06. Financial Reports
CityHaJl
10300 Torre Avenue
Cupertino. CA 95014-3255
Telephone: (408) 777-3220
Fax: (408) 777-3366
CITY OF
CUPEIQ1NO
DEPARTMENT OF ADMINISTRATIVE SERVICES
Agenda Item No. ~
Meeting Date: January 17,2006
SUBJECT AND ISSUE
Accept the City's year-end financial reports for 2004-05.
BACKGROUND
Weare pleased to present to the City Council the following three financial reports for the fiscal
year ended June 30, 2005.
· Comprehensive Annual Financial Report (CAFR)
· Redevelopment Agency Basic Component Unit Financial Statements
· Memorandum on Internal Control Structure
The City's audit firm, Maze and Associates, audited the first two reports and wrote the third
report after completing their annual review. These reports were discussed in detail with the
City's Audit Committee.
We have submitted the CAFR to the Governmental Finance Officers Association for
consideration of the Certificate of Achievement Award.
RECOMMENDATION
Accept the City's year-end financial reports for 2004-05.
Submitted by:
Approved for submission:
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David W. Knapp
City Manager
David Woo
Finance Director
Printed on Recycled Paper
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
BASIC COMPONENT UNIT FINANCIAL STATEMENTS
FOR THE YEAR ENDED
JUNE 30, 2005
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
Basic Component Unit Financial Statements
For The Year Ended June 30, 2005
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...............................................................................................................11
Fund Financial Statements:
Balance Sheet............................................................................................................................. 14
Statement of Revenues, Expenditures, and Changes in Fund Balance ....................................15
Statements of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual:
VaIleo 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
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AAAZE &
· w,. ASSOCIA rES
INDEPENDENT AUDITORS' REPORT
ACCOUNTANCY CORPORATION
1931 San Miguel Drive - Suite 100
Walnut Creek, California 94596
(925) 930-0902· FAX (925) 930-0135
E-Mail: maze@mazeassociates.com
Website: www.mazeassociates.com
Members ofthe 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, 2005, as listed in the table of contents. These fmancial
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 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. Those standards require that we plan and perfonn the
audit to obtain reasonable assurance as to whether the financial statements are ftee 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 20, 2005
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, 2005 and the results of its operations for the year then ended, in
confonnity with generally accepted accounting principles in the United States of America.
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 infonnation,
principally inquiries of management regarding the methods of measurement and presentation of this
infonnation, but we did not audit this infonnation and we express no opinion on it.
C'('()~ .., ~~
September 20, 2005
A Professional Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS
This provides an objective and easily readable analysis of 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 within the City, while ensuring an adequate stock of low and moderate
income housing in the City. The project area encompasses the Vallco Fashion Park 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.
FISCAL 2004-05 FINANCIAL HIGHLIGHTS
The Agency increased its net asset and fund balance deficits in fiscal 2004-05 as administrative,
community development, and required pass-through and Educational Revenue and Augmentation Fund
(ERAF) expenditures exceeded the Agency's revenues from incremental property taxes. Tax increment
revenue decreased severely this year as the unsecured property roll plunged reflecting the declining retail
climate of the shopping center. The City's General Fund continues to finance upfront administrative and
development activities to improve the economic future of the project area that includes the shopping
center and surrounding vicinity. Plans for the area include a hotel, mixed retail and residential
development of the Rose Bowl, condominiums, parking structures, new restaurants and retail stores.
Construction of a 16-screen movie theatre began at the shopping center.
Fiscal 2004-05 highlights include the following:
Agency-wide:
· Agency total assets amounted to $38.4 thousand, an increase from the prior year total of $34.7
thousand.
· Agency total liabilities tota]ed $260.7 thousand, an increase of $47.1 thousand from the prior
year.
· The Agency's net asset deficit stood at $222.3 thousand for June 30, 2005, an increased deficit of
$43.4 thousand from the prior year.
· Agency-wide revenues consist solely of $18.8 thousand in general tax revenues.
· Agency-wide expenses were $62.2 thousand, consisting of non-housing redevelopment activities.
