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06. Year-end audited financial reportADMINISTRATIVE SERVICES DEPARTMENT CUPERTINO CITY HALL 10300 TORRE AVENUE • CUPERTINO, CA 950143202 {408) 777-3220 • FAX {408) 777-3109 SUMMARY Agenda Item No. Meeting Date: December 15, 2009 SUBJECT AND ISSUE Accept the City's annual year-end audited fina~lcial reports for 2008-09 BACKGROUND Staff is pleased to present to the City Council the following financial reports for the fiscal year ended June 30, 2009. • Comprehensive Annual Financial Report • Redevelopment Agency Basic Component Unit Financial Statements • Transportation Development Act Progr;~m Financial Statements • Memorandum on Internal Control and I~.equired Communications • Independent Accountant's Report for tree City's Investment Policy • Blackberry Farm Cash Collections Procedures Report • Compliance with the Proposition 111 2~~08-09 Appropriations Limit Increment • The Redevelopment Agency's annual rc;port to State Controller • Development Impact Fee Report Except for the Iast two items, the above were either audited or issued by the City's certif ed public accountants, Maze and Associates, anti all reports were discussed with the Audit Committee. The auditors have given a clean opinion on the financial statements and the controls associated with producing the inform;~tian. The Comprehensive Annual Financial Report will be submitted for the Certificate of <~chievement Award. RECOMMENDATION Accept the City's annual year-end audited fina~icial reports for 2008-09 Submit by: ~~---~.~ David Woo Finance Director Reviewed by: - ~~ -~ C of A. Atwood Director of Administrative Services Ap roved far submission: D~~vid W. Knapp City Manager 6-1 Annual year-end audited financial reports for 2008-09 December 15, 2009 Page 2 of 2 Attachments: A. Comprehensive Annual Financial Report B. Redevelopment Agency Basic Component Unit Financial Statements C. Transportation Development Act Program Financial Statements D. Memorandum on Internal Control and Required Communications E. Independent Accountant's Report for the City's Investment Policy F. Blackberry Farm Cash Collections Procedures Report G. Compliance with the Proposition 111 2008-09 Appropriations Limit Increment H. The Redevelopment Agency's annual report to State Controller I. Development Impact Fee Report 6-2 CITY OF CUPERTINO REDEVELOPMENT AGENCY BASIC CaFMPONENT iTNIT FINANCI~-L STATEMENTS FOR THE YEAR ENDED JUT~TE 30, 2009 Attachment B 6-3 CTTY OF CUPERTINO REDEVELOPMENT AGENCY Basic Component Unit Financial Statements For The Year Ended June 30, 2009 TABLE OF CONTENTS Page Independent Auditors' Report ...................................................................................................................1 Management's Discussion And Analysis .................................................................................................3 Component Unit Financial Statements: Agency-Wide Financial Statements: Statement of Net Assets .............................................................................................................10 Statement of Activities ...............................................................................................................1 l Fund Financial Statements: Balance Sheet .............................................................................................................................14 Statement of Revenues, Expenditures, and Changes in Fund Balances ...................................15 Statement of Revenues, Expenditures, and Changes in Fund Balance -Budget and Actual: Cupertino Square Redevelopment Special Revenue Fund ...............................................16 Low and Moderate Income Housing Special Revenue Fund ...........................................17 Notes to Basic Component Unit Financial Statements ....................................................................19 Report On Internal Control Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With GovernmentAuditingStandards ...................................................25 s-a MazE & ASSOCIATES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite 215 Pleasant HiJI, California 94523 (925J 930-0902 • FAX (925) 930-0735 INDEPENDENT AUIITTORS' REPORT maze@mazeassociates.com wwwrmazeassociates.com Members of the Governing Board Cupertino Redevelopment Agency Cupertino, California We have audited the accompanying basic component unit financial statements of governmental activities, and each major fund, of the Cupertino Redevelopment: Agency (Agency), a component unit of the City of Cupertino, as of and for the year ended 3une 30, 2009, as listed in the table of contents. These financial statements are the responsbility of the Agency's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States of America and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America. '.Chose standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.. Tn our opinion, the financial statements referred to above present fairly in all material respects, the respective financial position of governmental activities and each major fund, of the Cupertino Redevelopment Agency as of June 30, 2009 and the results of its operations for the year then ended, in conformity with generally accepted accounting principles in the United States of America. In, accordance with Government Auditing Standards, ~He have also issued our report dated September 14, 2009 on our consideration of the City of Cupertino's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing ;3tandards and should be considered in assessing the results of our audit. Management's Discussion and Analysis is required by the Government Accounting Standards Board, but is not part of the financial statements. We have applied certain limited procedures to this information, principally inquiries of management regarding the methods of measurement and presentation of this information, but we did not audit this information and ~~ve express no opinion on it. September 14, 2009 6-5 A Professfonaf (:orporatfan This Page Left Intentionally Blank s-s MANAGEMENT'S DISCUSSION AND ANALYSIS This discusses the City of Cupertino Redevelopment: Agency's fmancial performance. Please read this document in conjunction with the accompanying Basic; Component Unit Financial Statements. As a component unit of the City of Cupertino, the Agency's purpose is to eliminate blight in the Cupertino Square Redevelopment Project Area, while ensuring an adequate stock of low and moderate income housing in the City. The project area encompasses the Cupertino Square (formerly Vallco) shopping center and the "Rose Bowl" site south of the mall. The Agency can issue debt payable out of the property tax growth expected to result from the redevelopment of the project area. The Agency may enter into development agreements with developers and others to further its purposes. Twenty-five percent of the taxes generated are earmarked for low and moderate income housing. 2008-09 FINANCIAL ffiGHLIGHTS Highlights include the following: Agency-wide: • Agency total assets amounted to $759,217, ati increase from the prior year total of $199,867. • Agency liabilities totaled $5,882, a decrease cif $261,356 from the prior year. • The Agency's net assets stood at $753,335 for June 30, 2009, an improvement from the $67,371 deficit of the prior year. • Agency-wide revenues consisted of $1,215,5'L6 in property taxes and interest. • Agency-wide expenses were $394,810, consi:~ting of non-housing community development activities. Fund Level: • The Cupertino Square Redevelopment Fund earned a fund balance of $246,298 at June 30, 2009, a reversal from the $267,238 deficit at June 30, 2008. • Redevelopment Fund tax revenues of $908,316 represented. a 450% increase from last year's $165,200. Expenditures climbed 89% from $209,062 in 2007-08 to $394,810 in 2007-08. • Low and Moderate Income Housing Fund tai: and interest revenues increased to $307,170 in fiscal 2008-09, up 397% from the prior year'.~evel of $61,848. OVERVIEW OF THE BASIC COMPONENT UNIT FINANCIAL STATEMENTS This report is in two parts: 1) Management's Discussion and Analysis (this part), and 2) The Basic Component Unit Financial Statements, which include the Agency-wide and the Fund Financial Statements, along with the notes to the statements. The Basic Component Unit Financial Statements The Basic Component Unit Financial Statements comprise the Agency-wide Financial Statements and the Fund Financial Statements. These two sets of fmancial statements provide two different views of the Agency's financial activities and fmancial position-long-term and short-tenor. s-~ Agency-wide Financial Statements The Agency-wide Financial Statements provide along-term view of the Agency's activities as a whole, and comprise the Statement of Net Assets and the Statement of Activities. The Statement. of Net Assets provides information about the financial position of the Agency, including all its capital assets and long- term liabilities on the full accrual basis, similar to that used by private enterprises. The Statement of Activities provides information about all the Agency's revenues and all its expenses, also on the full accrual basis, with the emphasis on measuring net revenues or expenses of each of the Agency's programs. The Statement of Activities explains in detail the change in Net Assets for the year. All of the Agency's services are considered to be governmental activities, consisting of community development services. General Agency revenues such as property tax increments support these services. Fund Financial Statements The Fund Financial Statements report the Agency's operations in more detail than the Agency-wide statements and focus on the short-term activities of the Agency's major funds. The Fund Financial Statements are on the modified accrual basis, which means they measure only current fmancial resources and uses such as current revenues and expenditures, current assets, current liabilities and fund balances. They exclude capital and other long-lived assets, long-term debt and other long-term liabilities. The entity's only two funds are considered major funds and are presented individually since these funds account for alI fmancial activities of the Agency. The Cupertino Square Redevelopment Fund serves as its general fund, and is always a major fund. The second fund is the Low and .Moderate Income Housing Fund, which the Agency elects to show as a major fund. The funds are discussed further in the Analysis of Major Funds section. Comparisons of budget and actual information are presented as part of the Basic Component Unit Financial Statements. FINANCIAL ACTIVITIES OF THE AGENCY AS A WHOLE This analysis focuses on the net assets and changes in net assets of the Agency as a whole, as presented in the Agency-wide Statement of Net Assets and Statement of Activities. Governmental Activities Table 1 shows that the Agency changed from an accumulated deficit of $67,371 at June 30, 2008 to a net asset surplus of $753,335 at June 30, 2009. The accumulated deficit was the result of expenditures incurred by the Agency in the establishment and development of the project area over its fzrst nine years, during which incremental property tax revenues have been minimal. The 2007 sale of two parcels in the project area and subsequent tax reassessment resulted in tax revenues jumping from $220,267 in 2007-08 to $1,211,128 in 2008-09. The Agency used the increase to payback a $263,324 City of Cupertino advance that financed start up costs for the Agency. Much of the tax increment growth went toward improving the cash position of the Agency. Housing fund cash rose from $199,867 at the end of last year to $507,037 this year. The project azea's cash balance went from zero to $252,1$0. 