilities are not due and payable in the current period are not reported in the governmental fund: Interest payable (1,487) Long -term liabilities (12,975,000) Net deficit of governmental activities $ (15,905) See independent auditors' report and notes to basic financial statements. -6- Page 66 of 190 LAKE ELSINORE RECREATION AUTHORITY STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GOVERNMENTAL FUND For the year ended June 30, 2012 Debt Service REVENUES: Lease payments - principal $ 390,000 Lease payments - interest 19,066 TOTAL REVENUES 409,066 EXPENDITURES: Current: Professional services 3,982 Debt service: Principal retirement 390,000 Interest and fiscal charges 19,066 TOTAL EXPENDITURES 413,048 EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (3,982) FUND BALANCE (DEFICIT) - BEGINNING OF YEAR (11,923) FUND BALANCE (DEFICIT) - END OF YEAR $ (15,905) See independent auditors' report and notes to basic financial statements. -7- Page 67 of 190 LAKE ELSINORE RECREATION AUTHORITY RECONCILIATION OF THE GOVERNMENTAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE TO THE STATEMENT OF ACTIVITIES For the year ended June 30, 2012 Net change in fund balance (deficit) - total governmental fund $ (3,982) Amounts reported for governmental activities in the Statement of Activities are different because: The governmental fund reports the receipt of lease payments as revenue, but repayments of the principal are included as a reduction of the lease receivable in the Statement of Net Assets. Principal lease payments (390,000) The governmental fund reports retirement of the principal of long -term debt as expenditures, but retirements are included as a reduction of long -term liabilities in the Statement of Net Assets. Long -term debt principal payments 390,000 Change in net assets of governmental activities $ (3,982) See independent auditors' report and notes to basic financial statements. -8- Page 68 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES: A. Description of the Reporting Entity: The Lake Elsinore Recreation Authority (the Authority) is a joint exercise of powers between the City of Lake Elsinore (the City) and the Lake Elsinore Redevelopment Agency (the Agency) which was dissolved effective February 1, 2012, created by a joint powers agreement dated December 1, 1996. The Recreation Authority continues to function without the Agency. The purpose of the Authority is to provide, through the issuance of revenue bonds, a financing pool to fund capital improvement projects. These revenue bonds are to be repaid solely from the revenues of certain public obligations. The Authority does not have taxing power. The City Council also acts as the governing body of the Authority. The Authority's activities in these financial statements are reported as a debt service fund. The Authority is a component unit of the City and, accordingly, the financial statements of the Authority are included in the financial statements of the City. The Authority is an integral part of the reporting entity of the City. The funds of the Authority have been blended within the financial statements of the City because the City Council of the City is the governing board of the Authority and exercises control over the operations of the Authority. Only the funds of the Authority are included herein, therefore, these financial statements do no purport to represent the financial position or results of operations of the City. B. Basis of Presentation: The accounting policies of the Authority conform to accounting principles generally accepted in the United States of America as they are applicable to governmental units. The Governmental Accounting Standard Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The more significant accounting policies reflected in the financial statements are summarized as follows: Government -Wide and Fund 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 nonfiduciary activities of the primary government (the Authority). 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. All Authority activities are governmental; no business -type activities are reported in the statements. See independent auditors' report. -9- Page 69 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Basis of Presentation (Continued): Government -Wide and Fund Financial Statements (Continued) The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are expenses that are clearly identifiable with a specific program, project, function or segment. The Authority does not have program revenues. Taxes and other items that are properly not included among program revenues are reported instead as general revenues. As part of the basic financial statements, separate fund financial statements are provided for governmental funds. The Authority has only one governmental fund, which is reported as a major fund. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation: The government -wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Under the economic resources measurement focus, all assets and liabilities (whether current or noncurrent) associated with their activity are included on their balance sheets. Operating statements present increases (revenues) and decreases (expenses) in total net assets. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under the current financial resources measurement focus, only current assets and current liabilities are generally included on their balance sheets. The reported fund balance (net current assets) is considered to be 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. -10- Page 70 of 190 LAKE, ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Continued): Under the modified accrual basis of accounting, revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, except for principal and interest on general long-term liabilities which are recognized as expenditures to the extent they have matured. Proceeds of general long -term liabilities are reported as other financing sources. Interest associated with the current fiscal period is considered to be susceptible to accrual, and are therefore recognized as revenues on the current fiscal period. The Authority reports the following major governmental fund: The Debt Service Fund is used to account for the accumulation of resources for, and the repayment of, long -term debt principal, interest and related costs. When both restricted and unrestricted resources are available for use, it is the Authority's policy to use restricted resources first, and then unrestricted resources as they are needed. D. Explanation of Differences between the Governmental Fund Balance Sheet and the Statement of Net Assets: These differences from the long -term economic focus of the Statement of Net Assets versus the current financial resources focus on the Governmental Fund Balances Sheets are described below: Lease Receivable and Interest Receivable The lease receivable and related interest receivable applicable to the Authority's governmental activities are not current resources and accordingly are not reported as assets in the governmental fund financial statements. All receivables (both current and long -term) are reported on the Statement of Net Assets. See independent auditors' report. Page 71 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): D. Explanation of Differences between the Governmental Fund Balance Sheet and the Statement of Net Assets (Continued): Lease Receivable and Interest Receivable (Continued) Balances at June 30, 2012 were: Lease receivable $ 12,975,000 Interest receivable 1,487 Total lease receivable and interest receivable $ 12.976.487 Long -Term Debt Liabilities Long -term liabilities applicable to the Authority's governmental activities are not due and payable in the current period and accordingly are not reported as liabilities in the governmental fund financial statements. All liabilities (both current and long -tern) are reported in the Statement of Net Assets. Balances at the end of this fiscal year were: Interest payable $ (1,487) Long -term liabilities (12,975,000) Total long -term debt liabilities $ (12976.4871 E. Explanation of Differences between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balance and the Statement of Activities: These differences arise from the long -term economic focus of the Statement of Activities versus the current financial resources focus of the governmental funds are described below: Lease Receivable Payments Some revenues reported in the Statement of Revenues, Expenditures and Changes in Fund Balances are included as an addition or deletion of lease receivable in the Statement of Net Assets. Principal payment on lease $ (390,000) See independent auditors' report. -12- Page 72 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): E. Explanation of Differences between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balance and the Statement of Activities (Continued): Long -Term Debt Principal Payments Some expenditures 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. Long -term debt principal payments $_ 390,000 F. Investments: Investments are stated at fair value. G. 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 represents tentative management plans that are subject to change. H. 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. See independent auditors' report. - 13 - Page 73 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 2. CASH AND INVESTMENTS: Cash and Investments The Authority's cash and investments are held by outside fiscal agents under provisions of the bond indentures. Investments of cash with fiscal agent are governed by the trust indenture. 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. Investments authorized for funds held by bond trustee include, U.S. Treasury Obligations, U.S. Government Sponsored Agency Securities, 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. 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 Authority manages its exposure to interest rate risk is by purchasing shorter term investments to provide the cash flow and liquidity needed for operations. The Authority's cash and investments of $2,341 consisted of mutual funds, and the fair value of the mutual funds is not affected by changes in interest rates. 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 assignment of a rating by a nationally recognized statistical rating organization. At June 30, 2012, the minimum required rating for the investment in mutual funds is A. The actual rating by Standard and Poor's of the investment was AAA. 3. LEASE RECEIVABLE: The Authority has entered into a lease agreement with the City to lease certain recreation facilities financed with the proceeds of the 2000 Series A Revenue Refunding Bonds and prior bonds (1997 Series A Bonds). Under the lease agreement, the Authority receives lease payments in an amount to pay the debt service on the 2000 Series A Revenue Refunding Bonds (see Note 4). The lease receivable balance at June 30, 2012 amounted to $12,975,000. See independent auditors' report. -14- Page 74 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 4. LONG -TERM LIABILITIES: Date of Years of Rate of Amount Issue Maturity Interest Authorized Revenue Refunding Bonds 2000 Series A 7/00 2005 -2032 Variable $ 15,660,000 Outstanding Outstanding Due Within June 30. 