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HomeMy WebLinkAbout98.11-28-2018 ONLINE Board Item 17 Attachment 3 - CAFR.pdf rimik g .AMI „ i I I Orange County Sanitation District Comprehensive Annual Financial Report for the year ended June 30, 2018 Orange County,California ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2018 Prepared By: Administrative Services Department Financial Management Division Lorenzo Tyner Assistant General Manager& Director of Finance and Administrative Services (THIS PAGE LEFT INTENTIONALLY BLANK) ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30, 2018 Paae INTRODUCTORY SECTION: Letterof Transmittal..................................................................................................................... i-vii GFOA Certificate of Achievement............................................................................................... vill Boardof Directors........................................................................................................................ ix OrganizationChart...................................................................................................................... x Mapof Service Area.................................................................................................................... A FINANCIAL SECTION: Independent Auditors' Report...................................................................................................... 1-2 Management Discussion and Analysis—Required Supplementary Information........................ 3-9 Basic Financial Statements: Statement of Net Position................................................................................................... 12 Statement of Revenues, Expenses, and Changes in Net Position .................................... 13 Statementof Cash Flows.................................................................................................... 14 Notes to Basic Financial Statements.................................................................................. 15-48 Required Supplementary Information: Proportionate Share of the Net Pension Liability(Asset)—OCERS Pension Plan............ 50 Schedule of District Contributions—OCERS Pension Plan............................................... 51 Total Pension Liability—Additional Retiree Benefit Account.............................................. 52 Changes in Total Pension Liability—Additional Retiree Benefit Account........................... 53 Total OPEB Liability—Post-Employment Medical Benefits Plan......................................... 54 Changes in Total OPEB Liability—Post-Employment Medical Benefits Plan..................... 55 Supplementary Information: Combining Area Schedule of Net Position.......................................................................... 58 Combining Area Schedule of Revenues, Expenses, and Changes in Net Position .......... 59 Combining Area Schedule of Cash Flows 60 STATISTICAL SECTION: Net Position by Component—Last Ten Fiscal Years.................................................................. 62 Revenues and Gross Capital Contributions by Source—Last Ten Fiscal Years........................ 63 Expenses by Type—Last Ten Fiscal Years................................................................................ 64 Change in Net Position—Last Ten Fiscal Years......................................................................... 65 Cash and Investment Reserve Balances—Last Ten Fiscal Years............................................. 66 Sewer Service Fees—Last Nine Fiscal Years and Next Fiscal Year.......................................... 67 Number of Accounts and Revenues by Customer Class—Last Ten Fiscal Years..................... 68 Principal Sewer Service Customers—Prior Fiscal Year and Nine Years Ago............................ 69 Ratio of Annual Debt Service to Total Expenses—Last Ten Fiscal Years. 70 Debt Coverage Ratios—Last Ten Fiscal Years. 71 Computation of Direct and Overlapping Debt 72 Ratios of Outstanding Debt—Last Ten Fiscal Years 73 Comparison of the Volume of Wastewater Treated—Last Ten Fiscal Years 74 Authorized Full-time Equivalents by Function—Last Ten Fiscal Years 75 Biosolids Produced—Last Ten Fiscal Years............................................................................... 76 Capital Asset Statistics—Last Ten Fiscal Years......................................................................... 77 Demographic Statistics—Last Ten Fiscal Years......................................................................... 78 Estimated Population Served by Orange County Sanitation District.......................................... 79 Principal Orange County Employers—Current Fiscal Year and Nine Years Ago....................... 80 OperatingIndicators.................................................................................................................... 81 OTHER DATA&TRENDS: Cash and Investment Portfolio ................................................................................................... 84 Property Tax Rates—Direct and Overlapping Governments—Last Ten Fiscal Years............... 85 Assessed and Estimated Actual Value of Taxable Property—Last Ten Fiscal Years................ 86 Property Tax and User Fee Levies and Collections—Last Ten Fiscal Years 87 Property Value and Construction—Last Ten Fiscal Years ......................................................... 88 Insurancein Force....................................................................................................................... 89 (THIS PAGE LEFT INTENTIONALLY BLANK) Serving, Orange County Sanitation District Anaheim 108"Ellis Avenue,Fountain Valley,CA 92708 714.962.2411 • www.ocsd.com B Buena October 29, 2018 CY Fountain Va The Board of Directors of the Orange County Sanitation District, Fulls Orange County, California Garden G Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation District, Orange County, California for the fiscal year ended June 30, 2018. This report includes the Huntington B financial position and activity of individual revenue areas, as described within the Governmental Structure below,as of June 30,2018 and was prepared by the Financial Management Division of the Sanitation District's Administrative Services Department. La Ha Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the Sanitation District.To the best of our knowledge La Pal and belief,the enclosed data is accurate in all material respects and is reported in a manner designed Los Alam to present fairly the financial position and changes in the financial position of the Sanitation District. All disclosures necessary to enable the reader to gain an understanding of the agency's financial Newport a activities have been included. Ora Included within the accompanying financial statements are all of the organizations, activities, and functions controlled by the Sanitation District's Board of Directors in accordance with the Pla Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting. For the purpose of this evaluation, control was determined by the Board's Santa responsibility for: (1) adoption of the budget and user charges, (2) taxing authority, and (3) establishment of policies. The reporting entity and its services are described in further detail in Note Seal B - 1 of the financial statements. Stan An audit of the books, financial records and transactions of the Sanitation District is conducted annually by independent certified public accountants.The Sanitation District selected the accounting Tu firm of Macias Girl & O'Connell LLP to perform the audit for the year ended June 30, 2018. The auditors' report on the Sanitation District's basic financial statements and supplementary information Villa is located on page 1 within the financial section of this report. This report renders an unmodified opinion on the Sanitation District's basic financial statements for the year ended June 30, 2018. County of Ora Management's discussion and analysis(MD&A)immediately follows the independent auditors'report Costa M and provides a narrative introduction, overview, and analysis of the basic financial statements. The Sanitary Dis MD&A complements this letter of transmittal and should be read in conjunction with it. Midway City Sanitary District GOVERNMENTAL STRUCTURE Irvine The Orange County Sanitation District encompasses the Northern section of Orange County. The Water Dit Sanitation District provides wastewater treatment for an area of the County covering 479 square miles Yorba D and serving a population of approximately 2.6 million, or 81 percent of the County's population. The Water Di Sanitation District was originally incorporated in 1954 as nine separate public corporations, or districts. In April of 1998, at the Sanitation District's request, the Board of Supervisors of the County of Orange passed Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Districts into a new, single sanitation district, to be known as the Orange County Sanitation District, effective July 1, 1998. This action was recommended to the Board by the Local Agency Formation Commission in order to simplify governance structures, reduce the size of the Board, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. The boundaries of the nine previous districts had remained intact for the purpose of TOE Our Mission: 7o protect public health and the environment by providing effective wastewater collection, treatment, and recycling. collecting sewer user fees at the previously established rate schedules, and were referred to as nine individual revenue areas through June 30, 2000. Effective July 1,2003, all Revenue Areas, except Revenue Area 14, consolidated user fee rates and all enterprise fund accounting and budgeting activities and are now known as the Consolidated Revenue Area. The Sanitation District is managed by an administrative organization composed of directors appointed by the agencies or cities which are serviced by the Sanitation District. Each of the two remaining Revenue Areas, the Consolidated Revenue Area and Revenue Area 14, has its own budget and is responsible for the construction and maintenance of its own collection system.All Revenue Areas, except Revenue Area 14 and the portion of the Consolidated Revenue Area previously known as Revenue Area 13, receive their own share of the one-percent ad valorem property tax levy. In addition, all Revenue Areas except Revenue Area 14, collect user fees from property owners. Revenue Area 14 receives all of its revenues from service charges to the Irvine Ranch Water District. The purpose of the Sanitation District's wastewater management program is to protect the public's health, preserve the beneficial uses of the coastal waters, and maintain air quality. The objectives of operating the treatment plants are to process and dispose of the treated wastewater and the separated solids in accordance with Federal, state, and local laws including the Environmental Protection Agency. The Sanitation District sewerage system includes approximately 396 miles of sewers that convey wastewater generated within the Sanitation District's boundaries to the Sanitation District's two wastewater treatment plants, Reclamation Plant No. 1 located in the City of Fountain Valley, and Treatment Plant No.2located in the City of Huntington Beach. Plants No. 1 and No. 2 have secondary treatment capacities of 182 million gallons per day(mgd)and 150 mgd, respectively. In fiscal year 2018-19, both plants are projected to receive a combined average daily wastewater flow of 183 million gallons per day from residential, commercial, and industrial sources. After wastewater receives secondary treatment at Plant No. 1, it flows to the Groundwater Water Replenishment System (GWRS) at the Orange County Water District, located adjacent to the Sanitation District, where it undergoes a state-of-the-art purification process consisting of microfiltralion, reverse osmosis, and ultraviolet light with hydrogen peroxide. The product water is near-distilled quality. Approximately 35 million gallons (132,500 cubic meters) per day of the GWRS water are pumped into injection wells to create a seawater intrusion barrier. Another 65 million gallons (246,000 cubic meters) are pumped daily to Orange County Water District's percolation basins in Anaheim where the GWRS water naturally filters through sand and gravel to the deep aquifers of the groundwater basin. Remaining outflows of treated wastewater from Plants 1 and 2 are combined and discharged to the ocean off the Huntington Beach coast through an outfall pipe that is 120 inches in diameter and approximately five miles long. The last mile of the outfall pipe is a diffuser that dilutes the wastewater with seawater in a ratio of 148 parts seawater to one part treated wastewater at an average depth of 185 feet. ECONOMIC CONDITIONS AND OUTLOOK According to the California Employment Development Department (EDD), Orange County generated a slight decrease of approximately 0.2 percent in payroll jobs from August 2017 to August 2018. During this same time period, unemployment in Orange County decreased to 3.1 percent from 3.8 percent while the unemployment in California as a whole decreased to 4.3 percent from 4.9 percent. In June 2018, Chapman University forecasted Orange County's 2018 total payroll employment to increase 2.4 percent over the prior year, or the addition of 38,000 payroll jobs in 2018. The four sectors generating the most new jobs in Orange County are construction, professional & business, education & health, and leisure & hospitality. Of these categories, construction is clearly a standout with a 6.9 percent annual average growth, or roughly double that of the other three sectors. Coupled with the powerful multiplier effects that building activity has on other job sectors, the growing importance of the construction sector in shaping the county's economic outlook should be clear. Chapman's forecast calls for construction to pick up even more steam in 2018, growing at a 5.8 percent rate versus the 4.5 percent increase in 2017. This will help fuel overall job growth of 2.4 percent in Orange County in 2018, roughly the same as the 2.3 percent growth Chapman is forecasting for California and significantly higher than the forecast of 1.5 percent growth for the U.S. Orange County's job growth is being fueled by housing permit activity. Although total permits are expected to hit a post-recession high of 11,200 units, it should be noted that single-family permits have helped offset the sharp decline in multi-family units. It is too early to tell whether that decline is related in a significant way to concerns over mounting political pressure to institute rent controls in Orange County. Housing affordability, which measures a family's ability to afford a median-priced home, is projected to continue a steady decline that started in late 2016, when the affordability index hit 72.6. By the fourth quarter of 2017, the index dropped to 68.3, with a further drop projected to near 60.0 by year-end 2018. Despite decreasing housing affordability in the county, there is a light supplies of homes available for sale, contributing to another year of relatively high housing price appreciation. MAJOR INITIATIVES Following are the District's current major initiatives as outlined in the General Manager's work plan for FY 2018-19: 1. Safety and Security • Emergency Preparedness — Develop and conduct an external emergency response and recovery drill by June 30, 2019 that tests the Integrated Emergency Response Plan (IERP). • Safety Engineering Solutions — Continue the 11 Safety Improvement Construction Projects and implement physical site security enhancements as needed to ensure all facilities remain secure. All identified safety improvement contracts and task orders are awarded by May 30, 2019. • Voluntary Protection Plan (VPP) Certification - Complete a full review and audit of all Safety and Health policies, conduct a third-party VPP readiness assessment, and draft a VPP implementation plan by June 30,2019. • Safety Help Desk — Create a Safety Help Desk Program by June 30, 2019 with software and in- house telephone extension monitored by Risk Management staff, intended to provide internal customers with prompt information and support related to health and safety services. Services include but are not limited to: troubleshooting safety problems, scheduling contractor orientation, or getting policy guidance. • Security Committee & Plan — Reconvene the Security Committee to facilitate development and implementation of a Physical and Cyber Security Plan by March 31, 2019. 