6-8 d Table 1 Governmental Neat Assets at June 30 Cash and investments Total assets Other liabilities Advance from City of Cupertino Total liabilities 2009 2008 $759,217 $199,867 759,217 199,867 5,882 3,914 --- 263,324 5,882 267,238 Net assets: Restricted for low and moderate income housing and encumbrances 546,569 199,867 Unrestricted net assets (deficit} 206,766 (267,238) Total net assets (accumulated deficit} $753,335 ($67,371) As shown in Table 2, the Agency has experienced rises in net assets the past two years because property valuation growth has caused tax revenues to exceed redevelopment and planning costs. If development of the project area continues, the additional tax revenue~~ will allow the Agency to issue bonds and provide capital for economic improvement. Table 2 Governmental Activities Change in Govermnental Net Assets 2408-09 2007-08 Expenses Community development 394 810 209 062 Total expenses .394.810 209,062 Revenues General revenues: Taxes: Incremental property tax 1,211,128 220,267 Investment income 4,388 6,781 Total general revenues 1,215.516 227,048 Total revenues 1,215,516 227,048 Increase in net assets S82.Q Q~ 1~ 6-9 THE AGENCY'S FUND FINANCIAL STATEMENTS Table 3 below summarizes total Agency activity and balances at the fund level: Table 3 Total Governmental Fund Level Highlights at June 30 Total assets Total liabilities Total fund balances {deficits) Total revenues Total expenditures 2009 2008 $ 759,217 $ 199,867 5,882 267,238 753,335 (67,371) 1,215,516 227,048 394,810 209,062 Mirroring the Agency-wide results, the Agency's funds reported a 3une 30, 2009 combined fund balance surplus of $753,335, a reversal from the $67,371 deficit at June 30, 2008. Analyses of Major Funds Cupertino Spuare Redevelopment Fund This Fund accounts for property tax increment revenue allocated to the Vallco Redevelopment Project Area, established in August 2000. It serves as the general fund for the project area, with expenditures for the ongoing management and oversight of overall project area activities. The fund's name comes from the Cupertino Squaze (formerly named Vallco) shopping center that comprises most of the project area. Excluding the 25% that is set-aside for low and moderate income housing purposes, current year tax increment revenues jumped 450% to $908,346 compared to the $165,200 received in the prior year, reflecting the first full year of tax growth resulting from the 2007 sale of the Rose Bowl site to KCR Development and the Wolfe Road/Vallco Parkway retail site to Vallco International Shopping Center (Orbit Resources). It exceeded growth estimates incorparated into the $610,250 original and final budget. Expenditures rose 89% over last year, ending up at $394,810 for 2008-09. The statutorily required pass- through of taxes to special districts, schools, and the county grew to $160,545 compared to $37,912 last year. This pass-through, shown as an expenditure against gross taxes, is annually paid at 25% of estimated pxoject area taxes and trued-up the following yeaz based on actual receipts. Because 2008-09 actual receipts came in higher than estimated, there wiIl be an additional $66,732true-up in 2009-10. The Agency directly financed $53,600 in school field improvements this year. Tax revenues exceeded community development expenditures for the year allowing the Agency to payback all of the $263,324 General Fund advance and transform last year's $267,238 fund balance deficit to this year's $246,298 surplus. 6-10 6 Low and Moderate Income Housins Fund Because of a 2002 legal settlement, the Agency sets•-aside 25% of the tax increment revenue for future low and moderate income housing projects sponsored by the Agency. This is higher than the state mandated 20% minimum. In fiscal 2008-09, the Agency's annual receipts for ]ow and moderate income housing purposes totaled $302,782 compared to $55,067 for the prior fiscal year, proportional to the growth in overall taxes. In order to accumulate capital for future purposes, no housing funds were spent this year. Lower yields in the City's investment portfolio, Led to less interest income, $4,388 compared to $6,782 last year. The housing fund balance grew from $199,867 to $507,037. CAPITAL ASSETS The Agency possesses no capital assets. INDEBTEDNESS The Agency paid back a $263,324 advance from t]he City of Cupertino's General Fund that covered staffing, consultant, and legal costs. The Agency i~ authorized under California state law to finance redevelopment activities through a number of sources, including Loans from City government and the issuance of agency debt. ECONOMIC OUTLOOK AND MAJOR INITIATNES Facing difficulties in making payments to their lender, Gramercy Capital, mall owners Cupertino Square LLC and Orbit Resources filed bankruptcy in September 2008. Tn May 2009, Gramercy foreclosed on the owners and subsequently sold the mall to Son Son (:ompany in October 2009, pending approval by the bacdauptcy court. Property tax assessment appeals are pending with the county. Other owners, KCR Development, who are not in bankruptcy, are laying a foundation for amixed-use condominium/retail development in the Rose Bowl section of the project area in order to vest their rights in a development agreement with the Agency. CONTACTING THE AGENCY'S FINANCIAL 11ZANAGEMENT This report is in#ended to provide a general overvievr of the Agency's fmances. Further information can be obtained from the City of Cupertino's Finance Department, 10300 Torre Avenue, Cupertino, CA 95014-3202, phone (408) 777-3220, or by visituxg the City's website at www.cupertino.org. 6-11 This Page Left intentionally BIank 6-12 CITY OF CUPERTINO REDEVELOPMENT AGENCY STATEMENT t1F NET ASSETS AND STATEMENT OF ACT~TITIE5 The Statement of Net Assets and the Statement of Activities summarize the entire Agency's financial activities and fmancial position. They are prepared on the same basis as is used by most businesses, which means they include all the Agency's assets a,id all its liabilities, as well as all its revenues and expenses. This is known as the full accrual basis-the effect of all the Agency's transactions is taken into account, regardless of whether or when cash changes hands, but all material internal transactions between Agency funds have been eliminated. The Statement of Net Assets reports the difference between the Agency's total assets and the Agency's total liabilities, including all the Agency's capital assets and all its long-term debt. The Statement of Net Assets presents similar information to the old balana~ sheet format, but presents it in a way that focuses the reader on the composition of the Agency's net as;~ets, by subtracting total liabilities from total assets. The Statement of Net Assets summarizes the fmancial position of all the Agency's fmancial position in a single column. The Statement of Activities reports increases and decreases in the Agency's net assets. It is also prepared on the full accrual basis, which means it includes all the Agency's revenues and all its expenses, regardless of when cash changes hands. This differs from the "modified accrual" basis used in the Fund financial statements, which reflect only current €.ssets, current liabilities, available revenues and measurable expenditures. The Statement of Activities presents the Agency's expenses that are listed by program first. Program revenues that is, revenues that are generated directly by these programs-are then deducted from program expenses to arrive at the net expense of each program. The Agency's general revenues are then listed and the Change in Net Assets is computed and reconciled with the Statement of Net Assets. These fmancial statements along with the fimd fmancial statements and footnotes are called Basic Component Unit Financial Statements. 6-13 CITY OF CUPERTINO REDEVELOPMENT AGENCY STATEMENT OF NET ASSETS JurrE 30, aoo9 - . Governmental ~~ Activities ASSETS Cash and investments (Note 3) $759,217 Total Assets 759,217 LIABILITIES Accounts payable 1,768 Accrued payroll and benefits 4,114 Total Liabilities 5,882 NET ASSETS (Note 4) Restricted for: Low and moderate income housing 507,037 Projects 39,532 Unrestricted 206,766 Total Net Assets $753,335 See accompanying notes to financial statements 6-14 10 CITY OF CUPERTINO REDEVELOPMENT AGENCY STATEMENT O]Y ACTIVITIES FOR THE YEAR EIVI)ED JUNE 30, 2009 Functions/Programs Expenses: Community development Total expenses ' General revenues: Taxes: Incremental property taxes Investment income Total general revenues Change in Net Assets Governmental Activities $394,810 394,810 1,211,128 4,388 1,215,516 $20,706 Net Assets (Accumulated Deficit} -Beginning (67,371) Net Assets -Ending $753,335 See accompanying notes to financial statements 6-15 This Page Left Intentionally Blank s-~s FUND FINANCIAL STATEMENTS The funds described below were determined to be Major Funds by the Agency in fisca12009. Cupertino Square Redevelopment Fund Accounts for revenue and expenditures related to th~~ development of the pxoject area at the Cupertino Square regional mall (Vallco). Low and Moderate Income Housing Fund Accounts for redevelopment tax revenues used for love and moderate income housing programs. s-~~ CITY OF CUPERTINO REDEVELOPMENT AGENCY GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2009 ' :~ Low and Moderate Total , Cupertino Square income Governmental Redevelopment Housing Funds Assets Cash and investments (Note 3) $252,180 $507,037 $759,217 ~ - Total Assets $252,180 $507,037 $759,217 Liabilities and Fund Balances Accounts payable $1,768 $1,768 Accrued payroll and benefits 4,114 4,114 Total Liabilities 5,882 5,882 Fund balances (Note 4): - Reserved for low and moderate _ income hoasing $507,037 507,037 Reserved for encumbrances 39,532 39,532 Unreserved, undesignated 206,766 20b,766 : . TOTAT, FUND BALANCES 246,298 507,037 753,335 Total Liabilities and Fund Bal ances $252,180 $507,037 $759,217 See accompanying notes to financial statements 4' 'F ~_~ ,:.) 6-18 1Q CITY OF CUPERTINO REDEVELOPMENT AGENCY GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2009 Revenues: Incremental property taxes {Note 2) Use of money and property Total Revenues Expenditures: Community development: Salaries end benefits Professional and legal costs Pass-through expenditures (Note 5) Miscellaneous Total Expenditures Net change in Fund Balances Low and Moderate Total Cupertino Square Income Governmental Redeve] opment Housing Funds $:~08,34b $302,782 $1,211,128 4,388 41388 '08,346 307,170 1,215,516 169,180 11,485 160,545 53,600 .394,810 513,536 307,170 169,180 11,485 160,545 53,600 394,810 $20,706 Fund balances (deficit), beginning of year5267 238 199,867 67,371) Fund balances, end of year $246,298 $507,037 $753,335 See accompanying notes to financial statements 6-19 CITY OF CUPERTINO REDEVELOPMENT AGENCY CUPERTINO SQUARE REDEVELOPMENT SPECIAL REVENUE FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL FOR THE YEAR ENDED JUNE 30, 2009 REVENUES: Incremental property taxes Total Revenues EXPENDITURES: Community development: Salaries and benefits Professional and legal costs Pass-through expenditures MisceIlaneous Total Expenditures Net change in Fund Balances Fund balance (deficit), beginning ofyear Fund balance, end of year Variance with Budgeted Amounts Final Budget Positive Original Final Actual Amounts (Negative) $167,000 $610,250 $908,346 $2982096 167,000 610,250 908,346 298,096 179,3 65 179,365 169,180 10,185 51,3 00 113, 966 11,485 102,481 160,000 160,545 (545) 67,600 53,600 14,000 230,665 520,931 394,810 126,121 ($63,665) $89,319 513,536 $424J217 (267,238) $246,298 See accompanying notes to financial statements 6-20 if •- CITY OF CUPERTINO REDEVELOPMENT AGENCY LOW AND MODERATE INCOME HOi:~SING SPECIAL REVENUE FUND STATEMENT OF REVENT:BS, EXPENDITURES AND CHANGES IN Fi1ND BALANCES - BUDGET AND ACTUAL FOR THE YEAR ENDED TUNE 30, 2009 Budgeted Amounts Original Final REVENUES: Variance with Final Budget Positive Actual Amounts {Negative} Incremental property taxes $56,000 $203,750 $302,782 $99,032 Use of money and property 10,000 10,000 4,388 {5,612} _ Total Revenues 66,000 213,750 307,170 93,420 _ EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES $66,000 $213,750 307,170 $93,420 Fund balances beginning of year 199,867 Fund balances end ofyear $507,037 See accompanying notes to financial statements 6-21 This Page Left Intentionally Blank 6-22 CITY OF CUPERTINO REDEVELOPMENT AGENCY Notes to Component Unitt Financial Statements NOTE 1-SIGNIFICANT ACCOUNTING POLICTE~ A. Description of the Cupertino Redevelopment Agency -The Cupertino Redevelopment Agency (Agency) was created under the provisions of the California Health and Safety Code for the purpose of rehabilitating property considered to be in a blighted condition. On August 2I, 2000, the City Council enacted and passed Ordinance 1$50, establishing the Redevelopment Plan for the Cupertino Vallco Redevelopment Project Area. The Project Area encompasses the Cupertino Square (formerly named Vallco) shopping center and the "Rose Bowl" site. The Agency's primary source of revenue is property taxes, referred to in the accompanying financial statements as "incremental property taxes" Property taxes allocated to the Agency are computed in the following manner: 1. The assessed valuation of ali property in t13e Project Area is determined on the date of adoption of the Redevelopment Plan by a designatio:z of a fiscal year assessment roll. 2. Property taxes related to any incremental increase in assessed values after the adoption of a Redevelopment Plan aze allocated to the Agency; all taxes on the "frozen" assessed valuation of the property are allocated to the City and ocher districts receiving taxes from the project area. The Agency has no power to levy and collect taxes. Any legislative property tax reduction would lower the amount of tax revenues that would otherwise be available to pay the principal and interest on bonds or loans from the City and any increased tax rate or assessed valuation or any elimination of present exemptions would increase the amount of tax revenues available for this purpose. The Agency is also authorized to finance the Redevelopment Plan from other sources, including assistance from the City, the State and federal governments, interest income and the issuance of Agency debt. The Agency is a sepazate legal entity governed by the City Council sitting in a separate capacity as the Redevelopment Agency Board. City staff p erforms all administrative, accounting, management and budgeting functions. Since the City exerci;~es control over the Agency operations, the Agency is considered a component unit of the City and i.s included in the City's basic financial statements. B. Basis of Presentation The Agency's Basic Component Unit Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. The Government Accounting Standards Board is the acknowledged standard setting body for establishing accounting and financial reporting standards followed by governmental entities in the United States of America. These Statements require that the financial statements described below be presented. Agency-Wide Statements: The Statement of Net Assets and the Statement of Activities include the financial activities of the overall Agency government. Eliminations have been made to miniumize the double counting of internal activities. 