2010 Additions Retirements June 30, 2012 One Year Revenue Refunding Bonds: 2000 Series A 13.365.000_ $ 390.000 S 12.975.000 � 410.000 Revenue Refunding Bonds: 2000 Series A In July 2000, $15,660,000 principal amount of Revenue Refunding Bonds, Series A was issued in accordance with the indenture to provide funds to finance the Authority's lease of certain City recreation facilities from the City for lease back to the City and refund the 1997 Series A Revenue Bonds. The term bonds are due in annual installments of $300,000 to $960,000 from February 1, 2006 through February 1, 2032; interest is variable. The Bonds are subject to call and redemption prior to their stated maturity commencing February 1, 2002, at specified redemption prices. Future debt requirements for the 2000 Series A Revenue Refunding Bonds are as follows: Year Ending June 30, 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 Totals See independent auditors' report. Principal $ 410,000 430,000 450,000 470,000 490,000 2,805,000 3,515,000 4,405,000 12.975.000 -15- Interest * $ 9,083 8,796 8,496 8,179 7,850 33,792 23,026 9.523 Total $ 419,083 438,796 458,496 478,179 497,850 2,838,792 3,538,026 4.414,523 $ 108.745 $ 13.083.745 Page 75 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 4. LONG -TERM LIABILITIES (CONTINUED): Revenue Refunding Bonds (Continued): 2000 Series A (Continued) * Interest on the bonds is payable on the first of each month, so long as the bonds bear interest at a variable interest rate, and after conversion to a fixed rate, interest will be payable on February I and August 1 of each year. The amount of the payments are not yet known due to the variable interest rate which is calculated weekly. For purposes of this schedule, the interest rate at June 30, 2012 of 0.07% was used to calculate the future interest payments. If for any reason the Remarketing Agent does not set a variable rate on the second Business Day of a calendar week, then the variable rate for that period will remain at the variable rate set for the immediately preceding Wednesday through Tuesday period. If a court holds that the variable rate set for any period is invalid or unenforceable, the variable rate for that period, will be set, as determined by the Remarketing Agent, as the rate that is equal to the 30 -day tax- exempt or taxable commercial paper rate, as appropriate, published in The Band Buyer (or any successor to such publication) as of the date of determination of the unenforceable rate or, in the event The Bond Buyer (or any such successor) is no longer published, any other newspaper or journal containing financial news, printed in the English language and customarily published on each business day, or general circulation in New York, New York and selected by the Authority, whose decision will be final and conclusive. 5. LIABILITY, PROPERTY AND PROTECTION: Description Self- Insurance Pool Pursuant to Joint Powers Agreement To account for risks of loss and liability claims, the Authority participates in the City's liability, property and protection policy. The City is a member of the California Joint Powers Insurance Authority (Insurance Authority). The Insurance Authority is composed of 123 California public entities and is organized under a joint powers agreement pursuant to California Government Code §6500 et seq. The purpose of the Insurance 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 lines of coverage. The Insurance 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 Committee. See independent auditors' report. -16- Page 76 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 5. LIABILITY, PROPERTY AND PROTECTION (CONTINUED): Self - Insurance Programs of the Insurance Authority 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 $30,000 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 $10 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 2011 -12 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. 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. See independent auditors' report. -17- Page 77 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 5. LIABILITY, PROPERTYAND PROTECTION (CONTINUED): Self- Insurance Programs of the Insurance Authority (Continued) Workers' Compensation - In the workers' compensation program claims are pooled separately between public safety (police and fire) and non- public safety 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 $50,000 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 $50,000 to $100,000 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 $100,000 up to the reinsurance attachment point of $2 million are distributed based on the outcome of cost allocation within the first and second loss layers. (5) Costs of covered claims from $2 million up to statutory limits are paid under a reinsurance policy. Protection is provided per statutory liability under California Workers' Compensation Law. Employer's Liability losses are pooled among members to $2 million. Coverage fi-om $2 million to $5 million is purchased as part of a reinsurance policy, and Employer's Liability losses from $5 million to $10 million are pooled among members. Purchased Insurance 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 $37,073,451. 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. Adequacy of Protection During the past three fiscal years, none of the above programs of protection experienced settlements orjudgments that exceeded pooled or insured coverage. There were also no significant reductions in pooled or insured liability coverage in 201 1 -2012. See independent auditors' report. -18- Page 78 of 190 LAKE ELSINORE RECREATION AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2012 6. CONTINGENCIES: As of June 30, 2012, in the opinion of the Authority's management, there are no outstanding matters which would have a significant effect on the financial condition of the funds of the Authority. 7. SUBSEQUENT EVENTS: Events occurring after June 30, 2012, have been evaluated for possible adjustment to the financial statements or disclosure as of March 27, 2013, which is the date the financial statements were available to be issued. See independent auditors' report. -19- Page 79 of 190 Page 80 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY COMPONENT UNIT FINANCIAL STATEMENTS WITH REPORT ON AUDIT BYINDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS JANUARY 31, 2012 Page 81 of 190 Page 82 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY TABLE OF CONTENTS January 31, 2012 Page Number Independent Auditors' Report 1 - 2 Basic Financial Statements: 3 Statement of Net Assets 4 Statement ofActivities 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 Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 67-68 Page 83 of 190 Page 84 of 190 INDEPENDENT AUDITORS' REPORT The Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California We have audited the accompanying 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 January 31, 2012 and for the seven months ended January 31, 2012, 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 January 31, 2012, and the respective changes in financial position thereof for the seven months ended January 31, 2012 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 15 to the financial statements, the Lake Elsinore Redevelopment Agency was dissolved effective February 1, 2012 as a result of legislation enacted by the State of California. Our opinions cover the seven months ended January 31, 2012, the date of dissolution. -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located an Orange and San Diego Counlier Page 85 of 190 In accordance with Government Auditing Standards, we have also issued our report dated March 27, 2013 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 pail 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, 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. ZI Irvine, California March 27, 2013 2- Page 86 of 190 BASIC FINANCIAL STATEMENTS -3- Page 87 of 190 LAKE, ELSINORE REDEVELOPMENT AGENCY STATEMENT OP NET ASSETS January 31, 2012 See independent auditors' report and notes to basic financial statements, -4- Page 88 of 190 Governmental Activities ASSETS: Cash and investments (Note 2) $ 25,032,203 Interest receivable 2.203 Prepaid items 167,637 Notes receivable (Note 3) 10,837,000 Interest receivable on notes 257,176 Due from other governments 97,381 Land held f'or resale (Note 5) 6,136,849 Deferred charges 2,699,312 Restricted assets: Cash and investments with fiscal agents (Note 2) 5,421,409 Capital assets, not depreciated (Note 4) 2,426,392 Capital assets, depreciated, net (Note 4) 8,919,951 TOTAL ASSETS 61,997,513 LIABILITIES: Accounts payable 2,372,041 Due to other governments 4,395,837 Due to the City of Lake Elsinore 12.236 Interest payable 1,154,658 Noncurrent liabilities (Note 6): Due within one year 2,916,1 17 Due in more than one year 63,573,128 TOTAL LIABILITIES 74,424,019 NET ASSETS (DEFICIT): Invested in capital assets 11,346.343 Restricted for low and moderate income housing 56,746,754 Unrestricted (deficit) (80,519,601) TOTAL NET DEFICIT $ (12,426,504) See independent auditors' report and notes to basic financial statements, -4- Page 88 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY STATEMENT OF ACTIVITIES For the seven months ended January 31, 2012 Functions /programs Expenses Governmental activities: Revenue and General government $ 1,088,868 Pass- through payments 3,542,473 Project improvements 721,706 Interest on long -term debt 2,527,322 Total governmental activities $ 7,880,369 General revenues: Tax increment Investment income Other income Total general revenues Change in net assets NET DEFICIT- JULY 1, 2011 AS RESTATED NET DEFICIT - JANUARY 31, 2012 See independent auditors' repmt and notes to basic financial statements. -5- (7,880369) 11,362,806 751,510 122,676 12,236,992 4,356,623 (16,783,127) (12,426,504) Page 89 of 190 Net (Expense) Revenue and Changes in Program Revenues Net Assets Charges Operating Capital for Grants and Grants and Governmental Services Contributions Contributions Activities $ - $ - $ - $ (1,088,868) - - - (3,542,473) - - - (721,706) - - - (2.527,322) General revenues: Tax increment Investment income Other income Total general revenues Change in net assets NET DEFICIT- JULY 1, 2011 AS RESTATED NET DEFICIT - JANUARY 31, 2012 See independent auditors' repmt and notes to basic financial statements. -5- (7,880369) 11,362,806 751,510 122,676 12,236,992 4,356,623 (16,783,127) (12,426,504) Page 89 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY BALANCESHEET GOVERNMENTAL FUNDS ASSETS Cash and investments (Note 2) Cash and investments with fiscal agents (Note 2) Interest receivable Prepaid items Notes receivable (Note 3) Interest receivable on notes Due from other governments Due fiom other funds (Note 9) Advances to other funds (Note 9) Land held for resale (Note 5) TOTAL ASSETS LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable Deferred revenue interest on advance to other funds Deferred revenue for property tax inclued in advance Deferred revenue for notes receivable Deferred revenue interest on notes receivable Due to other governments Due to the City of Lake Elsinore Due to other funds (Note 9) Advances from other funds (Note 9) TO "I'AL LIABILITIES FUND BALANCES (DEFICITS) (NOTE 11): Nonspendable: Prepaid items Advances to other funds Land held for resale Restricted for: Low and moderate income housing Debt service Capital projects Unassigned TOTAL FUND BALANCES (DEFICITS) January 31, 2012 Special Revenue Fund Debt Service Funds Rancho Rancho Rancho Rancho Laguna LagunaI Lagunall Laguna 111 $ 6,298,714 $ 7,459,623 $ 9,319,760 $ 1,299,923 1,452,935 2,234,030 1,534,604 199,840 605 330 1,212 56 - - 117,658 49,979 10,837,000 - - - 257,176 - - - - 53,745 34,386 9,250 - 4,809,388 12,229,211 - 38,294,999 - - _ 48.369 $ 57,189,798 $ 14,557,116 $ 23,236,831 $ 1,559,048 443,044 $ 1,403,039 $ 352,556 $ 147,251 16,504,560 - - - 3,750,000 - - - 10,837,000 - - - 257,176 - - - - 2,002,105 2,389,742 3,990 - - 4,854 2,851 - - - 12,229,211 - 15,992,753 17,817,334 4,484,912 31,791,780 19,397,897 20,564,486 16,868,215 - - 117,658 49,979 18,040,439 - - - 48,369 5,856,275 - - - E452,935 21234,030 2,554,687 199,840 (7,074,811) - (15,5587986) 25398,018 (4,840,781) 2,672345 (153097167) TOTAL LIABILITIES AND FUND BALANCES $ 57,189,798 $ 147557.116 $ 23,236,831 $ 1,559,048 See independent auditors' report and notes to basic financial statements. -6- Page 90 of 190 Other Total Governmental Governmental Funds Funds $ 654,183 $ 25,032,203 - 5,421,409 - 2,203 - 167,637 - 10,837,000 - 257.176 - 97,381 - 17,038,599 - 38.294.999 6,088,480 6,136,849 $ 6042,663 $ 103,285,456 $ 26,151 $ 2,372,041 - 16,504,560 - 3,750,000 - 10,837,000 - 257,176 - 4,395,837 4,531 12,236 4,8097388 17,038,599 - 38,294,999 4,840,070 93,462,448 167,637 - 18,040,439 6;088,480 6,136,849 5,856,275 - 6,441,492 654,183 654,183 (4,840,070) (22471867) 1,902,593 9,823,008 $ 6,742,663 $ 103,285,456 -7- Page 91 of 190 THIS PAGE INTENTIONALLY LEFT BLANK Page 92 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY RECONCILIATION OF ]'HE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS January 31, 2012 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 January 31. 