Public Health, California Department of Safe Drinking Water State Revolving Fund 01/11

CALIFORNIA DEPARTMENT OF PUBLIC HEALTH Independent Auditor’s Report FINANCIAL AUDIT OF THE SAFE DRINKING WATER STATE REVOLVING FUND For the Fiscal Year Ended June 30, 2010 J C OHN HIANG California State Controller January 2011 January 21, 2011 Mark B. Horton, M.D., M.S.P.H., Director California Department of Public Health 1615 Capitol Avenue, MS 0500 P.O. Box 997377 Sacramento, CA 95899-7377 Dear Dr. Horton: The following is the report on the financial audit for the California Department of Public Health’s Safe Drinking Water State Revolving Fund for the fiscal year ended June 30, 2010. Our audit disclosed that the fund’s financial statements conform to accounting principles generally accepted in the United States of America, and we found no instances of material noncompliance with applicable laws, regulations, contracts, or grant agreements. If you have any questions, please call Andrew Finlayson, Chief, State Agency Audits Bureau, at (916) 324-6310. Sincerely, Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits JVB/wm Mark B. Horton, M.D., M.S.P.H., Director -2- January 21, 2011 cc: Kevin Reilly, DVM, MPVM, Chief Deputy Director of Policy and Programs California Department of Public Health (via e-mail) Jose Ortiz, Acting Chief Deputy Director of Operations California Department of Public Health (via e-mail) Alan Lum, Acting Deputy Director–Administration California Department of Public Health (via e-mail) Merrianne McDonald, Chief of Accounting California Department of Public Health (via e-mail) Rufus Howell, Deputy Director, Center for Environmental Health California Department of Public Health (via e-mail) Gary Yamamoto, Division Chief, Drinking Water & Environmental Management California Department of Public Health (via e-mail) Leah Walker, Chief, Technical Programs Branch California Department of Public Health (via e-mail) Addie Aguirre, Chief, Infrastructure Funding Administration Section California Department of Public Health (via e-mail) David Whitsell, Chief, Internal Audits California Department of Public Health (via e-mail) Karen Petruzzi, CDPH Audit Coordinator California Department of Public Health (via e-mail) Julianne Talbot, CPA, Division of Accounting and Reporting, State Controller’s Office (via e-mail) Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Contents Page Independent Auditor’s Report ........................................................................................... 1 Management’s Discussion and Analysis ........................................................................... 3 Statement of Net Assets .................................................................................................... 5 Statement of Revenues, Expenses, and Changes in Fund Net Assets ............................... 6 Statement of Cash Flows ................................................................................................... 7 Notes to the Financial Statements ..................................................................................... 8 Mark B. Horton, M.D., M.S.P.H., Director California Department of Public Health 1615 Capitol Avenue, MS 0500 P.O. Box 997377 Sacramento, CA 95899-7377 INDEPENDENT AUDITOR’S REPORT We have audited the accompanying Statement of Net Assets, Statement of Revenue, Expenses, and Changes in Net Assets, and Statement of Cash Flows of the Safe Drinking Water State Revolving Fund (Fund) as of and for the year ended June 30, 2010. These financial statements are the responsibility of the California Department of Public Health’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to provide reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1, Definition of Reporting Entity, the financial statements of the Fund are intended to present the financial position, and the changes in financial position and cash flows, where applicable, of only that portion of the financial reporting entity of the department that is attributable to the transactions of the Fund. They do not purport to, and do not present the financial position of the State of California as of June 30, 2010, or the changes in its financial position of its cash flows. Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and budgetary comparison information on pages 3 and 4 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquires of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquires, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. -1- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund as of June 30, 2010, and the changes in financial position and cash flows thereof for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Internal Control Over Financial Reporting In planning and performing our audit, we considered the department’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing our opinion on the effectiveness of the department’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the department’s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the department’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of department management, those charged with governance, and state control agencies, and is not intended to be used by anymore other than these specified parties. However, this report is a matter of public record and its distribution is not limited. Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits January 21, 2011 -2- STATE OF CALIFORNIA CALIFORNIA DEPARTMENT OF PUBLIC HEALTH DRINKING WATER PROGRAM MANAGEMENT DISCUSSION AND ANALYSIS For the Year Ended June 30, 2010 The following discussion and analysis of the California Department of Public Health’s (CDPH) Drinking Water Program’s (Program) financial performance provides an overview of the Program’s financial activities for the year ended June 30, 2010. Please read it in conjunction with the financial statements. Most of the Program’s funds are Non-governmental Trust and Agency Funds (Federal) with the three 0629 funds being Service Enterprise Funds. Fund 0625 is the Administration Account, fund 0626 is the Water System Reliability Account, fund 0628 is the Small System Technical Assistance Account, and funds 0629 and 7500 are Safe Drinking Water State Revolving Funds (SDWSRF). The interest rate CDPH uses is calculated in accordance with California Health and Safety Code Section 116761.65 at 50 percent of the average interest rate, computed by the true interest cost method paid by the State on general obligation bonds issued during the previous calendar year. CDPH uses the resources of the SDWSRF for low interest loans and, in some cases, principal forgiveness (“grants”) to enable water systems to fund necessary infrastructure improvements. CDPH manages the SDWSRF resources to fund projects to ensure that public water systems are able to provide an adequate, reliable supply of safe clean drinking water in conformance with federal and state standards. The SDWSRT project ranking process ensures that program resources and funds are applied to the most significant public health and compliance problems. USING THIS FINANCIAL REPORT The CDPH Program financial statements consist of the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. The Statement of Net Assets and the Statement of Revenues, Expenses, and Changes in Net Assets provide an indication of the CDPH Program’s financial health. The Statement of Net Assets includes all CDPH Program’s assets and liabilities. The Statement of Revenues, Expenses, and Changes in Net Assets reports off of the revenues and expenses during the time period indicated. The Statement of Cash Flows reports the cash provided and used by operating activities, as well as other cash sources such as bond proceeds, transfers, and grants. -3- FINANCIAL HIGHLIGHTS Year ended Year ended June 30, 2010 June 30, 2009 Assets Current assets 160,835,892 169,762,764 Noncurrent assets 537,967,132 498,429,980 Total assets 698,793,024 668,192,744 Liabilities Current liabilities 9,616,776 1,656,388 Noncurrent liabilities 787,726 565,433 Total liabilities 10,404,502 2,221,821 Net assets Total net assets 688,388,522 665,970,923 Changes in net assets Operating revenues 22,643,339 22,434,406 Operating expenses 29,119,484 12,010,652 Net operating income/loss (6,476,145) 10,423,754 Nonoperating revenues 28,893,744 47,671,474 Change in net assets 22,417,599 58,095,228 FINANCIAL ANALYSIS CDPH Program’s net assets were increased by approximately $58.1 million in 2009 and increased by $22.4 million in 2010 as more the EPA grant was smaller in 2010. The increase in total assets in 2009 is primarily due to a large number of loans to other governments, a large cash deposit in the State of California’s Surplus Money Investment Fund (SMIF), and a large EPA grant. The increase in total liabilities in 2010 is primarily due to the approximate $17.6 million in grant awards for the year. The largest component of the CDPH Program’s total assets is loans receivable from other governments. These receivables represent approximately 80% of the total assets as of June 30, 2010. The largest component of the CDPH Program’s total liabilities is deferred revenue. Deferred revenue constitutes approximately 73% of the Program’s total liabilities as of June 30, 2010. The Program’s operating revenues consist primarily of investment earnings (SMIF interest) and interest on the loans to the water entities plus transfers in from EPA Administrative money. The transfers in from EPA Administrative money represent 51% of 2010 total revenues. The Program’s operating expenses are primarily comprised of principal debt forgiveness. Principal debt forgiveness represents 55% of the 2010 operating expenses. -4- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Net Assets June 30, 2010 June 30, 2010 June 30, 2009 ASSETS Current