Fund Level:
· The Vallco Redevelopment Fund's unrestricted fund balance deficit increased to $261.7
thousand at June 30, 2005, up from a $213.6 thousand deficit at June 30, 2004.
· Redevelopment Fund revenues of $14.1 thousand represented a decrease from last year's $57.4
thousand.
· Low and Moderate Income Housing Fund revenues decreased to $4.7 thousand in fiscal 2004-05,
down from the prior year level of $19.2 thousand.
· There have been no outlays from the Housing Fund in the past two years.
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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 these financial 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 financial statements provide two different views of the
Agency's financial activities and [mancial position-long-term and short-term.
The Agency-wide Financial Statements provide a longer-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 as a whole, including all its capital assets
and long-term liabilities on the full accrual basis, similar to that used by corporations. 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.
The Fund Financial Statements report the Agency's operations in more detail than the Agency-wide
statements and focus primarily on the short-term activities of the Agency's Major Funds. The Fund
Financial Statements measure only current revenues and expenditures, current assets, liabilities and fund
balances; they exclude capital assets, long-term debt and other long-term amounts.
The entity's two funds are considered Major Funds and are presented individually since these funds
account for all financial activities ofthe Agency. Major Funds are identified and described below. There
are no Non-major funds established for the Agency at this time.
The Agency-wide Financial Statements
All of the Agency's basic services are considered to be governmental activities, conslstmg of
redevelopment services. General Agency revenues such as property tax increments support these
servIces.
Agency-wide financial statements are prepared on the accrual basis, which means they measure the flow
of all economic resources of the Agency as a whole.
Fund Financial Statements
Governmental Fund financial statements are prepared on the modified accrual basis, which means they
measure only current financial resources and uses. Any capital assets and other long-lived assets, along
with long-term liabilities, would be presented only in the Agency-wide financial statements.
The Fund Financial Statements provide detailed information about the Agency's most significant funds,
called Major Funds. Each Major Fund is presented individually, with any Non-major Funds summarized
and presented only in a single column. As the Agency has no Non-major funds, the two Major Funds
reflect the total activities of the agency. The Vallco Redevelopment Fund serves as its general fund, and
is always a Major Fund, but other funds may change from year to year as a result of changes in the pattern
of Agency's activities. The City of Cupertino Redevelopment Agency's two Major Funds are discussed
in the Analysis of Major Funds section.
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Comparisons of budget and actual financial information are presented for Major Funds 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 (Tables 1,2
and 3), presented in the Agency-wide Statement of Net Assets and Statement of Activities that follow.
Governmental Activities
'.
Table 1 shows that the Agency's net asset deficit rose from $178.9 thousand at June 30, 2004 to $222.3
thousand at June 30, 2005. The causes of the deficit growth are explained below.
Table 1
Governmental Net Assets at June 30
(In Thousands)
Total liabilities
Governmental Activities
2005 2004
$38.4 $34.7
38.4 34.7
3.9
2.0
258.7 209.7
260.7 213.6
Cash and investments
Total assets
Accounts payable and accruals
Accrued payroll and benefits
Other liabilities
Net assets:
Restricted for low and moderate income housing
Unrestricted deficit
39.4 34.7
(261.7) (213.6)
($222.3) ($178.9)
Total net asset accumulated deficit
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The Agency's net assets decreased $43.4 thousand during fiscal year 2004-05. The decrease and
accumulated net asset deficit are a result of expenditures incurred by the Agency in the establishment and
development of the project area over the past four years, during which the incremental property tax
revenues have been minimal. Advances totaling $258.7 thousand ITom the City of Cupertino have been
required to finance 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 as
part ofthe Countywide property collection process.
