Financial ReportADMINISTRATIVE SERVICES DEPARTMENT
CUPERTINO
CITY HALL
10300 TORRE AVENUE • CUPERTINO, CA 95014-3255
(408) 777-3220 • FAX (408) 777-3109
SUMMARY
Agenda Item No. U
SUBJECT AND ISSUE
Accept the City's year-end financial reports for 2006-07.
BACKGROUND
Meeting Date: January 15, 2008
Staff is pleased to present to the City Council the Comprehensive Annual Financial Report
(CAFR), Redevelopment Agency annual reports, three internal control reports, and the
development impact fee report, for the fiscal year ended June 30, 2007. All but the
development report were either audited or issued by the City's certified public accountants,
Maze and Associates. These reports were discussed earlier today with the Council's Audit
Committee. Highlights are as follows:
CAFR
The City's $45.7 million in revenues from governmental, non-enterprise activities jumped
$6 million or 15% over the previous year, led by increases in grants for the Mary Avenue
Bridge and street projects, property taxes, investment earnings, sales taxes, construction
taxes, and the end of the two-year state tax takeaway. Overall governmental expenditures
of $37.8 million were up 4% or $1.6 million over last year almost all due to capital outlays
for the Mary Avenue Footbridge, Stevens Creek Corridor Park, and street improvement
projects. After the $1.7 million in proceeds for land sales and $5.1 million in net transfers
of retiree medical reserves to a separate internal service fund, governmental fund balance
increased by $4.5 million or 12% to finish the year at $41.3 million. The ending number
comprises: a) $5.5 million in cash and assets restricted to purchase orders, housing loans,
the Cleo Avenue housing parcel, Redevelopment Agency advances made, and prepaid
capital contributions on the animal control contract; b) $7.8 million in funds reserved for
street, affordable housing, storm drain, environmental, and public television purposes; c)
$16 million set-aside as per the General Fund reserve policy; d) $1 million in infrastructure
and utility user tax reserves; e) $3.9 million of City funds locked into existing building,
park and traffic capital projects; and f) $7.1 million representing the unreserved,
undesignated General Fund balance that the City used to help finance $11.8 million of new
capital work and acquisitions adopted in the 2007-08 five-year capital budget.
Year-end financial reports for 2006-07
January 15, 2008
Page 2 of 3
Redevelopment Agency
The Agency's financial statements include a current year 2007 audit finding that the annual
blight alleviation progress report was not filed with the Agency's Board and the State
Controller. To rectify this, staff submits to the Council and Agency Board, as Attachment
#3, the annual report that was filed last month with the State Controller. In addition, the
Agency corrected the prior year 2006 finding with its adoption of the five-year
implementation plan more than a year ago.
Internal Control
A Final Accounting Issues Memo, Memorandum on Internal Control Structure, and a
compliance review of the City's Investment Policy is enclosed. No significant deficiencies
or material weaknesses were found, but the auditors did suggest some improvements in
computer hardware and network security, wire transfer verification, accounts receivable
write-off approval, and grant billing follow-up.
Development Fee Report
State law requires an annual report on the City's three development impact fees, notably
the below market rate housing fee; the park dedication in-lieu fee; and the "Heart of the
City" planning fee. Attachment #7 provides information on amounts collected, spent, and
available for 2006-07.
RECOMMENDATION
Accept the City's year-end financial reports for 2006-07.
Submitted by:
,l.
David Woo
Finance Director
Ap roved for submission:
David W. Knapp
City Manager
Reviewed by:
Caro A. Atwood
Director of Administrative Services
Attachments:
1. Comprehensive Annual Financial Report
2. Redevelopment Agency Basic Component Unit Financial Statements
3. December 20, 2007 Letter to State Controller's Office Disclosing the Agency's
annual report
Year-end financial reports for 2006-07
January 15, 2008
Page 3 of 3
4. Final Accounting Issues Memo
5. Memorandum on Internal Control Structure
6. Independent Accountant's Report on Investment Policy
7. Development Fee Report
Due to their size, some attachments can be found at:
www c~ertino org/city government/departments and offices/finance/index.asp
CITY OF CUPERTINO
REDEVELOPMENT AGENCY
BASIC COMPONENT UNIT
FINANCIAL STATEMENTS
FOR THE YEAR ENDLD
JUNE 30, 2007
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Basic Component Unit Financial Statements
For The Year Ended June 30, 2007
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 ............................................................................................................... l 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
Notes to Component Unit Financial Statements ..............................................................................17
Report On Compliance And On Internal Control Over Financial
Reporting Based On An Audit Of Financial Statements
Performed In Accordance With Government Auditing Standards ...................................................23
Schedule of Current Year Finding .........................................................................................................25
Schedule of Prior Year Finding ..............................................................................................................26
MazE &
ASSOCIATES
ACCOUNTANCY CORPORATION
3478 Buskirk Ave. -Suite 215
Pleasant Hill, California 94523
(925) 930-0902 • FAX (925) 930-0135
maze @mazeassociates. coin
INDEPENDENT AUDITORS' REPORT www.mazeassociates.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 June 30, 2007, as listed in the table of contents. These financial
statements are the responsibility 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 standazds 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. Those standards require that we plan and perform the
audit to obtain reasonable assurance as to whether the financial statements aze 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.