assets: Cash and pooled investments (Note 3) $ 133,231,354 $ 146,783,179 Receivables: Loan interest 2,795,051 1,991,612 SMIF interest (Note 4) 154,027 348,002 Due from Environmental Protection Agency (Note 5) 2,832,213 1,692,569 Current portion of loans receivable (Note 6) 21,813,247 18,947,402 Total current assets 160,825,892 169,762,764 Noncurrent assets: Noncurrent loans receivable 537,967,132 498,429,980 Total noncurrent assets 537,967,132 498,429,980 Total assets $ 698,793,024 $ 668,192,744 LIABILITIES Current liabilities: Accounts payable $ 452,650 $ 894,896 Deferred revenue (Note 8) 6,982,979 195,263 Due to California Department of Public Health (Note 9) 2,181,147 566,229 Total current liabilities 9,616,776 1,656,388 Noncurrent liabilities: Compensated absences payable 787,726 565,433 Total noncurrent liabilities 787,726 565,433 Total liabilities $ 10,404,502 $ 2,221,821 NET ASSETS Restricted 688,388,522 665,970,923 Total net assets $ 688,388,522 $ 665,970,923 The notes to the financial statements are an integral part of this statement. -5- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Revenues, Expenses, and Changes in Fund Net Assets Year Ended June 30, 2010 June 30, 2010 June 30, 2009 Operating revenues: Loan interest $ 11,174,639 $ 9,636,551 EPA administrative reimbursements 11,468,700 12,797,855 Total operating revenues 22,643,339 22,434,406 Operating expenses: Salaries and benefits 6,254,488 5,106,067 Other expenses 5,214,210 4,372,667 Principal debt forgiveness (Note 7) 17,650,786 2,531,918 Total operating expenses 29,119,484 12,010,652 Income (loss) from operations (6,476,145) 10,423,754 Nonoperating revenues (expenses): SMIF interest 666,835 1,902,950 EPA capitalization grant 28,226,909 40,079,672 State match — 5,688,852 Total nonoperating revenues (expenses) 28,893,744 47,671,474 Change in net assets 22,417,599 58,095,228 Total net assets–beginning 665,970,923 607,875,695 Total net assets–ending $ 688,388,522 $ 665,970,923 The notes to the financial statements are an integral part of this statement. -6- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Cash Flows Year Ended June 30, 2010 June 30, 2010 June 30, 2009 CASH FLOW FROM OPERATING ACTIVITIES Cash received from interest on loans $ 12,550,161 $ 11,443,994 Cash paid for loans and grants disbursed (80,489,004) (42,956,363) Principal received on loans receivable 18,256,265 15,662,376 Cash received for fines and penalties — — Cash paid to employees and vendors (10,139,148) (11,217,850) Payments for interfund services used — — EPA grants for administrative and set-aside costs 10,394,469 11,105,286 Net cash flows from operating activities (49,427,257) (15,962,557) CASH FLOW FROM INVESTING ACTIVITIES Interest received from investments 861,162 2,157,774 Net cash flows from investing activities 861,162 2,157,774 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES Transfers from the Environmental Protection Agency 35,014,270 58,655,681 Transfers from the State of California — 6,485,615 Net cash flows from noncapital financing activities 35,014,270 65,141,296 Net increase in cash and cash equivalents (13,551,825) 51,336,513 Cash and cash equivalents–July 1, 2009, and 2008 146,783,179 95,446,666 Cash and cash equivalents–June 30, 2010 $ 133,231,354 $ 146,783,179 Reconciliation of operating income (loss) to net cash flows provided by (used in) operating activities: Operating income (loss) $ (6,476,142) $ 10,423,754 Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activity: (Increase) decrease in interest receivable (803,439) 345,658 (Increase) in loans receivable (42,402,997) (18,508,639) (Increase) due from EPA for administrative expenses (1,139,644) (1,692,569) (Decrease) in accounts payable (442,246) (2,297,962) Increase (decrease) due to the California Department of Public Health 1,614,918 (766,555) Increase (decrease) principal debt forgiveness payable — (3,455,980) Increase (decrease) in compensated absences payable 222,293 (10,264) Total adjustments (42,951,115) (26,386,311) Net cash flows from operating activities $ (49,427,257) $ (15,962,557) The notes to the financial statements are an integral part of this statement. -7- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Notes to the Financial Statements Year Ended June 30, 2010 NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. General Information Effective July 1, 2007, the California Department of Health Services was divided into two separate departments: the California Department of Health Care Services and the California Department of Public Health. Pursuant to Chapter 241, Statutes of 2006 (SB 162), specific programs and public health responsibilities were transferred from the former California Department of Health Services to the newly established California Department of Public Health. The Safe Drinking Water State Revolving Fund (Fund) is now administered by the California Department of Public