Table 2
Governmental Activities
Changes in Governmental Net Assets
(In Thousands)
2004-05
2003-04
Expenses
Community development
Total expenses
$ 62.2
62.2
$98.9
98.9
Revenues
General revenues:
Taxes:
Incremental property tax
Total general revenues
Total revenues
18.8
18.8
18.8
76:6
76.6
76.6
Decrease in net assets
$(43.4)
$(22.3)
The Agency experienced the $43.4 decrease in net assets during 2004-05 for the following primary
reasons:
· The City's advance to the Agency grew by $49 thousand as general community development
activities, payable only ITom the general Redevelopment Fund, outpaced tax increment revenues
for the Agency as a whole. The City will continue to finance these general operations until
redevelopment of the project area can produce the additional tax revenues that will make the
Agency self-supportive or make bond financing more attractive.
· The Agency's 2004-05 incremental property tax revenue of $18.8 thousand decreased
significantly from the $76.6 thousand of a year ago. A decreasing unsecured tax roll caused the
decline.
· Community development expenses amounted to $62.2 thousand in fiscal 2004-05, a decrease of
$36.7 thousand or 37% from the prior year. Expenses comprise $55.5 thousand in administrative
and development functions, $3.7 thousand in pass-through payments obligated to other
jurisdictions pursuant to California Redevelopment Law, and $2.9 thousand in ERAF payments to
the State as required by the State budget.
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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)
2005
2004
Total assets
Total liabilities
Total fund balance deficits
Total revenues
Total expenditures
$ 39.4
261.7
(222.3)
18.8
62.2
$ 34.7
213.6
(178.9)
76.9
98.9
At June 30, 2005. the Agency's funds reported combined fund balance deficit of $222.3 thousand, an
increased deficit of $43.4 thousand from the June 30, 2004 fund balance. The Low and Moderate Income
Housing Fund receives twenty-five percent of the Agency's incremental property tax revenues. The
Valleo Redevelopment Fund retains the remaining tax increment, but shoulders all of the administrative,
pass-through and ERAF expenses required for the Agency.
Analyses of Major Funds
Valko Redeve10pmeut 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
expenditures for the ongoing management and oversight of overall project area activities. This is the
fourth fiscal year for which the Agency has received incremental property taxes.
Excluding the 25% that is set-aside for low and moderate income housing purposes, current year tax
increment revenues decreased to $14.1 thousand or only about a fourth of the $57.4 received in the prior
year. The unsecured property tax roll took a beating reflecting the weak business condition of the project
area.
Expenditures decreased 37% ITom last year ending up at $62.2 thousand for 2004-05. $50.8 thousand of
these expenditures are for in-house staff and outside professional and legal community development work
that includes a revision and extension of the development agreement for the Vallco project area. The
remaining $6.6 thousand of expenditures are actually ERAF payments and AB 1290 pass-throughs of tax
dollars to the State and other local jurisdictions as required by the State budget and State law.
Low and Moderate Income Housiu!! Fund
This fund accounts for the receipt of the State-mandated 20% mInImum set-aside of tax increment
revenue allocated to the Vallco Redevelopment Project Area and for expenditures associated with any
eventuallow/moderate income housing projects associated with the Agency. In a 2002 legal settlement,
the Agency agreed to set-aside 25% of the revenue.
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In fiscal 2004-05, the Agency's set aside for low and moderate income housing purposes totaled $4.7
thousand compared to $19.2 thousand for the prior fiscal year. As no low and moderate income housing
activities were undertaken, no expenditures have been charged to this fund.
CAPITAL ASSETS
The Agency has no capital assets as of June 30, 2005.
INDEBTEDNESS
At June 30, :?005 the Agency's total indebtedness 'amounts to $260.7 thousand, which primarily consists
of a $258.7 thousand advance from the City of Cupertino. The City is authorized under California state
law to finance redevelopment activities through a number of sources, including the issuance of agency
debt.
ECONOMIC OUTLOOK AND MAJOR INITIATIVES
The economy of the City and the Agency and their major initiatives for the coming year are discussed in
detail in the Transmittal Letter to the City of Cupertino's Comprehensive Annual Financial Report for the
fiscal year ended June 30, 2005.
CONTACTING THE AGENCY'S FINANCIAL MANAGEMENT
These financial statements are intended to provide citizens, taxpayers, investors, and creditors with a
general overview of the Agency's finances. Questions about this Report should be directed to the City of
Cupertino's Finance Department, 10300 Torre Avenue, Cupertino, CA 95014.