In accordance with Government Auditing Standards, we have also issued a report dated September 21, 2007
on our consideration of the Agency's internal control structure and on its compliance with laws and
regulations.
In 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, 2007 and the results of its operations for the year then ended, in
conformity with generally accepted accounting principles in the United States of America.
Management's Discussion and Analysis is required by the Government Accounting Standards Boazd, 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 we express no opinion on it.
~~ ~ ~u,~
September 21, 2007
A Professional Corporation
This Page Left Intentionally Blank
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discusses the City of Cupertino Redevelopment Agency's financial 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 Vallco
Redevelopment Project Area, while ensuring an adequate stock of low and moderate income housing in
the City. The project area encompasses the renamed Cupertino Square (formerly Vallco) shopping center
and the "Rose Bowl" site south of the mall. The Agency has the power to condemn properties for this
purpose and to issue debt payable out of the incremental property taxes expected to be realized as a result
of its redevelopment activities. The Agency may enter into development agreements with developers and
others to further its purposes.
2006-07 FINANCIAL FIIGHLIGHTS
Highlights include the following:
Agency-wide:
• Agency total assets amounted to $176.3 thousand, a 25% increase from the prior year total of
$141.1 thousand.
• Agency liabilities totaled $261.7 thousand, a decrease of $4.2 thousand from the prior year.
• The Agency's net asset deficit stood at $85.4 thousand for June 30, 2007, an improvement of
$39.4 thousand from the prior year.
• Agency-wide revenues consisted of $193.3 thousand in general revenues.
• Agency-wide expenses were $153.9 thousand, consisting of non-housing community
development activities.
Fund Level:
• The Cupertino Square Redevelopment Fund's unrestricted fund balance deficit increased to
$223.4 thousand at June 30, 2007, up from a $210.7 thousand deficit at June 30, 2006.
• Redevelopment Fund revenues of $141.2 thousand represented a slight increase from last year's
$139.3 thousand. Expenses climbed from $88.2 thousand in 2005-06 to $153.9 thousand in 2006-
07.
• Low and Moderate Income Housing Fund revenues increased to $52.2 thousand in fiscal 2006-
07, up 13% from the prior year level of $46.4 thousand.
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.
3
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 fmancial activities and financial position-long-term and short-term.
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 fmancial 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 financial 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 all financial 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's net assets improved from a deficit of $124.8 thousand at June 30, 2006
to a deficit of $85.4 thousand at June 30, 2007. The accumulated net asset deficit is a result of
expenditures incurred by the Agency in the establishment and development of the project area over its
first five years, during which incremental property tax revenues have been minimal. Advances totaling
$258.7 thousand from the City of Cupertino have been required to fmance the start up costs for the
Agency. The advances from the City are repayable from future tax increment revenues, which come from
property taxes that .are levied by the County annually and apportioned to the Agency. The advance
balance did not change during the year.
The cash position of the Agency improved by $71.6 thousand due to the rise in net assets plus the
elimination of receivables and payables related to professional services provided by a noise consultant for
the AMC theatre project last year.
4
Table 1
Governmental Net Assets at June 30
(In Thousands)
Governmental
Activities
2007 2006
Cash and investments $176.3 $104.7
Accounts receivable --- 36.4
Total assets 176.3 141.1
Accounts payable and accruals --- 5.8
Accrued payroll and benefits 3.0 1.4
Advance from City of Cupertino 258.7 258.7
Total liabilities 261.7 265.9
Net assets:
Restricted for low and moderate income housing 138.0 85.8
Unrestricted deficit (223.4) (210.6)
Total net assets (accumulated deficit) ($85.4) $( 124.8)
As shown in Table 2 on the next page, the Agency experienced the $39.4 thousand rise in net assets
during 2006-07 because property valuation growth has allowed tax revenues to finally cover
administrative costs on an Agency-wide level. As redevelopment of the project area continues, the
forecasted additional tax revenues will continue to improve net assets and allow the Agency to payback
the City advance, make bond financing more attractive, and provide capital for economic improvement.
5
Table 2
Governmental Activities
Changes in Governmental Net Assets
(In Thousands)
. 2006-07 2005-06
Expenses
Community development $153.9 88.2
Total expenses 153.9 88.2
Revenues
General revenues:
Taxes:
Incremental property tax 187.3 185.7
Investment income 6.0 ----
Total general revenues 193.3 185.7
Total revenues 193.3 185.7
Increase in net assets X39.4 X97.5
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
(In Thousands)
2007 2006
Total assets $ 176.3 $ 141.1
Total liabilities 261.7 265.9
Total fund balance deficits (85.4) (124.8)
Total revenues 193.3 185.7
Total expenditures 153.9 88.2
Mirroring the entity-wide results, the Agency's funds reported a June 30, 2007 combined fund balance
deficit of $85.4 thousand, an improvement from the $124.8 thousand deficit at June 30, 2006.
Analyses of Major Funds
Cupertino Square Redevelopment Fund
This Fund accounts for the receipt of tax increment revenue allocated to the Vallco Redevelopment
Project Area, established in August 2000. It serves as the administrative fund for the project area, with
6
expenditures for the ongoing management and oversight of overall project area activities. The fund's
name comes from the Cupertino Square (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 increased 1 % to $140.5 thousand compared to the $139.3 thousand received in the
prior year, reflecting the absence of ownership or major assessment changes.