Health. The Fund was created pursuant to Health and Safety Code (HSC) section 116760.30, and is continuously appropriated without regard to fiscal year. The Fund is capitalized by the U.S. Environmental Protection Agency (EPA) by a series of federal grants. As a condition for receiving the federal grant, the department is required to provide an additional 20% of matching funds. The department uses the Fund primarily to make loans to public water systems for financing the cost of infrastructure needed to achieve or to maintain compliance with the Safe Drinking Water Act requirements and to protect public health. The activities of the Fund are included in the State of California’s Comprehensive Annual Financial Report. The Fund includes the federal loan fund, two state match loan funds, and five set-aside funds. The set-aside funds are the: (1) Administration Account, (2) Water System Reliability Account, (3) Source Protection Account, (4) Small System Technical Assistance Account, and (5) Public Water System, Safe Drinking Water Revolving Fund. The Public Water System, Safe Drinking Water State Revolving Fund is a set-aside fund that was created during fiscal year (FY) 2006-07 to pay for expenses to provide public water system oversight activities to support the Fund’s loan and grant program. The establishment of the separate set-aside funds to account for the costs related to the administration of the Fund is consistent with federal guidelines. The loan and set-aside funds are combined to form the Fund’s financial statements. b. Basis of Presentation The Fund is classified as an enterprise fund. The Fund is accounted for on the flow of economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded at the time the liabilities are incurred. Enterprise funds account for goods or services provided to the general public on a continuing basis when: (1) the department intends that all or most of the cost involved is to be financed by user charges, or (2) periodic measurement of the results of operations is appropriate for management control, accountability, capital maintenance, public policy, or other purposes. The Fund applies all applicable Governmental Accounting Standards Board (GASB) pronouncements, pursuant to GASB Statement No. 20, as well as all applicable Financial Accounting Standards Board (FASB) Statements and -8- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Interpretations issued on or before November 30, 1989, unless the pronouncements conflict with or contradict GASB pronouncements. For purposes of the Statement of Cash Flows, all cash and pooled investments, as discussed in Note 4, are considered to be cash equivalents. c. Revenue Recognition The operating revenues and expenses are generated through the issuance of loans and the operation of the Fund’s set-aside activities. All other revenues and expenses are reported as non-operating revenues and expenses. Funding from federal capitalization grants and state matching grants for reimbursement of the Fund’s set-aside activities is recognized as operating revenue as set-aside activity expenditures are incurred. Funding from federal capitalization grants and state matching grants for loan activities is recognized as a non-operating revenue when loans are disbursed. Amounts received from the federal capitalization grants and state matching grants for the purpose of making loans before the loans are disbursed are recorded as deferred revenues. d. Cash Flow Presentation The statement of cash flows if provided in accordance with the provisions of GASB 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting; and GASB 34, Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments. In accordance with GASB 9 and GASB 34, the direct method was used to report net cash flows from operating activities by adjusting operating income to reconcile it to net cash from operating activities. e. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the reporting date and revenues and expenses during the reporting period. Actual results could differ from those estimates. f. Compensated Absences State employees are eligible to accrue annual leave, vacation, and sick leave. Annual leave accrues at a rate of 11 to 20 hours per month. Vacation accrues at a rate of 7 to 16 hours per month. Accrued annual leave and vacation are paid out upon termination while sick leave is not. As of June 30, 2009, the Fund’s compensated absences totaled $787,726. g. Restricted Net Assets Net assets are restricted due to specific provisions of the Federal Safe Drinking Water Revolving Fund Program. -9- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund h. Reclassifications Certain reclassifications have been made to fiscal year 2008-09 balances to conform to the presentation used in fiscal year 2009-10. i. Restatement of Beginning Net Assets Beginning fund balance decreased by $38,264,982 to correct capitalization grant revenue