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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 format of the Statement of Activities differs considerably from those used in the past. It 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 new financial statements along with the fund financial statements and footnotes are called Basic
Component Unit financial Statements.
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
STATEMENT OF NET ASSETS
JUNE 30, 2005
Governmental
Activities
ASSETS
Cash and investments (Note 3)
$38,428
Total Assets
38,428
LIAB ILITIES
Accrual payroll and benefits
Advance ÍÌ"om City (Note 5)
2,038
258,712
Total Liabilities
260,750
NET ASSETS (Note 6)
Restricted for:
Low and moderate income housing
39,425
Total Net Assets
(261,747)
($222,322)
Unrestricted deficit
See accompanying notes to tinancial statements
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
STATEMENT OF ACTIVITIES
FOR THE YEAR ENDED JUNE 30, 2005
Functions/Programs
Expenses:
Community development
Governmental
Activities
$62,184
Total expenses
62,184
General revenues:
Taxes:
Incremental property taxes
18,775
Total general revenues
18,775
Change in Net Assets
(43,409)
Net Assets (Accumulated Deficit) -Beginning
(178,913)
($222,322)
Net Assets (Accumulated Deficit) -Ending
See accompanying notes to financial statements
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FUND FINANCIAL STATEMENTS
GASB 34 revises the format of the Fund Financial Statements so that only individual major funds are
presented, while non-major funds are combined in a single column. Major funds are defined generally as
having significant activities or balances in the current year.
MAJOR GOVERNMENTAL FUNDS
The funds described below were determined to be Major Funds by the Agency in fisca12005.
Vallco Redevelopment Fund
Accounts for revenue and expenditures related to the construction of a redevelopment agency project
area at the Vallco Regional Mall.
Low and Moderate Income Honsing Fund
Accounts for the Federal Housing and Community Development Grant Program activities administered
through the county. Monies in this fund are governed by the program rules.
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
GOVERNMENTAL FUNDS
BALANCE SHEET
JUNE 30, 2005
Low and Moderate Total
Valleo Income Governmental
Redevelopment Housing Funds
Assets
Cash and investments (Note 3) $38,428 $38,428
Due from other funds (Note 4) 997 997
Total Assets $39,425 $39,425
Liabilities and Fund Balances
Accrual payroll and benefits $2,038 $2,038
Due to other funds (Note 4) 997 997
Advance from City (Note 5) 258,712 258,712
Total Liabilities 261,747 261,747
Fund balances (deficit):
Reserved for low and moderate
income housing $39,425 39,425
Unreserved, undesignated (261,747) (261,747)
TOTAL FUND BALANCES (261,747) 39,425 (222,322)
Total Liabilities and Fund Balances $39,425 $39,425
See accompanying notes to financial statements
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
GOVERNMENTAL FUNDS
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
FOR THE YEAR ENDED JUNE 30, 2005
Low and Moderate Total
Valleo Income Governmental
Redevelopment Housing Funds
Revenues:
Jncremental property taxes $14,081 $4,694 $18,775
Total Revenues 14,081 4,694 18,775
Expenditures:
Community development:
Salaries and benefits 50,825 50,825
Professional and legal costs 4,730 4,730
Pass-through expenditures (Note 7) 3,747 3,747
ERAF payment 2,882 2,882
Total Expenditures 62,184 62,184
Excess (deficiency) of revenues
over (under) expenditures (48,103) 4,694 (43,409)
Fund balances (deficit), beginning cfyear (213,644) 34,731 (178,913)
Fund balances (deficit), end cfyear ($261,747) $39,425 ($222,322)
See accompanying notes to financial statements
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
V ALLCO REDEVELOPMENT SPECIAL REVENUE FUND
STATEMENT OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCES
BUDGET AND ACTUAL
FOR THE YEAR ENDED JUNE 30, 2005
REVENUES:
Incremental property taxes
Use of money and property
Total Revenues
EXPENDITURES:
Community development:
Salaries and benefits
Professional and legal costs
Pass-through expenditures
ERAF expend itures
Total Expenditures
Variance with
Budgeted Amounts Final Budget
Positive
Original Final Actual Amounts (Negative)
$35,000 $35,000 $14,081 ($20,919)
3,000 3,000 ($3,000)
38,000 38,000 14,081 (23,919)
54,474
150,000
54,474
150,000
50,825 3,649
4,730 145,270
3,747 (3,747)
2,882 (2,882)
62,184 142,290
(48,103) $118,371
(213,644)
($261,747)
204,474
204,474
EXCESS (DEFICIENCY) OF REVENUES
OVER EXPENDITURES
Fund balance (deficit), July I
Fund balance (deficit), June 30
($166,474)
($166,474)
See accompanying notes to financial statements
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
I NOTE I - 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
Va1lco Redevelopment Project Area. The Project Area encompasses the Vallco Fashion Park, a retail
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 detennined on the date of adoption
of the Redevelopment Plan by a designation of a fiscal year assessment role.