Expenditures jumped 74% over last year, ending up at $153.9 thousand for 2006-07. The hiring of a new
Economic Development and Redevelopment Agency manager caused personnel costs to increase from
$58.9 to $92.9 thousand, while the statutorily required pass-through of taxes to special districts and
schools rose significantly to $58.5 thousand compared to $14.8 thousand last year. This pass-through,
shown as an expenditure against gross taxes, jumped because it's annually assessed based on estimated
taxes and trued-up the following year based on actual receipts. Because last year's actual receipts came in
much higher than estimated, it follows that this year's pass-through soared accordingly. In addition,
professional costs were avoided this year because of the 2006 completion of the five-year redevelopment
implementation plan. The Educational and Revenue Augmentation Fund state tax takeaway also ended
last year.
On the fund level, the retained tax revenues were not sufficient to cover the administrative expenses for
the year, causing last year's fund balance deficit to increase from $210.7 thousand to this year's $223.4
thousand.
Low and Moderate Income Housing 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 2006-07, the Agency's allocation for low and moderate income housing purposes totaled $46.8
thousand compared to $46.4 thousand for the prior fiscal year, proportional to the growth in overall taxes.
The City's affordable housing activities did not use any redevelopment funds this year. As the cash
balance has grown, the fund started to earn interest this year, at $5.4 thousand. The fund balance reserved
for housing grew from $85.8 thousand to $138 thousand.
CAPITAL ASSETS
The Agency continues to possess no capital assets.
INDEBTEDNESS
At June 30, 2007 the Agency's indebtedness consisted of an unchanged $258.7 thousand advance from
the City of Cupertino to cover staffing, consultant, and legal costs that exceed tax revenues. The City is
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 INITIATIVES
With the openings of a new 16-screen AMC theatre, an upscale bowling alley, Strike Cupertino, and two
new multi-level parking structures, and with new flooring, signage, and mall exteriors, Cupertino
Square's new owners hope to lure in new tenants. A new food court will be built. Outside the existing
7
enclosed mall, building plans have been approved for a new California Pizza Kitchen. Land use plans are
being considered for amixed-use condominium retail development in the Rose Bowl section of the
project area. Additional retail within one of the pazking structures and a new hotel is envisioned for the
future.
CONTACTING THE AGENCY'S FINANCIAL MANAGEMENT
This report is intended to provide citizens, taxpayers, investors, and creditors with a general overview of
the Agency's finances. Further information can be obtained from the City of Cupertino's Finance
Department, 10300 Torre Avenue, Cupertino, CA 95014-3255, phone (408) 777-3220, or by visiting the
City's website at www.cupertino.org.
8
CITY OF CUPERTINO REDEVELOPMENT AGENCY
STATEMENT OF NET ASSETS
AND STATEMENT OF
ACTIVITIES
The Statement of Net Assets and the Statement of Activities summarize the entire Agency's financial
activities and financial position. They are prepared on the same basis as is used by most businesses,
which means they include all the Agency's assets and 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 balance sheet format, but presents it in a way that focuses
the reader on the composition of the Agency's net assets, by subtracting total liabilities from total assets.
The Statement of Net Assets summarizes the financial position of all the Agency's financial 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 assets, 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 financial statements along with the fund financial statements and footnotes are called Basic
Component Unit Financial Statements.
9
CITY OF CUPERTINO REDEVELOPMENT AGENCY
STATEMENT OF NET ASSETS
JUNE 30, 2007
ASSETS
Cash and investments (Note 3)
Total Assets
LIABILITIES
Accrued payroll and benefits
Advance from City (Note 4)
Total Liabilities
Governmental
Activities
$176,338
176,338
2,983
258,712
261,695
NET ASSETS (Note 5)
Restricted for:
Low and moderate income housing 138,019
Unrestricted deficit (223,376)
Total Net Assets (Accumulated Deficit) ($85,357)
See accompanying notes to financial statements
10
CITY OF CUPERTINO REDEVELOPMENT AGENCY
STATEMENT OF ACTIVITIES
FOR THE YEAR ENDED JUNE 30, 2007
Governmental
Functions/Programs Activities
Expenses:
Community development $153,874
Total expenses 153,874
General revenues:
Taxes:
Incremental property taxes 187,275
Investment income 6,051
Total general revenues 193,326
Change in Net Assets 39,452
Net Assets (Accumulated Deficit) -Beginning (124,809)
Net Assets (Accumulated Deficit) -Ending ($85,357)
See accompanying notes to financial statements
11
This Page Left Intentionally Blank
FUND FINANCIAL STATEMENTS
The funds described below were determined to be Major Funds by the Agency in fisca12007.
Vallco 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 Flousing Fund
Accounts for redevelopment tax revenues used for low and moderate income housing programs.