that was over recognized in the prior year. NOTE 2— CAPITALIZATION GRANTS The Fund is financed by annual grants from the U.S. Environmental Protection Agency (EPA) and a state match equal to 20% of the federal award. In June 2009, the Fund was awarded an additional federal capitalization grant under the American Recovery and Reinvestment Act of 2009 (ARRA). The ARRA grant required that no less than 50% of the funds be provided as additional subsidization in the form of principal forgiveness, grants, or negative interest loans. The Fund is providing the additional subsidization in the form of principal forgiveness and negative interest loans which have been recorded as principal forgiveness expense. Of the amount awarded by EPA, the department has designated $111.4 million for administrative expenses, program management, small system technical assistance, loan assistance, and other state program expenses (collectively known as set-asides), and $891.8 million for loans. Set-asides are accounted for in other funds. There is an additional ARRA grant received this year of which $9.1 million are designated for set-asides and $149.8 million for loans. The grants awarded, amounts drawn on each grant, and the loan balances available for active grants, as of June 30, 2010, are presented below: Award Award Available for Grant Capitalization Available for Available for Award Drawn Loans as of Year Grant Amount Set-Aside Loans for Loans June 30, 2009 1998 $ 75,682,600 $ 10,048,176 $ 65,634,424 $ 65,634,424 $ — 1999 77,108,200 4,934,925 72,173,275 72,173,275 — 2000 80,816,700 5,172,269 75,644,431 75,644,431 — 2001 83,993,100 2,000,000 81,993,100 81,993,100 — 2002 84,340,000 7,060,400 77,279,600 77,279,600 — 2003 82,392,347 6,879,101 75,513,246 75,513,246 — 2004 81,966,200 11,016,282 70,949,917 70,949,917 — 2005 84,957,600 16,601,008 68,356,592 34,470,672 33,885,920 2006 84,847,500 12,248,614 72,598,886 — 72,598,886 2007 67,123,678 8,700,249 58,423,429 — 58,423,429 2008 67,105,000 8,960,700 58,144,300 — 58,144,300 2009 66,424,000 8,867,604 57,556,396 — 57,556,396 2010 66,424,000 8,867,604 57,556,396 — 57,556,396 ARRA 2009 159,008,000 9,197,000 149,811,000 — 48,351,411 -10- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund NOTE 3— CASH AND POOLED INVESTMENTS Cash and pooled investments comprise of the following items: June 30, 2010 June 30, 2009 General cash $ 3,430,219 $ 4,941,581 Cash in State Treasury 16,626,691 17,582,536 Deposits on hand 7,444 334,062 Deposits in Surplus Money Investment Fund 113,167,000 123,925,000 Total $ 133,231,354 $ 146,783,179 Cash in State Treasury is cash deposits managed by the Centralized Treasury System. Excess cash is invested in the Surplus Money Investment Fund (SMIF). All of the resources of the SMIF are invested through the Pooled Money Investment Account (PMIA). The PMIA investment program is designated by the Pooled Money Investment Boars and is administered by the Office of the State Treasurer. Investments in the SMIF are stated at fair value. As of June 30, 2010, the Fund has invested funds in SMIF in the amount of $113,167,000. All cash and investments in SMIF are highly liquid and considered cash equivalents. Cash equivalents are readily convertible to known amounts of cash and are so near their maturity they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less meet this definition. Additional disclosure details required by GASB 3, GASB Technical Bulletin 94-1, and GASB 40 regarding cash deposits, investments, and derivatives, can be found in the June 30, 2010 Comprehensive Annual Financial Report of the State of California. NOTE 4— SMIF INTEREST RECEIVABLE Investment Interest Receivable represents the amount of interest earned but not yet deposited in the Surplus Money Investment Fund. The amount of SMIF interest receivable as of June 30, 2010, and June 30, 2009, is $154,027 and $348,002, respectively. NOTE 5— DUE FROM EPA For the Fund’s set-aside and loan administration activities, amounts due from the Environmental Protection Agency are recognized when expenditures are incurred. The amount Due from EPA is the amount by which expenditures exceed EPA grant reimbursements. The amount Due from EPA as of June 30, 2010, and June 30, 2009, is $2,832,213 and $1,692,569, respectively. NOTE 6— LOAN PRINCIPAL AND INTEREST RECEIVABLE The department disburses the loan proceeds on a cost reimbursement basis. As entities spend money on projects financed by the Fund and request reimbursement, the department releases the loan proceeds. Interest accrues on all loan disbursements as of the date each disbursement is made. -11- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund There is no allowance for uncollectible accounts, as all repayments are current, and management believes all loans will be repaid according to the loan terms. There have been no loan defaults in the program since its inception. The Fund makes loans to