6-23 CITY OF CUPERTINO REDEVELOPMENT AGENCY Notes to Component Unit Financial Statements NOTE 1-SIGNIFICANT ACCOUNTING POLICIES (Continued) The Statement of Activities presents a comparison between direct expenses and program revenues for each function of the Agency's governmental activities. Du•ect expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include (a) charges paid by the zecipients of goods or services offered by the programs, (b) grants and contributions that are restricted to meeting the operational needs of a particular program, and (c) fees, grants and contributions that are restricted to financing the acquisition or construction of capital assets. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the Agency's funds. The emphasis of fund financial statements is on major individual funds, each of which is displayed in a separate column. The Agency considers both of its funds to be major funds. G Major Funds Major funds are identified and presented separately in the fund financial statements. Major funds are defined as funds that have either assets, liabilities, revenues or expenditures/expenses equal to ten pexcent of their fund-type total and five percent of the grand total. The Agency reported all its governmental funds as major funds in the accompanying financial sta#ements: Cupertino Square Redevelopment Fund -Accounts for revenue and expenditures related to the development of the project area at the Cupertino Square regional mall. Low and Moderate Income housing Fund -Accounts for. redevelopment tax revenues used for low and moderate income housing programs in the City. D. Basis ofAccountmg The agency-wide financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. 6-24 ~n CITY OF CUPERTINO REDiEVELOPMENT AGENCY Notes to Component Unit Financial Statements NOTE 1-SIGNIFICANT ACCOUNTIlVG POLICIES (Continued) Governmental funds financial statements are: reported using the current financial resources measurement focus and the mod~ed accrual b:3sis of accounting. Under this method, revenues are recognized when measurable and available. 7`he Agency considers all revenues reported in the governmental funds to be available if the reve~iues are collected within sixty days after year-end. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. Governmental capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of governmental Long- term debt and acquisitions under capital leases ~~re reported as other financing sources. Those revenues susceptible to accrual are incremental property taxes and interest. Non-exchange transactions, im which the Agency gives or receives value without directly receiving or giving equal value in exchange, include taxes, grants, entitlements, and donations. On the accrual basis, revenue from taxes is recognized. in the fiscal year for which the taxes are levied or assessed. Revenue from gams, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. The Agency may fund programs with a combi ~~tion of cost-reimbursement grants, categorical block grants, and general revenues. Thus, both restri~rted and unrestricted net assets may be available to fmance program expenditures. The Agency's policy is to first apply restricted grant resources to such programs, followed by general revenues if neces~;ary. Certain indixect costs are included in program expenses reported for individual functions and activities. E. Budgets and Budgetary Accounting The Agency operates under the general laws of the State of California and follows the budgetary process of the City. Annually, the Board adopts a budget effective July 1 for the ensuing fiscal year. From the effective date of the budget, which is adopted and controlled at the Agency level, the amounts stated therein as proposed expenditure:; become appropriations. The Board may amend the budget by resolution during the fiscal year. All appropriations lapse at year end. Encumbrance accounting is employed as an extension of the budgetary process. Under encumbrance accounting, purchase orders, contracts, and othex commitments for expenditures are recorded in order to reserve that portion of the applicable appropriation. Encumbrances outstanding at year-end are recorded as reservations of fund balance because they do not constitute expenditures or liabilities, and are automatically reappropriated the following year. Unencumbered and unexpended appropriations lapse at year-end. 6-25 CITY OF CUPERTINO REDEVELOPMENT AGENCY Notes to Component Unit Financial Stn#ements NOTE 1-SIGNIFICANT ACCOUNTING POLICIES (Continued} F. Property Tax Levy, Collection and Maximum Rates -Article 70II of the California Constitution provides for a maximum general property tax rate of $1.00 per $100 of assessed value, which may be adjusted by no more than two percent per year unless the property is sold or transferred, in which case it is reassessed at market value. The State Legislature has determined the method of distribution of property tax receipts among the counties, cities, school districts and other special districts. Santa Clara County assesses properties, bills for and collects property taxes on the following schedule: Secured Unsecured Valuation date January 1 January 1 Lien/levy date July 1 July 1 50% on November 1 July 31 Due dates 50% on February 1 December 10 August 31 Delinquent as of Apri110 Property taxes levied are recorded as revenues and receivables in the fiscal year of levy. NOTE 2 -LOW AND MODERATE INCOME HOUSING FUND ACTIVITIES Under California Redevelopment Law, agencies are required to deposit a minimum twenty percent of incremental property taxes received into a Low and Moderate Income Housvng Fund. However, on January 31, 2002 the Agency settled a lawsuit challenging the formation of the Project Area. This settlemen# requires the Agency to set aside twenty-five percent of incremental property taxes for low and moderate income housing activities. For fiscal 2008-2009, the Agency received $1,211,128 in incremental property taxes of which twenty-five percent, or $302,782, was deposited into the Low and Moderate Income Housing Special Revenue Fund. NOTE 3 -CASH AND INVESTMENTS The Agency's cash is included in a cash and investments pool maintained by the City of Cupertino (City), the details of which are presented in the City's basic financial statements. As of June 30, 2009 the City's treasury was composed primarily of investments in the State of California Local Agency Investment Fund, Federal agencies securities, U.S. Treasuries, non-negotiable certificates of deposit, and money market funds. s-2s ~~ CITY OF CUPERTINO REDEVELOPMENT AGENCY No#es to Component Unit Financial Statements NOTE 4 -NET ASSETS AND FUND BALANCES Net Assets are measured on the full accrual basis, while Fund Balances are measured on the modified accrual basis. Net Assets At the Agency-Wide level, net assets is the excess of all the Agency's assets over all its liabilities. Restricted describes the portion of net assets which is restricted as to use by the terms and conditions of agreements with outside parties, governmental regulations, laws, or other restrictions which the Agency cannot unilaterally alter. These principally include developer fees received for use on capital projects, debt service requirements, and redevelopment funds restricted to low and moderate income housing purposes. Unrestricted describes the portion of net assets ,which is not restricted to use. NOTE 5 -PASS-THROUGH PAYMENTS Pursuant to California Redevelopment Law (Health and Safety Code Section 33607.5), the Agency is obligated to pass-through twenty percent of tl3e gross tax increment received on the Project Area to jurisdictions within the project area. In addition, the Agency is obligated to pass-through an additional amount of tax increment pursuant 'to Health and Safety Code Section 33676, which requires basic aid payments to be made. For th.e yeaz ended Tune 30, 2009, the Agency calculated and retarded $160,545 inpass-through and basic aid payments to the affected jurisdictions. s-27 "~ This Page Left Intentionally Blank -_, :_:~ ~. z ~~ ri ~:., i ..l 6-28 MazE & ASSOCIATES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. - Suite 215 Pleasant Hill, Calffornia 34523 (925) 930-0902 • FAX {925) 930-Oi35 REPORT ON INTERN~ILL CONTROL OVER mazeQmazeassociates.com FINANCIAL REPCIRT]NG AND ON vYww.mazeassociafes.com COMPLIANCE AND OTAER MATTERS BASED ON AP1 AIIDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNM1IENTAUDITIIVGSTANDARDS Members of the City of Cupertino Redevelopment Agency Cupertino, California We have audited the financial statements of the City o:F Cupertino Redevelopment Agency as of and for the year ended June 30, 2009, and have issued our ref~ort thereon dated September 14, 2009. We have conducted our audit in accordance with generally accepted auditing standards in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting In planning and performing our audit, we considered the Agency's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an c~pinion 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 control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Agency's ability to initiate, authorize, record, process, or report financial data reliably in accordance with gene;rally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Agency's financial statements that is more than inconsequential will not be prevented or detected by the Agency's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material mi:;statement of the financial statements will not be prevented or detected by the Agency's internal control. Our consideration of internal control over financial re;porting was for the limited purpose described in the second paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. As part of our audits, we prepared and issued our separate Memorandum on Internal Con~xol dated September 14, 2009. 6-29 A Professional Gorporaffon 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. Our audit included tests of compliance with provisions of the Guidelines or Compliance Audits o~' California Redevelopment Agencies. 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 that are required to be reported under GovernmentAuditing Standards. This report is intended for the information of the Board, management and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than the above parties. ~a~ ~ ~~ September 14, 2009 6-30 ~~ Attachment CITY OF CLTI'ERTINO TRANSPORTATION DEVELOPMENT ACT PROIxRAM FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2009 6-31 CITY OF CUPERTINO Transportation Development Act Program - (A Program of the City of Cupertino, California) - For the Year Ended June 30, 2009 Table of Contents Page IndependentAuditor's Report .................................................................................................................... I Balance Sheet .........................................................................................................2 Statement of Revenues and Expenditures ............................................................................................. 3 Notes to Financial Statements ........................................................:........................... ..... 5 Independent Auditor's Compliance Report .............................................................................................. 7 6-32 ' MazE & ASSOCIATES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. - Suite 2i5 Pleasant Hill, California 94523 {925) 930-0902 • FAX (925) 930-0135 INDEPENDENT AUDITOR'S REPORT maze@mazeassociates.com wrw~rmazeassociates.com The Honorable Mayor and Members of the City Council of the City of Cupertino, California We have audited the accompanying financial statements of the City of Cupertino Transportation Development Act Program (the Program), a component of the City of Cupertino, California (the City), as of June 30, 2009, and for the year then ended, as listed in the table of contents. These financial statements are the responsibility of the management of the City. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States of America and the standards prescribed b3~ the Transportation Development Act. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the financial statements referred to above present only the Program and are not intended to present fairly the financial position results of total operations of the City in conformity with g~;nerally accepted accounting principles in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Program as of Junf: 30, 2009, and the results of the Program's operations for the year then ended in conformity with generally accepted accounting principles in the United States of America. ~na~ ~ ~.,~w~- September 14, 2009 6-33 A Professional Corpora8on CTFY OF CUPERTINO TTtANSPORTATION DEVELOPMENT ACT PROGRAM (A Program of the City of Cupertino, California) BALANCE SHEET June 30, 2009 ASSETS Account Receivable LIABILTI'IES Due to City of Cupertino See notes to financial statements. $42,193 $42,193 6-34 2 CITY OF CU]'ERTINO TRANSPORTATION DEVELOPMENT ACT PROGRAM (A Program of the City of Cupertino, California) STATEMENT OF REVENUES AND EXPENDTFURES FOR THE YEAR ENDED JUNE 30, 2009 REVENUES: T.D.A. Article 3.0 City of Cupertino and Other Contributions (Note 4) Total Revenues EXPENDITURES: Professional and Contract Services Excess of Revenues Over Expenditures See notes to financial statements. 2007-07001084 Mary Avenue B icycle Footbridge $42,193 6,162,3 b7 6,204,560 6,204,Sb0 6-35 This Page Left Intentionally Blank 6-36 CITY OF CU]'ERTINO TRANSPORTATION DEVELC-PMENT ACT PROGRAM A PROGRAM OF THE CITY OF CUPERTINO, CALIFORNIA NOTES TO FINANCI1lI, STATEMENTS ,NOTE 1-DESCRIPTION OF REPORTING EPITITY The City of Cupertino, California (the City) Transportation Development Act Program (the Program) includes the financial activities associated with the projects funded by the State of California Transportation Development Act (TDA). The State of California created a local transportation fiend for each County fiznded by one-quarter of a cent of the 7% state sales tax. Article 3 of the TDA permits local agencies to spend a portion of that money (not to exceed 2%) on facilities provided for the exclusive use of pede:ctrians and bicycles. The projects are distributed through the Metropolitan Transportation Commission (MTC) which is the agency responsible for allocation of fund:. to eligible claimants within the greater San Francisco Bay Area. Eligibility is contingent upon the cities having adopted a comprehensive bicycle master plan. The City of Cupertino adopted the Cupertino Bicycle Transportation Plan on December 7, 1998 {Resolution 98-299). The Program is for the improvement of bicycle facility and construction of bicycle lanes in various locations throughout the City. Individual project funds are generally expended over a two or three year period. There was $42, I93 in fund revenues allocated by MTC for the year ended June 30, 2009 NOTE 2 - SL)NIlVIARY OF SIGNIFICANT ACCOUNTING POLICIES A. FundAccou-:ting The projects are accounted for as part of a Mary Avenue Bicycle Footbridge Capital Project Fund of the City. A fund is a set of self-balancing accounts which comprise its assets, liabilities, fund equity, revenues and expenditures. B. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized. The projects are accounted for in a governmental fund type and the modified accrual basis of accounting is used. Under the modified accrual basis revenues are recognized when they become measurable and available as net current assets. TDA Article 3.0 revenues are recognized when qualifying project expenditures are incurred Expenditures are generally recognized when they are incutxed 6-37 c CITY OF CUPERTINO TRANSPORTATION DEVELOPMENT ACT PROGRAM A PROGRAM OF THE CITY OF CUPERTINO, CALIFORNIA NOTES TO FINANCIAL STATEMENTS NOTE 3 - TDA ARTICLE REVENUE/EXPENSE MTC Allocation TDA Expended To Project Name # Grant June 30, 2009 Mary Avenue Bicycle Footbridge Project 2007-07001484 $42,193 $42,193 NOTE 4 -CITY OF CUPERTINO CONTRIBUTION For the fiscal year ended June 30, 2009, the projects had disbursements which exceeded the grant revenues available. These disbursements were paid by the City and have been reflected as City contributions in the accompanying financial statements. 6-38 5 MazE & ASSOCIATES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite 215 Pleasanf Hitl, California 94523 (925) 930-0902 • FAX (925) 930-0135 maze@mazeassoclates.com www.mazeassociates.com INDEPENDENT AUDITORS' COMPLIANCE REPORT The Honorable Mayor and Members of the City Council of the City of Cupertino, California We have audited the accompanying financial s#ate~nents of the City of Cupertino Transportation Development Act Program (the Program), a pros-am of the City of Cupertino, California (the ~~ City), as of Tune 30, 2009, and for the period ended June 30, 2009, and have issued our report thereon dated September 14, 2009. We conducted our audit in accordance with generally accepted auditing standards in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Compliance with laws, regulations, contracts atzd grants applicable to the Program is the responsibility of the management of the City. As part of obtaining reasonable assurance about whether the fmancial statements- are free of material misstatement, we performed tests of the City's compliance with certain provisions of the Transportation Development Act including - Public Utilities Code Section 99245 as enacted and amended by .stature through June, 2007, and the allocation instructions and resolutions of the Metropolitan Transportation Commission as required by Section 6666 of the California Administrative Code. However, the objective of our audit was not to provide an apinion on overall compliance with such provisions. Accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. This report is intended for the information of the Mayor, Members of the City Council, management, and others within the City, and aff~cials of applicable state grantor agencies. However, this report is a matter of public record and its distribution is not limited. September 14, 2009 6-39 A Professlona! i:orporaSan 7 CITY OF CUPERTINO MEMORANDUM ON INTERNAL CONTROL AND REQUIRED COMM[JNICATIONS FOR THE YEAR ENDED JUNE 30, 2009 Attachment D 6-40 CITY OF CUPE]tTINO MEMORANDUM ON INTERNAL CONTROL AND REQUIItED COMMI7PTICATIONS For the Year Ended J~nne 30, 20fl9 Table of Contents Page Memorandum on Xnternal Control ...................................................................................................1 Schedule of Other Matters ........................................... ............................................................. 2 Status'of Prior Year Schedule.of Other Matters ...................................................................... 5 Required Communications .....................................................:........................................................11 Financial Statement Audit Assurance ................................................................................... I 1 Other Information Included with the Audited Financial Statements ..................................11 Accounting Policies ...............................................................................................................11 Unusual Transactions, Controversial or Emerging E~.reas ...................................................12 Estimates ..................... .......:................................................................................12 .................... Disagreements with Management ........................................................................................12 Retention Issues ........................................................,...........................................................12 Di ~ cu ]ties ...........................................................................................................................13 Audit Adjustments ................................................................................................................13 Uncorrected Misstatements ...................................................................................................13 6-41 M,azE & ASSOCIATES ACCOUNTANCY CORPORATION 34?8 Buskirk Ave. -Suite 215 Pleasant HiN, Callfarnla 94523 (925} 930-0902 • FAX {925) 930-0735 maze @mazeassociates. coin MEMORANDUM ON INTERNAL CONTROL wivw.mazeassociates.com September 14, 2009 To the City Council of the City of Cupertino, California In planning and performing our audit of the financial statements of the City of Cupertino as of and for the year ended 3une 30, 2009, in accordance with auditing standards generally accepted in the United States of America, we considered the City's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. A control deficiency exists when the desiga or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affec#s the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Our consideration of internal control was for the limited purpose described in the fast paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. However, we noted no matters that we consider to be material weaknesses. Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we believe to be of potential benefit to the City. The City's written responses included in this report have not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion oa them. This communication is intended solely for the information and use of management, Ciiy Council, others within the organization, and agencies and pass-through entities requiring compliance with generally accepted government auditing standards, and is not intended to be and should not be used by anyone other than these specifed parties. ~R~ ~~-- A Professlona! Corporadort 6 - 42 CITY OF CUP>@;RTlNO MEMORANDUM ON INTERNAL CONTROL SCHEDULE OF OTHER MATTERS 2009-O1 New, Ideas for Service Delivery Several cities have moved to various "green" processes, data simplification and elimination of redundant controls in an effort to streamline service delivery. Daring recessionary times when municipalities are asked to do more with less, it makes sense to review organizational processes and eliminate unnecessary steps. Areas that Cupertino might wish to consider include the following: Paperless Agendas Provide agendas and attachments in electronic format to all commissions and City Council. This process eliminates reproduction and paper costs, shortens agenda. turnaround times, and reduces staff compilation and delivery time. , Options range from electronic delivery of agendas and attachments to electronic access only (no paper copy) at the meetings. Consent Calendar Items Identify and reduce consent calendar items that alre;idy have appropriate approval controls at the organization level. Many items of business normally ad+~ressed via a consent calendar have already been approved by staff multiple times, thus eliminating the ne+ed for additional Council approval. Removal of these items wilt result in the same level of approval co~strols and provide more time to City Council to address the more important agenda items such as,land use, policy changes and other business. Same items include, but are not limited to: • Resolution accepting Accounts Payable; • Resolution accepting PayxolI; • Bingo Permits; • Alcohol Beverage Licenses; • CIP Projects which have been~previously approved by the Council and in which the bids are within the adopted budgefi • Maintenance Agreements related to developmen~ • Quitclaims; • Easements (granting, accepting and vacating); • Fina[ subdivision and parcel maps. Electronic Outreach Establish electronic notification in lieu of historic newsletters and/or City wide mailings. Electronic publications can save the city printing costs, postage andl staff time. Possible publications falling into this category for Cupertino include: • City wide mailings for land use or other issues; • The Scene; and • The Parks and Recreation Schedule. 6-43 CITY OF CUPERTINO MEMORANDUM ON IN'T'ERNAL CONTROL SCHEDULE OF OTHER MATTERS Securi Continue to increase overall security of assets throughout the City. Public Works recently increased security by controlling building access with new keys and key cards. Other recommendations include; • Access of the network system pia personalized, two-factor authentification on sign in. This would eliminate the continual need to update passwords. • Reconsider the City's decision to support the iPhone as a PDA option due to ongoing security issues. Management Response The City is interested in pursuing these ideas with the City Council and will refer the recommendations on to the Fiscal Strategic Ptan Committee for possible incorporation in the budget process. 