13
CITY OF CUPERTINO REDEVELOPMENT AGENCY
GOVERNMENTAL FUNDS
BALANCE SHEET
JUNE 30, 2007
Low and Moderate Total
Cupertino Square Income Governmental
Redevelopment Housing Funds
Assets
Cash and investments (Note 3) $38,319 $138,019 $176,338
Total Assets $38,319 $138,019 $176,338
Liabilities and Fund Balances
Accrued payroll and benefits $2,983 $2,983
Advance from City (Note 4) 258,712 258,712
Total Liabilities 261,695 261,695
Fund balances (deficit) (Note 5):
Reserved for low and moderate
income housing $138,019 138,019
Unreserved, undesignated (223,376) (223,376)
TOTAL FUND BALANCES (DEFICIT) (223,376) 138,019 (85,357)
Total Liabilities and Fund Balances $38,319 $138,019 $176,338
See accompanying notes to financial statements
14
CITY OF CUPERTINO REDEVELOPMENT AGENCY
GOVERNMENTAL FUNDS
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
FOR THE YEAR ENDED JUNE 30, 2007
Revenues:
Incremental property taxes (Note 2)
Use of money and properly
Total Revenues
Expenditures:
Community development:
Salaries and benefits
Pass-through expenditures (Note 6)
Miscellaneous
Total Expenditures
Net change in Fund Balances
Low and Moderate
Cupertino Square Income
Redevelopment Housing
Total
Governmental
Funds
$140,456 $46,819 $187,275
695 5,356 6,051
141,151 52,175 193,326
92,948
58,453
2,473
153,874
(12,723 )
52,175
92,948
58,453
2,473
153,874
39,452
Fund balances (deficit), beginning of year (210,653) 85,844 (124,809)
Fund balances (deficit), end of year ($223,376) $138,019 ($85,357)
See accompanying notes to financial statements
15
CITY OF CUPERTINO REDEVELOPMENT AGENCY
CUPERTINO SQUARE REDEVELOPMENT SPECIAL REVENUE FUND
STATEMENT OF REVENUES, EXPENDITURES
AND CI~ANGES IN FUND BALANCE
BUDGET AND ACTUAL
FOR THE YEAR ENDED JUNE 30, 2007
REVENUES:
Incremental property taxes
Use of money and property
Total Revenues
EXPENDITURES:
Community development:
Salaries and benefits
Professional and legal costs
Pass-through expenditures
Miscellaneous
Total Expenditures
Net change in Fund Balances
Fund balance (deficit), beginning of year
Fund balance (deficit), end of year
(210,653)
($223,376)
See accompanying notes to financial statements
Budgeted Amounts
Original Final
Variance with
Final Budget
Positive
Actual Amounts (Negative)
$90,000 $90,000 $140,456 $50,456
695 695
90,000 90,000 141,151 51,151
167,438 167,438 92,948 74,490
50,000 50,000 50,000
58,453 (58,453)
2,473 (2,473)
217,438 217,438 153,874 63,564
($127,438) ($127,438) (12,723) $114,715
--,
16
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
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 21, 2000 the City
Council enacted and passed ordinance 1850, 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 all property in the Project Area is determined on the date of adoption
of the Redevelopment Plan by a designation of a fiscal year assessment roll.
2. Property taxes related to any incremental increase in assessed values after the adoption of a
Redevelopment Plan are allocated to the Agency; all taxes on the "frozen" assessed valuation of
the property are allocated to the City and other 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 separate legal entity governed by the City Council sitting in a separate capacity as
the Redevelopment Agency Board. City staff performs all administrative, accounting, management
and budgeting functions. Since the City exercises control over the Agency operations, the Agency
is considered a component unit of the City and is included in the City's general purpose fmancial
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 U.S.A.
These Statements require that the fmancial statements described below be presented.
Government-wide Statements: The Statement of Net Assets
include the financial activities of the overall Agency government.
minimize the double counting of internal activities.
and the Statement of Activities
Eliminations have been made to
17
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. Direct 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 recipients 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.
C. Major Funds
Major funds are identified and presented separately in the fund financial statements.. All other
funds, called non-major funds, are combined and reported in a single column, regardless of their
fund-type.
Major funds are defined as funds that have either assets, liabilities, revenues or
expenditures/expenses equal to ten percent of their fund-type total and five percent of the grand
total.
The Agency reported the following major governmental funds in the accompanying financial
statements:
Vallco 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 of Accounting
The government-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.
18
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES (Continued)
Governmental funds financial statements are reported using the current financial resources
measurement focus and the modified accrual basis of accounting. Under this method, revenues are
recognized when measurable and available. The Agency considers all revenues reported in the
governmental funds to be available if the revenues 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 are reported as other fnancing sources.
Those revenues susceptible to accrual are incremental properly taxes and interest.
Non-exchange transactions, in 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 grants, entitlements, and donations is recognized in the fiscal year in
which all eligibility requirements have been satisfied.
The Agency may fund programs with a combination of cost-reimbursement grants, categorical block
grants, and general revenues. Thus, both restricted and unrestricted net assets may be available to
finance program expenditures. The Agency's policy is to first apply restricted grant resources to such
programs, followed by general revenues if necessary.
Certain indirect 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 expenditures become appropriations. The Board may amend the
budget by resolution during the fiscal year. All appropriations lapse at year end. The Agency did not
budget activity in the Low and Moderate Income Housing Fund for fiscal 2006-2007, and that fund
has been excluded from the budget versus actual statements in the accompanying financial statements.