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 perfonns all administrative, accounting, management
and budgeting functions. Because of the control the City exercises over Agency operations, the
Agency is considered a component unit of the City and is included in the City's general purpose
financial statements.
B. Basis of Presentation
The Agency's Basic Component Unit Financial Statements are prepared in confonnity 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.
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
I NOTE I - SIGNIFICANT ACCOUNTING POLICIES (Continned)
These Statements require that the financial statements described below be presented.
Government-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
minimize the double counting of internal activities.
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
GASB Statement 34 defines major funds and requires that the Agency's major funds be 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:
Valleo Redevelopment Fund - Accounts for revenue and expenditures related to the construction
of a redevelopment agency project area at the Valleo Regional Mall.
Low and Moderate Income Honsing Fund - Accounts for the Federal Housing and Community
Development Grant Program activities administered through the county. Monies in this fund are
governed by the program rules.
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CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
I NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued) I
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.
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 financing sources.
Those revenues susceptible to accrual are incremental property 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 2004-2005, and that fund
has been excluded from the budget versus actual statements in the accompanying financial statements.
~ -1 L/
19
CITY OF CUPERTINO REDEVELOPMENT AGENCY
Notes to Component Unit Financial Statements
I NOTE 4 -INTERFUND TRANSACTIONS
These balances are expected to be repaid shortly after the end of the fiscal year when revenues are
received. At June 30, 2005, the current amount due ITom the Vallco Redevelopment fund to the
Low and Moderate Income Housing fund was $997.
I NOTE 5 - ADVANCE FROM THE CITY GENERAL FUND I
As of June 30, 2005 the developer ofthe Agency's primary project area had not begun to redevelop.
As a result, tax increment revenues are not yet sufficient to finance Agency operations. To assist the
Agency until project redevelopment generates additional tax increment revenues, the City has
advanced funds to the Agency to finance operations. As ofJune 30, 2005 the balance of the advance
is $258,712.
NOTE 6 - NET ASSETS AND FUND BALANCES
GASB Statement 34 adds the concept of Net Assets, which is measured on the full accrual basis, to
the concept of Fund Balance, which is measured on the modified accrual basis.
A. Net Assets
Net Assets is the excess of all the Agency's assets over all its liabilities, regardless of fund. Net
Assets are divided into three captions under GASB Statement 34. These captions apply only to
Net Assets, which is determined only at the Government-wide level, and are described below:
Invested in Capital Assets, net of related debt describes the portion of Net Assets which is
represented by the current net book value of the Agency's capital assets, less the outstanding
balance of any debt issued to finance these assets.
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 purposes.
Unrestricted describes the portion of Net Assets which is not restricted to use.
¡NOTE 7 - 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, 2005, the Agency calculated and recorded
$3,747 in pass-through and basic aid payments to the affected jurisdictions.