2t}Q9-02 GASB Statement No. S4, Fund Balance Renortin~ and Governmental Fund 7~pe De initions {Effective for frscal IO/II) This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The initial distinction that is made in reporting fund balance infarmation is identifying amounts -that are considered nonspendable, such as fund balance associated with inventories. This Statement also provides for additional classification as restricted, committed, assigned, and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, extenaal resource providers, or through enabling legislation. The committed fitnd balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the govenunent's highest level ofdecision-making authority, Amounts in the assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. Unassigned fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned. Governments are required to disclose information about the processes through which constraints are imposed on amounts in the committed and assigned classifications. Disclosure of the policies in the notes to the financial statements is required. This Statement also provides guidance for classifying stabilization amounts on the face of the balance sheet and requires disclosure of certain information about stabilization arrangements in the notes to the financial statements. 6 - 44 CITY OF CUPTRTINO MEMORANDUM ON INTERNAL CONTROL SCHEDULE OF OTHER MATTERS The Statement also clarifies the governmental fund definitions. The definitions of the general fund, special revenue fund type, capital projects fund type, debt service fund type, and permanent fund type are clarified by the provisions in this Statement. Interpretal:ions of certain terms within the definition of the special revenue fund type have been provided and, far some governments, those interpretations may affect the activities they choose to report in those funds. The capital projects fund type definition also was clarified for better alignment with the needs of prepazers and users. Definitions of other governmental fund types also have been modified for clarity and consistency. Management Response: Accepted. The City will implement this Pronouncement in fiscal year 2010-2011. 6-45 CITY OF CUPERTINO MEMORANDUM ON INTERNAL CONTROL STATUS OF PRIOR YEAR OTHER MATTERS 200$-Ol -Restrictions Over Below Market Rate Units Cupertino has approximately 9b below market rate (BMR} ownership units throughout the City. Each unit holds a restriction on the resale value of the property as it relates to the encumbering of debt. A property owner cannot sell the unit above the formula value set for each property to qualify as a BMR unit. As such, the owner cannot encumber above this resale valuation restriction. It has come to City Management's attention that one of these units has been encumbered by approximately $300,000 over the restricted value. In addition, on review of the remaining 95 units, City staff found that five units have second loans ranging from $10,000 to $15,000 over this limit. The City holds a first position on the properties and the deeds record a value restriction, but negotiations will be needed with lenders that have extended the additional loans. Cupertino does not believe that they have additional debt exposure on any of these properties. We recommend the City put a monitoring system in place to ensure owners are following the restrictions set forth. Current year Status: We concur with the audit finding, have discussed performance standards with our monitoring contractor, and have initiated follow up procedures to routinely monitor and advise owners of this limitation. In addition, with the assistance of Goldfarb and Lipman, the City has substantially revised the BMR contracts, resale agreements and deed of trust documents to highlight loan limitations to the property owner and any passible lending agency. X00&02 -Information Technology Best Practices Recommendations We conducted an Information Systems Review with our audit which encompassed the financial information system and the network environment that houses it. We expanded our work in previous years beyond simply looking at fmancial information systems as a result of greater risks of unauthorized access caused by overall industry growth of web-based commerce and Internet based fmancial systems. Internal controls that are present in the overall network environment have become more important and relevant to understanding the internal controls aver the financial system. We believe Information System controls must be continuously improved and enhanced to stay ahead of the ever increasing sophistication of hackers and criminals. Currently, there are no Information Technology standards which local governments are required to conform ta. Indeed there are a wide variety of informal guidelines and suggested controls from many different organizations which local governments can use to implement appropriate controls to ensure adequate security over information technology. Our Information Technology staff has reviewed these informal guidelines and we have concluded that the certification and accreditation framework developed by the National Institute of Standards and Technology (I,TIST) for the Federal Information Security Management Act (FISMA} are the most appropriate for local government. KIST standards represent the minimum security requirements for federal government agencies information systems. We understand the U. S. Department of Justice recommends these for local law enforcement. Our procedures included performing an external network scan based on PCI DS5 criteria and NIST in determining that internal control provides for: - Internet access defenses including hacker prevention, detection and deterrent systems - Security. of data from physical or network access - Adequately protecting data from unauthorized internal access 6-46 CITY OF CUP]E:R.TINO MEMORANDUM ON INTI~RNAL CONTROL STATUS OF PRIOR YEAR OTHER MATTERS - Reasonable measures to ensure continuation of service While the results of our work did not indicate material wE;aknesses, we did note exploitable vulnerabilities and a few areas which should be improved. A summary of these results are as follows: • General Information Systems Controls - We compared the City's information systems controls with the various NIST standards and believe improvements should be considered for implementation such as employing Audit/Event logging, contingency planning and training and other areas. • Financial Application Server Vulnerabilities -Our scan found exploitable vulnerabilities in the City's financial systems (Financial application server and one randomly selected workstation). Our results indicate a weakness in the information systems control processes. In addition, the City should evaluate and monitor the effectiveness of its information systems control procedures, including periodic vulnerability scans. • Audit/Event Logging - We believe this is another un~portant standard of NEST. The City should have audit/event logs of any addition, deletion or change in financial information system user accounts and tha# log should be monitored by someone without 'the rights to effect such changes to ensure only authorized and appropriate changes are made. Current Year Status: The City will be reviewing its adherence to PCI DS'. and NIST criteria during this fiscal year and addressing all fmdings into a formal Security Policy and possible supplemental policy. , • All patch management will be analyzed and rem.ediated using the City Bindview server asset. Analysis is being reviewed to find all machines that are not up to date. The Bindview product also allows us to deliver the patches to machines remotel~~. Remediation is well under way. • The latest version of Win VNC has been down[oad~~d and will be installed on all machines utilizing this remote access resource. • The Finance server has, since this report, been updated with latest patches and had SQL service pack 4 installed. This system has to have verification from proprietary vendor, Sungard Pentamation, before installing any such updates, whereas they will not guarantee support otherwise. Although it may impede prompt updating, the City wants to ensue the continued support form the vendor for the system. The City can work with the vendor towards a better communication vehicle with which to inform about untested and verified patches and updates. • The City will also be working with Sungard far tree installation and upgrade of the SQL server to 20U5 to 2008 (pending compatibility and support from vendor). • CA Brightstor patches applied to server. • The City logs additions, deletions and changes in sy:~tem user accounts. • The City will be reviewing a custom or possible baseline addition to the Sungard application that will allow for audit and event logging of security chanj;es such as addition, deletion or changes to user accounts. 6-47 CITY OF CUPERI'Il~IO MEMORANDUM ON INTERNAL CONTROL STATUS OF PRIOR YEAR OTHER MATTERS 2,008-03 -Upcoming GASB -Statement No. 49 -Accounting and Financial Reporting for Pollution Remediation Obligations (Effective for Fiscal Year 2008-2049) This Statement addresses accounting and financial reporting for pollution remediation obligations (including contamination), which aze obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups. This Statement excludes pollution prevention and landfitl closure or post-closure costs. A municipality must estimate expected outlays for pollution remediation if it knows a site is polluted and any of the following recognition triggers occur. ^ Pollution poses an imminent danger to the public or environment and a government has little or no discretion to avoid fixing the problem. , = A government has violated a pollution prevention-related permit or license. ^ A regulator has identified (or evidence indicates it will identify) a government as responsible (or potentially responsible} for cleaning up pollution, or for paying all or some of the cost of the clean up. = A government is named (or evidence indicates that it will be named) in a. lawsuit to compel it to address the pollution. ^ A government begins or legally obligates itself to begin cleanup or post-cleanup activities (limited to amounts the government is legally required to complete). Liabilities and expenses would be estimated using an "expected cash flows" measurement technique, which is used by environmental professionals but will be employed for the fast time by governments. Statement 49 also will require governments to disclose information about their pollution obligations associated with clean up efforts in the notes to the financial statements. Pollution remediation outlays should be capitalized in the proprietary fund statements when goods and services are acquired if acquiied"for any of the following circumstances: a. To prepare property for sale. Capitalized costs (including pollution remediation costs) continue to be limited to tower of cost or net realizable value b. To prepaze property for use when the property was acquired with known or suspected pollution that was expected to be remediatad. Governments should capitalize only those pollution remediation outlays expected to be necessary to place the asset into its intended location and condition for use. c. To perform pollution remediation that restores apollution-caused decline in service utility that was recognized as an asset impairment. Governments should capitalize only those pollution remediation outlays expected to be necessary to place the asset into its intended location and condition for use. d. To acquire property, plant, and equipment that has a future alternative use. Outlays should be capitalized only to the extent of the estimated service utility that will exist after pollution remediation activities uses have ceased. For outlays under criteria a and b, capitalization is appropriate only if the outlays take place within a reasonable period prior to the expected sate or following acquisition of the property, respectively, or are delayed, but the delay is beyond the government's control. 7 6-48 CITY OF CUPE:RTINO MEMORANDUM ON INTERNAL CONTROL STATUS OF PRIOR YEAR ~JTHER MATTERS Current Year Status: The City implemented this Pronouncement, which had no impact on the City's financial statements. 