Encumbrance accounting is employed as an extension of the budgetary process. Under encumbrance
accounting, purchase orders, contracts, and other 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.
19
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
NO'T'E 1 -SIGNIFICANT ACCOUNTING POLICIES (Continued)
F. Property Tax Levy, Collection and Maximum Rates -Article XIII 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
Due dates 50% on February 1 July 31
December 10 August 31
Delinquent as of April 10
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 Housing Fund. However, on
January 31, 2002 the Agency settled a lawsuit challenging the formation of the Project Area. This
settlement requires the Agency to set aside twenty-five percent of incremental property taxes for low
and moderate income housing activities. For fiscal 2006-2007, the Agency received $187,275 in
incremental property taxes of which twenty-five percent or $46,819 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 fmancial statements. As of June 30,
2007 the City's treasury was composed primarily of investments in the State of California Local
Agency Investment Fund, Federal agencies securities and non-negotiable certificates of deposit, and
money market funds.
NOTE 4 -ADVA1VCi? FROM THE CITY (,I~,M?F:r~L FUND
As of June 30, 2007, tax increment revenues were not yet sufficient to fmance Agency operations.
To assist the Agency until project redevelopment generates additional tax increment revenues, the
City advanced funds to the Agency to fmance operations. As of June 30, 2007 the balance of the
advance was $258,712.
-~
20
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
NOTE 5 -NET ASSETS AND FUND BALANCES
Net Assets are measured on the full accrual basis, while Fund Balances are measured on the
modified accrual basis.
A. Net Assets
At the Government-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.
B. Fund Deficit
As of June 30, 2007, the Cupertino Square Redevelopment Special Revenue Fund had a deficit of
$223,376.
NOTE 6 -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 the 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 the year June 30, 2007, the Agency calculated and recorded
$58,453 in pass-through and basic aid payments to the affected jurisdictions.
21
This Page Left Intentionally Blank
MazE &
ASSOCIATES
ACCOUNTANCY CORPORATION
3478 Buskirk Ave. -Suite 215
REPORT ON INTERNAL CONTROL OVER Pleasant Hill, California 94523
FINANCIAL REPORTING AND ON (925) 930-0902 • FAX (925) 930-Oi35
maze @mazeassocia tes. com
COMPLIANCE AND OTHER MATTERS www.mazeassociates.com
BASED ON AN AUDTT OF
FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENTAUDITINGSTANDARDS
Members of the Redevelopment Agency
of the City of Cupertino
Cupertino, California
We have audited the fmancial statements of the Redevelopment Agency of the City of Cupertino as of and
for the year ended June 30, 2007, and have issued our report thereon dated Cupertino. 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 fmancial reporting
as a basis for designing our auditing procedures for the purpose of expressing our opinions on the fmancial
statements, but not for the purpose of expressing an opinion on the effectiveness of the Agency's internal
control over fmancial reporting. Accordingly, we do not express an opinion on the effectiveness of the
Agency's internal control over fmancial 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 fmancial data reliably in accordance with generally 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 misstatement of the financial statements will not be
prevented or detected by the Agency's internal control.
Our consideration of internal control over fmancial reporting was for the limited purpose described in the
second paragraph and would not necessarily identify all deficiencies in internal control over fmancial
reporting that might be significant deficiencies or material weaknesses. As part of our audits, we prepared
and issued our separate Memorandum on Internal Control dated September 21, 2007.
A Professional Corporation
23
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 for Compliance Audits of California Redevelopment A e~ ncies. 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 instances of noncompliance that are
required to be reported under Government Auditing Standards which are described in the accompanying
Schedule of Findings and Questioned Costs.
We did not audit the Agency's responses to the findings included in the Schedule of Findings and
Questioned Costs and, accordingly, we express no opinion on them.
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.
Yrtau ~ ~ ~~
September 21, 2007
24
SCHEDULE OF CURRENT YEAR FINDING
Finding 07-01: Reports on Blight Progress
According to the Health & Safety Code 33080.1, the Agency is required to submit an annual
report on blight progress to the Agency Board and the State Controller's Office within 6
months after fiscal year end. We understand the Agency did not submit this required
information for fiscal year 2006. We recommend the Agency submit the required information
to the Board and State Controller Office on a timely basis in future fiscal years.
Management Response: The Agency will comply, beginning with the 2007 filing.
25
SCHEDULE OF PRIOR YEAR FINDING
Finding 06-01: Five-Year Implementation Plan
In accordance with Health & Safety Code 33490 and 33413(b) Redevelopment agencies must provide
Implementation Plans for each project area every five years and have the first plan adopted within five
years following the adoption of the redevelopment plan. The Agency has not yet adopted afive-year
implementation plan. The project area was established in August 2000 and Agency is required to adopt
their first five year implementation plan for fiscal years 2005 through 2010 by August 2005.
Current Status:
The Five-year Implementation Plan was adopted at the December 6, 2006, City Council Redevelopment
Agency Meeting.