21
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~ -1&
AAAZE &
· w,' ASSOCIA TES
REPORT ON COMPLIANCE AND' ON
INTERNAL CONTROL OVER FINANCIAL
REPORTING BASED ON AN AUDIT OF
FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE
WITH GOVERNMENT AUDITING STANDARDS
ACCOUNTANCY CORPORATION
1931 San Miguel Drive - Suite 100
Walnut Creek, California 94596
(925) 930-0902 . FAX (925) 930-0135
E-Mail: maze@mazeassociates.com
Website: www.mazeassociates.com
Members of the Governing Board
City of Cupertino Redevelopment Agency
Cupertino, California
We have audited the financial statements of the Redevelopment Agency of the City of Cupertino as of and
for the year ended June 30, 2005, and have issued our report thereon dated September 20,2005. 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 City's internal control over financial reporting in
order to determine our auditing procedures for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control over financial reporting. Our consideration
of the internal control over financial reporting would not necessarily disclose all matters in the internal
control over financial reporting that might be material weaknesses. A material weakness is a condition in
which the design or operation of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in
relation to the financial statements being audited may OCCIIf and not be detected within a timely period by
employees in the normal cOllfse of performing their assigned functions. We noted no matters involving the
internal control over financial reporting and its operation that we consider to be material weaknesses,
however we did communicate other matters to City Council in our separate Memorandum on Internal
Controls dated September 20, 2005.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City's financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts and grant agreements, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. Our audit included tests of compliance with provisions of
the Guidelines for Comoliance Audits of California Redevelopment Al!encies. However, providing an
opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do
not express sllCh an opinion. The results of our tests disclosed no instances of noncompliance, except as
noted below, that are required to be reported under Government Auditing Standards.
Th is report is intended for the information of the City Council, 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.
CVY)~-,,~
September 20, 2005
A ProfessIonal Corporation
23
(p -27
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~-Jt
CITY OF CUPERTINO
MEMORANDUM ON
INTERNAL CONTROL STRUCTURE
FOR THE YEAR ENDED JUNE 30, 2005
&-2lJ
AAAZE&
· r" ASSOCIA TES
September 20, 2005
ACCOUNTANCY CORPORATION
1931 San Miguel Drive - Suite 100
Walnut Creek, California 94596
(925) 930-0902' FAX (925) 930-0135
E-Mail: maze@mazeassociates.com
Website: www.mazeassociates.com
To the City Council of
the City of Cupertino, California
Under generally accepted auditing standards in the United States of America, auditors are encouraged to
report various matters concerning an entity's internal control structure noted during an audit, and are
required to report certain of those matters. Matters that are required to be reported are significant
deficiencies in the design or the operation of the internal control structure that, in the auditor's judgment,
could adversely affect the organization's ability to record, process, summarize and report financial data
consistent with the assertions of management in the [mancial statements.
As part of our audit of the financial statements of the City of Cupertino for the year ended June 30, 2005,
we considered the City's internal control structure in determining the scope of our audit procedures for
the purpose of rendering an opinion on the financial statements. While our purpose was not to provide
assurances on the internal control structure, certain matters came to our attention that we want to report
to you. These matters, along with our recommendations, are described in the accompanying
memorandum.
A material weakness is a significant deficiency in which the design or operation of one or more of the
internal control structure elements does not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in the normal course of performing their
assigned functions.
Our consideration of the internal control structure would not necessarily disclose all matters in the
internal control structure that might be significant deficiencies and, accordingly, would not necessarily
disclose all significant deficiencies that are also considered to be material weaknesses as defined above.
However, none of the matters described in the accompanying memorandum is believed to be a material
weakness.
The accompanying memorandum on internal control structure is intended solely for the use of
management and the City Council. This restriction is not intended to limit the distribution of this letter
and the accompanying memorandum which, upon acceptance by the City Council, are a matter of public
record. To the extent that the City Council intends to rely upon this letter and the accompanying
memorandum, such reliance should take into account the limited basis on which our recommendations
were developed, as described above, and the limitations inherent in the internal control structure. In
addition, the City Council should understand that the criteria used by us in considering the internal
control structure could differ significantly from the criteria the City Council may be using for its purpose.