2008-04 -Upcoming GASB Statement No. 51, Accounting and Financial Reporting for Intangible .Assets (Effective for tscal 09/IO) -Retroactive Ap In icatl on Required Governments have different types of intangible assets, such as easements, water rights, patents, trademarks, and computer software. Easements are referred to in the GASB 34 description of capital assets, which has raised questions about whether and when intangible assets should be considered capital assets for financial reporting purposes. The absence of specific authoritative guidance has resu'.Eted in inconsistencies in the recognition, initial measurement, and amortization of intangible assets among governments. The objective of this Statement is to establish accounting and financial reporting requirements far intangible assets to reduce inconsistencies and enhance comparability. A summary of the statement: - Intangible assets should be classified, accounted for and reported as capital assets, unless excluded from the scope. Guidance in this statement is in addition to existing capital asset guidance. - GASB 51 specifically addresses the nature of int;~ngible assets. o Lack of physical substance. An asset may be contained in or on an item with physical substance, for example, a compact disc in the case of computer software. An asset also may be closely associated with another item that has physical substance, for example, the underlying land in the case of a right-of-way easement. These modes of containment and associated items should not be considered when determining whether or not an asset . lacks physical substance. o Nonfinancial nature. In the context of t7:us Statement, an asset with a nonfinancial nature is one that is not in a monetary form similar to cash and investment securities, and it represents neither a claim or right to assets in a monetary form similar to receivables, nor a prepayment for goods or services. o Initial useful lie greater than one year. - GASB 51 excludes: o Assets acquired or created primarily for the purpose of directly obtaining income or profit. o Assets resulting from capital lease trans~ic#ions reported by lessees. o Goodwill created through the combination of a government and another entity. - Recognition of an intangible asset occurs only if it is considered identifiable. That is when either of the following apply: o The asset is separable from the governnnent. That is it can be sold, transferred, licensed, rented, or exchanged. o The asset arises from contractual or other legal rights, regazdless of whether transferable or separable. 6-49 CITY OF CUPERTINO MEMORANDUM ON INTERNAL CONTROL STATUS OF PRIOR YEAR OTHER MATTERS - Specific conditions must present to recognize iatemally generated intangibles. Capitalization of costs begins after ail of the following criteria are met: o Determination of specific objectives of the projec# and the nature of the service capacity expected upon the completion. o Demonstration of the feasibility that the completed project will provide its expected service capacity o Demonstration of the current intention, ability, and effort to complete or continue development of the intangible asset. o Internally generated computer software is used as ari example in applying the specific conditions approach. - Amortization lives are addressed: o Limited by contractual or legal •provisions. ^ Renewal periods for rights may be considered if there is evidence that the government will seek and be able to achieve renewal and that any anticipated outlays to be incurred as part of achieving the renewal are nominal. Such evidence should consider the required consent of a third party and the satisfaction of any conditions required to achieve renewal. o An indefinite life (no amortization) is permitted so long as there are: ^ No limi#ing legal, contractual, regulatory, technological, or other factors, and ^ No subsequent change in circumstances. ^ A permanent right-of--way easement is an example. Retroactive Application. For GASB 34 Phase I & II governments, retroactive reporting is required for intangible assets acquired in fiscal years ending after June 30, 1980. Retroactive reporting is not required for intangible assets with indefinite useful Lives or internally generated intangibles, as of the effective date of this Statement. Current Year Status: • Accepted. The City will examine possible application to City when implementing for fiscal year 2009- 2010. 9 6-50 MAZE & ASSOC/AYES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite 275 Pleasant Hill, California 94523 REQUlI2ED COMMITNICATIONS {925) 830-0902 • FAX (925J 930-0735 mazeC~lmazeassociafes.cam September 14, 2009 www.+nazeassociates.com To the City Council of the City of Cupertino, Califomia We have audited the financial statements of the City of Cupertino as of and for the year ended June 30, 2009 and have issued our report thereon dated September 14, 2009. Professional standards require that we advise you of the following matters relating to our audit. Financial Statement Audit Assurance: Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable assurance about whether the fnancial statements are free of material misstatemen#. An audit in accordance with generally accepted auditing standards does not provide absolute assurance about, or guarantee the accuracy of, the financial statements. Because of the concept of reasonable assurance and because we did not perform a detailed examination of all transactions, there is an inherent risk that material errors, fraud, or illegal acts may exist and not be detected by us. Other Information Included with the Audited Financial Statements: Pursuan# to professional standards, our responsibility as auditors for other information in documents containing the City's audited financial statements does not extend beyond the financial information identified in the audit report, and we are not required to perform any procedures to corroborate such other information, Our responsibility also includes communicating to you any information that we believe is a material misstatement of fact, Nothing came to our attention .that caused us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements. This other information and the extent of our procedures is explained in our audit report. Accounting Policies: Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the City is included in Note 1 to the financial statements. There have been no initial selections of accounting policies and no changes in significant accounting policies or their application during 2009. As described in the notes to the financial statements, during the year, the City implemented the following new standards: + GASB Statement No. 45 -Accounting and Financial Rep~oriing by Employers jor Post- • Employment Benefus Otlaer than Pensions. GASB 45 uses Pension Accounting (GASB 27) to change the accounting for O#her Post Employment Benefits (OPEB} to full accrual at the Entity-wide financial statement levels. Under the concepts in GASB 45, an actuarial study or simplified measurement method calculation is performed to determine an Annual Required Contribution {ARC). So long as employers contribute this amount every year, no accrual adjustment is needed in the financial statements. A summary of the impacts of this Statement are presented below. A Professlona! Corporation 11 6-52 As discussed in Note 10 to the financial statements, the cost of the~benefits provided by the Plan is currently being paid on apay-as-you-go basis, and the City is currently evaluating the long-term strategy for funding the benefits provided. under tEce Plan. During the fiscal year, the City paid $647,923 towards the actuarially-derived annual pe~ision cost of $2,475,000, by paying the current retiree medical premiums, and therefore has recorded a Net OPEB obligation of $1,827,077 at June 30. There was no cumulative effec# of the accounting change as of the beginning of the year. • GASB Statement Na. 49 -Accounting and Financial Reporting for Pollution Remediation Obligations This Statement establishes financial reporting of obligations for pollution remediation. There was no material effect on the financial statements from the implementation of this Statement. Unusual Transactions, Controversial or Emerging Areas: No matters have come to our attention that would require us, under professional standards, to infonn you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. There have been no initial selections of accounting policies and no changes in significant accounting policies or their application during 2009. Estimates: Accounting estimates are an integral part of'the financial statements prepared by management and are based on management's current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them ma;y differ markedly from management's current judgments. The most sensitive accounting estimates affecting the financial statements are depreciation and compensated absences. Management's estimate of the depreciation is based on useful lives determined by management. These lives have been determined by management based on the expected useful life of assets as disclosed in Note 5. We evaluated the key factors and assumptions used to develop the depreciation estimate and determined that it is reasonable in relation to the basic financial statements taken as a whole. Accrued compensated absences is estimated using accumulated unpaid leave hours and hourly pay rates in effect at the end of the fiscal year. We evaluated the key factors and assumptions used to develop the accrued compensated absences •and determined that it is reasonable in relation to the basic financial statements taken as a whole. Disagreements with Management: For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a fnancial accounting, reporting, or auditing matter that could be significant to the City's financial statements or the auditor's report, No such disagreements arose during the course of the audit. Management informed us that, and £o our knowledge, there were no consultations with other accountants regarding auditing and accounting matters. Retention Issues: We did not discuss any major issues with management regarding the application of accounting principles and auditing standards that resui;ted in a condition to our retention as the City's auditors. 12 6-53 Difficulties: We encountered no serious difficulties in dealing with management relating to the performance of the audit. Audit Adjustments: For purposes of this communication, professional standards define an audit adjustment, whether or not recorded by the City, as a proposed correction of the fmancial statements that, in our judgment, may not have been detected except through the audit procedures performed. These adjustments may include those proposed by us but not recorded by the City that could potentially cause future financial statements to be materially misstated, even though we have concluded that the adjustments are not material to the current financial statements. We did not propose any audit adjustments that, in our judgment, could have a significant effect, either individually or in the aggregate, on the entity's financial reporting process. 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. We have no such misstatements to report to the audit committee. ***~** This report is intended solely for the information and use of the audit committee, City Council, and management and is not intended to be and should not be used by anyone other than these specified parties. ~a~- ~~~ 13 6-54 MazE & ASSOCIATES Attachment E ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite 215 Pleasant Hill, California 94523 (925) 930-0902 • FAX (925) 930-Oi35 INDEPENDENT ACCOUNTANT'S REPORT maze®mazeassociates.com wuvw.mazeassociates.com ON AGREED-UPON PROCEDURES FOR THE CITY OF CUPERTINO INVESTMCENT POLICY September 14, 2009 David Woo Director of Finance City of Cupertino 10300 Torre Avenue Cupertino, CA 95014-3255 Dear David: At your request, we have performed the limited procedures enumerated below, which were agreed upon by the City, solely to assist you with respect to the Investment Policy. 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 City's responsibility as the specified user of 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. DETAIL TESTS AND RESULTS As requested, we performed tests of the Investment Policy listed below. Procedure A. We obtained the Investment Policy (policy), dated December 16, 2008, approved by City Council. We compared the investments authorized by the policy against the investments listed in the March 2009 Treasurer's Investment Report to make sure that all investment types are allowed by the investment policy. Finding: No exceptions noted. All investment types appear to be in compliance with the City's investment policy. A Professional ~:orporailon 6-55 ~,.~y Procedare B. We compared the City's Investment Policy with California Government Code Section 53601 to ensure the City's Investment Policy complied with California Government Code Section 53601, Finding: No exceptions noted. The City's Investment Policy appears to comply with California Government Code Section 53601. Procedure C. We compared the March 2009 Treasurer's Investment Report with California Government Code Section 53646 to ensure the March 2009 Treasurer's Investment Report complied with California Government Code Section 53646. Finding: No exceptions noted. The March 2009 Treasurer's Investment Report appears to comply with California Government Code Section 53646. Procedure D. We inquired whether investment performance statistics and activity reports are generated on a monthly basis for presentation to the oversight (audit) committee, City Manager and City Council, as required by the Investment Policy. Finding: No exceptions noted. Per our conservation with the Finance Director, investment performance statistics and activity reports are generated on a monthly basis and presented to the oversight (audit) committee, City Manager and City Council, as required by the Investment Policy. Procedure E. We inquired and documented our understanding of the wire transfer procedures. The Investment Policy requires all wire transfers initiated by Treasury Section personnel to be reconfirmed by the appropriate financial institution to non-treasury staff. Finding: No exceptions noted. Per review of the wire transfer procedures, the City appears to be in compliance with the Investment Policy. Procedure F. We selected five investment sales from various months of Treasurer's Reports and performed the following: • Traced investmen# type to the supporting broker's confirmation. • Traced the sale date to the supporting broker's confirmation. • Traced the amount of the investment sold to a supporting broker's confirmation. Finding: No exceptions noted. The City appears to be in compliance with the Investment Policy. 