2. Succession Planning • Realignment of Operations, Maintenance& Engineering (Maintenance Mode)—Assess the roles and responsibilities of each department and workgroup within the Operation and Maintenance and Engineering Departments and adjust the structure and roles to more efficiently support delivery of services to operate, maintain, refurbish, and replace Orange County Sanitation District (OCSD) assets by November 30, 2018. Make the necessary adjustments to the organization by March 31, 2019. • Labor Negotiations — Complete successful negotiations with all represented bargaining units by June 30,2019. • Leadership Development — Provide at least two specialized trainings tailored to the Supervisory Level by June 30, 2019. iii 3. Resource Recovery • Water Quality for Water Recycling — Update OCSD's wastewater ordinance to reflect necessary discharge regulations resulting from alkaline hydrolysis to protect water quality by June 30, 2019. 4. Reliability • Asset Management Plan — Develop an Asset Management Plan by October 31, 2018 that includes an inventory of critical assets for each process area, the collection system and fleet; an evaluation of their condition and performance; and a budgeting and implementation plan to maintain, rehabilitate, and replace these assets to meet the required levels of service at the lowest life cycle cost and at an acceptable level of risk. 5. Operational Optimization • OCSD Headquarters Building — Create a final concept plan for the new building complex north of Ellis Avenue by February 28, 2019. • Board Meeting Agenda Management Software System — Select and install a new Board Meeting Agenda Management Software System by June 30, 2019. • Document Management— In preparation for creating a more digital workplace and reducing physical record storage, develop a Scope of Work by November 30, 2018 to issue a Request for Proposals for a Trusted System Needs Assessment and award a contract by February 28, 2019. Present the records retention schedule to the Board of Directors for approval by December 31, 2018. • Sludge Dewatering and Odor Control Plant No. 1 — Begin production of dewatered biosolids cake by March 31, 2019. • American Society of Civil Engineers Peer Review — Complete a peer review of the Engineering Department's Capital Improvement Program delivery system by the American Society of Civil Engineers by May 31, 2019. • Communications Audit— Develop scope of work and issue RFP by June 30, 2019 to select firm to conduct a communications audit to review effectiveness of OCSD's communication efforts to redefine and rescope the program. • Lobbyist Contract—Complete selection and contract implementation of legislative lobbyist contracts by December 31, 2018. • Return to Work Program— Develop a formal Return to Work Program to communicate expectations of what is expected of all parties (employees, supervisors, physicians, etc.)by June 30, 2019. Strategic Planning In December 2017, the Board of Directors approved the biennium update to the rolling five-year strategic plan for 2014-2019. This is a comprehensive strategic plan to steer OCSD's efforts and engage the organization to envision service levels and operational needs for the next five years. This process began with a consultant retained by OCSD conducting confidential Board Interviews with interested Board members to identify issues of concerns. Next the consultant led a Strategic Planning Workshop for employees and attended the Executive Management Team's annual retreat to provide feedback from the Board members and employees. The update concluded with five Strategic Goals being identified as completed, no new goals being adopted and a few minor modifications being made to OCSD's levels of service. Driven by our Mission, Vision and Core Values, the 2017 Strategic Plan Update maintains the District's aggressive efforts to meet the sanitation, health, and safety needs of the 2.6 million people being served in a cost-effective manner,while protecting the environment where we live. iv Since implementation of the first comprehensive strategic plan in 2007, 40 strategic goals have been established and completed. In December 2017, the District updated the Five-Year Strategic Plan and, as part of the strategic planning process, reaffirmed the following goals: • Completion of the Odor Control Master Plan; • Development of Future Biosolids Management Options; • Research new energy efficiency and conversion technologies; • Complete the transfer of 174 miles of local sewers to a local agency; • Determine partnerships, needs, strategies, benefits and costs associated with recycling of Plant No.2 effluent water; and • Workforce planning and development to ensure that the right people with the right skills and abili0es, are in the right place, at the right time. This Strategic Plan continues to chart a focused roadmap of success for the future of the Orange County Sanitation District. It addresses critical operations and construction issues, financial and budgeting challenges, and gives a clear and concise direction to staff, ratepayers, regulatory agencies, and the general public. SERVICE EFFORTS AND ACCOMPLISHMENTS The following service efforts and accomplishments were achieved by the Sanitation District during the year ended June 30, 2018: • Platinum Peak Performance Award from the National Association of Clean Water Agencies (NACWA) • Silver Award of Distinction- 2016.2017 Annual Report, Communicator Award from the Academy of Interactive&Visual Arts (AIVA) • Silver Award of Distinction-OCSD CIP Annual Report, Communicator Award from AIVA • Silver Award of Distinction-The Flushable 3, Communicator Award from AIVA • Environmental Communications Award- OCSD's and OCWD's GWRS Bottled Water Campaign from the American Academy of Environmental Engineers and Scientists • Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA) • Distinguished Budget Presentation Award from GFOA • National Environmental Achievement Award (NEAR), Urban Runoff Program from NACWA • Honorable Mention- Urban Runoff Program from Orange County Business Council's Turning Red Tape into Red Carpet ACCOUNTING AND BUDGETARY CONTROLS The Sanitation District's accounting records are maintained on the accrual basis. In developing and evaluating the Sanitation District's accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2)the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of a control should not v exceed the benefits likely to be derived; and (2) the evaluation of costs and benefits requires estimates and judgments by management. We believe that the Sanitation District's internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. Each year the Sanitation District's Board of Directors adopts an annual operating plan. A joint works budget is first prepared that identifies the specific capital projects and operating activities to be undertaken by the Sanitation District during the year. The budgetary level of control, the level at which expenses cannot exceed budget, is exercised at the individual district, or fund level. The Sanitation District has adopted a Uniform Purchasing Policy that identifies the agreed upon purchasing standards. ACCUMULATED FUNDS AND RESERVES POLICY The Board of Directors of the Orange County Sanitation District has established the criteria below to determine the total funds required as listed in the Accumulated Funds and Reserves Policy: Cash Flow Reserve Criteria: is established to fund operations, maintenance and certificates of participation expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and the sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve will be established as the sum of an amount equal to six months operations and maintenance expenses and the total of the annual debt (COP) service payments due in August each year. Operating Contingency Reserve Criteria: is established to provide for non-recurring expenditures that were not anticipated when the annual budget and sewer service fees were considered and adopted. The level of this reserve will be established at an amount equal to ten percent of the annual operating budget. Capital Improvement Reserve Criteria: is established to fund annual increments of the capital improvement program. The long-term target is for one half of the capital improvement program to be funded from borrowing and for one half to be funded from current revenues and reserves. With this program in mind, the target level of this reserve has been established at one half of the average annual capital improvement program over the next ten years. Levels higher and lower than the target can be expected as a result of outlay variability in the annual capital improvement programs. Catastrophic Loss or Self-Insurance Reserve Criteria: are established for property damage including fire, flood and earthquake; for general liability; and for workers' compensation. These reserves are intended to supplement purchased insurance policies, FEMA disaster reimbursements and State disaster reimbursements. The potential infrastructure loss from a major earthquake has been estimated at $495 million. The level of this reserve has been set to fund the District's non-reimbursed costs, estimated to be $57 million. Capital Replacement/Renewal Reserve Criteria: is established to provide thirty percent of the funding to replace or refurbish the current collection and treatment and disposal facilities at the end of their useful economic lives. The current replacement value of these facilities is estimated to be $10.8 billion. The initial criterion level was established at $50 million, which will be augmented by interest earnings and a small portion of the annual sewer user fees in order to meet projected needs over the next 20 years. Debt Service Reserve Criteria: Provisions of the various Certificate of Participation (COP) issues require debt service reserves to be under the control of the Trustee for that issue. These reserve funds are not available for the general needs of the District and must be maintained at specified levels. The level of required COP service reserves at June 30, 2018 was $5.0 million. In addition, the District's Debt Service Reserve policy requires total debt service reserves to be ten percent of the total outstanding COP debt, or$100 million at June 30, 2018. vi Accumulated funds exceeding the levels specified by District policy will be maintained in a rate stabilization fund. These funds will be applied to future years' needs in order to maintain rates or to moderate annual fluctuations.There is no established target for this reserve. As of June 30, 2018, the Sanitation District was in compliance with the Accumulated Funds and Reserves Policy with designated cash and investments totaling $680 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District's reserve policy: Designated Cash and Investments Designated For Cash Flow Contingency $173 million Designated For Self-Insurance 57 million Designated For Capital Improvements 350 million Designated For Debt Service Requirements 100 million Total Designated Cash and Investments 8 680 million CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING The Government Finance Officers' Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Orange County Sanitation District for the Sanitation District's comprehensive annual financial report for the year ended June 30, 2017. This was the twenty-third consecutive year that the Sanitation District has received this award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program requirements and we are submitting it to GFOA to determine its eligibility for another certificate. ACKNOWLEDGMENTS This report could not have been accomplished without the dedicated services of the Financial Management Division staff, and I would like to especially express my appreciation to Line Hsiao, Accounting Supervisor, who assisted in its preparation. I would also like to thank the Sanitation District's Board of Directors and the General Manager for their interest and support in conducting the financial operations of the Sanitation District in a responsible and progressive manner. Respectfully submitted, Lorenzo Tyn Assistant General Manager& Director of Finance and Administrative Services vii G � Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting Presented to Orange County Sanitation District California For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2017 C'1c. i. P. Arm a Executive DirectodCEO viii ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2018 Agency Active Director Alternate Director Cities: Anaheim Denise Barnes Lucille Kring Brea Glenn Parker Cecilia Hupp Buena Park Fred Smith Virginia Vaughn Cypress Mariellen Yarc Stacy Berry Fountain Valley Steve Nagel Cheryl Brothers Fullerton Greg Sebourn Jesus Silva Garden Grove Steve Jones Kris Beard Huntington Beach Erik Peterson Mike Posey Irvine Donald P. Wagner Lynn Schott La Habra Tim Shaw Michael Blazey La Palma Peter Kim Marshall Goodman Los Alamitos Richard Murphy Warren Kusumoto Newport Beach Scott Peotter Brad Avery Orange Teresa Smith Mark Murphy Placentia Chad Wanke Ward Smith Santa Ana Sal Tinajero David Benavides Seal Beach Ellery Deaton Sandra Massa-Lavitt Stanton David Shawver Carol Warren Tustin Allan Bernstein Chuck Puckett Villa Park Robert Collacott Robert Pitts Sanitary Water Districts: Costa Mesa Sanitary District James M. Ferryman Robert Ooten Midway City Sanitary District Charlie Nguyen AI Krippner Irvine Ranch Water District John Withers Douglas Reinhart Yorba Linda Water District Phil Hawkins Brooke Jones County Areas: Member of the Board Michelle Steel Shawn Nelson of Supervisors ix ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30, 2018 caned coonaal Me GM01nn 1 Envionnanitl yineenn, BmN Services Hann Remo Ad nstrative ServKn t`a� AJiinnwation O&M MnnnisM.n Atlnvn,m Em ��� RisF Manegemen✓ Fnanaal Rea .Pnl c Wmiy Collecbon Faali Safety Management Ops B Mamn name CaMracls,PurtM1atitg LabaM0 an Rgeq MaaganeM B Malenals Monimnng l)MrP Fb Se ms Management Inlmnapan Civil B MecM1anigl Rant No,1 Tetlawlogy Eyineenng Opa — rJeNiolB Contrd Plat No,2 rs Figimciy Oper — Plant No,1 Maintenance Mimmna Rehaba l;8 P4nning Plant No Maintenance X ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2018 ftDDSD. LA HABRA BREA YORBA FULLER LINDA PLAC A LA B EK T� p K PRE ANANdM VILL 0 A PA LOS ORANGE `-� nos O ROV 1 BEACH M di Pce I ANT UNT � ANA SlIN ALLE P1 HUB TO IRVINE COSTA MESA NEWPORT BEACH N +� N Semk area p neary x.. Sewer piwlinea r.w...._uv S Reclamation Rant No.1(P3) mcanrz.r'v'.uan°m..w heatment Plant W.Y(P2) .e w e eoim�.a.6� .on. wm7mm m.m uuwamtia� � Pump and lM[statbns amwagmrsimsa,.�m✓� O ftnmwrateC Dranp County(wflfte areas) scam.awmv A (THIS PAGE LEFT INTENTIONALLY BLANK) xii Certified RINGO Public ACCOUnIaIILS Independent Auditor's Report To the Board of Directors Orange County Sanitation District Fountain Valley,California We have audited the accompanying financial statements of the Orange County Sanitation District (the District)as of and for the year ended June 30,2018,and the related notes to the financial statements,which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America;this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement,whether due to fraud or error. Auditor's Responsibility 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.