2012 are: Property tax Interest on interfund loans Interest on notes receivable Long -term notes receivable used in governmental activities are not financial resources and therefore are not reported in the funds. Long -teen 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 long -term, are reported in the Statement of Net Assets. Balances as of January 31, 2012 at 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 fi-om 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 trout 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- $ 9,823,008 11,346,343 3,750,000 16,504,560 257,176 10,837,000 (69,757,362) 2,540,340 727,777 (1.154,658) 2,699,312 $(12.426,504) Page 93 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY STATEMENT OF REVENUES. EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the seven months ended Jamuny 31, 2012 REVENUES: Tax increment Investment income Other income TOTAL REVENUES EXPENDITURES: Current: Professional services Pass- through payments Project costs Debt service: Principal retirement Interest and fiscal charges TOTAL EXPENDITURES EXCESS OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in (Note 9) Transfers out (Note 9) TOTAL OTHER FINANCING SOURCES (USES) NET CHANGE M FUND BALANCES FUND BALANCES (DEFICITS) - JULY L 2011, AS RESTATED FUND BALANCES (DEFICITS) - JANUARY 31, 2012 Special Revenue Fund Debt Service Funds Rancho Rancho Rancho Rancho Laguna Lagunal Lagunall Laguna 111 $ - $ 3,350,633 $ 4,766,741 $ 1,333,630 51,362 43,675 162,240 6,637 240 1,911,931 3,561 102 51,602 5,306,239 4,932,542 1,340369 97,011 303,807 338,000 129,532 - 879335 1,985,992 677,146 27,027 - - 7,479 675,000 459.207 628,918 136,658 296,594 714,250 840,371 131,818 1,095,632 2,356,599 3.793,281 1,082,633 (1,044,030) 2,949,640 1,139,261 257,736 (388,987) (204,662) (90,756) (388,987) (204,662) (90,756) (1,044,030) 2,560,653 934,599 166,980 26,442,048 (7,401,434) L737,746 (15,476,147) $ 25,398,018 $ (4,840,781) $ 2,672,345 $(15,309,167) See independent auditors' report and notes to basic financial statements. _l0_ Page 94 of 190 Other Total Governmental Governmental Funds Funds $ - $ 9,451,004 30 263,944 418,644 2,334,478 418,674 12,049,426 868,350 3,542,473 987,200 1,021,706 1,899,783 - 1,983,033 987,200 9,315,345 (568,526) 2,734,081 684,405 684,405 - (684,405) 684,405 115,879 2,734,081 1,786.714 7,088,927 $ 1,902,593 $ 9,823,008 Page 95 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY RECONCILIATION OP THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES For the seven months ended January 31, 2012 Net change in fund balances - total governmental funds Amounts reported for governmental activities in the Statement of Activities are different because: When capital assets that are to be used in governmental activities are purchased or constructed, the resources expended for those assets are reported as expenditures in governmental funds. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. As a result, fund balance decreases by the amount of financial resod ces expended, whereas net assets decreased by the amount of depreciation expense charged for the year. Depreciation The issuance of long term debt and related items provides current financial resom ces to governmental funds, while the repayment of the principal of long tens -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 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 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- $ 2.734.081 (220,518) 1,899,783 (104,146) (240,014) (94,341) (78,532) (27,256) 230,410 257,156 $ 4,356,623 Page 96 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES AGENCY FUND January 31, 2012 ASSETS Cash and investments (Note 2) $ 16.721 Cash and investments with fiscal agents (Note 2) 4,133,546 Interest receivable 2 Due from other governments 877,579 TOTAL ASSETS $ 5,027,848 LIABILITIES Due to City ot'lake Elsinore $ 4,800 Due to bondholders 5,023,048 TOTAL LIABILITIES $ 5,027,848 See independent auditors' report and notes to basic financial statements - 13 - Page 97 of 190 THIS PAGE INTENTIONALLY LEFT BLANK -14- Page 98 of 190 NOTES TO BASIC FINANCIAL STATEMENTS -15- Page 99 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS January 31, 2012 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 up to the date of the dissolution 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 not purport to represent the financial position or results of operations of the City. The Agency had the following redevelopment projects: Rancho LagunaI 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- Page 100 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 were 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 were being developed to alleviate blighting conditions. These included the existence of deteriorated, dilapidated, or obsolescent structures which the Agency selectively acquired and either rehabilitated or removed substandard structures and developed for residential, commercial or industrial use. As discussed in Note 15, the Agency was dissolved effective February 1, 2012 as a result of legislation enacted by the State of California. 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- Page 101 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 1. 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 Lacuna 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 -tern debt principal, interest and related costs within this project area. See independent auditors' report. -18- Page 102 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued): Fund Financial Statements (Continued) Major Funds (Continued): 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. Additionally, the Agency reports the following fund types: The Capital Projects 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 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. -19- Page 103 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 -term 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- Page 104 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 1. 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 governmental 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- Page 105 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 1 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 1% 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- Page 106 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 seven months ended January 31, 2012. 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 hnprovements 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- Page 107 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 represents 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 $9,823,008 differs from "net assets" of governmental activities $(12,426,504) 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 $ 11.346.343 See independent auditors' report. 24- Page 108 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 interfund loans $ 16,504,560 Interest on notes receivable 257,176 1 6,761,736 Property Tax Property tax reported in the special revenue funds as part of advances to other 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 $ 3.750.000 Long -term notes receivable used in governmental activities are not financial resources and therefore are not reported in the funds. Long -term notes receivable Long -Term Debt Transactions $ 10.837.000 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 $ (69,757,362) Deferred amount on refunding, net of accumulated amortization 2,540,340 Bond discount, net of accumulated amortization 727,777 Accrued interest payable on long -term liabilities (1,154,658) Long -term debt transactions $ (67 643 903) See independent auditors' report. -25- Page 109 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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): 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 � 2-6 312 L. Explanation of Differences between Governmental Funds Operating Statements and the Statement of Activities: The "net change in fund balances" for governmental funds $2,734,081 differs from the "change in net assets" for governmental activities $4,356,623 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. Depreciation on capital assets Long -Term Debt Transactions (220.5 18) 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. Principal added on note payable Principal payments Long -term debt transactions See independent auditors' report. -26- $ (104,145) 2,003,928 $ 1,899.783 Page 110 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 long -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 _— L44,.M) 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 $ 230,410 Interest on notes receivable 257,156 $ 487.566 Deferred Amounts 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. -27- $ (94,341) (78,532) (27,256) $ (200,129) Page 111 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 January 31, 2012 are classified in the accompanying financial statements as follows: Cash and investments at January 31, 2012 consisted of the following: Deposits with financial institutions Investments Total Cash and Investments See independent auditors' report. $ 9,592,928 25,010,951 34.603.879 Page 112 of 190 Fiduciary Government- Fund Wide Statement of Statement of Assets and Net Assets Liabilities Total Cash and investments $ 25,032,203 $ 16,721 $ 25,048,924 Restricted assets: Cash and investments with fiscal agents 5,421,409 4,133,546 9,554,955 Total Cash and Investments $ 30.453.612 $ 4.150.267 &=11&03 .879 Cash and investments at January 31, 2012 consisted of the following: Deposits with financial institutions Investments Total Cash and Investments See independent auditors' report. $ 9,592,928 25,010,951 34.603.879 Page 112 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 California 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. Authorized Investment Type United States Treasury Obligations 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 Maximum Maturity 5 years 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 $ 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. -29- Page 113 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. 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: Investment Type United States Treasury Obligations United States Government Sponsored Agency Securities California Asset Management Program Money Market Mutual Funds See independent auditors' report. Remaining Maturity (in Months) 12 Months 13-24 25-60 or Less Months Months Total $ 1,064,927 $ - $ 2,907,499 $ 3,972,426 - 4,334,160 86,082 - 9,554,956 - 7,063,327 11,397,487 - 86,082 9,554,956 $ 10.705.965 4.334.160 9.970.826 S 25.010,951 -30- Page 114 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 assignment 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, for the seven months ended January 31, 2012, for each investment type: Investment Type United States Treasury Obligations United States Government Sponsored Agency Securities California Asset Management Program Money Market Mutual Funds N/A - Not Applicable Custodial Credit Risk 11,397.487 $ 3.972.426 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. -31 - Page 1 IS of 190 Not Total Minimum Required as of Legal to be ,January 31, 2012 Ratine AAA AA+ Rated $ 3,972,426 N/A $ - $ - $ 3,972,426 11,397,487 N/A 11,397,487 - 86,082 N/A 86,082 - - 9,554,956 A 9,554,956 - 11,397.487 $ 3.972.426 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. -31 - Page 1 IS of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 governmental 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 January 31, 2012, the Agency's deposits (bank balances) were fully insured by the Federal Deposit Insurance Corporation. 