6-56 Procedure CT. We selected five investments purchased (as of March 2009) for fiscal 2009 from the City's investment files and performed the following: • Traced to the Treasurer's Investment Deport in the month acquired. • Agreed the amount, terms and interest rate to the Treasurer's Investment Report. • Verified that the investment type is authorized by the investment policy. Finding: No exceptions noted. The City appears to be in compliance with the Investment Policy. Procedure H. We sent audit confirmations to Wells Fargo Bank, the City's third party investment safekeeping custodian, for the March 2009 statement. We received the March 2009 statement from Wells Fargo Bank and traced the following from each investment listed in the Wells Fargo statement to the City's March 2009 Treasurer's Investment Report: • Investment description • Market value • Purchase date • Maturity date Coupon rate Finding: No exceptions noted. The City appears to be in compliance with the Investment Policy. Procedure J. We judgmentally selected 9 Federal Agencies investments from the March 2009 Wells Fargo statement and traced the reported ratings to M~~ody's rating online. Finding: No exceptions noted. The City al-pears to be in compliance with the Investment Policy. We were not engaged to, and did not, perform an audit in accordance with generally accepted auditing standards, the objective of which would be the expression of an opinion on the specified elements, accounts, or items in this report. Accord.iungly, 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. This report is intended solely for the City's infortr~ation and use and is not intended to be and should not be used by anyone other than the City. fours very truly, ~a~ ~~~~~ Maze & Associates 6-57 At t achment ~:`F AGREED UPON PROCEDURES REPORT ON CITY OF CUPERTINO BLACKBERRY FARM CASH COLLECTION PROCEDURES AUGUST 6 & 7, 2009 6-58 MazE & ASSOCIATES ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite Zt5 Pleasant Hlll, California 94523 (925) 93x0902 • FAX {925) 930-0135 mazeQmazeassocfates.com www. mazeassociates. com AGREED UPON PROCEDURES REPORT ON CITY OF CUP'ERTINO BLACKBERRY FARM CASH COLLECTION PROCEDURES AUGUST 6 ~r 7, 2009 Carol Atwood Administrative Services Director City of Cupertino 10300 Torre Avenue Cupertino, CA 95014-3255 City of Cupertino, California Dear Carol, We have applied certain agreed-upon procedures below to the City of Cupertino Blackberry Farm Cash Collection Controls as of August 6 and 7, 2009. This engagement to apply agreed-upon procedures was performed in accordance with standards established by the American Institt:~te of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified usezs of this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the ~~urpose for which this report has been requested or for any other purpose. This report is intended for the information of management and the City Council; however, this restriction is not intended to limit the distribution of this report, which is a matter of public record. BACKGROUND I. Site Facilities Park facilities include a natural habitat for native trees, animals, and fish, six group picnic areas, two pools, a waterslide, volleyball courts, new bocce ball courts and horseshoe courts. Structures include a new ticket: kiosk, dressing rooms, restrooms, a Concessionaire (Blackberry Cafes}, a retreat center and maintenance buildings. Group picnic areas may be used by.reservation only on a first come, first serve basis. Full remittance is required at the time the reservation is made. Phone reservations can be paid by credit card only and walk-in reservations can be paid by cash, check, or credit card. 6-59 A Arofesslonal ~;olporadon II. Overview of Site Operations There are six employees including the Supervisor, two Recreation Coordinators and three staff assistants. The Recreation Coordinators function as supervisors overseeing Park employees and the operations. There are eight part-time Cashiers working at the site with two Cashier s working two collection windows during the same time on any given time of the day. The third cash register is available but not used as it is considered unnecessary based on the volume of transactions. There are three collection locations at the site: two which process revenues of the City and one which processes concessionaire revenues. - Ticket Kiosk: Processes pool admissions, swim passes and other pool related fees - Main Office: Processes picnic reservation fees - Concessionaire (Blackberry Cafe'): Processes food, drink and snack sales (Controls for this site were excluded from our work since the City does not receive these revenues) Most collections received are in the form of currency and credit cards by walk-in . . customers who wish to purchase pool admissions and swim passes. Ficnic reservation fees aze made mostly with checks and credit cards. Transaction volume varies but ranges from $200 to $1,300 per day with over 90% related to swimming pool admission fees. Other types of collections are for swimming diapers for infants and picnic reservation fees. Park employees had no formal policy guidelines on cash collection procedures. However, the Recreation Coordinators obtained a copy of detailed instructions on deposits from another employee from the City's Community Center and have followed the instructions prescribed in the checklist. s-so 2 OBSERVATION OF CASH COLLECTION PROCEDURES III. Overview of Cast: Collection Process A cashiering station concept is used at the site where smart #erminal cash registers aze connected ~to a software system (CLASS), a cash drawer and printer. Data entered into the register is automatically recorded into the system which then is used to produce a Daily Cash Balance Report to reconcile with collections. Receipts are system printed for the. customer and the cash drawer is connected to the register providing access for the Cashier to secure remittances after the transaction is complete. System-generated pre-numbered receipts are provided to the customers. Pool customers are provided a wrist band as evidence of .payment of fees. Cashiers do not generate separate copies of cash remittance receipts for reconciliation purposes, as the detailed transaction information is captured at the time of entry. Credit card transactions are recorded electronically at the site which is linked to the baxik. The system generates two copies of credit card receipts of which one is kept by the Cashier and used to reconcile to the Report as discussed below. Cash drawers are programmed to open automatically when the Cashier entezs the remittance amount and transaction #ype into the system. The remittances information entered by the Cashier is automatically recorded into the CLASS system which is interfaced with the City's general ledger finance system. Once the remittance information is processed it cannot be altered b:y employees. Each Cashier is required to generate a Dail~~ Cash Balance Report (Report) from the system. The Report shows the name of the Cashier, the date, transaction types, time of each transaction, terminal number, debit and ~~redit (for changes given out) transactions, receipt numbers, and net amount collected. Cashiers are required to reconcile the Report with that day's collections. Before the collections and supporting documents are submitted to the Recreation Coordinator, the Cashier and a Staff Assistant reconcile the Net Collections from the Report to the total of currency, check collections and credit card receipts. At the Main Office where picnic site reservations are handled, employees generate a Report only. when a remittance is received. Once the reconciliation is complete, the Report and collections are submitted to the Recreation Coordinator which must occur before leaving at the end of the day. Undeposited remittances and supporting documents are kept in a safe. s-s~ The next day, one of the Recreation Coordinators generates a Daily Cash Balance Report- with CC & Locations (Master Report), which serves as the master sheet showing the grand totals all remittances by type. 'The Recreation Coordinator adds up the subtotals on all the Reports from the prior day and compares the sums against the balances shown on the Master Report for any discrepancies. The Recreation Coordinator also generates a remittance processing list, which shows all of the daily credit card receipt transactions, and compares the balance per the list against the credit card totals on the Master Report. Cash is re-counted when filling out the bank deposit slip to ensure it has been accounted for. An armored vehicle comes Monday, Wednesday, and Friday to pick up the deposit during the busy summer season. For the rest of year, the deposit goes to the Finance Department. The Recreation Coordinators send a copy of bank deposit slip, Master Report, remittances processing list for credit card transactions, and daily general ledger report to the Finance Department. The Finance Payroll Clerk reconciles these reports to the daily bank statement. If cash or checks have been given to Finance, then the Finance accounts receivable clerk matches the reports with the money before including it with deposits from other City departments. IV: Security Each employee has a unique login code used to log into the CLASS system. The Report produced by the System identifies the Cashier responsible fox that day's remittances and provides for accountability of there are missing funds or errors. The cash registers in the Kiosk are located on the counter away from the window, though visible from the outside, and receipts are retained in the cash registers. Each cash register has a locking mechanism which requires a key to gain access to the cash drawer. Despite that, keys are Left in the register which enables anyone, to gain access. {See Recommendation #2) The Recreation Coordinator keeps the undeposited remittances and supporting documents in a safe until the next morning when the deposit is prepared. The safe is kept in a locked storage room inside the Main Office and requires an electronic combination code to open. Each of six employees, including the Supervisor, Recreation Coordinators and Staff Assistants has possession of the key to the storage room and all have combination code to the safe. (See Recommendation #1) s-sz 4 Y. refunds The Park has no refund policy, but according to staff refunds rarely occur. When customers request refunds, they are given a credit fox future use. Although the CLASS system allows Cashiers to make refunds without any approval, Cashiers are instructed not to make refunds without a Supervisor's approval. (See Recommendation #3) As for the refunds made in connection with the picnic site reservation, the refund process is done at the City's Community Center location. Vl. Other Observations - When checks are received at the Main Office, the checks are endorsed using a stamp that reads: Pay to the ~~rder of Wells Fargo Bank N. A. For deposit only Blackberry Park - We were informed that .Recreation Coordinators, not Cashiers, handle customer complaints about fees and refunding is:~ues. - The Park employees shred credit card :-eceipts after their daily cash reconciliation pxocess is done as per the City's reque~~t. - We observed performance of cash remittances receipt procedures by a Cashier and obtained two consecutive remittance receipts resulting from two consecutive cash transactions. Each of the two obtained receipts showed a unique receipt number, and the receipt numbers on. the receipts were in a sequential order (#22409 and #22410). Some of the daily cash balance reports appeared to have missing receipt numbers or contain receipt numbers in anon-sequential order. (Recommendation #5) - In addition, we also noted that the Cashiers appear to have unrestricted access to swimming pool entrance tickets and diapers. (Recommendation #4) 6-63 SPECIFIC PROCEDURES Staff requested that we perform certain procedures which we have listed below along with a reference to our narrative and discussions. 