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the District's internal control.Accordingly,we express no such opinion.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of the Orange County Sanitation District, as of June 30, 2018, and the changes in its financial position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. MMOS Glnl 6 0'C W Oell LLP 4675M huv Cwn.Suite tue Newport B—N CAW W www.mgocpa.com Emphasis of Matter As discussed in Note 1 to basic financial statements, effective July 1, 2017, the District adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 75, Accatmring and Financial Reportingjor Postemployment Bereftts Other Than Pensions.Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis,Schedule of Proportionate Share of the Net Pension Liability (Asset)—OCERS Pension Plan,Schedule of District Contributions,Schedule of Total Pension Liability—Additional Retiree Benefit Account, Schedule of Changes in Total Pension Liability—Additional Retiree Benefit Amount, Schedule of Total OPEB Liability—Post-Employment Medical Benefits Plan,and Schedule of Changes in Total OPEB Liability — Post-Employment Medical Benefits Plan, as listed in the table of contents, be presented to supplement the basic financial statements. Such information,although not a part of the basic financial statements,is required by the Governmental Accounting Standards Board,who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. 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 inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, 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. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District's basic financial statements. The separate"Combining Area" financial statements, introductory section,statistical section,and other data and trends are presented for purposes of additional analysis and are not a required par of the basic financial statements. The"Combining Area"financial statements are the responsibility of management and were derived from, and relate directly to, the underlying accounting and other records used to prepare the basic financial statements.Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves,and other additional procedures in accordance with auditing standards generally accepted in the United States of America.In our opinion,the"Combining Area" financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. 71ne introductory and statistical sections and other data and trends have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them.. r Newport Beach,Califomia October 29,2018 2 Management Discussion and Analysis June 30,2018 This section of the financial statements of the Orange County Sanitation District(District) is management's narrative overview and analysis of the financial activities of the District for the fiscal year ended June 30, 2018.The information presented here is to be considered in conjunction with additional information provided within the letter of transmittal located in the Introductory Section of this report. Financial Highlights • As of June 30,2018,the District's assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $2,194.8 million (net position). Of this amount, $626.7 million represents unrestricted net position, which may be used to meet the District's ongoing obligations to citizens and creditors. • Total net position increased $153.6 million, or 7.5 percent over the prior year. This amount includes the impact of the restatement of beginning net position in the amount of $7.6 million due to implementation of the Governmental Accounting Standards Board (GASB)Statement No.75. • Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $22.6 million, or 0.9 percent over the prior year. • Net investment in capital assets increased $63.2 million, or 4.2 percent over the prior year. • Unrestricted Net Position increased$90.3 million, or 16.8 percent over the prior year. • Total outstanding bonded debt decreased by$32.1 million from the prior year to$1.0 billion. Overview of the Basic Financial Statements The District operates as a utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of accounting.As an enterprise fund,the District's basic financial statements are comprised of two components:financial statements and notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. In accordance with the GASB Codification of Governmental Accounting and Financial Reporting Standards, the District's financial statements include a Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net Position;and a Statement of Cash Flows.The Statement of Net Position includes the District's assets, deferred outflow of resources, liabilities, and deferred inflows of resources; and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors(liabilities). It also provides the basis for computing the rate of return,evaluating the capital structure of the District, and assessing the liquidity and financial flexibility of the District. The Statement of Revenues, Expenses, and Changes in Net Position accounts for the current year's revenues and expenses. This statement measures the success of the District's operations over the past year and can be used to determine the District's creditworthiness. It also highlights the District's dependency on property tax revenues in supplementing user fees and other charges for recovering total cost. The final required financial statement,the Statement of Cash Flows, reports cash receipts,cash payments, and net changes in cash resulting from operations, investments, and financial activities of the reporting period. 3 Net Position As previously noted, net position increased$153.6 million,or 7.5 percent over the net position for FY 2016- 17,to$2,194.8 million in FY 2017-18. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2018 2017 (Decrease) (Decrease) Assets and deferred outflow of resources Assets Current and other assets $ 750,084 $ 610,450 $ 139,634 22.9% Net capital assets 2,626,015 2,603,458 22,557 0.9% Total assets 3,376,099 3,213,908 162,191 5.0% Deferred outflows of resources 83,940 74,510 9,430 12.7% Total assets and deferred outflows of resources 3,460,039 3,288,418 171,621 5.2% Liabilities Current liabilities 117,665 99,376 18,289 18.4% Noncurrent liabilities 1,083,311 1,118,146 (34,835) -3.1% Total liabilities 1,200,976 1,217,522 16,546 -1.4 e Deferred inflows of resources 64,274 29,671 34,603 116.6% Total liabilities and deferred inflows of resources 1,265,250 1,247,193 18,057 1.4% Net position Net investment in capital assets 1,568,118 1,504,898 63,220 4.2% Unrestricted` 626,671 536,327 90,344 16.8% Total net position 2,194,789 2,041.225 153,564 7.5°0 The amount for F 2016117 does not include the impact of the restatement of beginning net position in the amount of$7.6 million due to implementation of the Governmental Accounting Standards Board(GASH)Statement No.75. Current and other assets increased $139.6 million, or 22.9 percent, due primarily to net cash provided by operations of$220.6 million, proceeds from property taxes of$94.3 million, other government repayments of $20.5 million, receipt of capital facilities capacity charges of $17.9 million, contributions from other governments of$3.5 million, interest received of$7.4 million, offset by capital outlays of $112.8 million, bonded debt retirements of$32.1 million, interest paid of$44.2 million, and net investment activities and other items of$35.5 million. Net Capital assets increased $22.5 million, or 0.9 percent, due mostly to the ongoing capital improvement program construction in progress additions of $112.7 million, land additions of $4.5 million, and capital equipment of$3.0 million, offset by depreciation of$97.4 million, and $0.3 million of prior capital project expenses that were written off as expense. Included in total capital outlay additions is the Sludge Dewatering and Odor Control Project at Plant No. 1 and Plant No. 2 with total project budgets of$188.3 million and $90.5 million, respectively. These projects construct primary sludge thickening facilities to 4 improve solids handling capacity, replace aging sludge dewatering facilities, reduce biosolids handling and disposal, and rehabilitate obsolete solids handling odor control equipment. In FY 2017-18, the District incurred project costs of$9.0 million at Plant No. 1 and$22.2 million at Plant No. 2 bringing the total cost- to-date to$174.8 million and $68.8 million, respectively. Collection system projects includes the Newhope-Placentia Trunk Replacement. The Newhope-Placentia Trunk Replacement incurred outlays of$4.1 million in FY 2017-18 with a total project budget of $116.3 million through the projected completion in FY 2021-22.This project will increase the size of approximately 35,000 feet of the trunk line from Yorba Linda Boulevard to Orangewood Avenue. The upsized sewer will accommodate flows from the newly abandoned Yorba Linda Pump Station and the newly interconnected Atwood Sub-trunk. The Gisler-Redhill System Improvements (Reach "B") is another collection system project that incurred outlays of $5.0 million in FY 2017-18 with a total project budget of $25.2 million through projected completion in FY 2018-19. This project will replace a section of the existing sewer and rehabilitate other reaches in the Gisler-Redhill System. This will include installing a larger diameter pipelines, providing interties, new diversion settings, and sliplining and relining manholes. See page 8 for the Schedule of Capital Assets and listing of other major capital additions for FY 2017-18. Deferred Outflows of Resources increased$9.4 million,or 12.7 percent from the prior year primarily due to $13.6 million increase in pension deferred outflows due to the changes of actuarial assumptions and other inputs, and a decrease of$4.2 million for the difference between carrying amount of the retired debt and the acquisition price of COP Series. Deferred Inflows of Resources increased$34.6 million,or 116.6 percent over the prior year is primarily due to the decrease in pension expense as a result of the change in projected and actual earnings on pension plan investments and changes of assumptions or other inputs. Net Investment in capital assets increased $63.2 million, or 4.2 percent over the prior year primarily due to the result of the net increase in capital assets of$22.6 million coupled with a $40.6 million decrease in related debt. Unrestricted netposition increased $90.3 million,or 16.8 percent due to the overall increase in net position of$161.1 million and a decrease in the beginning net position of$7.6 million for implementing GASB 75 related to Other Postemployment Benefits(OPEB),offset by the increase in net investment in capital assets of$63.2 million. 5 Changes in Net Position Net position increased $38.5 million in FY 2017-18, or 31.4 percent over the prior years increase in net position. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2018 2017 (Decrease) (Decrease) Revenues: Operating revenues Service charges $ 316,329 $ 312,237 $ 4,092 1.3% Permit and inspection fees 1,170 1,045 125 12.0% Total operating revenues 317,499 313,282 4,217 1.3% Non-operating revenues Property taxes 94,188 88,284 5,904 6.7% Investment and interest income 3,230 3,081 149 4.8% Contrib.from other government 6,802 24,388 (17,586) -72.1% Other 809 2,757 (1,948) -70.7% Total non-operating revenues 105,029 118,510 (13,481) -11.4% Total revenues 422,528 431,792 (9,264) -2.1% Expenses: Operating expense other than depreciation and amortization 145,556 150,252 (4,696) -3.1% Depreciation and amortization 97,399 96,320 1,079 1.1% Non-operating expense 36,494 78,918 (42,424) -53.8% Total expenses 279,449 325,490 46,041 -14.1% Income before capital contributions 143,079 106,302 36,777 34.6% Capital facilities capacity charges 18,077 16,351 1,726 10.6% Increase in net position 161,156 122,653 38,503 31.4% Beginning net position, as restated' 2,033,633 1,918,572 115,061 6.0% Ending net position 2,194,789 2,041,225 153,564 7.5% The amount for FY 2016117 does not include the impact of the restatement of beginning net position in the amount of$7.6 million due to implementation of the Governmental Accounting Standards Board(GASH)Statement No.75. As previously stated, an enterprise fund is used to account for the operations of the District, which is financed and operated in a manner similar to private business enterprises. This allows the District to determine that the costs (expenses, including depreciation and amortization) of providing wastewater management services on a continuing basis are financed or recovered primarily through user charges. Sewer service user fees are evaluated annually based primarily on budget requirements for total operation and maintenance expenses and capital outlays for providing wastewater management services. Property tax revenues are dedicated for the payment of debt service. In FY 2017-18, operating revenues increased $4.2 million, or 1.3 percent from the prior year primarily due to a 1.2 percent increase in the average sewer user fee rate and a decrease in user fee rebates issued over the prior year. 6 Sources of Revenue Functional Expenses June 30, 2018 June 30,2018 ■Collections 22% Olnterest 2% 11% ■Treahnenl& It User Fees Disposal o Depreciation& 00ther Amortization OTaxes Levied 35.4 40% D Interest Expense T5% ■Other The$13.5 million,or 11.4 percent decrease in non-operating revenues primarily consists of a$17.5 million, or 72.1 percent decrease in contributions from other governments, a $1.9 million, or 70.7 percent in other expenses, somewhat offset by a $5.9 million, or 6.7 percent increase in property tax. The decrease in contributions from other governments is reflective of the decrease in integration adjustment of Revenue Area 14's equity share in OCSD's Joint Works Treatment Facilities based on the flows discharged to OCSD. The increase in property tax revenue is primarily the result of the increase in total assessed valuation of 6.7 percent over the prior year. The decrease in other revenue is mainly attributable to a $1 million decrease in non-federal grant reimbursement relative to project 2-72 Newhope-Placentia trunk sewer replacement project in the prior year and a$1 million decrease in project FE14-05 pollution remediation estimates. Operating expense before depreciation and amortization decreased $4.7 million or 3.1 percent from the prior year. The majority of this decrease is attributable to the $6.9 million, or 9.3 percent decrease in salaries and benefits and the $2.0 million, or 26.6 percent decrease in feasibility studies, that were somewhat offset by a $2.8 million, or 10.8 percent increase in supplies, repairs and maintenance, and the $1.2 million, or 19.3 percent increase in utilities. The increase in supplies, repairs and maintenance expenses is mostly attributable to repairs such as digester cleaning services and engine components purchased to remedy gas leaks. The increase in utilities is attributable to an increase of$880,000 in power charges as a result of higher electricity rates, increased consumption from facility-related demand, and a Plant 2 Central Generation (CenGen) shutdown. Feasibility studies are done to determine the necessity and the preferred designs of future potential construction projects and fluctuate from year-to-year, as required. Operating salaries and benefits decreased by$6.8 million to$67.4 million,a 9.3 percent decrease from the prior year.The operating salaries and benefits costs are part of the overall decrease of$8.0 million in total salaries and benefits when including the salaries and benefits capitalized within the capital improvement program. Overall, total District salaries and benefits were $84.0 million, an 8.2 percent decrease from the prior year total of$91.6 million. This decrease is reflective of the$10.7 million, or 72.9 percent decrease in retirement premiums as a result of the $214.1 million pay down against the District's unfunded actuarial accrued pension liability(UAAL)over the current and previous three fiscal years,that was somewhat offset by a$3.1 million,or 4.7 percent increase in salaries and wages. This pay down resulted in a UAAL premium rate decrease from 7.86 percent in FY 2015-16 to 1.42 percent in FY 2017-18. Non-operating expense decreased $42.4 million, or 53.8 percent, and is primarily reflective of the $50.0 million reduction in transfer of local sewer service fee assets and replacement funds to East Orange County Water District (EOCWD), a $2.2 million, or 91.9 percent decrease in loss on disposal of capital assets, somewhat offsetting this decrease is the increase in interest expense of $9.4 million, or 36.5 percent increase from the prior year total of$25.6 million. 