26
CITY OF CUPERTINO
MEMORANDUM ON
INTERNAL CONTROL STRUCTURE
FOR THE YEAR ENDED JUNE 30, 2007
MazE &
ASSOCIATES
September 21, 2007
To the City Council of
the City of Cupertino
City of Cupertino, California
ACCOUNTANCY CORPORATION
3478 Buskirk Ave. -Suite 215
Pleasant Hill, California 94523
(925) 930-0902 • FAX (925) 930-0135
maze C~mazeassocia tes. com
www.mazeassociates.cnm
In planning and performing our audit of the financial statements of the City of Cupertino as of and for the
year ended June 30, 2007, 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 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 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 first paragraph and
would not necessarily identify all deficiencies in internal control that might be significant deficiencies or
material weaknesses. We did not identify any deficiencies in internal control that we consider to be
material weaknesses, as defined above.
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 on them.
This communication is intended solely for the information and use of management, City 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 specified parties.
~~ ~ ~~~
A Professional Corporation
CITY OF CUPERTINO
MEMORANDUM ON INTERNAL CONTROL STRUCTURE
SCHEDULE OF OTHER MATTERS
2007-01 VTA Grant Receivable Follow-up
As of June 30, 2007, the City has a Mary Avenue Bicycle Footbridge Capital Project which is budgeted to
cost about $10.7 million in total. $2 million of the project costs are budgeted to be funded by the City's
General Fund. The remaining project costs are budgeted to be funded by grants. As of June 30, 2007, the
City had recorded $1.4 million of grant reimbursement receivables from Santa Clara Valley
Transportation Authority (VTA) and Caltrans. However, the City had to defer the $1.4 million of grant
revenue in the fund level because the City did not receive the grant reimbursements within the "current
and available" period of 60 days. Since the amount of the grants are large, the City should make sure that
all grant reimbursements are submitted and collected timely. We recommend that after the Public Works
Department has completed the initial submissions of the requests for grant reimbursement, the requests
should then be forwarded to Finance Department for follow-up to make sure that they are collected
timely.
Management Response: Recommendation implemented. The grants were collected by the end of
December 2007 and Finance will continue to monitor all receivables on this project.
INDEPENDENT ACCOUNTANT'S REPORT
ON AGREED-UPON PROCEDURES
FOR THE CITY OF CUPERTINO
INVESTMENT POLICY
MazE &
ASSOCIATES
ACCOUNTANCY CORPORATION
3478 Buskirk Ave. -Suite 215
Pleasant Hill, California 94523
(925) 930-0902 • FAX (925) 930-0135
INDEPENDENT ACCOUNTANT'S REPORT mazeC~mazeassociates.com
ON AGREED-UPON PROCEDURES w~'~'w mazeassociates.com
FOR THE CITY OF CUPERTINO
INVESTMENT POLICY
September 21, 2007
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 April 17, 2007, approved by City Council.
We compared the investments authorized by the policy against the investments listed in the
March 2007 Treasurer's Investment Report to make sure that all investment types are allowed
by the investment policy.
Finding: None noted. All investment types appear to be in compliance with the City's
investment policy.
A Professional Corporation
Procedure
B. We compared the City's Investment Policy with California Government Code Section 53601 to
make sure that the City's Investment Policy complied with California Government Code Section
53601.
Finding: None noted. City's Investment Policy appears to comply with California Government
Code Section 53601.
Procedure
C. We compared the March 2007 Treasurer's Investment Report with California Government Code
Section 53646 to make sure that the March 2007 Treasurer's Investment Report complied with
California Government Code Section 53646.
Finding: None noted. The March 2007 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: None noted. Per our conservation with 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: Wire Transfer Procedures
As of May 2007, the Administrative Director, the Finance Director and the Accountant were
authorized individually to initiate and complete all wire transfers. Wire transfers initiated by
Treasury Section personnel were not reconfirmed by the appropriate financial institution to non-
treasury staff. Also, the wire transfer process did not require a call back feature in which a
second employee with separate password had to confirm in order to complete the wire transfer
transaction.
Subsequently, we recommended to Finance staff that in order to mitigate any internal control
weakness, all wire transfers should be set up to have acall-back confirmation feature. For
example, the first employee initiates and requests the wire transfer. Once the request has been
received by the bank, a call back confirm is electronically sent to a second employee. The
second employee then logs in with a different password to confirm and complete the wire
transfer.
The City has since implemented the second employee call-back feature in its wire transfer
procedures.
Procedure
F. We selected eight investment sales from various months of Treasurer's Report and performed
the following:
• Traced investment type to the supporting broker's confirmation.
• Traced the sale date to the supporting broker's confirmation
• Traced amount of investment sold to supporting broker's confirmation.
Finding: None noted. City appears to be in compliance with the Investment Policy.
Procedure
G. We selected the one and only investment purchase (as of March 2007) for fiscal 2007 from the
City's investment files and performed the following:
• Traced to Treasurer's Investment Report in the month acquired.
• Agreed to Treasurer's Investment Report the amount, terms and interest rate.
• Determined if investment type is authorized by the investment policy.
Finding: None noted. City appears to be in compliance with the Investment Policy.