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 $11,397,487 of United States Government Sponsored Agency Securities and $3,972,426 of United States Treasury Obligations. Investments in the Pool 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. See independent auditors' report. -32- Page 116 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 proceeds of the loan assisted with the acquisition of property and development of the Pottery Covet 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 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 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 January 31, 2012 the release of construction has not been recorded. At January 31, 2012, the total outstanding balance of $9,980,426 includes interest of $243,426. A note receivable in the amount of $1,100,000 from L,MV 11 Affordable, LP dated October 12, 2010. The proceeds of the loan assisted with the rehabilitation of 64 units of affordable housing for families the Lakeview 11 Affordable Housing Project. The loan is to be repaid with interest in arrears in annual installments on July 1, commencing on July l 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 January 31, 2012 the deed of trust has not been recorded. At January 31, 2012, the total outstanding balance of $1,113,750 includes accrued interest of $13,750. See independent auditors' report. - 33 - Page 117 of 190 LAKE EL,SINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 4. CAPITALASSETS: A summary of changes in the capital assets for the seven months ended January 31, 2012 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 Less accumulated depreciation for: Buildings and structures Improvements other than buildings Machinery and equipment Furniture and fixtures Total accumulated depreciation Total capital assets being depreciated, net Total capital assets, net Balance at Balance at June 30, 2011 Additions Deletions January 31, 2012 $ 2,426,392 $ - $ - $ 2,426,392 2,426,392 - 2,426,392 14,089,503 - - 14,089,503 349,940 - - 349,940 972,376 - - 972,376 996 996 15.412,815 15,412,815 (5,123,134) (212,353) (175,840) (8,165) (972,376) (996) (6,272,346) (220,518) 9,140,469 (220,518) - (5,335,487) - (184,005) - (972,376) (996) (6,492,864) _ 8.919,951 11.566.861 (220.518) $ - $ 11 43 6 343 Depreciation expense was charged to governmental activities, general government program. 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. See independent auditors' report. -34- Page 118 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 6. LONG -TERM LIABILITIES: * - Principal only Date of Years of Rate of Amount Due Issue Maturity % Interest Authorized Loans Payable: Within 2011 Additions Public Financing Authority Various Various Various $ 60,320,000 EVMWD(AmberRidge) 2/95 1995 -2014 2.70 % -6.00% 867,574 Subordinate Tax Allocation $ - $ 1,500,000 $ 58,580,000 $ 2,455,000 Revenue Bonds 4/11 2011 -2038 Various 4,610,000 Developer Agreements: refunding (2,618,872) - (78,532) Wal -Mart Stores, Inc. 3/93 1995 -2012 7.00% 2,200,000* Oakgrove Equities 3/93 1996 -2016 7.00% 1,800,000* Outlet Center 12/89 1996 -2015 N/A 2,140,000 * - Principal only See independent auditors' report. -35- Page 119 of 190 Outstanding Outstanding Due June 30, January 31, Within 2011 Additions Retirements 2012 One Year Loans Payable: Public Financing Authority $ 60,080,000 $ - $ 1,500,000 $ 58,580,000 $ 2,455,000 Deferred amount on refunding (2,618,872) - (78,532) (2,540,340) - Discount on bonds (755,032) - (27,255) (727,777) - EVMWD (Amber Ridge) 204,046 - 53,436 150,610 55,412 Subordinate Tax Allocation Revenue Bonds 4,610,000 - - 4,610,000 90,000 Developer Agreements: Wal -Mart Stores, Inc. 263,362 - 203,142 60,220 60,220 Oak Grove Equities 2,393,231 104,146 - 2,497,377 - Outlet Centel 414,172 - - 414,172 109,416 Advances from the City of Lake Elsinore 3.588,188 143.205 3,444,983 146,069 68.179.095 $ ID44, $ 1293,926 $ 66.489.245 2.916.117 See independent auditors' report. -35- Page 119 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 January 31, 2012, loan agreements between the Agency and Authority totaled $58,580,000 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 - 2010 Series A In February 2010, $15,435,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrently with the issuance of the bonds, 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 January 31, 2012 is $14,450,000. At January 31, 2012, the Agency has a cash reserve balance for debt service of $1,472,220 which is sufficient to cover the Bond Indenture Reserve Requirement. See independent auditors' report. -36- Page 120 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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. Concurrently with the issuance of the bonds, 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 January 31, 2012 is $9,795,000. At January 31, 2012, the Agency has a cash reserve balance for debt service of $939,767 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. Concurrently with the issuance of the bonds, 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 1 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 January 31, 2012 is $28,785,000. At January 31, 2012, the Agency has a cash reserve balance for debt service of $2,222,938 which is sufficient to cover the Bond Indenture Reserve Requirement. See independent auditors' report. -37- Page 121 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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. Concurrently with the issuance of the bonds, 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 January 31, 2012 is $5,550,000. At January 31, 2012, the Agency has a cash reserve balance for debt service of $539,755 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 2018-2022 2023-2027 2028-2032 2033-2034 Totals See independent auditors' report. Principal 2,455,000 2,520,000 2,590,000 2,660,000 2,745,000 15,260,000 13,835,000 13,145,000 3,370,000 $ 58.580.000 -38- Interest $ 1,217,954 2,402,558 2,333,745 2,262,351 2,287,611 2,105,426 8,868,563 5,655,348 2,602,269 177,713 $ 29.913,538 Total $ 1,217,954 4,857,558 4,853,745 4,852,351 4,947,611 4,850,426 24,128,563 19,490,348 15,747,269 3,547,713 1_88 .493.538 Page 122 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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. Principal interest Total 2012 $ - $ - $ - 2013 55,412 5,328 60,740 2014 57,474 3,266 60,740 2015 37.724 1.113 38.837 Totals S 150.610 $ 9.707 $ 160.317 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 Il was issued to reimburse infrastructure costs to McMillin Swwnerly 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 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. The proceeds from the Lake Elsinore Public Financing Authority Local Agency Revenue Bonds 2011 Series A were used to purchase the bonds issued by the Agency. 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. -39- Page 123 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 11 are as follows: Year Ending June 30, 2012 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2032 2033-2034 Totals 2011 Series Project Area III Principal 70,000 75,000 80,000 80,000 85,000 520,000 735,000 1,065,000 550,000 3.260.000 Interest $ 117,658 234,055 231,107 227,380 223,180 218,598 995,125 767,104 425,914 42,840 3.482.961 Total $ 117,658 304,055 306,107 307,380 303,180 303,598 1,515,125 1,502,104 1,490,914 592,840 $ 6.742.961 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 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 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. The proceeds from the Lake Elsinore Public Financing Authority Local Agency Revenue Bonds 2011 Series A were used to purchase the bonds issued by the Agency. 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. M Page 124 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 2018-2022 2023-2027 2028-2032 2033-2037 2038-2039 Totals C. Developer Agreements: Principal 20,000 20,000 20,000 20,000 25,000 140,000 195,000 285,000 410,000 215,000 1,350.000 Interest $ 49,979 99,597 98,788 97,827 96,778 95,525 450,613 389,681 298,646 167,640 16,856 1,861,930 Total $ 49,979 119,597 118,788 117,827 116,778 120,525 590,613 584,681 583,646 577,640 231.856 $ 3.211.930 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 $2,200,000 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 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 January 31, 2012, the Agency owes $60,220 to Wal -Mart Stores, Inc., which has been included in the long -term obligations. See independent auditors' report. -41 - Page 125 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 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 January 31, 2012, the Agency owes $2,497,377 to Oak Grove Equities, which has been included in the long -term obligations. Any unpaid obligation on the 20th 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 January 31, 2012, 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. 42- Page 126 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 2018-2022 2023-2027 2028-2032 Totals Principal I Interest T Total 146,069 6 68,900 2 214,969 148,991 6 65,978 2 214,969 151,970 6 62,998 2 214,968 155,010 5 59,959 2 214,969 158,110 5 56,859 2 214,969 839,267 2 235,577 1 1,074,844 926,618 1 148,226 1 1,074, 844 918.948 5 51.784 9 970.732 7. COMMUNITY FACILITIES DISTRICT BONDS: 1 750.281 4,195,264 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 $1,377,715 at January 31, 2012. 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. Community Facilities District 90- 2'fuscany Hills Public Improvements 2002 Series A Community Facilities District 90 -2 Tuscany Hills Public Improvements 2007 Series A Total Community Facilities District Bonds See independent auditors' report. -43- Original Bonds Issue Outstanding at Amount January 31, 2012 $ 14,470,000 $ 6,545,000 7,340,000 7,340,000 $ 13.885.000 Page 127 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 8. GOVERNMENTAL FUND BALANCE CLASSIFICATIONS: The fund balances reported on the fund statements 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 Frond 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 proposes 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. Page 128 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 January 31, 2012 are as follows: Payable Fund Other Governmental Funds Rancho Laguna III Debt Service Fund Advances to and from other funds at January 31, 2012 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 17,038.599 Amount $ 15,992,753 17,817,334 4,484,912 S 38,294 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 $18,040,439 and accrued interest of $16,504,560. 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. -45- Page 129 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 9. INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS (CONTINUED): Transfers in and out representing normal operations at January 31, 2012 are as follows: Transfers In Other Governmental Funds 10. PASS - THROUGH AGREEMENTS: Transfers Out Rancho Laguna I Debt Service Fund Rancho Laguna II Debt Service Fund Rancho Laguna III Debt Service Fund Amount $ 388,987 204,662 90,756 $ 684 405 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: The Rancho Laguna I and Ill Debt Service Funds have accumulated fund deficits of $4,840,781 and $15,309,167, respectively, at January 31, 2012. 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 It. 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. -46- Page 130 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 11. FUND BALANCE 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. With the dissolution of the Redevelopment Agency as of February 1, 2012, all of the assets and liabilities were transferred to a Successor Agency to be held on behalf of the State of California. See Note 15 for additional information. See independent auditors' report. -47- Page 131 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 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 January 31, 2012 Lakeside Village Project - Due January 1, 2031 $ 5,000,000 $ 4.090.916 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 (Insurance Authority). The Insurance Authority is composed of 123 California public entities and is organized under a joint powers agreement pursuant to California Government Code §6500 et seq. The purpose of the Insurance 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 lines of coverage. The Insurance 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 Committee. See independent auditors' report. Page 132 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 14. LIABILITY, PROPERTY AND PROTECTION (CONTINUED): B. Self- Insurance Programs of the Insurance Authority: 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 $30,000 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 $10 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 2011 -12 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. 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. See independent auditors' report. Page 133 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 14. LIABILITY, PROPERTY AND PROTECTION (CONTINUED): C. Purchased Insurance: 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 $37,073,451. 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 years, none of the above programs of protection experienced settlements or judgments that exceeded pooled or insured coverage. There were also no significant reductions in pooled or insured liability coverage in 2011-2012. 