7 Capital Facility Capacity Charges increased $1.7 million, or 10.6 percent from the prior year due to an increase in rates and connection fees collected from cities as well as more supplemental capital facilities capacity charges assessed to industrial dischargers than last year. Capital Assets At June 30, 2018, the District had a net investment of$2.6 billion in capital assets. This represents a net increase(including additions and deletions)of$22.6 million or 0.9 percent over the prior year. Schedule of Capital Assets (Net of Depreciation and Amortization) (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2018 2017 (Decrease) (Decrease) Land $ 29,741 $ 25,247 $ 4,494 17.8% Construction in progress 427,996 461,833 (33,837) -7.3% Sewage collection facilities 494,171 482,558 11,613 2.4% Sewage treatment facilities 1,557,473 1,515,969 41,504 2.7% Effluent disposal facilities 33,178 34,636 (1,458) -4.2% Solids disposal facilities 288 297 (9) -3.0% General and administrative facilities 83,168 82,918 250 0.3% Capital assets, net 2,626,015 2,603,458 22,557 0.9% Major capital asset additions for the current fiscal year included the following: • $22.2 million—Sludge Dewatering and Odor Control at Plant No. 2 • $16.2 million—Ocean Ouffall System Rehabilitation • $ 9.9 million—Mt Langley Property • $ 9.0 million—Sludge Dewatering and Odor Control at Plant No. 1 • $ 7.7 million—Consolidated Demolition &Utility Improvements at Plant No. 2 • $ 6.4 million—Headworks Rehabilitation at Plant No. 1 • $ 5.2 milliion-A-Side Primary Clarifiers Repl. at P2 • $ 5.0 million -Gisler-Redhill System Improvements, Reach"B" More detailed information about the District's capital assets is provided in Notes 1 and 3 of Notes to Basic Financial Statements. Debt Administration At June 30, 2018, the District had$1.0 billion outstanding in bonded debt, a net decrease of$32.1 million, or 3.1 percent from the prior year.This reduction consisted of the accumulation of principal payments made in accordance with the schedule of debt service payments. During the Sanitation's most recent debt refunding, Moody's, Standard and Poor's, and Fitch Ratings all reaffirmed their AAA rating of the Orange County Sanitation District.The District's long-range financing plan is designed to maintain this high rating. Over the next five years, the District is projecting over$1.3 billion in future treatment plant and collection system capital improvements. In accordance with the District's long- term debt fiscal policy, the District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue.No new debt issuances are being proposed over the next five years to assist with the funding of the system improvements scheduled over this time period. However, the 2016B 8 Certificate Anticipation Notes Series (CANS) are due and payable on December 15, 2018, therefore, the Board of Directors of the Sanitation District has authorized and adopted Resolution No. OCSD 18-17 to issue the 2018A CANS of up to$109,875,000 in November 2018 which would allow the Sanitation District to repay the 2016E CANS and avoid using$110 million of reserves for such purpose. For more information on long-temt debt activities, see Note 4 of the Notes to Basic Financial Statements. Economic Factors and Next Year's Budgets and Rates • The unemployment rate within the County of Orange is at 3.3 percent in June 2018, a slight decrease from the rate of 3.8 percent a year ago. • Inflation for the Los Angeles-Riverside-Orange County area increased 2.2 percent in 2017 over the prior year based on the actual percentage change in the consumer price index according to the U. S. Department of Labor, Bureau of Labor Statistics. • The actual rate of return on investments decreased from the 0.6 percent earnings rate in FY 2016-17 to 0.5 percent for FY 2017-18. All of these factors are considered in preparing the District's biennium budget. As part of the District's recently approved five-year rate schedule, user fees were increased by 1.2 percent for FY 2018-19 over the prior year. The Single Family Residential (SFR)fee,which is the underlying for all other user rates, is applicable to the District's largest customer base:the SFR fee, increased by$4.00,from $331.00 to $335.00. This rate increase is necessary to finance the District's rash flow needs including $161.0 million in operating costs, $80.0 million in debt service costs and $175.0 million in capital improvement outlays in 2018-19. Capital Improvement costs are projected to total$2.7 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and maintain full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the District's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Financial Management Division,Orange County Sanitation District, 10844 Ellis Avenue, Fountain Valley, CA 92708-7018. 9 (THIS PAGE INTENTIONALLY LEFT BLANK) 10 ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS 11 ORANGE COUNTY SANITATION DISTRICT Statement of Net Position June 30,2018 2018 Current assets: Cash and cash equivalents $ 135,978,533 Investments 539,521,972 Accounts receivable,net of allowance for uncollectibles$455,979 13,202,940 Accrued interest receivable 2,851,382 Connection fees receivable 3,871,076 Property tax receivable 1,227,135 Inventories 7,243,823 Prepaid expenses 1,645,412 Total current assets 705,542,273 Noncurrent assets: Restricted: Cash and cash equivalents 4,953,800 Accrued interest receivable 6,855 Unrestricted: Non-depreciable capital assets 457,737,093 Depreciable capital assets,net of accumulated depreciation 2,168,277,734 Other noncurrent assets,net 10,344 Net pension asset-OCERS 39,571,100 Total noncurrent assets 2,670,556,926 Total assets 3,376,099,199 Deferred outflows of resources: Deferred losses on defeasances 32,880,203 Deferred outlowa related to pensions 51,059,589 Total deferred outflows of resources 83,939,792 Total assets and deferred outlowa of resources 3,460,038,991 Current liabilities: Accounts payable 13,365,974 Accrued expenses 15,404,746 Retentions payable 2,147,719 Interest payable 17,113,450 Due to other governmental agency 18,888,270 Current portion of long-term obligations 50,744,930 Total current liabilities 117,665,089 Noncurrent liabilities: Noncurrent portion of long-term obligations 1,057,454,621 Total OPEB liability 5,025,395 Total pension liability-ARBA 20,831,172 Total noncurrent liabilities 1,083,311,188 Total liabilities 1,200,976,277 Deferred inflows of resources: Deferred inflows related to pensions 64,273,306 Total liabilities and deferred inflows of resources 1,265,249,583 Net position: Net investment in capital assets 1,568,118,074 Unrestricted 626,671,334 Total net position $ 2,194,789,408 See Accompanying Notes to Basic Financial Statements. 12 ORANGE COUNTY SANITATION DISTRICT Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, 2018 2018 Operating revenues: Service charges $ 316,328,764 Permit and inspection fees 1,170,329 Total operating revenues 317,499,093 Operating expenses other than depreciation and amortization: Salaries and benefits 67,418,039 Utilities 7,298,104 Supplies, repairs and maintenance 28,237,502 Contractual services 29,520,286 Feasibility studies 6,094,056 Other 6,988,024 Total operating expenses other than depreciation and amortization 145,556,011 Operating income before depreciation and amortization 171,943,082 Depreciation and amortization 97,399,234 Operating income 74,543,848 Non-operating revenues: Property taxes 94,188,353 Investment and interest income 3,229,756 Contributions from other government 6,802,282 Other 809,076 Total non-operating revenues 105,029,467 Non-operating expenses: Interest 35,011,026 Other 1,287,728 Loss on disposal of assets 195,780 Total non-operating expenses 36,494,534 Income before capital contributions 143,078,781 Capital contributions: Capital facilities capacity charges 18,077,353 Change in net position 161,156,134 Total net position -beginning, as restated 2,033,633,274 Total net position -ending $ 2,194,789,408 See Accompanying Notes to Basic Financial Statements. 13 ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows For the Year Ended June 30, 2018 2018 Cash flows from operating activities: Receipts from customers and users $ 374,435,755 Payments to employees (73,967,137) Payments to suppliers (79,896,248) Net cash provided by operating activities 220,572,370 Cash flows from noncapital financing activities: Proceeds from property taxes 94,280,270 Payments for other obligations (478,516) Net cash provided by noncapital financing activities 93,801,754 Cash flows from capital and related financing activities: Capital facilities capacity charges 17,918,938 Additions to capital assets (112,829,813) Interest paid (44,240,870) Principal payments on debt obligation (32,141,018) Contribution from other government 3,538,879 Net cash used in capital and related financing activities (167,753,884) Cash flows from investing activities: Proceeds from the sale of investments 181,547,334 Purchases of investments (309,468,552) SARI project payments 20,472,023 Interest received 7,393,886 Net cash used in investing activities (100,055,309) Net increase in cash and cash equivalents 46,564,931 Cash and cash equivalents, beginning of year 94,367,402 Cash and cash equivalents,end of year $ 140,932,333 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 74,543,848 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 97,399,234 Bad debt expense(net recoveries) 219,792 (Increase)/decrease in operating assets: Accounts receivable 32,257,047 Inventories (75,275) Prepaid and other assets 87,640 Increase/(decrease)in operating liabilities: Accounts payable (2,012,182) Accrued expenses 150,961 Due to other governmental agency 24,679,615 Net pension/OPEB liability (8,463,282) Pension/OPEB/accrued leave payable 1,192,318 Compensated absences 209,235 Claims and judgments 383,419 Net cash provided by operating activities $ 220,572,370 Noncash activities: Unrealized (loss)on the fair value of investments $ (5,074,806) Receivable from non-operating activities 4,085,372 Capital assets acquired through accounts payable 5,377,210 Capital facilities capacity charges acquired 158,415 See Accompanying Notes to Basic Financial Statements. 14 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 (11 Summary of Significant Accountina Policies Reoortino Entity The Orange County Sanitation District(OCSD)is a public agency which owns and operates certain wastewater facilities in order to provide regional wastewater collection, treatment, and disposal services to approximately 2.6 million people in the northern and central portion of the County of Orange, California. OCSD is managed by an administrative organization comprised of directors appointed by the agencies and cities which are serviced by OCSD. OCSD's service area was originally formed in 1954 pursuant to the County Sanitation District Act and consisted of seven independent special districts. Two additional districts were formed and additional service areas were added in 1985 and 1986. These special districts were jointly responsible for the treatment and disposal facilities which they each used. In April of 1998, the Board of Supervisors of Orange County passed Resolution 98-140 approving the consolidation of the existing nine special districts into a new, single sanitation district. This action was taken in order to simplify the governance structures, reduce the size of OCSD's Board of Directors, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. Pursuant to the Resolution and Government Code Section 57500, the predecessor special districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to OCSD, including all assets, liabilities,and equity. Effective July 1, 1998, the organization became known as the Orange County Sanitation District. The boundaries of one of the previous districts, now known as Revenue Area No. 14, have been maintained separately because their use of OCSD's collection, treatment, and disposal system is funded by the Irvine Ranch Water District (IRWD). The boundaries of the other eight districts have been consolidated and are collectively referred to as the Consolidated Revenue Area. OCSD utilizes joint operating and capital outlay accounts to pay joint treatment, disposal, and construction costs. These joint costs are allocated to each revenue area based on gallons of sewage Flow. The supplemental schedules and statements show internal segregations and are not intended to represent separate funds for presentation as major or non-major funds in the basic financial statements. The accompanying financial statements present OCSD and its blended component unit, the Orange County Sanitation District Financing Corporation (Corporation). The Corporation is a legally separate entity although in substance it is considered to be part of OCSD's operations. OCSD is considered to be financially accountable for the Corporation which is governed by a board comprised entirely of OCSD's board members. There is no requirement for separate financial statements of the Corporation; consequently, separate financial statements for the Corporation are not prepared. The Corporation had no financial activity during the fiscal year ended June 30, 2018, other than principal and interest payments on outstanding certificates of participation/revenue obligations and notes (see Note 4). OCSD is independent of and overlaps other formal political jurisdictions. There are many governmental entities, including the County of Orange, that operate within OCSD's jurisdiction; however, financial information for these entities is not included in the accompanying financial statements in accordance with the Governmental Accounting Standards Board (GASS) Codification of Governmental Accounting and Financial Reporting Standards. 15 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Measurement Focus and Basis of Accounting OCSD operates as an enterprise activity. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the Board of Directors is that the costs (expenses, including depreciation and amortization)of providing services to the general public on a continuing basis be financed or recovered primarily through user charges. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of related cash flows. The accounting policies of OCSD conform to accounting principles generally accepted in the United States of America (GAAP) as applicable to governments. The GASB is the accepted standard-setting body for establishing governmental accounting and financial reporting principles in the United States. Operating Plans Each year, OCSD staff prepares an annual operating plan which is adopted by the Board of Directors. The annual operating plan is used to serve as a basis for monitoring financial progress, estimating the levy and collection of taxes, and determining future service charge rates. During the year, these plans may be amended as circumstances or levels of operation dictate. Cash and Cash Equivalents Investments with original maturities of three months or less when purchased and money market mutual funds and external investment pools that can be withdrawn on demand are considered to be cash equivalents. Investments Except for certain investments in monies held by fiscal agents as disclosed in Note 2, section"Fair Value of Investments", all other investments are stated at fair value (the price that would be received to sell an asset in an orderly transaction between market participants acting in their economic best interest at the measurement dale). Changes in fair value that occur during the fiscal year are reported as part of investment and interest income. Investment and interest income includes interest earnings and realized and unrealized gains or losses in fair value. Investment and interest income are recorded as revenues and receivables when declared and realized gains or losses are recorded when the investment is sold. Accounts Receivable Accounts receivable is reported net of the allowance for uncollectible receivables. Uncollectible receivables were $455,979 at June 30, 2018. Unbilled sewer services through June 30, 2018 are recorded as revenue and receivables. Management determines the allowance for uncollectible receivables by evaluating individual accounts receivable at least one year past due and considering a customer's financial condition, credit history and current economic conditions. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received. 16 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Inventories Inventories, which are held for consumption and not resale, are stated at cost on a weighted- average basis, and then is expensed when used. Capital Assets Outlays for property, plant, equipment, and construction in progress are recorded in the revenue area which will use the asset. Such outlays may be for individual revenue area assets or for a revenue area's share of joint assets. Capital assets of properly, plant, and equipment are defined as assets with an initial, individual cost of more than $5,000 and an estimated useful life of at least three years. Such assets are recorded at cost, except for donated capital assets, donated works of art and similar items, and capital assets received in a service concession arrangement, which are recorded at acquisition value at the time received. Cost includes labor; materials; outside services; vehicle and equipment usage; other ancillary costs consisting of direct charges such as engineering, purchasing, supervision, or fringe benefits. Interest costs, net of interest earnings, have been capitalized on projects prior to fiscal year 2017-2018. Commencing with fiscal year 2017-2018, OCSD early implemented GASS Statement No. 89, where interest costs incurred before the end of the construction period are no longer capitalized. Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method in accordance with generally accepted accounting principles. OCSD also considers the guidelines of estimated useful lives as recommended in the State of California Controller's Uniform System of Accounts for Waste Disposal Districts, which range from 3 to 75 years. The following are estimated useful lives for major classes of depreciable assets: Sewage collection facilities—50 years, Sewage treatment facilities—40 years, Sewage disposal facilities— 40 years, General plant and administrative structures — 40 years, and other General plant and administrative facilities and equipment—4 to 25 years. Amortization Amortization of the excess purchase price over the book value of assets acquired is provided using the straight-line method over an estimated useful life of 30 years. Premiums and discounts on certificate anticipation notes and wastewater refunding revenue obligations are amortized to interest expense over the respective terms of the installment obligations based on the effective interest method (Note 4). Restricted Assets Certain assets are classified as restricted because their use is limited by applicable debt covenants. Specifically, the assets are restricted for installment payments due on certificates of participation and revenue obligations or are maintained by a trustee as a reserve requirement for the certificates of participation and revenue obligations. When both restricted and unrestricted resources are available for use, it is OCSD's policy to use restricted resources first, then unrestricted resources as they are needed. 17 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Deferred Charges on Defeasances For advance refundings resulting in defeasance of debt, the difference between the reacquisition price and the net carrying amount of the old debt(i.e. deferred charges) is reported as a defamed outflow of resources and amortized to interest expense based on the effective interest method over the remaining life of the old debt or the life of the new debt, whichever is shorter. OCSD's deferred charges on the refunding debt at June 30, 2018 are$32,880,203. Net Position Net position represents the total of assets and deferred outflows of resources less liabilities and deferred inflows of resources, and is classified into two categories: Net Investment in Capital Assets — This amount consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets and excludes unspent debt proceeds. Deferred outflows of resources that are attributable to the acquisition, construction or improvement of those assets or related debt also are included in this component of net position. Unrestricted—This amount represents the residual of amounts not classified in the other category and represents the net equity available for OCSD. Compensated Absences OCSD's employees, other than operations and maintenance personnel, are granted vacation and sick leave in varying amounts with maximum accumulations of 200 hours and 560 hours for vacation and sick days earned but unused, respectively. Operations and maintenance personnel accrue between 80 and 250 personal leave hours per year depending on years of service. Personal leave can be accumulated up to a maximum of 440 hours. Vacation and sick leave benefits and personal days are recorded as an expense and liability when earned by eligible employees. The distribution between current and long-term portions of the liability is based on historical trends. Claims and Judgments OCSD records estimated losses when it is probable that a claim liability has been incurred and when the amount of the loss can be reasonably estimated. Claims payable includes an estimate for incurred but unreported claims. The distribution between current and long-term portions of the liability is based on historical trends. Pensions OCSD has two defined benefit pension plans for retirees: the plan maintained through and by the Orange County Employees' Retirement System (OCERS) and the Additional Retiree Benefit Account (AREA) administered directly by OCSD. For purposes of measuring the net pension asset, deferred outflows of resources related to pensions, deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of OCSD's cost sharing multiple-employer plan with the OCERS plan (Plan) and additions to/deductions from the Plan's fiduciary net position have been determined on the same basis as they are reported by OCERS. Benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. A deferred outflow of resources and deferred inflow of resources related to pensions result from changes in the components of the net pension liability and are applicable to a future reporting period (Note 5). 18 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Property Taxes The County is permitted by Slate law (Proposition 13) to levy taxes at one percent of full market value (at time of purchase) and can increase the assessed value no more than two percent per year. OCSD receives a share of this basic levy, proportionate to what was received in the 1976 to 1978 period. Property taxes are determined annually and attached as enforceable liens on real property as of January 1 and are payable in two installments which become delinquent after December 10 and April 10. The County bills and collects the property taxes and remits them to OCSD in installments during the year. Property tax revenues are recognized when levied. The Board of Directors has designated property tax revenue to be used for the annual debt service requirements prior to being used as funding for current operations. Capital Facilities Capacity Charges Capital facilities capacity charges represent fees imposed at the time a structure is newly connected to OCSD's system, directly or indirectly, or an existing structure or category of use is increased. This charge is to pay for District facilities in existence at the time the charge is imposed or to pay for new facilities to be constructed that are of benefit to the property being charged. Operating and Non-operating Revenues and Expenses Operating revenues and expenses result from collecting, treating, and disposing of wastewater and inspection and permitting services. OCSD's operating revenues consist of charges to customers for the services provided. Operating expenses include the cost of providing these services, administrative expenses, and depreciation and amortization expenses.All revenues and expenses not meeting these definitions and which are not capital in nature are reported as non-operating revenues and expenses. Construction Commitments OCSD has active construction projects to add additional capacity, improve treatment, or replace/ rehabilitate existing assets. At June 30, 2018, the outstanding commitments with contractors totaled $96,474,802. Self-Insurance Plans For the year ended June 30, 2018, OCSD was self-insured for portions of workers compensation, property damage, and general liability. The self-insurance portion of the workers' compensation exposure is the $1,000,000 deductible per occurrence under the outside excess insurance coverage to statutory levels. The self-insurance portion of the property damage exposure covering fire and other perils is the $500,000 per occurrence deductible (for most perils) under the outside excess property insurance coverage to $1 billion. The self-insurance portion of the property damage exposure covering flood is the $100,000 per occurrence deductible with outside excess property insurance coverage to $300 million. The self-insurance portion of the property damage exposure covering earthquake is the 5% per structure, minimum $5,000,000 deductible with outside excess insurance coverage to $25 million on covered structures. OCSD has insured a number of key structures against the peril of earthquake, all other structures are completely self- insured. The self-insurance portion of the boiler & machinery exposure is the deductible ranging from $25,000 to $350,000 under the outside excess boiler & machinery insurance coverage to $100 million per occurrence combined limit. The self-insurance portion of the general liability exposure is the $500,000 per occurrence deductible under the outside excess liability coverage to $40 million per occurrence and aggregate. The self-insurance portion of the pollution liability 19 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 exposure is the deductible ranging from$75,000 to$250,000 per loss deductible under the outside pollution liability insurance coverage to$10 million. There were no significant changes in insurance coverage during the fiscal year ended June 30, 2018. During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against OCSD are processed by General Counsel or an outside claim administrator. These claims are charged to claims expense based on estimated or known amounts which will ultimately be paid. Claims incurred but not yet reported have been considered in determining the accrual for loss contingencies. Workers' compensation reserves are actuarially determined and general liability estimated loss accruals are estimated using past experience adjusted for current trends and any other factors that would modify past experience. The estimate of the claims liability also includes any amounts for incremental and nonincremental claim adjustment expenses. OCSD management believes that there are no unrecorded claims as of June 30, 2018 that would materially affect the financial position of OCSD. Deferred Compensation Plan OCSD offers its employees a deferred compensation plan established in accordance with Internal Revenue Code Section 457. The plan permits all employees of OCSD to defer a portion of their salary until future years. The amount deferred is not available to employees until termination, retirement, death or for unforeseeable emergency. The assets of the plan are held in trust for the exclusive benefit of the participants and their beneficiaries. Since the plan assets are administered by an outside party and are not subject to the claims of OCSD's general creditors, in accordance with GASB Statement 32, the plan's assets and liabilities are not included within OCSD's financial statements. New GASS Pronouncements The accompanying financial statements reflect the implementation of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The purpose of this statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). This statement replaces the requirements of Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB. The retroactive effect of implementing this change in reporting other postemployment benefits resulted in a restatement of the beginning net position as described further in Note 9. The effect on the previously issued financial statement as of June 30, 2017 resulted in an adjustment to ending net position from $2,041,225,032 to $2,033,633,274. In addition, GASB Statement No. 85, Omnibus 2017 resulted in revisions to the presentation of payroll-related measures in certain OPEB schedules presented as required supplementary information. The requirements of these Statements that are applicable to OCSD are effective for reporting periods beginning after June 15, 2017 and have been implemented in fiscal year 2017-2018. The accompanying financial statements also reflect the implementation of GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period. This Statement requires that interest cost incurred before the end of a construction period be recognized as an expense in the period in which the cost is incurred for financial statements prepared using the economic resources measurement focus. As a result, interest costs incurred before the end of a construction period are no longer included in the historical cost of capital assets reported. The requirements of this Statement that are applicable to OCSD are effective for reporting periods beginning after December 15,2019 and has been early implemented in fiscal year 2017-2018. 