qualified local and private entities at interest rates ranging between 0% and 50% of the average rate paid by the State on general obligation bonds. Loans must be repaid within 20 years after completion of the project (30 years for financially disadvantaged communities). Recipients make semiannual or, in some cases, annual payments, generally starting 12 months after project completion. Loan interest revenue and its related receivable is recorded as it accrues. The Fund has loan interest receivable as of June 30, 2010, and June 30, 2009, in the amount of $2,795,051 and $1,991,612, respectively. The following schedule of loans receivable activity for the year ended June 30, 2010, lists each water system’s outstanding loan balance. Included in the ―Active Loans‖ category are water systems that have both fully disbursed and active loans outstanding. Total Loan Amounts Total Principal Outstanding Authorized Disbursed as of Payments as of Loan Balance as Water Entity Loan Amounts June 30, 2010 June 30, 2010 of June 30, 2010 Fully Disbursed Loans Anaheim, City of $ 1 8,062,849 $ 1 8,062,849 $ 6 ,476,658 $ 11,586,191 Angels, City of 1 ,489,361 1 ,489,361 5 21,277 968,084 Asoleado Mutual Water Company 5 9,200 5 9,200 4 2,827 16,373 Bella Vista Water District 1 0,171,641 1 0,171,641 6 09,686 9,561,955 Benicia, City of 1 1,716,747 1 1,716,747 1 ,423,011 10,293,736 Biola Community Services District 1 77,000 1 77,000 3 0,975 146,025 Blythe, City of 9 ,807,160 9 ,807,160 1 ,176,859 8,630,301 Brawley, City of (102) 1 5,823,475 1 5,823,475 7 ,120,564 8,702,911 Brawley, City of (103) 4 ,127,516 4 ,127,516 1 ,754,194 2,373,322 California Water Service Co - (301) 7 ,078,698 7 ,078,698 1 17,978 6,960,720 California Water Service Co - (316) 4 94,276 4 94,276 3 5,304 458,972 Capell Valley Estates, Inc. 6 48,000 6 48,000 7 7,815 570,185 Carpinteria Valley Water District (121) 9 ,236,658 9 ,236,658 - 9,236,658 Carpinteria Valley Water District (125) 8 ,140,452 8 ,140,452 9 77,550 7,162,902 Colusa, County of 1 71,720 1 71,720 1 1,448 160,272 Contra Costa Water District (106) 1 5,137,776 1 5,137,776 4 ,813,164 10,324,612 Contra Costa Water District (118) 5 ,942,427 5 ,942,427 1 ,363,707 4,578,720 Contra Costa Water District 101 (SWAP) 2 ,000,000 2 ,000,000 5 91,666 1,408,334 Crescent City (401) 7 ,000,000 7 ,000,000 2 ,100,000 4,900,000 Del Rey Community Services District 1 72,380 1 72,380 2 2,984 149,396 Dinuba, City of 6 ,956,217 6 ,956,217 1 33,694 6,822,523 Dunsmuir, City of 5 5,800 5 5,800 1 1,160 44,640 Dutch Flat Mutual Water Company 2 01,530 2 01,530 4 1,372 160,158 East Bay Municipal Utility District 2 ,188,000 2 ,188,000 5 45,937 1,642,063 East Valley Water District 1 69,052 1 69,052 3 0,429 138,623 Eastern Municipal Water District 4 2,098,388 4 2,098,388 4 ,209,839 37,888,549 El Dorado Irrigation Water District (102) 8 06,954 8 06,954 2 22,677 584,277 El Dorado Irrigation Water District (103) 6 39,925 6 39,925 1 76,586 463,339 El Dorado Irrigation Water District (104) 7 54,130 7 54,130 2 08,100 546,030 El Dorado Irrigation Water District (105) 1 ,022,963 1 ,022,963 2 82,284 740,679 El Dorado Irrigation Water District (130) 9 59,041 9 59,041 1 95,487 763,554 El Dorado Irrigation Water District (131) 1 ,928,791 1 ,928,791 3 93,157 1,535,634 El Dorado Irrigation Water District (140) 5 ,749,808 5 ,749,808 4 57,258 5,292,550 El Dorado Irrigation Water District (141) 3 ,387,107 3 ,387,107 4 09,047 2,978,060 El Dorado Irrigation Water District (142) 1 ,732,745 1 ,732,745 2 09,256 1,523,489 El Dorado Irrigation Water District (143) 5 ,873,746 5 ,873,746 3 48,193 5,525,553 Escondido, City of 2 ,048,125 2 ,048,125 5 11,036 1,537,089 -12- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Total Loan Amounts Total Principal Outstanding Authorized Disbursed as of Payments as of Loan Balance as Water Entity Loan Amounts June 30, 2010 June 30, 2010 of June 30, 2010 Fully Disbursed Loans (continued) Fort Bragg, City of 2 ,141,532 2,141,532 3 74,768 1,766,764 Fruitridge Vista 3 ,272,505 3,247,959 4 86,639 2,761,320 Garberville Sanitary District 1 00,000 100,000 8 ,411 91,589 Georgetown Divide - PUD - Lake Walton 4 00,511 400,511 - 400,511 Grenada Water Company 5 90,000 590,000 1 08,167 481,833 Grizzly Flats Community District 2 53,336 253,336 6 1,863 191,473 Hillview Water Company (302-02) 3 ,808,447 3,808,447 1 90,422 3,618,025 Humboldt Bay Municipal Water District 1 0,946,739 10,946,739 3 ,284,022 7,662,717 Imperial County - West Lake County Campground 8 3,374 83,374 2 1,092 62,282 Imperial County - Red Hill Marina Campground 1 46,789 146,789 2 5,688 121,101 Indian Valley Community Services District 1 13,557 113,557 1 8,169 95,388 Ivanhoe Public Utility District 1 ,494,247 1,494,247 2 98,849 1,195,398 Kerman, City of 3 ,300,000 3,299,999 2 47,500 3,052,499 Kern County Water Agency 2 ,825,780 2,825,705 - 2,825,705 Kings, County of 9 91,251 991,251 9 9,125 892,126 Konocti - Ford's