Procedure
I. We sent audit confirmations to the City's third party investment safekeeping custodian, Wells
Fargo Bank, for the March 2007 statement. We received the March 2007 statement from Wells
Fargo Bank and traced the following from each investment listed in the Wells Fargo statement
to the City's March 2007 Treasurer's Investment Report:
• Investment description
• Market value
• Purchase date
• Maturity date
• Coupon rate
Note: The Wells Fargo Bank statement incorrectly spelled "Wilmot State Bank" as
"Wilmont State Bank". This spelling error was subsequently corrected in the City's June
2007 Treasurer's Investment Report.
Finding: None noted. City appears to be in compliance with the Investment Policy.
Procedure
J. We judgmentally selected 17 Federal Agencies investments from the March 2007 Wells Fargo
statement and traced the reported ratings to Moody's rating online.
Finding: None noted. City appears 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. Accordingly, we do not express such an opinion. Had we
performed additional procedures, other matters might have come to our attention that would have
been reported to you.
This report is intended solely for the City's information and use and is not intended to be and should
not be used by anyone other than the City.
Yours very truly,
Maze & Associates
CITY OF CUPERTINO
FINAL ACCOUNTING ISSUES MEMO
Fiscal year ended June 30, 2007
Accounts Receivable Write-offs
Currently, the Finance Director reviews the accounts receivable aging listing and notifies the Accounts
Receivable Clerk to write off accounts over 120 days. However, there is no review of which accounts
were actually written off in the system after the accounts are written off by the Accounts Receivable
Clerk. We suggest that the Finance Director or another employee review the general ledger after the
Accounts Receivable Clerk has posted the write-offs to make sure that all write-offs are authorized and
proper. Alternatively, a financial system report showing the details of accounts receivable write-offs may
be reviewed and approved by a second employee.
Information Systems Review
Recommendations from our Information Systems Review are based on best practices and industry
standards. Based on our review, notable points or internal control weaknesses are documented under each
section. These internal control issues are not high risks for financial misstatement but are industry
standards and best practices.
Management
• An Information Security Policy should be implemented to reflect management guidance and
direction in developing controls over information systems and related resources.
Physical Security
• Non-IT staff should be escorted while they are in the server room
Iuformation Systems Security: Financial Application
• There should be enforced password complexity for the financial system to reduce the risks of
easy guessing and brute force attacks against the passwords. Required use of unique alpha
numeric and special character combinations is optimum.
• There should be a written policy for the regular changing of financial system account passwords.
An automatic enforcement of this policy would be optimum.
Information Systems Security: Network Communications
• Intrusion detection systems should be in place on the internal network to monitor the network for
intrusions and attacks.
CITY OF CUYERTINO
FINAL ACCOUNTING ISSUES MEMO
Fiscal year ended June 30, 2007
New Pronouncements
GASB Statement No. 48 -Sales and Pledges of Receivables and Future Revenues and Intra-Entity
Transfers ofAssets and Future Revenues (effective for Fiscal Year 2007-2008)
This Statement establishes financial reporting of several categories of transactions. We have ordered the
topics to those we believe are most relevant to cities, followed by the other topics:
Issues Most Relevant to Cities:
Intra-Entity Transfers ofAssets at Carrying Value: This Statement stipulates that governments should
not revalue assets that are transferred between financial reporting entity components. Therefore, any
assets (or future revenues) sold or donated within the same financial reporting entity should continue
to be reported at their current carrying value when those assets or future revenues are transferred.
Differences between the sales price and carrying value are recognized as a gain/ (loss) on the seller's
statements and as an expense/ (revenue) on the buyer's statements. A transfer or subsidy treatment
should be used in the basic financial statements.
Disclosures of Revenue Pledged for Repayment of Debt: Though this GASB does not appear to
impact the recording of debt with pledged revenues, it will expand disclosure requirements. We have
italicized what we believe to be the change from current disclosures as follows:
1. Identification of the specific revenue pledged and the approximate amount of the pledge [e.g.
remaining debt service].
2. Identification of, and general purpose for, the debt secured by the pledged revenue.
3. The term of the commitment [e.g. remaining term of the debt].
4. The relationship of the pledged amount to the total for that specific revenue, if estimable-
that is, the proportion of the specific revenue stream that has been pledged.
A comparison of the pledged revenues recognized during the period to the principal and
interest requirements for the debt directly or indirectly collateralized by those revenues. For
this disclosure, pledged revenues recognized during the period may be presented net of
specified operating expenses, based on the provisions of the pledge agreement; [e.g. revenue
coverage calculation] however, the amounts should not be netted in the financial statements.
• Financing Authorities: The Statement does not change the substance of accounting for revenues
received by a government which are pledged for repayment of debt issued by a financing authority.
The Statement requires the financing authority to recognize revenue when the pledging government is
obligated to make the payments. This is essentially the counterparty perspective of recognizing debt
service when due.
CITY OF CUPERTINO
FINAL ACCOUNTING ISSUES MEMO
Fiscal year ended June 30, 2007
Other Topics:
^ Exchanges of Specific Receivables/Revenues for Cash: Statement #48 states that "Governments
sometimes exchange an interest in their expected cash flows from collecting specific receivables or
specific future revenues for immediate cash payments-generally, a single lump sum. The issue
addressed is whether exchanges should be reported as a sale or as a collateralized borrowing resulting
in a liability. A sale treatment is permitted only if the government relinquishes control of the
exchanged receivable/revenue. Specific criteria are listed in the Statement which are used to
determine whether control is retained (indicating a borrowing treatment) or relinquished (indicating a
sales treatment)
Exchange examples listed include the sale of future tobacco settlement revenues and the sale of
delinquent property tax liens. These types of transactions are highly unusual and infrequent. This
would have been helpful for those cities which securitized the VLF receivables.