20 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 (21 Cash and Investments Cash and investments as of June 30, 2018 are classified within the accompanying Statement of Net Position as follows: Statement of Net Position: Current, Unrestricted: Cash and cash equivalents $135,978,533 Investments 539,521,972 Subtotal-current, unrestricted 675,500,505 Restricted: Cash and cash equivalents 4,953,800 Total cash and cash equivalents and investments $680,454,305 Cash and investments consist of the following as of June 30, 2018: Cash on hand $ 3,000 Deposits with financial institutions 2,411,045 Managed portfolio-cash and investments 673,086,460 Subtotal -unrestricted cash and investments 675,500,505 Monies held by trustees: Cash and cash equivalents 4,953,800 Grand total cash and investments $680,454,305 21 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Investments Authorized by the California Government Code and OCSD's Investment Policy The following table identifies the investment types that are authorized by the California Government Code and OCSD's investment policy. This table and the subsequent tables identify certain provisions of either the California Government Code or OCSD's investment policy (whichever is more restrictive)that address interest rate risk, credit risk, and concentration of credit risk. Authorized Maximum by OCSD's Maximum Investment Investment Type-Authorized by Investment Maximum Percentage in a Single the California Government Code Policy? Maturity (1)(3) of Portfolio If) Issuer(1) Local Agency Bonds Yes 5 years 10% (2) 5% (2) U.S. Treasury Obligations Yes 5 years No limit No limit California State Treasury Obligations Yes 5 years No limit No limit U.S. Agency Securities Yes 5 years No limit 20% (2) Bankers Acceptances Yes 180 days 40% 5% (2) Commercial Paper Yes 270 days 25% 5% (2) Negotiable Certificates of Deposit Yes 5 years 30% 5% (2) Repurchase Agreements Yes 1 year 20% (2) 5% (2) Reverse Repurchase Agreements Yes 90 days (2) 5% (2) 5% (2) Corporate Medium-Tenn Notes Yes 5 years 30% 5% (2) Mutual Funds Yes NIA 20% 10% Money Market Mutual Funds Yes NIA 20% 20% Mortgage Pass-Through Securities/ CMO/Asset-Backed Securities Yes 5 years 20% 5% (2) County Investment Pools Yes N/A 15% (2) 15% (2) Local Agency Investment Fund (LAIF) Yes N/A 15% (2) 15% (2) Supmnational Obligations Yes 5 years 30% 30% Not.. (1) Restrictions are in accordance Wth the California Government Code unless indicated otheoeise. (2)The restdctlon Is In accordance With OCSD's Investment PoncyvAmh Is more restrictive than the Callfomla Government code. (3)As allowtl by California Government Code section 5301 the Board of Directors has adopted a policy of a maAmum maturgyof Syeare for Investments purchased by DG$Dk as ernal moneymanager for the long-ter,Investment no do III The duration of the long-term Investment pordollo can never exceed BO months. Investments purchased for the shod-term portfolio are subject to the matudtyrestdctions no tied In this table. 22 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Investments Authorized by Debt Agreements The investment of debt proceeds held by trustees is governed by provisions of the debt covenant agreements, rather than the general provisions of the California Government Code or OCSD's investment policy. The following table identifies the investment types that are authorized for investments held by OCSD's debt trustees. This table and the subsequent tables identity certain provisions of the debt covenant agreements that address interest rate risk, credit risk, and concentration of credit risk. Maximum Maximum Investment Type-Authorized by the Maximum Percentage Investment in a Debt Covenant Agreement Maturity of Portfolio Single Issuer Slate and Local Agency Bonds 5 years No limit No limit U.S. Treasury Obligations 5 years No limit No limit U.S. Agency Securities 5 years No limit No limit Bankers Acceptances 180 days 40% 30% Commercial Paper 270 days 40% 10% Negotiable Certificates of Deposit 5 years 30% 30% Repurchase Agreements 1 year No limit No limit Corporate Medium-Term Notes 5 years 30% 30% Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 20% Local Agency Investment Fund (LAIF) N/A No limit No limit Guaranteed Investment Contracts NIA No limit No limit Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment has before maturity, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that OCSD manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary to provide the cash flow and liquidity needed for operations. OCSD monitors the interest rate risk inherent in its managed portfolio by measuring the modified duration of its portfolio. The duration of monies held for shorter tens purposes is recommended by OCSD's Treasurer and is based on OCSD's cash flow requirements in meeting current operating and capital needs. The average duration of monies invested for shorter term purposes may never exceed 180 days. The duration of monies held for longer term purposes is recommended annually by OCSD's Treasurer and is based on OCSD's five-year cash flow forecast. The average duration may not exceed 120 percent nor be less than 80 percent of the recommended duration. The average duration of monies invested for longer term purposes may never exceed 60 months. There is no stated maximum maturity for the Money Market Mutual Funds. The money market mutual funds for Blackrock Institutional Fund and First American Government Obligations Fund are daily liquid funds available on demand. 23 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Following is a table which summarizes OCSD's managed portfolio investments by purpose with the modified duration as of June 30, 2018. Modified Modified Duration Duration Investment Type Fair Value (in years) (in months) Short-Term Portfolio: U.S. Treasury Bills $ 59,851,200 0.135 1.62 Local Agency Investment Fund 55,104,678 0.529 6.35 U.S. Treasury Notes 30,957,000 0.169 2.03 U.S. Agency Securities 24,218,123 0.082 0.99 Commercial Paper 10,058,827 0.183 2.19 Certificates of Deposit 9,939,086 0.368 4.42 Corporate Medium-Term Notes 8,014,233 0.224 2.69 Supmnationals 7,994,655 0.087 1.04 Money Market Mutual Funds 4,727,642 - - Short-term portfolio subtotal $210,865,444 0.249 2.99 Long-Term Portfolio: U.S. Treasury Notes $ 137,436,984 2.788 33.46 Corporate Medium-Term Notes 105,957,676 2.773 33.28 U.S. Agency Securities* 103,508,844 2.214 26.56 Asset Backed Secudtles/CMO* 34,763,432 0.965 11.57 Supmnationals 32,064,683 3.119 37.42 Commercial Paper 16,905,320 0.243 2.91 U.S. Treasury Inflation-Protected Securities (TIPS)** 10,665,636 6.000 72.00 Money Market Mutual Funds 10,528,215 - - Certificates of Deposit 5,821,913 0.110 1.32 Taxable Municipal Bonds 4,382,355 1.764 21.17 U.S. GoA. Backed Mortgage Pools (GNMA)* 185,958 4.273 51.28 Long-term portfolio subtotal $462,221,016 2.417 29.00 Total Portfolio $673,086,460 * Includes highly sensitive securities. **The investments duration in excess of five years was permitted by OCSD's Investment Policy atthe ame itwaspumhased 24 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 OCSD monitors the interest rate risk inherent in its other investments using specific identification of the investments. Following is a table of these investments all held by trustees, as of June 30, 2018. Fair Value Maturities Cash equivalents held by fiscal agents: Money Market Mutual Funds: First American Govemment Obligations Fund 4,953,382 20 days Blackrock Institutional Funds 418 39 days Total fair value of investments held by fiscal agents $ 4,953,800 Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations OCSD's investments (including investments held by trustees) include the following investments that are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above): • Mortgage-backed securities: These securities are subject to early payment in a period of declining interest rates. The resulting reduction in expected total cash flows affects the fair value of these securities, making them highly sensitive to change in interest rates. At fiscal year end, the fair value of investments in mortgage-backed securities totaled $3,763,829 including $2,294,752 of mortgage pass-through securities, $1,283,119 of U.S. agency securities, and $185,958 of U.S. government backed mortgage pools. Fair Value of Investments OCSD measures and records its investments using fair value measurement guidelines established by generally accepted accounting principles. These guidelines recognize a three-tiered fair value hierarchy,as follows: Level 1: Quoted prices for identical investments in active markets; Level 2: Observable inputs other than quoted market prices; and Level 3: Unobservable inputs. 25 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 At June 30, 2018, OCSD had the following fair value measurements for its managed investment portfolio: Quoted Prices in Actie Significant Other Markets for Observable Unobsernabl Identical Assets Inputs Inputs Imeslment Type Fair Value Level 1 Level 2 Level 3 Investments in Short-Term Portfolio: U.S.Treasury Bills $ 59,851,200 $ - $ 59,851,200 $ - U.S.Treasury Notes 30,957,000 30,957,000 - U.S.Agency Securities 24,218,123 - 24,218,123 - CDmmeroial Paper 10,058,827 - 10,05%a27 - Certificates of Deposits 9,939,1186 - 9,939,085 - Corporate Medium-term Notes 8,014,233 - 8,014.233 - Suprenationals 7,994,655 - 7,994,655 Investmentsin Long-Tern Portfolio: U.S.Treasury Notes 137,436,984 - 137,436,984 - Corporate Medium-term Notes 105,957.676 - 105,957,676 - U.S.Agency Securities 103,508,844 - 103,508,844 - Asset Backed Secunties/CMO 34,763,432 - 34,763,432 Supranationals 32,064,683 - 32,064,683 Commercial Paper 16,905,320 - 16,905.320 US Treasury Inflation Protected Securities(TIPS) 10,665,636 - 10,665,636 - Certificates of Deposits 5,821.913 - 5,821.913 - Taxable Municipal Bonds 4,382.355 - 4,382.355 - U.S. Government Backed Mortgage Pools 185,958 - 185,958 Fair Value Hlerarchy Totals $ - $ 602,725,925 $ - Imeslments Not Subject To Fair Value Hierarchy: Local Agency Investment Fund(LAIF)' 55,104,678 Money Market Mutual Funds' 4,727,642 Money Market Mutual Funds- 10,528,215 Total Portfolio $673,086,460 ' lamstedin Shod TomPordblio "Invested in Long-Term Portklio US Bank is the custodial bank for all of OCSD's investments shown above in the managed portfolio, except for LAIF. Investments classified as Level 2 are valued using US Bank's fair value hierarchy matrix based on the asset type classification. The fair value hierarchy level matrix is based on discussions with (1) pricing vendors, (2) broker/dealers, (3) investment managers, (4) industry groups, and (5)independent accounting firms. Monies held by trustees (fiscal agents) that are invested in money market mutual funds are reported at carrying cost. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The following table presents the minimum rating as required by the California Government Code, OCSD's investment policy, or debt agreements, and the actual rating as of year-end for each investment type. 26 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Investment Type and the Lowest Rating Reported at Year End Fair Value Investments with no legal minimum rating&no required disclosure: U.S.Treasury Obligations $238,910,820 U.S.Agency Securities-GNM4 185,958 Subtotal $239,096,778 Invesments with no legal minimum rating: U.S.Agency Securities(other than GNM4): Rating of AA-(Standard&Poor's) 94,520,544 Rating of P-1 (Moodys) 33,206,423 Municipal Bonds: Rating of Aal (Moodys) 1,436,512 Rating ofAa3(Moodys) 2,945,843 Cerfificates of Deposits; Rating ofX1 (Standard and Poor's) 8,765,689 Rating of P-1 (Moodys) 5,997,200 Not rated 998,110 Local Agency lnvestinenl Fund(LAIF): Not rated 55,104,678 Subtotal 202,974,999 Investments with a legal minimum rating(or its equivalent)of A Corporate Medium-Tema Notes: Rating of Aal (Moodys) 3.930.440 Rating of AA+(Standard and Poor's) 2.944.800 Rating of AA+(Fitch) 2.919,881 Rating of Aa2(Moodys) 3.908.867 Rating of AA-(Standard&Poor's) 2,441,500 Rating of At (Moodys) 13,297,646 Rating of A+(Fitch) 6,444,285 Rating ofA2(MDodys) 39,846,414 Rating ofA(Standard&Poor's) 10,949,431 Rating ofA3(MDodys)' 16,481,401 Rating of A-(Standard&Poor's)' 7,826,040 Rating of BBB+(Standard&Poor's)' 2,962,904 Not rated 18,300 Money Market Mutual Funds: Rating of P-1 (Moodys) 15,255,857 Invested with fiscal agents: Rating of Aaa-mf(Moodys) 4,953,800 Subtotal 134,181,566 Imestinents with a legal minim um rating(or its equivalent)of AA Asset Backed Securities/CN70: Rating of Aaa(Moodys) 24,098,386 Rating of AAA(Standard&Poor's) 8,341,682 Rating of AA-(Standard and Poore) 2,167,755 Rating of BBB(Fitch)* 126,997 Rating of B(Fitch)" 28,612 Supranabonal Obligations: Rating ofAaa(Moodys) 28,837,318 Rating of AAA(Fitch) 6,224,920 Rating of P-1 (Moodys) 4,997,100 Subtotal 74,822,770 Invesaoents with a legal minimum rating(or its equivalent)of"Prime": Commercial Paper: Rating of P-1 (Moodys)' 10,458,370 Rating ofA-1 (Standard&Poor's)* 16,505,777 Subtotal 26,964,147 Total $678,040.260 Imestinent was in compliance with legal requirements atthe time it was purchased. 27 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Concentration of Credit Risk Limitations on the amount that OCSD is allowed to invest in any one issuer have been identified previously in the section "Investments Authorized by the California Government Code and OCSD's Investment Policy" and in the section "Investments Authorized by Debt Agreements." OCSD follows whichever guideline is the most restrictive. As of June 30, 2018, OCSD had the following investments representing five percent or more of total investments: Name of Issuer Fair Value % of Total Federal Home Loan Bank System (FHLB) $ 54,686,653 8.12% Federal National Mortgage Association (FNMA) $ 48,561,145 7.21% Custodial Credit Risk Custodial credit risk for deposits is the risk that in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The California Government Code and OCSD's investment policy contain legal requirements that limit the exposure to custodial credit risk for deposits as follows: a financial institution must secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. Custodial credit risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and OCSD's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments. As of June 30, 2018, in accordance with OCSD's investment policy, none of OCSD's investments were held with a counterparty. All of OCSD's investments were held with an independent third party custodian bank registered in the name of OCSD. OCSD uses US Bank as a third party custody and safekeeping service for its investment securities. Investment in State Investment Pool OCSD is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of OCSD's investment in this pool is reported in the accompanying financial statements at amounts based upon OCSD's pro-rats share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are mortgage-backed securities, other asset-backed securities, loans to certain state funds, securities with interest rates that vary according to changes in rates greater than a one-for-one basis, and structured notes. The amounts invested in LAIF are recorded as cash and cash equivalents at June 30, 2018. 28 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 (31 Capital Assets Capital asset activity for the year ended June 30, 2018 is as follows: Beginning Ending Balance at Additions/ Deletions j Balance at July 1,2017 Transfers Transfers June 30,2018 Capital assets not depreciated: Cost: Land $ 25,247,046 $ 4,494,197 $ - $ 29,741,243 Construction in progress 461,833,450 112,729,390 (146,566,990) 427,995,850 Total nondepreciable assets 487,080,496 117,223,587 (146,566,990) 457,737,093 Depreciable capital assets: Cost: Sewage collection facilities 830,551,347 30,159,021 - 860,710,368 Sewage treatment facilities 2,366,129,584 111,241,674 (13,749) 2,477,357,509 Effluent disposal facilities 97,014,820 - - 97,014,820 Solids disposal facilities 3,463,236 - - 3,463,236 General and administrative facilities 246,051,157 7,899,118 (820,503) 253,129,772 Excess purchase price over book value on acquired assets 19,979,000 19,979,000 Subtotal 3,563,189,144 149,299,813 (834,252) 3,711,654,705 Accumulated depreciation: Sewage collection facilities (347,993,364) (18,546,029) - (366,539,393) Sewage treatment facilities (850,160,711) (69,737,183) 13,749 (919,884,145) Effluent disposal facilities (62,379,493) (1,457,559) - (63,837,052) Solids disposal facilities (3,165,971) (9,719) - (3,175,690) General and administrative facilities (163,132,772) (7,648,744) 819,825 (169,961,691) Excess purchase price over book value on acquired assets (19,979,000) (19,979,000) Subtotal (1,446,811,311) (97,399,234) 833,574 (1,543,376,971) Net depreciable assets 2,116,377,833 51,900,579 (678) 2,168,277,734 Net capital assets $ 2,603,458,329 $ 169,124,166 $ (146,567,668) $ 2.626,014,827 For the fiscal year ended June 30,2018,capital asset additions ot$149.3 million in depreciable capital assets are$2.7 million more then the $146.6 million transferred imm Contraction in Progress due to capital equipment purchases of$3.0 million,partially offset by$0.3 million of priorcapifelpmject expenses that were written off as expense. 