1. Entrance conference -discuss with staff the following: • The types of cash receipts to be collected at each of the site. • Any specific plan or procedures that the City is using at each of the site. See BACKGROUND 2. Does the Operator already have any plans or procedures for this location's cash collection site? If so, document the site's plans or procedures for cash collections. See BACKGROUND 3. Observe the physical location of the cash collection site. Is the cash collection location reasonably safeguarded from each access by the general public? See BACKGROUND 4. Will electronic cash registers be used to collect cash? If no, what controls will be used in place? See section III. Overview of Cash Collection Process 5. Will the electronic cash registers be locked when not in used? See section VI. Security 6. Will pre-numbered cash receipts, including any support, be given to each customer? If no, what controls will be used in place? See section III. Overview of Cash Collection Process 7. Will z-tape totals be used to compare with actual cash collected at end of each day/shift to make sure that all cash are accounted for? See section III. Overview of Cash Collection Process 8. If there are separate cash receipts from the electronic cash registers, will the receipts be numerically accounted for? See section IIZ Overview of Cash Collection Process 6-64 6 9. Will checks be restrictively endorsed with <i client stamp immediately upon receipt? See section VI. Security 10. Will voided receipts be reviewed by a supervisor or someone other than the Cashier? See section V. Refunds 11. Will daily/batch cash receipt reconciliations be reviewed and approved by a supervisor? See section IIl. Overview of Cash Collection Process 12. Will locked hags be used to control the cas]'n receipts until bank deposit? See section III. Overview of Cash Collection Process 13. Is there a safe to provide physical control. over the cash receipts from time of cash collection until time of bank deposits? See section VI Security ~ 4. Is the safe located reasonably out of the general public's view? See section VI. Security 15. WiII the safe be locked overnight? See section VI. Security 16. How often will the cash be deposited with 1:he bank? See section V. Other Observations 17. Based on the above responses and observations, evaluate and consider the need to apply one or more additional procedures. If there is any need to apply one or more additional procedures, discuss with City. 18. Draft report and related findings. See FINDINGS AND RECOMMENDATIONS 6-65 7 FINDINGS & RECOMMENDATIONS 1. Safe Combination Access Six employees have access to undeposited remittances held in the safe. All have the key to the storage room and the safe combination. This represents an unnecessary level of risk of misappropriation. Since it is the Recreation Coordinators who prepare the bank deposit, it is only those two employees who should have the combination to the safe. Response: Staff that have access are supervisory personnel for all operating hours of the park and they all need access to the safe to take out and put in cash drawers and to put in the deposits. At any one time there is at least one supervisory staff on duty. Cashiers and part-timers have no access to the safe combination. 2. Register geys: Keys left in the cash registers enable unauthorized access to the cash. We recommend that the City require that the keys be removed from the registers when not in use. Response: Keys have been removed and are naw kept in the safe when not in use. 3. Refund Controls Although it is the practice not to give any refunds, there is no policy. Refund options are enabled on the cash registers, but should be restricted to require a supervisors code before the system accepts a refund transaction. Response: Adding this to Recreation's current refund policy will be looked at. The point of sale system does not currently have a supervisor refund approval feature. Staff will look into programming enhancements that may be available with this software system. 4. Inventory Control: Wrist bands are the access control for the pool area and pool revenues account for over 90% of the transactions. We recommend staff perform a reconciliation of wristband usage to sales to verify all revenues have been accounted for. We recommend that each Cashier be supplied with a set {pre-counted) number of wrist bands and swim diapers each day and Cashiers include a reconciliation of items received, used and remaining in their daily close out. The reconciliation should include the number of cash/credit card remittances receipt transactions entered by the Cashier that day and the number of inventory items sold/returned by that Cashier at the end of his or her shift. In order to make the control process more effective, it is recommended that the City provide only a limited number of inventory items to the Park employees and maintain updated inventory data. Response: Diapers are of low value ($1) and they sold only 4 this summer season. Staff will look into some type of control commensurate w/loss risk, such as limiting the amount at the kiosk. While numerical control of wristbands is a good s-ss 8 idea, such control would be difficult to achieve because customers o$en ask for replacements because they lose them or because they put them on too loose or too tight. They serve well though as a visual proof that a customer has paid, not so well as a guard against cashier intentionally pocketing cash and not ringing up a sale. Having two cashiers out there and regular supervisory visits are the current compensating controls. 5. Receipt number Sequencing: We n~~ted in our observations that some of the daily cash balance reports appeared to have missing receipt numbers or contain receipt numbers in anon-sequential order. We believe it important that the City discuss the matter with the software provider to gain an understanding of what would cause this to ensure that this lack of sequencing does not zepresent unauthorized voids or refunds. Response: Because the system generated report presents transactions grouped by cashier and payment type, the sequence is broken up among the cashiers and payment types. There does not appear 1:o be a report solely by transaction number sequence. Staff will check into what prevents someone from completely erasing a transaction from the system. These agreed-upon procedures are substantially less in scope than an audit, the objective of which is the expression of an opinion on fmancial data Accordingly, we do not express such an opinion. Had we performed additional procedures or had we performed an audit of the remittances, matters might havf: come to our attention, which would have been reported to you. ~n ~ .nom October 8, 2009 s-s~ 9 /~ Attachment G /""~~L i,7"t' • AS~C.~~IAT'~'S ACCOUNTANCY CORPORAT/0N 3478 Buskirk Ave. - Suffe 215 Pleasanf Nill, California 94523 (925) 930-0902 • FAX (925) 930-Oy35 mazeC~mazeassoclafes. Com wtvw. mazeassocia tee. cvm AGREED UPON PROCEDURES REPORT ON COMPLIANCE WITH THE PROPOSITION 111 2008-2009 APPROPRLATiONS LIlVII'T INCREMENT Honorable Mayor and Members ofthe City Council City of Cupertino, California We have applied the procedures below to the Appropriation Limit Worksheet for the City of Cupe~tnio for the year ended June 30; 2009. These procedures, which were suggested by the League of California Cities and presented in their Article XXI.I[LB Appropriations Limitation Uniform Guidelines, were performed solely to assist you in meeting the requu•ements of Sec#ian 1.5 of Article ~ of the California Constitution. The sufficiency of the procedures is solely the responsibility of the specified users of 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. This report is intended for the mforn~ation of management and the City Council; however, this rest~7ction is not intended to Limit the distribution of this report, which is a matter of public record. The procedures you requested us to perform and our findings were as follows: A. We obtained the Appropriations Limitation Worksheet and determined that the 2008-2009 Appropriations Limit of $69,217,707 and annual adjustment factors were adapted by resolution of the City Council. We also determined that the population and inflation option was selected by a recorded vote of the City Council. The City Council adopted the 1.0172% County Population Change Factor. B. We recomputed the 200$-2009 Appropriations Limit by multiplying the 2007-2008 Appropriations Limit by the anm~al adjustment factor. C. For the Appropriations Limitation Worksheet, we agreed the. Per Capita Income, County and City Population Factors to California State Department of Finance Vilorksheets. Those agreed-upon procedures are substantially less in scope than an audit, the objective of which is the expression of an opinion on the Appropriations Limitation Worksheet. Accordingly, we do not express such an opinion. Had we performed additional procedures or had we made an audit of the Appropriations Limitation Worksheet and the other completed worksheets descn'bed above, matters might have come to our attention that would have been reported to you. • May 27, .2009 A Prolesslona! Corporation 6 - 68 Attachment H CUPERTINO December 9, 2009 ADMINISTRATIVE SERVICES DEPARTMENT CITY HALL 10300 TORRE: AVENUE: • CUPERTINO, CA 95014-3202 (408)777-3220 • FAX (408) 777-3109 State Controller's Office Division of Accounting and Reporting Section Local Government Reporting Section P. O. Box 942850 Sacramento, CA 94250 Dear Sirs, 1•n accordance with Section 33080.1 of the Health and Safety Code, this is the Cupertino Redevelopment Agency's annual report for the fiscal year ended June 30, 2009. The report includes the following enclosures and electronic submissions: {1) A signed cover page of State Controller':; Annual Report of Financial Transaction. The report itself has been transmitted via the SCO FTP site. (2) U.S. Bureau of the Census survey form. (3) Confirmation of the Agency's Online Filing of Annual Housing and Community Development Report. (4) Two copies of the independent financial ;audit including an opinion of the Agency's compliance with applicable laws and regulations governing redevelopment agencies. (5) A signed copy of the Statement of Indebtedness filed with the County auditor for the 2009-10 tax yeaz filed on September :78~ and amended on November 30~ , 2009. Properties and Loans. The Agency had no outstanding loan receivables and owned no properties. 2008-09 Redevelopment A~ency Accomplishment and Bli t Pro egr ss Report 08-09 Redevelopment Agency Accoznplishmei~ts Coordinated the following: ^ Provided analysis for the Board on the August `09 expiration of the Vallco Development Agreement. ^ Conducted a "Redevelopment 101" ovenriew for the City Council/Agency Board in May, 2008. 6-69 Cupertino Redevelopment Agency Annual Report for Fiscal Year Ending June 30, 2009 Page 2 of 2 ^ Finalized relocation of ~''TA Park & Ride facility from the Rose Bowl property to the J.C. Penney's Garage. Provided Facilitation for the following development,activities: ^ Completion of $1 million Benihana Restaurant rehabilitation. ^ Completion of T.G.I. Friday's Restaurant rehabilitation. ^ New International Food Court opening in November, 2008. ^ Revitalization of the NW mall entrance with new hardscape, lighting, and signage. ^ Constriction commencement of the Rose Bowl mixed use project. Misc. ^ In September of 2008 the mall owners, Orbit Resources, filed for bankruptcy as a result of a lawsuit with their primary lender, Gramercy. New Space Square Footage ^ Food Court 11,000 sf Rehabilitated Space Square Footage ^ T.G.I. Friday's 8,500 sf If you have any questions, you may contact me at (408) 777-3280. Respectfully submitted, ~~ David Woo Finance Director, City of Cupertino cc: Kelly Kline Enclosures s-~o Attachment I CITY OF CUPERTINO DEVELOPMENT IMPACT FEE RI~PORT FISCAL YEAR ENDING JUNE 30, 2009 1. Below Market Rate Housing Mitigation fee {A} Description and Amount: An in-lieu fee collected on new residential, office/industrial, hotel, and retail development in order to address impa+~t on affordable housing. Fee was $2.58 per sq ft on residential, $4.91 per sq ft +~n officefindustrial, hotel, and retail, and $2.46/sq ft in the Planned Industrial Zor-e for the reported year. (B} Amount collected in FY 08/09 30,248 (C} Beginning of year balance 1,446,916 End of year balance 250,359 (D) Interest earned 19,663 (E) Expenditures: $1,246,468 including group senior housing purchase 1,090k, WVCS affordable housing placement 65k, Project Sentinel rental mediation 38k, lot book reports 12k, printing and mailing 3k, BMR m~~nual update 10k, homeless survey 3k, legal fees 2k, administration 23k. 2. Park Dedication fee (A} Description: Fee collected on new residential developments for the acquisition, improvement, and maintenance of parks and recreation facilities. (B} Amount collected in FY 08!09 233,750 (C) Beginning of year balance 334,475 End of year balance 576,966 (D) Interest earned 9,623 (E) Expenditures: McClellan Ranch $882 3. Stevens Creek Blvd "Heart of the City" specific plan fee {A) Permit applicants along Stevens Creek Blvd corridor formerly paid a $0.044 per sq-ft fee to reimburse City for the $94,929 cost of the 1994 specific plan for the central area of the City. Cost has been fully reimbursed and the feE: no longer charged. 6-71