^ Residual Interests and Recourse Provisions: This Statement also includes guidance to be used for
recognizing other assets and liabilities arising from a sale of specific receivables or future revenues,
including residual interests and recourse provisions.
GASB Statement No. 49 -Accounting and Financial Reporting for Pollution Remediation Obligations
(Effective for Fiscal Year 2008-20091
This Statement addresses accounting and financial reporting for pollution remediation obligations
(including contamination), which are 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 landfill 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 first 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.
CITY OF CUPERTINO
FINAL ACCOUNTING ISSUES MEMO
Fiscal year ended June 30, 2007
Pollution remediation outlays should be capitalized in the government-wide and proprietary fund
statements when goods and services are acquired if acquired for any of the following circumstances:
a. To prepare property for sale. Capitalized costs (including pollution remediation costs) continue to be
limited to lower of cost or net realizable value
b. To prepare property for use when the property was acquired with known or suspected pollution that
was expected to be remediated. 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 have a future alternative use. Outlays should be
capitalized only to the extent of the estimated service utility that will exist after pollution remediation
activities 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 sale or following acquisition of the property, respectively, or are
delayed, but the delay is beyond the government's control.
ADMINISTRATIVE SERVICES DEPARTMENT
CUPERTINO
December 20, 2007
CITY HALL
10300 TORRE AVENUE • CUPERTINO, CA 95014-3255
(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,
In 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, 2007. The report
includes the following enclosures and electronic submissions:
(1) A signed cover page of State Controller's 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 2007-08 tax year on October 1, 2007
Properties and Loans
The Agency had no outstanding loan receivables and owned no properties.
2006-07 Redevelopment A>;ency Accomplishments
Coordinated the following:
^ Adopted the Vallco Project Area 2006-2010 Implementation Plan.
(December 2006)
^ Hired aRedevelopment/Economic Development Manager to help oversee efforts in
the Redevelopment area. (May 2007)
Cupertino Redevelopment Agency
Annual Report for Fiscal Year Ending June 30, 2007
Page 2 of 2
^ Launched a media campaign to inform the community of revitalization efforts at the
mall with a series of ads in the San Jose Mercury News, the Cupertino Courier, and
the World Journal Chinese Paper.
Provided facilitation for the following development activities:
^ Completion of two new garages next to Macy's and J.C. Penney's adding almost
1,400 parking spaces to the mall. (November 2006)
^ Opening of a 16-screen, 3,500 seat AMC Theater complex. The complex has been
ranking in the top # 10 of the 81 Bay Area theaters and is on target to welcome 1.5
million guests in 2007 and 2008. (April 2007)
^ Substantial completion of Strike Cupertino. (June 2007)
^ Implementation of a new signage program re-branding the mall as "Cupertino
Square" from the former "Vallco Fashion Park".
^ Completion of exterior improvements to Sears.
^ Commencement of construction for a new Food Court inside the mall.
Miscellaneous
^ In 2006, the Redevelopment Project Area began to generate noticeable tax
increment for the first time.
Mall owners are providing periodic updates to the City Council/Redevelopment
Agency Board regarding progress at the center.
New Space Square Footage
^ AMC Theaters 98,800 sf
Rehabilitated Space Square Footage
^ N/A
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
CITY OF CUPERTINO DEVELOPMENT FEE REPORT
FISCAL YEAR ENDING JUNE 30, 2007
1. Below Market Rate Housing Mitigation fee
(A) Description and Amount: An in-lieu fee collected on residential, office, industrial &
R&D development in order to address impact on affordable housing. Fee was $1.15
per sq ft on residential development and $2.25 per sq ft on office, industrial &
R&D development for the reported year
(B) Amount collected in FY 06/07 291,091
(C) Beginning of year balance 980,010
End of year balance 1,209,852
(D) Interest earned 62,853
(E) Expenditures: CCS affordable housing placement 65k,
Project Sentinel rental mediation 25k, nexus fee study 14k, architect for Cleo
Ave site development 8k and administrative costs 26k.
2. Park Dedication fee
(A) Description: Fees collected from developers in lieu of providing more parks
in the City.
(B) Amount collected in FY 06/07 252,950
(C) Beginning of year balance 40,658
End of year balance 150,353
(D) Interest earned 6,745
(E) Expenditure: none
(F) Transfer 200k to Stevens Creek corridor park project to backfill lost DWR grant.
3. Stevens Creek Blvd "Heart of the City" specific plan fee
(A) Permit applicants along Stevens Creek Blvd corridor pay a $0.044 per sq-ft based fee
to reimburse City for the $94,929 cost of the 1994 specific plan for the central area
of the City.
(B) Amount collected in FY 06/07 36,322
(C) Beginning of year balance 57,846
End of year balance 97,854
(D) Interest earned (estimate @ 4.85%) 3,686
(E) Expenditure: Costs incurred in 1994 to prepare "Heart of the City" specific plan.