29 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 (4) Long-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30,2018: Beginning ending DuewiBiin Long-term Balance,July 1 Additions Deletions Balance,June 30 one year amount Con uensated absences $ 7,8P,373 $ 7,252,711 $ (7,044,230) $ 8,025,854 $ 7,334,828 $ 691,026 Claim and judgments 4,052,668 941,417 (557,998) 4,436,087 732,040 3,704.047 Certificates of participation, revenue obligations &notes 1,044,250,000 - (32,140,000) 1,012,110,000 31,655,000 980,455,000 Unamonized premium 96,429,773 - (12,802,163) 83,627,610 11,023,062 72,604,548 Totals $1,152,549.8W $ 6,194.128 $ (52,544,391) $ 1.108,199,551 S50744,930 S1,057.454,521 Compensated Absences OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at June 30, 2018 is$8,025,854 with an estimated $7,334,828 to be paid or used within the next fiscal year. Claims and Judgments Payable OCSD is self-insured in a number of areas as described in Note 1. The following is a summary of the change in claims and judgments payable for the years ended June 30, 2018 and 2017: 2017-18 2016-17 Claims and judgments payable at July 1 $4,052,668 $4,571,057 Claims incurred during the fiscal year 941,417 497,501 Payments on claims during the fiscal year (557,998) (1,015,890) Claims and judgments payable at June 30 4,436,087 4,052,668 Less: current portion (732,040) (752,880) Total long-term claims and judgments payable $3,704,047 $3,299,788 30 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Certificates of Participation/Revenue Oblioations and Notes OCSD issues certificates of participation, revenue obligations and notes in order to finance construction of the treatment facilities. Each issuance represents a direct and proportionate interest in the semi-annual interest payments. Installment payments for the issues are payable from any source of lawfully available funds of OCSD. Certificates of participation, revenue obligations, and notes at June 30, 2018 are summarized as follows: Amount 2009A certificates of participation $ 4,690,000 2010A wastewater revenue obligations 80,000,000 2010C wastewater revenue obligations 157,000,000 2011A wastewater refunding revenue obligations 75,370,000 2012A wastewater refunding revenue obligations 100,645,000 2012B wastewater refunding revenue obligations 66,395,000 2014A wastewater refunding revenue obligations 78,375,000 2015A wastewater refunding revenue obligations 127,510,000 2016A wastewater refunding revenue obligations 145,880,000 2016B revenue refunding certificate anticipation notes 109,875,000 2017A wastewater refunding revenue obligations 66,370,000 Total certificates of participation, revenue obligations, and notes $1,012,110,000 Outstanding Certificates of Participation/Revenue Obligations and Notes All of the outstanding debt of OCSD is senior lien debt with rate covenants that require a minimum coverage ratio of 1.25. The minimum coverage ratio is the ratio of net annual revenues available for debt service requirements to total annual debt service requirements. As of June 30, 2018, the coverage ratio for senior lien debt was 3.66. May 2009 Certificates of Participation. Series 2009A On May 7, 2009, OCSD completed the sale of $200,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the certificates is fixed and will range from 3.00 percent to 5.00 percent. Annual principal payments are due on February 1, beginning February 1, 2010 through February 1, 2019. On March 30, 2016, $162,780,000 of the outstanding principal balance of the 2009 Series A certificates was advance-refunded with the proceeds of the March 30, 2016 wastewater refunding revenue obligations Series 2016A (see below) in a transaction accounted for as an in-substance defeasance. These funds are held in an escrow account that is not reflected on OCSD's financial statements because it has been legally defeased. At June 30, 2018, this $162,780,000 represents the amount still outstanding on bonds considered defeased. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2018 reserve of $4,952,817 is held by US Bank,the trustee, and meets the reserve requirement. 31 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 May 2010 Wastewater Revenue Obligations, Series 2010A On May 18, 2010, OCSD completed the sale of $80,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and will range from 5.56 percent to 5.58 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. The expected net interest rate on the obligations is fixed and will range from 3.614 percent to 3.627 percent. Annual principal payments are due on February 1, beginning February 1, 2034 through February 1, 2040. The trust agreement for the revenue obligations does not require the establishment of a reserve. December 2010 Wastewater Revenue Obligations, Series 2010C On December 8, 2010, OCSD completed the sale of $157,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and will range from 6.35 percent to 6.40 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. The expected net interest rate on the obligations is fixed and will range from 4.1275 percent to 4.16 percent. Annual principal payments are due on February 1, beginning February 1, 2031 through February 1, 2044. The trust agreement for the revenue obligations does not require the establishment of a reserve. October 2011 Wastewater Refunding Revenue Obligations, Series 2011A On October 3, 2011. OCSD completed the sale of $147,595,000 of wastewater refunding revenue obligations. The obligations were issued to refund $89,800,000 of the outstanding principal balance of 2000 Series A and B refunding certificates of participation, and $83,320,000 of the outstanding principal balance of 2003 certificates of participation. The staled interest rate on the obligations is fixed and will range from 3 percent to 5 percent. Annual principal payments are due on August 1 and February 1, beginning August 1, 2012 through February 1,2026. The trust agreement for the revenue obligations does not require the establishment of a reserve. March 2012 Wastewater Refunding Revenue Obligations, Series 2012A On March 22, 2012, OCSD completed the sale of $100,645,000 of wastewater refunding revenue obligations. The obligations were issued to refund the $108,180,000 outstanding principal balance of the 2003 certificates of participation. The stated interest rate on the obligations is fixed and will range from 3 percent to 4 percent. Annual principal payments are due on February 1, beginning February 1, 2031 through February 1, 2033. The trust agreement for the revenue obligations does not require the establishment of a reserve. 32 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 August 2012 Wastewater Refundina Revenue Obligations, Series 2012E On August 16, 2012, OCSD completed the sale of $66,395,000 of wastewater refunding revenue obligations. The obligations were issued to refund the remaining $91,900,000 outstanding principal balance of the Series 2000A and 2000B refunding certificates of participation. The stated interest rate on the obligations is fixed and will range from 3 to 5 percent. Annual principal payments are due on February 1, beginning February 1, 2019 through February 1, 2026. The trust agreement for the revenue obligations does not require the establishment of a reserve. August 2014 Wastewater Refundina Revenue Obligations, Series 2014A On August 7, 2014, OCSD completed the sale of $85,090,000 of wastewater refunding revenue obligations. The obligations were issued to partially refund an amount of$93,930,000 of the outstanding principal balance of 2007 Series B certificates of participation. The stated interest rate on the obligations is fixed at 5 percent. Annual principal payments are due on February 1, beginning February 1, 2018 through February 1, 2027. The trust agreement for the revenue obligations does not require the establishment of a reserve. February 2015 Wastewater Refunding Revenue Obligations, Series 2015A On February 12, 2015, OCSD completed the sale of $127,510,000 of wastewater refunding revenue obligations. The obligations were issued to partially refund an amount of $152,990,000 of the outstanding principal balance of 2007 Series B certificates of participation. The stated interest rate on the obligations is fixed at 5 percent. Annual principal payments are due on February 1, beginning February 1, 2028 through February 1,2037. The trust agreement for the revenue obligations does not require the establishment of a reserve. March 2016 Wastewater Refundina Revenue Obligations, Series 2016A On March 30, 2016, OCSD completed the sale of $145,880,000 of wastewater refunding revenue obligations. The obligations were issued to partially refund an amount of $162,780,000 of the outstanding principal balance of 2009 Series A certificates of participation. The stated interest rate on the obligations is fixed and will range from 4 to 5 percent. Annual principal payments are due on February 1, beginning February 1, 2020 through February 1, 2039. The trust agreement for the revenue obligations does not require the establishment of a reserve. November 2016 Revenue Refunding Certificate Anticipation Notes,Series 2016B On November 1, 2016, OCSD completed the sale of $109,875,000 of revenue refunding certificate anticipation notes. The notes were issued to fully refund the $120,850,000 outstanding principal balance of the 2014 Series B revenue refunding certificate anticipation notes. The interest rate on the notes is fixed at 2 percent. The notes will mature on December 15, 2018. OCSD expects the principal and interest on the notes to be paid from proceeds of the sale, prior to the maturity date, of a future series of certificates of participation, notes or other obligations. OCSD has a non-cancellable agreement with its lender to refinance the notes with future obligations that will not be expired until August 2021. 33 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 The trust agreement for the certificates does not require the establishment of a reserve. February 2017 Wastewater Refundina Revenue Obligations, Series 2017A On February 1, 2017, OCSD completed the sale of $66,370,000 of wastewater refunding revenue obligations. The obligations were issued to refund $91,620,000 of the outstanding principal balance of 2007 Series A certificates of participation. The stated interest rate on the obligations is fixed at 5 percent. Annual principal payments are due on February 1, beginning February 1, 2021 through February 1,2030. The trust agreement for the revenue obligations does not require the establishment of a reserve. Annual Amortization Reouirements The annual requirements to amortize all debt related to certificates of participation, revenue obligations, and anticipation notes as of June 30, 2018, including the Revenue Refunding Certificate Anticipation Notes, Series 2016E that currently matures in December 2018, are as follows: Year Ending June 30, Principal Estimated Interest Total 2019 $ 31,655,000 $ 41,616,369 $ 73,271,369 2020 32,730,000 38,934,869 71,664,869 2021 140,305,000 37,298,369 177,603,369 2022 28,405,000 35,776,869 64,181,869 2023 29,805,000 34,371,619 64,176,619 2024-2028 167,225,000 150,221,096 317,446,096 2029-2033 252,370,000 105,320,725 357,690,725 2034-2038 225,075,000 49,285,704 274,360,704 2039-2043 102,060,000 10,467,303 112,527,303 2044-2048 2,480,000 103,168 2,583,168 Total $1,012,110,000 $ 503,396,091 $ 1,515,506,091 34 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 (51 Pension Benefits OCSD has two defined benefit pension plans for retirees: the plan maintained through and by the Orange County Employees' Retirement System (OCERS) and the Additional Retiree Benefit Account(ARBA)administered directly by OCSD. A summary of pension amounts for OCSD's plans at June 30,2018 is presented below: OCERS ARBA Total Net pension asset-OCERS $ 39,571,100 $ - $ 39,571,100 Deferred outflows - pensions 48,595,341 2,464,248 51,059,589 Total pension liability-ARBA - 20,831,172 20,831,172 Deferred inflows -pensions 64,273,306 - 64,273,306 Pension expenses 2,785,617 1,612,274 4,397,891 A. Orange County Employees' Retirement System (OCERS) Plan Description: All qualified permanent and probationary employees are eligible to participate in OCSD's Employee Pension Plan (Plan), which is a cost-sharing multiple employer defined benefit pension plan administered by the Orange County Employees Retirement System (OCERS). OCERS was established in 1945 under the provisions of the County Employees Retirement Law of 1937 (CERL). The Plan operates under the provisions of the CERL, the California Public Employees' Pension Reform Act of 2013 (PEPRA), and the regulations, procedures and policies adopted by OCERS' Board of Retirement. The Plan's authority to establish and amend the benefit terms are set by the CERL and PEPRA and may be amended by the California stale legislature. The Plan is a tax qualified plan under Section 401(a)of the Internal Revenue Code Benefits Provided: OCERS provides service retirement, disability, death and survivor benefits to plan members who may be public employees or beneficiaries. The CERL and PEPRA establish benefit terms. Benefits are based on years of credited service equal to one year of full time employment. Members of plans B, G and H with ten years of service credit are entitled to receive a retirement allowance beginning at age 50; members of plan U with 5 years of service are eligible to receive a retirement allowance at age 52. Members attaining age 70 are eligible to retire regardless of credited service. 