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. See independent auditors' report. -50- Page 134 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 15. CONTINGENCIES (CONTINUED): 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 11 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. As of January 31, 2012, the Agency has accrued $938,618 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 infi-astructure. 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. See independent auditors' report. -51- Page 135 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 15. CONTINGENCIES (CONTINUED): Supplemental Education Revenue Augmentation Fund ( SERAF) (Continued) 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. The payments made by the housing fund were recorded as interfund advances (see Note 9). Recent Changes in Legislation Affecting California Redevelopment Agencies On June 29, 2011, Assembly Bills lx 26 (the "Dissolution Act") and lx 27 were enacted as part of the fiscal year 2011 -12 state budget package. The Dissolution Act required each California redevelopment agency to suspend nearly all activities except to implement existing contracts, meet already- incurred obligations, preserve its assets and prepare for dissolution. Assembly Bill lx 27 provided a means for redevelopment agencies to continue to exist and operate by means of a Voluntary Alternative Redevelopment Program. 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 the Dissolution Act and Assembly Bill Ix 27 on the grounds that these bills violate the California Constitution. On December 29, 2011, the California Supreme Court upheld the Dissolution Act and struck down Assembly Bill Ix 27, resulting in the dissolution of all redevelopment agencies on January 31, 2012. On June 27, 2012, as part of the fiscal year 2012 -13 state budget package, the Legislature passed and the Governor signed AB 1484, which made technical and substantive amendments to the Dissolution Act. Under the Dissolution Act, each California redevelopment agency (each "Dissolved RDA ") was dissolved, and the sponsoring community that formed the Dissolved RDA or a designated local authority became the "Successor Agency" to the Dissolved RDA effective as of February 1, 2012. Each Successor Agency is required to wind down the affairs of the Dissolved RDA. On January 24, 2012, the City elected to serve as the Successor Agency of the Redevelopment Agency of the City of Lake Elsinore. See independent auditors' report. -52- Page 136 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 15. CONTINGENCIES (CONTINUED): Recent Changes in Legislation Affecting California Redevelopment Agencies (Continued) The Dissolution Act also created oversight boards which monitor the activities of the successor agencies. The roles of the successor agencies and oversight boards is to administer the wind down of each Dissolved RDA, including making payments due on enforceable obligations, disposing of the assets (other than housing assets) and remitting the unencumbered balances of the Dissolved RDAs to the County Auditor - Controller for distribution to the affected taxing entities. The Dissolution Act allowed the sponsoring community that formed the Dissolved RDA to elect to assume the housing functions and take over the certain housing assets of the Dissolved RDA. If the sponsoring community did not elect to become the Successor Housing Agency and assume the Dissolved RDA's housing functions, such housing functions and all related housing assets were transferred to the local housing authority in the jurisdiction. AB 1484 modified and provided some clarifications on the treatment of housing assets under the Dissolution Act. The City elected on January 24, 2012 to serve as the Housing Successor Agency. Prior to February 1, 2012, the final seven months of activity of the Dissolved RDA are reported in the accompanying financial statements. After the date of dissolution, all assets, obligations, and activities of the Dissolved RDA have been transferred and are reported in a fiduciary fund (private - purpose trust fund) in the Successor Agency. Separate financial statements of the Successor Agency for the period of February 1, 2012 to June 30, 2012 are available from the City of Lake Elsinore at 130 South Main Street, Lake Elsinore, CA 92530. The Redevelopment Agency made the following transfers for the period January 1, 2011 to January 31, 2012: Loan proceeds in the amount of $4,258,453 from the 2011 Series A Public Financing Authority Loan were transferred to the City of Lake Elsinore under a reimbursement agreement dated March 10, 2011 on March 11, 2011. $676,500 was transferred to the City for debt service reimbursement under a reimbursement agreement on April 14, 2011 for fiscal year 2011 and an additional principal payment. $4,235,000 was paid back to the City of Lake Elsinore for prior advances on April 14, 2011. $450,000 was transferred to the City to reimburse for project costs on April 14, 2011 under a reimbursement agreement dated March 10, 2011. See independent auditors' report. -53- Page 137 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 15. CONTINGENCIES (CONTINUED): Recent Changes in Legislation Affecting California Redevelopment Agencies (Continued) $467,724 was transferred to the City on April 14, 2011 to reimburse debt service for fiscal year 2010. $657,562 was transferred to the City on April 14, 2011 to reimburse debt service for fiscal year 2010. $13,479 was transferred to the City to reimburse the City for mandatory pass through payments from the Redevelopment Agency plan amendments. $620,422 was transferred to the City on January 31 2012 to reimburse for debt service payments for fiscal year 2011 -2012. $214,969 was transferred to the City on January 31, 2012 for paying advances. $125,653 was transferred to the City on January 31, 2012 to reimburse for a seismic retrofit project. $83,246 was transferred to the City on January 31, 2012 to reimburse for a seismic retrofit project. The California State Controller has been directed to review the propriety of any transfers of assets between a Dissolved RDA and other public bodies that occurred after January 1, 2011. If the transfers were not made pursuant to an enforceable obligation and 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. The State Controller has not yet performed such review with respect to the City and the Agency. See independent auditors' report. -54- Page 138 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) January 31, 2012 16. RESTATEMENT OF BEGINNING NET ASSETS AND FUND BALANCES: Net Assets The net assets balances at July 1, 2011 were restated as follows: Net assets as previously reported - July 1, 2011 To adjust for Note receivable from Pottery Court Housing Associates, L.P. dated December 9, 2009 was previously recorded as a receivable for the Agency. Net assets were restated to remove the receivable as the note belongs to the City of Lake Elsinore. Net assets, as restated - July 1, 2011 Fund Balances The fund balances at July 1, 2011 were restated as follows: Fund balances (deficits) as previously reported - July I, 2011 Reclassify two SERAF payments to Rancho Laguna 11 Debt Service Fund balances (deficits) as restated - July 1, 2011 $ (15,783,127) (1,000,000) $ (16.783.127) Debt Service Funds Rancho Rancho Rancho Laguna I Laguna II Laguna III $ (10,287,184) $ 5,860,245 $ (16,712,896) See independent auditors' report. -55- 2,885,750 (4,122,499) 1,236,749 (7.401.434) $ 1.737346 $ (15.476.147) Page 139 of 190 THIS PAGE INTENTIONALLY LEFT BLANK -56- Page 140 of 190 REQUIRED SUPPLEMENTARY INFORMATION -57- Page 141 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY BUDGETARY COMPARISON SCHEDULE RANCHO LAGUNA SPECIAL REVENUE FUND For the seven months ended January 31, 2012 REVENUES: Tax increment Investment income Other income TOTAL REVENUES EXPENDITURES: Current: Protessional services Project costs Debt services: Principal retirement Interest and fiscal charges TOTAL EXPENDITURES EXCESS OF REVENUES OVER (UNDER) EXPENDITURES FUND BALANCE - JULY 1, 2011 FUND BALANCE - JANUARY 31, 2012 Variance with Final Budget Budgeted Amounts Positive Original Final Actual (Negative) $ 2,229,269 $ 2229,269 $ - $ (2,229,269) - - 51,362 51,362 468,125 468,125 240 (467,885) 2,697,394 2,697,394 51,602 (2645,792) 95,816 95,816 97,011 (1,195) - - 27,027 (27,027) 393,750 393,750 675,000 (281,250) 342,440 342,440 296.594 45,846 832,006 832,006 1,095,632 (263,626) 1,865,388 1,865,388 (1,044,030) (2,909,418) 26,442,048 26,442,048 26,442,048 - $ 28,307,436 $ 28,307,436 $ 25,398,018 $ (2,909,418) See independent auditors' report and note to required supplementary information. -58- Page 142 of 190 LAKE ESLINORE REDEVELOPMENT AGENCY NOTE TO REQUIRED SUPPLEMENTARY INFORMATION January 31, 2012 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. C) 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- Page 143 of 190 THIS PAGE INTENTIONALLY LEFT BLANK o Page 144 of 190 SUPPLEMENTARY INFORMATION -61 - Page 145 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY C0M13INING BALANCE SHEET OTHER GOVERNMENTAL FUNDS January 31, 2012 Capital Projects Funds Stadium Rancho Capital Laguna l ASSETS Cash and investments $ 654,183 $ - Land held for resale - 6,088,480 TOTAL ASSETS $ 654,183 $ 6,088,480 LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable $ - $ 5,537 Due to the City of Lake Elsinore - 4,531 Due to other funds - 4,809,388 TOTAL LIABILITIES - 4.819,456 FUND BALANCES (DEFICITS): Nonspendable: Land held for resale - 6,088,480 Restricted for: Capital projects 654,183 - Unassigned - (4,819,456) TOTAL FUND BALANCES (DEFICITS) 654,183 1.269,024 TOTAL LIABILITIES AND FUND BALANCE'S $ 654,183 $ 6,088,480 See independent auditors' report. -62- Page 146 of 190 Capital Projects Funds (Continued) 'Dotal Other Rancho Rancho Governmental Laguna ll Laguna Ill Funds $ - $ - $ 654,183 - - 6,088,480 - $ - $ 6,742,663 $ 13.554 $ 7.060 $ 26,151 - - 4,531 4,809,388 �a ccn ^rn <n eoen mn 6,088,480 654,183 (13,554) (7,060) (4,840,070) (13,554) (7,060) 1,901593 $ - $ - $ 6,742.663 63 - Page 147 of 190 LAKE ELSINORE REDEVELOPMENT AGENCY COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - OT14ER GOVERNMENTAL FUNDS For the seven months ended January 31, 2012 REVENUES: Investment income Other revenue TOTAL REVENUE'S EXPENDITURES: Current Project costs EXCESS OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES: Transfers in Capital Projects Funds Stadium Capital Rancho Laguna I $ $ 1 300,000 1,588 300,000 1,589 130,575 414,383 169,425 (412,794) 388,987 NET CHANGE IN FUND BALANCES 169,425 (23,807) FUND BALANCES (DEFICITS) - JULY I, 2011 484,758 1,292,831 FUND BALANCE'S (DEFICPCS) - JANUARY 31, 2012 $ 654,183 $ 1,269,024 See independent auditors' report. 64- Page 148 of 190 Capital Projects Funds (Continued) Total Other Rancho Rancho Governmental Laguna ll Laguna III Funds $ 14 $ 15 $ 30 58,528 58,528 418,644 58,542 58,543 418,674 281,070 161,172 987,200 (222,528) (102,629) (568,526) 204,662 90,756 684.405 (17,866) (11,873) 115,879 4,312 4,813 1,786,714 $ (13,554) $ (7,060) $ 1,902,593 65- Page 149 of 190 THIS PAGE INTENTIONALLY LEFT BLANK -66- Page 150 of 190 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California We have audited the accompanying financial statements of the governmental activities and each major fund of the Lake Elsinore Redevelopment Agency (the Agency), (a component unit of the City of Lake Elsinore), as of January 31, 2012 and for the seven months then ended, which collectively comprise the Agency's basic financial statements and have issued our report thereon dated March 27, 2013. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the Agency is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Agency's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the propose of expressing an opinion on the effectiveness of the Agency's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Agency's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the Agency's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. _07_ 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Coanlies Page 151 of 190 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Agency's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the management, Board of Directors and others within the Agency, and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, California March 27, 2013 -68- Page 152 of 190 CITY OF LAKE ELSINORE, CALIFORNIA SINGLE AUDIT OF FEDERALLY ASSISTED GRANTPROGRAMS JUNE 30, 2012 Page 153 of 190 CITY OF LAKE ELSINORE TABLE OF CONTENTS June 30, 2012 Page Number Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 1 -2 Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards 3 - 4 Schedule of Expenditures of Federal Awards and Schedule of Findings and Questioned Costs: Schedule of Expenditures of Federal Awards 5 - 6 Notes to Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs 8- 15 Summary Schedule of Prior Audit Findings 16-21 Page 154 of 190 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Honorable Mayor and Members of City Council City of Lake Elsinore Lake Elsinore, California We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore (the City), as of and for the year ended June 30, 2012, which collectively comprise the City's basic financial statements and have issued our report thereon dated March 27, 2013. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Renortin Management of the City is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited put-pose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined previously. However, we identified a certain deficiency in internal control over financial reporting, described as finding 2012 -01, in the accompanying schedule of findings and questioned costs that we consider to be a significant deficiency in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Ofces Iowled in Orange and San Diego Counties Page 155 of 190 Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted a certain other matter that we reported to management and the City Council in a separate letter dated March 27, 2013. The City's response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. We did not audit the City's response, and accordingly, we express no opinion on the response. This report is intended solely for the information and use of the City Council, management, others within the City, and federal awarding agencies and pass - through entities and is not intended to be and should not be used by anyone other than these specified parties. A anU A;W1" LrP Irvine, California March 27. 2013 -2- Page 156 of 190 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A -133 AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS The Honorable Mayor and Members of City Council City of Lake Elsinore Lake Elsinore, California Compliance We have audited the City of Lake Elsinore's (the City) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A -133 Compliance Supplement that could have a direct and material effect on each of the City's major federal programs for the year ended June 30, 2012. The City's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the City's management. Our responsibility is to express an opinion on the City'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 OMB Circular A -133, Audits of States. Local Governments. and Non -Profit Organizations. Those standards and OMB Circular A -133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City'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 on the City's compliance with those requirements. As described in Finding Numbers 2012 -02 through 2012 -04 in the accompanying schedule of findings and questioned costs, the City did not comply with requirements regarding cash management, period of availability and reporting that are applicable to its ARRA - Energy Efficiency and Conservation Block Grant Program. Compliance with such requirements is necessary, in our opinion, for the City to comply with the requirements applicable to that program. In our opinion, except for the noncompliance described in the preceding paragraph, the City complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2012. -3- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714,978.7893 OQuer /ocaled in Orange and San Diego Coanlier Page 157 of 190 Internal Control Over Com lip lance Management of the City is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the City's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A -133, 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 City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct, noncompliance with a type of compliance requirement of a federal program 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 type of compliance requirement of a federal program 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 over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. The City's responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the City's responses and, accordingly, we express no opinion on the responses. Schedule of Expenditures of Federal Awards We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore, as of and for the year ended June 30, 2012, and have issued our report thereon dated March 27, 2013, which contained unqualified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget CircularA -133, Audits of States. Local Governments, and Non -Profit Organizations, and is not a required part of the financial statements. 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 basic 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 of the City 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 schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements taken as a whole. The purpose of this report is solely to describe the scope of our testing of compliance with the types of compliance requirements applicable to each of the City of Lake Elsinore's major programs and our testing of internal control over compliance and the results of our testing, and to provide an opinion on the City's compliance but not to provide an opinion on the effectiveness of the City's internal control over compliance. This report is an integral part of the an audit performed in accordance with Government Auditing Standards in considering the City's compliance with requirements applicable to each major program and its internal control over compliance. Accordingly, this report is not suitable for any other purpose. Irvine, California March 27, 2013 -4- Page 158 of 190 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS AND SCHEDULE OF FINDINGS AND QUESTIONED COSTS Page 159 of 190 CITY OF LAKE ELSINORE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the year ended June 30, 2012 Federal Grantor/ Pass - through Grantor/ Program Title U.S. Department of Housing and Urban Development- Passed through County of Riverside, Economic Development Agency: Community Development Block Grant Program Total U.S. Department of Housing and Urban Development U.S. Department of Justice Direct Assistance: JAG Program Cluster: Edward Byrne Memorial Justice Assistance Grant Program ARRA - Recovery Act Edward Byrne Memorial Justice Assistance Grant Program Total U.S. Department of Justice U.S. Department of Transportation: Passed through City of Riverside: Minimum Penalties for Repeat Offenders for Driving While Intoxicated Passed through California Office of Traffic Safety: Minimum Penalties for Repeat Offenders for Driving While Intoxicated Total Passed through California Office of Traffic Safety Total U.S. Department of Transportation Federal Expenditures Domestic Grant /Project of Assistance Identification Federal Number Number Awards 14.218 ELF. 11-09 $ 115,370 1.LE.20 -10 11,836 LLE.22 -11 118,592 245,798 16338 2011 -DJ -BX -2344 14,760 16.804 2009 -SB -B9 -2398 5,916 20,676 20.608 AL1104 5,659 20.608 SC 11215 21,123 SC12215 25,575 46,698 52,357 See Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Federal Awards (pages 3 and 4) and Notes to the Schedule of Expenditures of Federal Awards (page 7). -5- Page 160 of 190 CITY OF LAKE ELSINORE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (CONTINUED) For the year ended June 30, 2012 Federal Grantor/ Pass - through Grantor/ Program Title U.S. Department of Energy: Direct Assistance: ARRA - Energy Efficiency and Conservation Block Grant Program U.S. Department of Homeland Security: Passed through County of Riverside: Emergency Management Performance Grants Direct Assistance: Homeland Security Grant Program Total Direct Assistance Total U.S. Department of Homeland Security TOTAL EXPENDITURES OF FEDERAL AWARDS Federal Expenditures Domestic Grant /Project of Assistance identification Federal Number Number Awards 81.128 EE0001965 S 164.612 97.042 2011 -0048 37,493 97.067 2011 -SS -0077 7,449 2010 -0085 15,250 22,699 60,192 $ 543,635 See Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Federal Awards (pages 3 and 4) and Notes to the Schedule of Expenditures of Federal Awards (page 7). -6- Page 161 of 190 CITY OF LAKE ELSINORE NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the year ended June 30, 2012 1. SCOPE OF PRESENTATION: The accompanying schedule presents only the expenditures incurred by the City of Lake Elsinore that are reimbursable under federal programs of federal financial assistance. For the purposes of this schedule, federal awards include both federal financial assistance received directly from a federal agency, as well as federal funds received indirectly by the City from a non - federal agency or other organization. Only the portions of program expenditures reimbursable with such federal funds are reported in the accompanying schedule. Program expenditures in excess of the maximum federal reimbursement authorized or the portion of the program expenditures that were funded with state, local or other non - federal funds are excluded from the accompanying schedule. 2. BASIS OF ACCOUNTING: The Schedule of Expenditures of Federal Awards reports expenditures on the modified accrual basis of accounting. Accordingly, expenditures represent amounts incurred during the fiscal year which meet federal grant eligibility requirements. 3. RELATIONSHIP TO COMPREHENSIVE ANNUAL FINANCIAL REPORT: Amounts reported in the accompanying Schedule of Expenditures of Federal Awards agree to amounts reported within the City's Annual Comprehensive Annual Financial Report. 4. RELATIONSHIP TO FEDERAL FINANCIAL REPORTS: Amounts reported in the accompanying Schedule of Expenditures of Federal Awards agree with amounts reported in federal financial reports. 5. DEFERRED LOAN RECEIVABALE: The Affordable Housing Development in Main Street Rejuvenation Projects program balance of deferred loan receivable at June 30, 2012 was $1,060,000, which includes principal of $1,000,000 and accrued interest of $60,000. 5. CONTINGENCIES: Under the terms of federal grants, additional audits may be requested by the grantor agencies and certain costs may be questioned as not being appropriate expenditures under the terns of the grants. Such audits could lead to a request for reimbursement to the grantor agencies. See Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 3 and 4) and the Schedule of Expenditures of Federal Awards (pages 5 and 6). -7- Page 162 of 190 CITY OF LAKE EL,SINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the year ended June 30, 2012 1. SUMMARY OF AUDITORS' RESULTS: Financial Statements Type of auditor's report issued: • Unqualified Internal control over financial reporting: • Material weakness identified? _ yes x no • Significant deficiency identified? x yes _ none reported o Finding reference number: 2012 -01 Noncompliance material to financial statements noted: yes x no Federal Awards: Internal control over major programs • Material weakness identified? yes x no • Significant deficiency identified? yes x none reported Type of auditor's report issued on compliance for major programs: • Unqualified for Community Development Block Grant (CDBG) Program • Qualified for ARRA - Energy Efficiency and Conservation Block Grant Program Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of OMB Circular A -133? x yes _ no o Finding reference numbers: 2012 -02, 2012 -03, and 2012 -04 Identification of major programs: CFDA Numbers Name of Federal Program or Cluster 14.218 United States Department of Housing and Urban Development, Passed through County of Riverside, Economic Development Agency, Community Development Block Grant (CDBG) Program 81.128 United States Department of Energy, Direct Assistance, ARRA - Energy Efficiency and Conservation Block Grant Program Dollar threshold used to distinguish between type A and type B programs: $ 300,000 Auditee qualified as low -risk auditee? _ yes x no See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditine Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). Page 163 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 2. Findings -Financial Statement Audit: SIGNIFICANT DEFICIENCY Finding Number 2012 -01 Criteria A formal process for year -end closing is an important aspect of ensuring proper reporting of financial information. Condition As part of year -end audit, we requested the City staff to prepare audit schedules to support balances on the general ledger. When we started the final fieldwork in October 2012, we noted that some of the schedules requested were not prepared and in the process of completing these audit schedules, the City noted the general ledger balances were not correct and made adjustments. Additionally, there was a delay recording the transactions related to the dissolution of the Lake Elsinore Redevelopment Agency. We did not receive a trial balance of the Agency until the middle of November 2012, which was revised in the beginning of December 2012 causing a delay in the audit. Recommendation We recommend that the City established a more formal year -end closing procedures and all audit schedules be reviewed by management prior to providing them to the auditors. This will improve efficiency in year -end work and allow the audit process to stay on schedule. Management Response The City is in agreement with the recommendation to establish more formal year -end closing procedures and to have all schedules reviewed prior to distribution to the auditors. This will be implemented for the fiscal year 2012 -2013. The dissolution of the Lake Elsinore Redevelopment Agency in fiscal year 2011 -12 caused unexpected delays that are not anticipated in fiscal year 2012-13. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -9- Page 164 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs -Major Federal Awards Program Audit: Finding Number 2012 -02 Noncompliance - Cash Management Major Program U.S. Department of Energy, Direct Assistance, ARRA - Energy Efficiency and Conservation Block Grant Program (EECBG) (CFDA #81.128), Grand Identification Number F,E0001965 Criteria Compliance with the OMB Circular A -133 compliance requirement of cash management should result in minimizing the time between the deposit of federal funds in the recipient's account and the disbursement of funds for program proposes. Condition The City received an advance of ARRA - EECBG funds totaling $201,700 in July and August 2010. $164,612 of these funds was expended for program purposes in fiscal year 2011 -2012. Prior- year's expenditures total $35,771, which leaves a balance held by the City of $1,317 as of June 30, 2012. The time between the deposit of the federal funds in the City's account and the disbursement of the funds for program purposes was not minimized, which resulted in an estimated interest of $1,263 earned on the advance as of June 30, 2012. Questioned Costs Questioned costs for this grant are reported in finding 2012 -03. The City has cash on hand from the original advance of $1,317 and estimated interest earned of $1,263 as of June 30, 2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -10- Page 165 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs - Major Federal Awards Program Audit (Continued): Findine Number 2012 -02 (Continued) Noncompliance - Cash Management (Continued) Cause The economic downturn of the country impacted the City and resulted in a higher personnel turnover rate. This caused several changes in the employee responsible for the grant. More consistency in the position was achieved in fiscal year 2011 -2012, which allowed substantial completion of the project. Effect The City may be penalized or fined for its noncompliance with program compliance requirements. Recommendation We recommend that the City implement procedures to minimize time elapsing between advances and disbursements. Interest earned on advances should be returned to the Federal Agency. Management Response The City will implement procedures to minimize time elapsing between advances and disbursements. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). Page 166 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs -Major Federal Awards Program Audit (Continued): Finding Number 2012 -03 Noncompliance - Period of Availability Major Program U.S. Department of Energy, Direct Assistance, ARRA - Energy Efficiency and Conservation Block Grant Program (EECBG) (CFDA #81.128), Grand Identification Number EE0001965 Criteria The ARRA - EECBG grant agreement contained a start date of June 7, 2010 and a completion date of September 30, 2010. Grant funds should be spent within the period defined by the grant agreement, which was September 30, 2010. Condition Federal expenditures of ARRA - EECBG occurred as follows: Expenditures through 9/30/10 (grant completion date) $ 16,606 Expenditures from 10/1/10 through 6/30/11 19,165 Expenditures from 7/1/11 through 6/30/12 164,612 Total Expenditures as of 6/30/12 20 8 Questioned Costs $183,777 of expenditures occurred after the grant agreement completion date of September 30, 2010. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -12- Page 167 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs -Major Federal Awards Program Audit (Continued): Findin1l Number 2012 -03 (Continued) Noncompliance - Period of Availability (Continued) Cause The economic downturn of the country impacted the City and resulted in a higher personnel turnover rate. This caused several changes in the employee responsible for the grant. More consistency in the position was achieved in fiscal year 2011 -2012, which allowed substantial completion of the project. Effect The City may be penalized or tined for its noncompliance with program compliance requirements. Recommendation We recommend that the City implement procedures to ensure that grant funds are spent within the time period specified by the grant agreement. Management Response The City will implement procedures to ensure that grant funds are spent with the time period specified by the grant agreement. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). - 13 - Page 168 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs - Major Federal Awards Program Audit (Continued): Finding Number 2012 -04 Noncompliance - Reporting Major Program U.S. Department of Energy, Direct Assistance, ARRA - Energy Efficiency and Conservation Block Grant Program (EECBG) (CFDA #81.128), Grand Identification Number EE0001965 Criteria Section 1512 Recovery Act reports, SF -425 Federal Financial Report, and the Performance Progress Report SF -PPR should contain accurate financial information. Condition During our testing of reports, we noted the City reported $201,700 of ARRA - EECBG expenditures as of September 30, 2010 in the quarterly Section 1512 Recovery Act report, the SF -425 Federal Financial Report, and the Performance Progress Report SF -PPR. Actual federal expenditures as of September 30, 2010 were $16,606. In addition, as of September 30, 2010, the SF -425 reported the City had no cash on hand when $185,094 of the advance received was still on hand. Questioned Costs Questioned costs for this grant are reported in finding 2012 -03. Cause The economic downturn of the country impacted the City and resulted in a higher personnel turnover rate. This caused several changes in the employee responsible for the grant. More consistency in the position was achieved in fiscal year 2011 -2012, which allowed substantial completion of the project. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -14- Page 169 of 190 CITY OF LAKE ELSINORE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the year ended June 30, 2012 3. Findings and Questioned Costs -Major Federal Awards Program Audit (Continued): Finding Number 2012 -04 (Continued) Noncompliance — Reporting (Continued) Effect The City may be penalized or fined for its noncompliance with program compliance requirements. Recommendation We recommend that the City implement procedures to review the accuracy and completeness of all grant reports. Management Response The City will implement procedures to review the accuracy and completeness of all grant reports. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -15- Page 170 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS For the year ended June 30, 2012 Finding Number 2010 -03 Maior Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CA 16URD92530M08 Condition The City does not have procedures to monitor relocation services provided by an outside consultant for compliance with grant requirements. Recommendation We recommend that the City implement internal control procedures to review program compliance with special tests and provisions of grant agreements. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). -16- Page 171 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS (CONTINUED) For the year ended June 30, 2012 Finding Number 2010 -04 Maier Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CA 16URD92530M08 Condition The City does not retain quarterly reports filed on -line and supporting documentation used to compile these reports. Furthermore, we noted that these reports were not reviewed by a supervisor prior to filing. Recommendation We recommend that the City implement internal control procedures to review compliance requirement for filing of reports. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -] 33 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). -17- Page 172 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS (CONTINUED) For the year ended June 30, 2012 Finding Number 2010 -05 Major Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CAI 6URD92530MO8 Condition During our compliance test, we noted that the City received two advances for which there was a significant elapse of time between the advances from the Federal Agency and the subsequent disbursements of grant expenditures. We could not identify whether the City has implemented procedures to minimize the time elapsed between receipt of advances and subsequent disbursements. One of the two advances was in the amount of $245,000 to pay for relocation costs, of which $52,840 was refunded to the City by the relocation service consultant in December 2010. We also noted that the City has not returned any interest income earned by advances to HUD. Recommendation We recommend that the City implement procedures to minimize time elapsing between advances and disbursements. Interest earned on advances should be returned to the Federal Agency. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -18- Page 173 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS (CONTINUED) For the year ended June 30, 2012 Findine Number 2010 -06 Major Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CA 16URD92530M08 Condition During our compliance test, we noted that the City used grant funds to pay for legal fees. Recommendation We recommend that the City consult with the grant coordinator to resolve this matter. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages I through 4). -19- Page 174 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS (CONTINUED) For the year ended June 30, 2012 Finding Number 2010 -07 Major Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CAI 6URD92530MO8 Condition During our compliance test, we noted that the City entered into a Disposition and Development Agreement (DDA) to carry out the project partly funded by the Affordable Housing Development in the Main Street Rejuvenation Projects program. However, the City could not locate the bid packages or cost analysis supporting the open procurement selection. We could not verify whether the DDA was awarded through a competitive procurement. Recommendation We recommend that the City establish procedures to retain all bid packages related to an on -going program. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). -20- Page 175 of 190 CITY OF LAKE ELSINORE SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS (CONTINUED) For the year ended June 30, 2012 Finding Number 2010 -08 Major Program U.S Department of Housing and Urban Development, Direct Assistance, Affordable Housing Development in Main Street Rejuvenation Projects Program (CFDA No. 14.878), Grant Identification Number CA I6URD92530M08 Condition During our compliance test, we noted that the outside consultant hired by the City to perform relocation services computed the relocation assistance using a method other than what is allowed under the grant agreement, resulting in an overpayment of relocation assistance. Recommendation We recommend that the City review and maintain proper documentation on relocation assistance to ensure that they are in compliance with grant agreement. Current Status The City did not have the grant in fiscal year 2011 -2012. See Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 and on the Schedule of Expenditures of Federal Awards (pages 1 through 4). -21 - Page 176 of 190 CITY OF LAKE ELSINORE APPROPRIATIONS LIMIT WORKSHEET NO.6 WITH INDEPENDENT ACCOUNTANTS' REPORT ON AGREED -UPON PROCEDURES APPLIED TO APPROPRIATIONS LIMIT WORKSHEET FOR THE YEAR ENDED JUNE 30, 2012 Page 177 of 190 INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES APPLIED TO APPROPRIATIONS LIMIT WORKSHEET NO. 6 To the Honorable Mayor and Members of the City Council of the City of Lake Elsinore Lake Elsinore, California We have applied the procedures enumerated below to the accompanying Appropriations Limit Worksheet No. 6 of the City of Lake Elsinore, California for the year ended June 30, 2012. These procedures which were agreed to by the City of Lake Elsinore, California and the League of California Cities (as presented in the League publication entitled "Article XIIIB Appropriations Limit Uniform Guidelines ") were performed solely to assist the City of Lake Elsinore, California in meeting the requirements of Section 1.5 of Article XIIIB of the California Constitution. The City of Lake Elsinore management is responsible for the Appropriations Limit Worksheet No. 6. This agreed -upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and our findings were as follows: I. We obtained the completed Worksheet No. 6 for the year ended June 30, 2012 and compared the limit and annual adjustment factors included in that worksheet to the limit and annual adjustment factors that were adopted by resolution of the City Council. We also compared the population and inflation options included in the aforementioned worksheet to those that were selected by a recorded vote of the City Council. Finding: No exceptions were noted as a result of our performing this procedure -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 -Tel: 714.978.1300 • Pax: 714.978.7893 Oeice.r located in Orange and San Diego Counlier Page 178 of 190 2. For the accompanying Appropriations Limit Worksheet No. 6 we added last year's limit to the total adjustments, and compared the resulting amount to this year's limit. We also recalculated the adjustment factors, and the adjustment for inflation and population, and compared the results to the amounts on Worksheet No. 6. No exceptions were noted as a result of our performing this procedure. 3. We compared the prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet No. 6 to the prior year appropriations limit calculated by the City. No exceptions were noted as a result of our performing this procedure. We were not engaged to, and did not perform an audit, the objective of which would be the expression of an opinion on the accompanying Appropriations Limit Worksheet No. 6. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriations limit for the base year, as defined by the League publication entitled "Article XIIIB Appropriations Limit Uniform Guidelines ". This report is intended solely for the information and use of the City Council and management of the City of Lake Elsinore, California and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, California March 27, 2013 -2- Page 179 of 190 CITY OF LAKE ELSINORE APPROPRIATIONS LIMIT WORKSHEET NO. 6 For the year ended June 30, 2012 Appropriations limit for fiscal year ended June 30, 2011 Adjustment factors for the fiscal year ended June 30, 2012 (see Note 2): Inflation Population Factor Factor Combined (Note 3) (Note 4) Factor 1.02510000 1.02060000 1.04621706 Adjustment for inflation and population Other adjustments (Note 5) Total adjustments Appropriations limit for fiscal year ended June 30, 2012 $60,579,154 x 0.04621706 2,799,790 2,799,790 63,378.944 See independent accountants' report on agreed -upon procedures applied to appropriations limit worksheet No.6 and accompanying notes. -3- Page 180 of 190 CITY OF LAKE ELSINORE NOTES TO APPROPRIATIONS LIMIT WORKSHEET NO. 6 For the year ended June 30, 2012 1. PURPOSE OF LIMITED PROCEDURES REVIEW: Under Article XIIIB of the California Constitution (the Gann Spending Limitation Initiative), California governmental agencies are restricted as to the amount of annual appropriations from proceeds of taxes. Effective for years beginning on or after July 1, 1990, under Section 1.5 of Article XIIIB, the annual calculation of the appropriations limit is subject to a limited procedures review in connection with the annual audit. 2. METHOD OF CALCULATION: Under Section 10.5 of Article XIIIB, for fiscal years beginning on or after July 1, 1990, the appropriations limit is required to be calculated based on the limit for the fiscal year 1986 -87, adjusted for the inflation and population factors discussed at Notes 3 and 4 below. 3. INFLATION FACTORS: A California governmental agency may adjust its appropriations limit by either the annual percentage change in the 4th quarter per capita personal income (which percentages are supplied by the State Department of Finance), or the annual percentage change in the local assessment roll due to local nonresidential new construction. The factor used by the City of Lake Elsinore for the fiscal year 2011 -2012 represents the annual percentage change in per capita income published by the California Department of Finance. 4. POPULATION FACTORS: A California governmental agency may adjust its appropriations limit by either the annual percentage change of the jurisdiction's own population, or the annual percentage change in population in the County where the jurisdiction is located. The factor used by the City of Lake Elsinore for fiscal year 2011 -2012 represents the annual percentage change in population for the City of Lake Elsinore. 5. OTHER ADJUSTMENTS: A California government agency may be required to adjust its appropriations limit when certain events occur, such as the transfer of responsibility for municipal services to, or from, another government agency or private entity. The City of Lake Elsinore had no such adjustments for the year ended June 30, 2012. See independent accountants' report on agreed -upon procedures applied to appropriations limit worksheet No.6. -4- Page 181 of 190 Page 182 of 190 To the Honorable Mayor and Members of the City Council of the City of Lake Elsinore Lake Elsinore, California We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore for the year ended June 30, 2012. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our engagement letter to you dated April 17, 2012 and in our letter on planning matters dated August 16, 2012. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City of Lake Elsinore are described in Note I to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during fiscal year ended June 30, 2012. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. Page 183 of 190 Significant Audit Findings (Continued Qualitative Aspects of Accounting Practices (Continued) The most sensitive estimates affecting the City of Lake Elsinore's financial statements are as follows: a. Management's estimate of the fair market value of investments is based on market values provided by outside sources. b. Management's estimate of the value of the capital assets (infrastructure) is based on industry standards. c. Management's estimate of the useful lives of capital assets for depreciation purposes is based on industry standards. d. The funded status and funding progress of the public defined benefit plans with CalPERS is based on actuarial valuations. e. The annual required contribution and actuarial accrued liability for the City's Other Post - Employment Benefit Plan is based on certain actuarial assumptions and methods prepared by an outside consultant We evaluated the key factors and assumptions used to develop these estimates in determining that they are reasonable in relation to the financial statements taken as a whole. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statement were reported in Note 16 regarding the defined benefit pension plan, in Note 17 regarding the City's other post - employment benefit plan and in Note 20 regarding the recent changes in legislation affecting California Redevelopment Agencies. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. The following material misstatement detected as a result of audit procedures were corrected by management: a. The adjustments to properly record the transactions related to the dissolution of the Lake Elsinore Redevelopment Agency and the subsequent transfer of assets and liabilities to the Successor Agency to the Lake Elsinore Redevelopment Agency. -2- Page 184 of 190 Significant Audit Findings (Continued): Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated March 27, 2013. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, out, professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to out, retention. Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to out- audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. This information is intended solely for the use of the City Council and management of the City of Lake Elsinore and is not intended to be and should not be used by anyone other than these specified parties. Irvine, California March 27. 2013 - 3 - Page 185 of 190 Page 186 of 190 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Honorable Mayor and Members of City Council City of Lake Elsinore Lake Elsinore, California We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore and its blended component units, including the Lake Elsinore Redevelopment Agency (the City), as of and for the year ended June 30, 2012, which collectively comprise the City's basic financial statements and have issued our report thereon dated March 27, 2013. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the City is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected on a timely basis. -1- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • TeL 714.978.1300 • Fax: 714.978.7893 Offices located nr Orange and San Diego Counties Page 187 of 190 Internal Control Over Financial Reporting (Continued) Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over financial reporting, described as significant deficiency #1, in the accompanying Schedule of Comments and Responses that we consider to be a significant deficiency in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted an other matter, described as noncompliance and other matter #2 in the accompanying Schedule of Comments and Responses that we have reported to management. The City's responses to the findings identified in our audit are described in the Schedule of Comments and Responses. We did not audit the City's responses and, accordingly, we express no opinion on them. This communication is intended solely for the information and use of the City Council, management and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine. California March 27, 2013 -2- Page 188 of 190 SCHEDULE OF COMMENTS AND RESPONSES Significant De£ciency: 1. Review Year -End Closing Schedule As part of year -end audit, we requested the City staff to prepare audit schedules to support balances on the general ledger. When we started the final fieldwork in October 2012, we noted that some of the schedules requested were not prepared and in the process of completing these audit schedules, the City noted the general ledger balances were not correct and made adjustments. Additionally, there was a delay recording the transactions related to the dissolution of the Lake Elsinore Redevelopment Agency. We did not receive a trial balance of the Agency until the middle of November 2012, which was revised in the beginning of December 2012 causing a delay in the audit. We recommend that the City established a more formal year -end closing procedures and all audit schedules be reviewed by management prior to providing them to the auditors. This will improve efficiency in year -end work and allow the audit process to stay on schedule. Management's Response: The City is in agreement with the recommendation to establish more formal year -end closing procedures and to have all schedules reviewed prior to distribution to the auditors. This will be implemented for the fiscal year 2012 -2013. The dissolution of the Lake Elsinore Redevelopment Agency in fiscal year 2011 -2012 caused unexpected delays that are not anticipated in fiscal year 2012 -2013. -3- Page 189 of 190