Acres Mobile Home Park 1 83,336 183,336 5 4,058 129,278 Lake Alpine Water Company 2 ,413,362 2,413,362 1 51,349 2,262,013 Lake Combie Mobile Home Village 5 4,951 54,951 1 3,711 41,240 Los Angeles, City of (101) 1 7,751,425 17,751,425 4 ,495,036 13,256,389 Meadow Vista County Water District (102) 7 3,305 73,305 5 7,902 15,403 Metropolitan Water District of Southern California 2 0,000,000 20,000,000 4 ,589,732 15,410,268 Montecito Water District 9 ,236,658 9,236,658 - 9,236,658 North Marin Water District 1 6,528,850 16,528,853 1 14,419 16,414,434 Placer County Water Agency 2 0,000,000 20,000,000 7 98,395 19,201,605 Redlands, City of 6 ,100,844 6,100,844 8 73,542 5,227,302 Redwood Mobile Home Park 7 8,441 78,441 7 8,441 - Richardson Beardsley Park, Inc. 5 7,093 57,093 1 4,457 42,636 Rio Dell, City of 2 ,720,000 2,720,000 6 8,000 2,652,000 River Pines Public Utility District 1 90,000 190,000 2 8,500 161,500 Rural North Vacaville Water District 8 ,838,365 8,838,365 2 ,631,055 6,207,310 San Buenaventura, City of 2 0,000,000 20,000,000 2 ,012,067 17,987,933 San Diego, City of 2 1,525,249 21,525,249 4 ,418,904 17,106,345 San Jose Water Water Company (301) 2 ,006,782 2,006,782 3 72,260 1,634,522 San Jose Water Water Company (303) 1 ,069,265 1,069,265 8 3,819 985,446 San Luis Obispo CFCD (105) 3 25,430 325,430 8 1,199 244,231 Santa Barbara, City of (123) 1 9,997,928 19,997,928 2 ,340,134 17,657,794 Santa Barbara, City of (111) 1 7,900,849 17,900,849 3 ,286,376 14,614,473 Santa Clara Valley Water District 6 ,350,000 6,349,999 5 08,012 5,841,987 Santiago County Water District 1 ,300,000 1,300,000 2 42,571 1,057,429 Sequoia Crest Water Company 1 20,949 120,949 4 ,815 116,134 Sereno Del Mar Water Company 2 50,000 250,000 8 5,337 164,663 Serrano Water District 3 ,460,882 3,460,882 1 ,828,609 1,632,273 Shady Glen Enterprises 1 36,878 136,878 1 6,700 120,178 Sierra Lakes County Water District 1 ,307,195 1,307,195 2 68,353 1,038,842 Sierra Mobile Home Park 5 9,110 59,110 1 7,733 41,377 Solano Irrigation District - Gibson Ranch (101) 2 ,124,896 2,124,896 5 86,360 1,538,536 Solano Irrigation District - Blue Ridge Oaks (107) 8 65,675 865,675 1 61,259 704,416 Solano Irrigation District - Peabody Improvement 3 86,000 386,000 7 1,904 314,096 Sonoma County CSA#41 - Jenner 1 20,000 120,000 2 ,384 117,616 Sonoma County Water Agency (107) 1 5,857,115 15,857,295 1 ,219,818 14,637,477 Southern Humboldt - Whitehorn Unified School 2 8,616 28,616 9 ,300 19,316 Spanish Flat Water District (419) 1 76,867 176,867 1 3,174 163,693 Spanish Flat Water District (112) 9 5,646 95,646 3 ,780 91,866 Stinson Beach County Water District 4 11,500 411,500 8 5,330 326,170 Strathmore Public Utility District (413) 4 51,500 451,500 4 5,150 406,350 Strathmore Public Utility District (420) 1 51,903 151,903 2 ,532 149,371 -13- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Total Loan Amounts Total Principal Outstanding Authorized Disbursed as of Payments as of Loan Balance as Water Entity Loan Amounts June 30, 2010 June 30, 2010 of June 30, 2010 Fully Disbursed Loans (continued) Terra Bella Irrigation District (105) 1 ,218,820 1,218,820 5 17,999 700,821 Terra Bella Irrigation District (404) 1 02,000 102,000 3 5,700 66,300 Tracy, City of 2 0,000,000 20,000,000 2 ,021,553 17,978,447 Truckee Donner Public Utility District 1 2,732,965 12,732,965 2 ,371,908 10,361,057 Tuolumne Utilities District - Monte Grande 5 01,452 501,452 1 6,715 484,737 Tuolumne Utilities District - Railbed Road 4 9,015 49,015 1 2,254 36,761 Union Public Utility District 2 ,296,451 2,296,451 1 80,018 2,116,433 Vallejo Water System (101) 6 ,675,000 6,675,000 2 ,832,174 3,842,826 Vallejo Water System (414) 6 8,080 68,080 1 8,722 49,358 Westmorland, City of 6 70,632 670,632 6 70,632 - Willow Creek Community Services District 4 70,884 470,884 4 7,088 423,796 Yolo County Airport 2 49,333 249,333 4 1,042 208,291 Yuba, City of 7 32,726 732,726 2 01,500 531,226 Total fully disbursed loans 5 00,971,949 500,947,509 8 3,581,676 417,365,833 Active Loans Anderson Valley USD 1 7,350 48,363 - 48,363 Capell Valley Estates Inc (ARRA) 1 72,358 6 9,671 - 69,671 Escondido, City of (ARRA) 2 ,899,400 5 6,940 - 56,940 Farm Mutual Water Co 1 ,193,600 302,045 - 302,045 Fresno, City of (150) 2 ,210,000 825,115 - 825,115 Fresno, City of (422) 8 0,000 80,000 - 80,000 Garrapatta Water Company Inc (ARRA) 1 14,813 4 7,192 - 47,192 Grass Valley 3 ,203,750 204,684 - 204,684 Jensen Mobile Home Park (ARRA) 2 7,671 3 ,992 - 3,992 Kings Mountain Park W/C 2 4,880 24,476 - 24,476 London 1 ,244,000 57,836 - 57,836 Los Angeles, City of (139) 2 5,335,671 25,335,671 - 25,335,671 Los Angeles, City of (144) 3 6,432,000 35,405,298 - 35,405,298 Los Angeles, City of (147) 3 8,684,250 38,684,250 - 38,684,250 Meadow Vista County Water District (149) 2 1,546,100 6,927,105 - 6,927,105 Plainview Mutal Water District 2 94,075 294,075 - 294,075 Rainbow Municipal Water District (ARRA) 3 ,351,340 1,619,260 - 1,619,260 Sacramento, City of (ARRA) 1 0,000,000 1,323,843 - 1,323,843 San Luis Obispo Cnty. Flood Cntrl.