We wish to express our appreciation for the courtesies and cooperation extended to our representatives
during the course of their work. We would be pleased to discuss these recommendations in greater detail
or otherwise assist in their implementation.
Very truly yours,
c-m~y~
A Professional Corporation
~ - 30
CITY OF CUPERTINO
MEMORANDUM ON INTERNAL CONTROL STRUCTURE
For The Year Ended June 30, 2005
Blackberry Farms Cash Collection Site
We selected the Blackberry Farms site to review cash receipt procedures. We have summarized the
procedures as follows. On a daily basis, the City's mail courier picks up the deposit bag from Blackberry
Farms and brings it to the Finance Department for deposit. The deposit bag is locked that only Mike
O'Dowd, Recreation Supervisor, and Tina Mao, Account Clerk, have the key.
To strengthen internal control over cash deposits, we recommend that Blackberry Farms verifY the
amount of deposited cash. For example, a copy of the bank deposit receipt can be provided to Blackberry
Farm for verification.
In addition, during peak months, the Blackberry Farm has approximately $20,000 in picnic reservations
receivables. We understand these receivables are not recorded in the general ledger. A1thoungh not
material to the fund, we recommend that the City consider accruing the receivables as part of the year
end closing.
Retiree Healthcare Fundin!!
As a follow-up to prior year's comments to the Committee and conversations with staff concerning
GASB 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than
Pensions. we have included additional comments below concerning the funding options available to the
City.
A key assumption in the actuary study is the rate of return on plan assets. Plan assets limited by
Government Code Section 53601, which does not permit investments in equity securities and limits fixed
income securities to 5 year maturities, will bear a rate of return that will be much less than that earned by
a retirement trust portfolio. Assets held in a trust are governed by a separate investment policy not
subject to Government Code Section 53601, and the assumed rate of return would be substantially higher
that that of a short term fixed income portfolio. This in turn means cash contribution required by the City
would be substantially less. This trust option represents a substantial costs savings to the City. You
should inform the actuary about your funding option as that will impact the assumed rate of return
needed for the study and a will significantly impact the annual required contribution needed from the
City.
If the City establishes a trust, then GASB 43, Financial Reporting for Postemployment Benefit Plans
Other Than Pension Plans. will apply and the implementation date for new financial reporting and
funding requirements moves up one year earlier to fiscal 2006-2007.
(g - 31
New Accounting Pronouncement: GASB #42. Accounting and Financial Reportiul! for Impairment
of Capital Assets and for Insurance Recoveries
GASB 42 is effective in fiscal 2005-2006 and addresses capital asset impairment and clarifies and
establishes accounting requirements for insurance recoveries. The City's significant investment in
electric and gas infrastructure makes there new rules particularly pertinent. A summary of the significant
provisions ofthe GASB are presented below
· A capital asset is considered impaired when its service utility has declined significantly and
unexpectedly. Governments are required to address prominent events or changes in
circumstances affecting capital assets to determine whether impairment has occurred.
Impairment causes may include:
o Evidence of physical damage,
o Enactment or approval of laws or regulations or other changes in environmental factors,
o Technological changes or evidence of obsolescence,
o Changes in the manner or duration of use of a capital asset, and
o Construction stoppage.
· A capital asset generally should be considered impaired if both the decline in service utility is
large in magnitude, and the event or change in circumstance is outside the normal life cycle of
the capital asset.
· Impairment losses on capital assets with continued usage should be measured using several
approaches including a service units approach, deflated depreciated replacement cost, or a
restoration cost approach. If evidence is available to demonstrate that the impairment will be
temporary, the capital asset should not be written down. Impaired capital assets that are idle
should be disclosed, regardless of whether the impairment is considered permanent or temporary.
· Insurance recoveries should be netted with the impairment loss, but restoration or replacement of
the capital asset using the insurance recovery should be reported as a separate transaction.
The City has an extensive capital asset base spread among diverse geographic locations. Accordingly, it
should study the possible impact of this Statement and prepare now for its implementation. We will
work with staff to ensure a complete evaluation of the impacts of these new rules and a smooth
implementation.
0-32.