& Water Cons. 2 6,000,000 25,390,148 - 25,390,148 Santiago Association 7 88,354 788,354 - 788,354 Shady Lane Mobile Home Park (ARRA) 7 5,000 57,500 - 57,500 Shasta Community Services District 2 ,031,111 1,933,996 - 1,933,996 Sierra Grande 5 2,383 41,328 - 41,328 Spring Valley Heights Homeowners Association 1 ,907,000 1,775,823 - 1,775,823 Terra Bella Irrigation District (146) 4 80,000 369,210 - 369,210 Villa Del Monte Mutual Water 1 ,056,328 741,371 - 741,371 West Side Union SD 7 ,000 7,000 - 7,000 Total active loans 1 79,228,434 142,414,546 - 142,414,546 Total $ 6 80,200,383 $ 643,362,055 $ 8 3,581,676 $ 559,780,379 Current loans receivable $ 21,813,247 Noncurrent loans receivable 537,967,132 Total loans receivable $ 559,780,379 -14- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund Loans mature at various intervals through July 1, 2039. The scheduled principal and interest payments on loans for fully disbursed projects maturing in the next four years and every five years thereafter are as follows: Year Ending Total June 30 Principal Interest Receivable 2011 $ 24,918,862 $ 7,859,108 $ 32,777,970 2012 22,211,834 7,457,307 29,669,141 2013 22,624,720 7,040,960 29,665,679 2014 23,047,892 6,614,327 29,662,219 2015 23,485,119 6,177,055 29,662,174 2016-2020 123,145,030 23,986,119 147,131,149 2021-2025 118,520,679 11,824,094 130,344,773 2026-2030 56,649,921 2,283,173 58,933,095 2031-2035 2,141,912 141 2,142,053 2036-2040 619,863 — 619,863 Total $ 417,365,832 $ 73,242,284 $ 490,608,116 The amortization schedules for the active projects may change upon completion of the project when the final loan balance will be determined. NOTE 7— PRINCIPAL DEBT FORGIVENESS EXPENSE The Fund has loan agreements with disadvantaged communities for which the Fund intents to forgive loan principal under the Fund’s disadvantaged community assistance program. Principal forgiveness expense is recognized when the Fund makes payment to the disadvantaged community. As of June 30, 2010, the Fund has not incurred principal forgiveness expense as a result of a loan recipient’s inability to repay a loan. During the year ended June 30, 2010, the Fund recognized Principal Debt Forgiveness Expenses of $17,650,786. NOTE 8— DEFERRED REVENUES The Fund draws from the federal capitalization grant for the purpose of making loan disbursements before the loans are actually disbursed to loan recipients. Deferred revenue is the amount drawn prior to year end for which loan disbursements are expected to be made in the subsequent year. Deferred revenue is the amount drawn from the federal capitalization grants for which no loan has yet been disbursed. NOTE 9— DUE TO CALIFORNIA DEPARTMENT OF PUBLIC HEALTH (CDPH) CDPH incurs various expenditures related to the Fund’s set-aside and loan administration activities including payroll, indirect costs, and other related expenditures. As of June 30, 2010, the Fund owes CDPH $2,181,147 for reimbursement of these expenditures. -15- Financial Audit of the Safe Drinking California Department of Public Health Water State Revolving Fund NOTE 10— PENALITIES AND FEES The Fund assesses a penalty of one-tenth of 1% per day from the repayment due date on the amount due on loan repayments past due. However, for the fiscal year ended June 30, 2010, the department elected not to impose late payment penalties. Changes to workload priorities associated with the department’s reorganization delayed the preparation of loan recipient invoices, and late payment penalties were waived as a result. In prior years, late payment penalties were insignificant. NOTE 11— RETIREMENT PLAN Plan Description The State is a member of the California Public Employees’ Retirement System (CalPERS), which provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. CalPERS is a defined benefit contributory retirement plan. Retirement contributions by employees are set by statute as a percentage of payroll (Tier I employees), or are zero (Tier II employees). Retirement contributions are actuarially determined under a program where total contributions plus CalPERS’ investment earnings will provide the necessary funds to pay retirement benefits when incurred. The employer contributions are included in the cost of personal services. The Fund is included in the State Miscellaneous Category within CalPERS. CalPERS functions as an investment and administrative agent for participating public agencies with the State of California, including the Fund. All risks and costs are shared proportionately by participating state agencies. For further information, refer to the State of California Comprehensive Annual Financial Report, and to the CalPERS Comprehensive Annual Financial Report. -16- State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250-5874 http://www.sco.ca.gov S11-SAA-002