35 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Benefits are determined by plan formula, age, years of service and final average salary (FAS) as follows: Plan G Plan H Plan B Plan U After 9121/79 Prof/Sup:After 10/1110 Hire Dale Prior to 9/21/79 Prof/Sup` Before 10/1/10 OCEA:After 8/1111 On or after 1/1/2013 OCEA': Before 811/11 501:After 7/1/11 5W Before All Before 1/1/2013 Final Average Highest 12 months Highest 36 months Highest 36 months Highest 36 months Compensation(FAS) Normal Retirement Age Age 55 Age 55 Age 57.5 Age 67 SeNce Requirement Age 70, any years Age 70,any years Age 70, any years Age 70, any years Eligibility Age 50, 10 years Age 50, 10 years Age 50, 10 years Age 52,5 years Benefit percent per 2.5%per year of FAS 2.5%per year of 1.667% per year of 2.5% per year of year of service for for every year of FAS for every year of FAS for every year of FAS for every year normal retirement age service credit service credit service credit of seri coach Benefit Adjustments Reduced before age Reduced before age Reduced before age Reduced before age 55 55 57.5 67 Public Employees Internal Revenue Code Internal Revenue Code Internal Revenue Code Pension Reform Act FAS Limitation Section 401(a)(17) Section 401 but 7) Section 401(a)(17) (PEPRAg 120%of Social Security wage base per year 'Profli Professional and Supemsor employee groups,bargaining unit SPL9G. OCEA Administrative,Clerical,Engineering,and Technical Sermces employee groups,bargaining unitOCEA '501:Operations and Maintenance employee groups,bargaining unit International Union of Operating Engineers Local 501. A cost of living adjustment is provided to benefit recipients based on changes in the Consumer Price Index (CPI) up to a maximum of 3% per year. Any increase greater than 3% is banked and may be used in years when the CPI is less than 3%. The increase is established and approved annually by the Board of Retirement. The Plan also provides disability and death benefits to eligible members and their beneficiaries, respectively. For retirees the death benefit is determined by the retirement benefit option chosen. For all other members the beneficiary is entitled to benefits based on the member's years of service and whether or not the cause of death is service related. At the December 31, 2017 measurement date, the following employees were covered by the benefit terms: Inactive employees or beneficiaries currently receiving benefits 474 Inactive employees entitled to but not yet receiving benefits 113 Active employees 592 Total 1,179 36 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Contributions: Participating employers and active members are required by statute to contribute a percentage of covered salary to the Plan. CERL requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and be effective on the July 1 following notice of a change in rate. Funding contributions are determined annually on an actuarial basis as of December 31 by OCERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Contributions to the Plan from OCSD were$7,525,655 for the year ended June 30, 2018. Contribution rates in effect for the fiscal year ended June 30, 2018 are as follows: Plan G Plan H Plan B Plan U Employer Contribution Rate, 7/1117-6'30/18 12.33% 12.33% 10.30% 9.25% Employee Contribution Rate, 711117-6130118(2) 6.3512.22%(1) 5.88-12.22% (1) 6.78-12.39% 6.44-13.68% Paid by Employer for Employee 3.50% 3.50% 0.00% 0.00% (1)Net of em ployer paid ponion of 3.5%. (2)Employee rates are determined bythe age of entry into the retirement system. For the year ended June 30, 2018, the contributions and average employer's contribution rate as a percentage of covered payroll were as follows: Average Employee (Paid Employer Employer by Employer) Contribution Plans Contributions Contributions Rate(%) Plan $ 16,815 $ 4,773 0.03% Plan H 5,534,624 1,556,280 10.84% Plan B 644,683 - 0.99% Plan U 1,329,533 - 2.03% Total $ 7,525,655 $ 1,561,053 Pension Assets / Liabilities: As of June 30, 2018, OCSD reported a net pension asset of $39,571,100 for its proportionate share of OCERS' net pension asset. The net pension asset was measured as of December 31, 2017 and the total pension asset used to calculate the net pension asset was determined by an actuarial valuation as of that date. OCSD's proportion of the net pension asset was based on a projection of OCSD's long-term share of contributions to the pension plan relative to the projected contribution of all participating employers, actuarially determined. At December 31, 2017, OCSD's proportion of the net pension liability was (0.799%), which was a decrease of 0.599% from its proportion measured as of December 31, 2016. The change in OCSD's proportion of the net pension liability during the fiscal year ended June 30, 2018 was caused by an additional contribution made in November 2016 and projections noted above. 37 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Pension Expense and Deferred Outflows/Inflows of Resources Related to Pensions: For the year ended June 30, 2018, OCSD recognized pension expense of $2,785,617 for its proportionate share of the pension expense. At June 30, 2018 OCSD reported its share of deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows Deferred Inflows of of Resources Resources Difference between expected and actual experience $ - $ 15,393,406 Net difference between projected and actual imestment earnings on pension plan inwstments 16,000,909 44,251,106 Changes of assumptions (1) 20,491,177 4,517,168 Changes in proportion and differences between employer contributions and proportionate share of contributions 1,296,565 111,626 Employer contributions paid to OCERS subsequent to the measurement dale 10,806,690 Total $ 48,595,341 $ 64,273,306 (1) The monetary effects of changes in actuarial assumptions and method totals$20,491,177 for deferred outflow and$4,517,168 for deferred inflows of resources. These changes include: • adjustirents to the rmrtality tables, • retierrent assumptions for deferred vested members(age at retirement 59,increase of 4.25%in reciprocity, and an increase in compensation increases), in the rate of marriage for male and female members at retirement or pre-retirement death, • an increase in the Consumer Rice Index of 2.75%per year,maximum increase is 3 b, • and a slight increase of.50%in salaries per year. Detail for these changes is available in the Segal Actuarial Valuation for December 31,2017,Section 3.This report m available on the DC9i8 w ebsite at w ww.ocers.org. The $10,806,690 reported as deferred outflows of resources related to pensions resulting from OCSD's contributions to OCERS subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 2019. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OCERS pensions will be recognized in pension expense as follows: Year ended June 30 Amount 2019 $ (5,465,917) 2020 (6,857,020) 2021 (10,219,274) 2022 (7,151,750) 2023 3,177,532 2024 31,774 Total $ (26,484,655) 38 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Actuarial Assumptions and Methods: The total pension liability in the December 31, 2017 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 7.00% of net pension plan investment expenses, including inflation Discount rate 7.00% Inflation rate 2.75% Projected salary increases 4.25% to 12.25% Cost of living adjustment 2.75% of retirement income OCERS Economic and Demographic Assumptions: On October 16, 2017, the OCERS Board adopted the following significant changes to the economic and demographic actuarial assumptions, which will be used to establish retirement contribution rates effective July 1,2019: • Reduced the assumed investment rate of return from 7.25%to 7% • Reduced the assumed rate of price inflation from 3.00%to 2.75% • Adopted the use of generational tables, which have identified reduced rates of mortality for members Additionally, the OCERS Board adopted a three-year phase-in of the impact to the contribution rates associated with the Unfunded Actuarially Accrued Liability. The cumulative effect of these changes will have the impact of increasing contribution rates for members and plan sponsors. The mortality assumptions used in the total pension liability at December 31, 2017 were based on the Headcount-Weighted RP-2014 Healthy Annuitant Mortality Table as a starting point, projected generationally using the two-dimensional Scale MP-2016, with age adjustments, and adjusted separately for healthy and disabled members. The basis for determining the mortality assumptions used were based on the results of the actuarial experience study for the period January 1, 2014 through December 31, 2016. Further details of the experience study can be found in the OCERS CAFR, available on their website at www.ocers.org. Lono-Term Expected Real Rate of Return: The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expected returns, net of inflation) are developed for each major asset class. These returns are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation and deducting expected investment expenses. 39 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 The target allocation and projected arithmetic real rates of return for each major asset class, after deducting inflation, but before investment expenses, used in the derivation of the long-term expected investment rate of return assumption are summarized in the following table for the calendar year ended December 31, 2017: Target Long-Term Expected Real Asset Class Allocation Rate of Return (Arithmetic) Global Equity 35.00% 6.38% Core Bonds 13.00% 1.03% High Yield Bonds 4.00% 3.52% Bank Loan 2.00% 2.86% TIPS 4.00% 0.96% Emerging Markets Debt 4.00% 3.78% Real Estate 10.00% 4.33% Core Infrastructure 2.00% 5.48% Natural Resources 10.00% 7.86% Risk Mitigation 5.00% 4.66% Mezzanine/Distressed Debts 3.00% 6.53% Private Equity 8.00% 9.48% Total 100.00% Discount Rate: The discount rate used to measure the total pension liability was 7.00% for the year ended December 31, 2017. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the actuarially determined contribution rates. For this purpose, only employer contributions that are intended to fund benefits for current plan members and their beneficiaries are included. Projected employer contributions that are intended to fund the service costs for future plan members and their beneficiaries, as well as projected contributions from future plan members, are not included. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all projected future benefit payments for current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability as of December 31, 2017. Sensitivity of the Proportionate Share of Net Pension Liability to Changes in the Discount Rate: The following table represents OCSD's proportionate share of the net pension liability calculated using the discount rate of 7.00%, as well as what OCSD's proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower(6.00%) or 1 percentage point higher(8.00%)than the current rate: 1% Decrease Current Discount Rate 1% Increase Net Pension Liability(Asset) (6.00%) (7.00%) (8.00%) December 31, 2017 $ 57,945,374 $ (39,571,100) $ (118,791,140) 40 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Pension Plan Fiduciary Net Position: Detailed information about OCERS' fiduciary net position is available in a separately issued OCERS comprehensive annual financial report. That report may be obtained from OCERS at 2223 Wellington Avenue, Santa Ana, California 92708 or at their web site (www.ocers.org). B.Additional Retiree Benefit Account(ARBA) Plan Description: The OCSD ARBA plan is a single-employer defined benefit plan which was administered by OCERS until February 29, 2008, when OCSD began direct administration. This benefit was established by the OCSD Board of Directors on October 25, 1992. It provides a monthly payment to retirees towards the premium costs of health insurance for the retiree and eligible dependents. The retiree is not required to use this amount for health insurance premium or to remain on the OCSD medical plan. The plan is currently paying benefits to 325 retirees. The ARBA plan is not subject to the reporting requirements of GASS 68 and 71 because a trust has not been set up for the plan. However, GASB 73 has been implemented for the ARBA plan in the fiscal year ended June 30, 2016. The plan is a funded on a pay-as-you-go plan from general funds and is administered by OCSD. Stand-alone financial statements are not issued for the plan. Benefits Provided: Employees who retire receive $10 per month for every year of service up to a maximum of 25 years, or $250 per month. This amount is independent of salary and is fixed at retirement. Because OCSD cannot ensure the use of the benefit for payment of eligible health insurance expenses, the benefit is taxable to the retiree. Survivor benefits are provided in the event that a retiree pre-deceases his/her spouse. For retirees hired prior to July 1, 1988, OCSD provides health insurance coverage for 2% months per year of service (see Note 6 — Other Postemployment Benefits). ARBA benefits begin immediately after this benefit ends. For those hired on or after July 1, 1988, ARBA benefits begin immediately upon retirement and continue for life. Employees hired into the OCEA bargaining group after August 1, 2011 are ineligible for this benefit. Benefits are determined by hire date, bargaining unit and years of service as follows: Hire dale All Prior to 7/1/88 All After 7/l/88 OCEA*: Before 8/1/11 Benefit amount per $10 per month x years of service up to $10 per month x years of service up to year of service for a maximum of 25 years a maximum of 25 years normal retirement age Service requirement Age 50 or over with 10 or more years Age 50 or over with 10 or more years eligibility Any age with 30 or more years Any age with 30 or more years Age 70 or over, any years Age 70 or over, any years Benefit payments Monthly for life Monthly for life Immediately after retiree health Benefit schedule insurance coverage ends Immediately upon retirement •OCEA: Adninisbative,Clerical,Engineering,and Technical Services employes groups,bargaining unit OCEA. No cost of living adjustment is provided to benefit recipients. 41 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 At June 30, 2018, the following employees were covered by the benefit terms: Inactive employees or beneficiaries currently receiving benefits 325 Inactive employees entitled to but not yet receiving benefits 53 Active employees 558 Total 936 Contributions: There are no employee contributions for this plan; OCSD covers 100% of the cost. OCSD utilizes a pay-as-you-go method for funding the plan. Contributions to the plan from OCSD were$728,450 for the year ended June 30,2018. Pension Liabilities: As of June 30, 2018, OCSD reported total pension liability of$20,831,172 for its ARBA plan. The total pension liability was determined by an actuarial valuation as of July 1, 2017. OCSD funds benefits on a 'pay as you go" basis and elected not to pre-fund its pension obligation. As a result, there are no plan assets and the total pension liability is equal to the net pension liability. Standard actuarial update procedures were used to project/discount from July 1, 2017 to the measurement date of June 30, 2018. The actuarial valuation performed as of July 1, 2017, used the entry age, level percent of pay cost method. This method represents the present value of all benefits accrued through the valuation date assuming that each employee's liability is expensed from hire date until retirement date as a level percentage of pay. The following table shows the changes in the total pension liability: Total Pension Liability Increase (Decrease) Beginning balance at July 1, 2017 $ 18,467,361 Changes in the year: Service cost 553,795 Interest on total pension liability 649,192 Changes of benefit terms - Difference between expected and actual experience 1,889,274 Changes of assumptions - Benefit payments(1) (728,450) Net changes 2,363,811 Ending balance at June 30, 2018 $ 20,831,172 (1)As part of the July 1,2017 actuarial valuation report,Denaey,Filliger&Associates prepared a projection of the expected annual cost to the District to pay ARBA benefits. 42 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Pension Expense and Deferred Outflows/inflows of Resources Related to Pension: For the year ended June 30, 2018, OCSD recognized pension expense of $1,612,274 for its ARBA plan. At June 30, 2018 OCSD reported its share of deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows Deferred Inflows of Resources of Resources Difference between expected and actual experience $ 1,603,020 $ - Changesofassumptions (1) 861,228 Net difference between projected and actual investment earnings on pension plan investments - Employer contributions over actuary projections Total $ 2,464,248 $ (1)The monetary effects of changes m actuarial assumrtions and method totals$861,228. These changes include passage of time,a change in the discount rate from 3.75%to 3.25%,change in actuarial system census and other losses. Amounts reported as deferred outflows of resources related to ARBA pensions will be recognized in pension expense as follows: Year ended June 30 Amount 2019 $ 409,287 2020 409,287 2021 409,287 2022 409,287 2023 409,287 2024 294,783 2025 123,030 Total $ 2,464,248 Actuarial Assumptions and Methods: The total pension liability in the July 1, 2017 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 3.25% per annum Discount rate 3.25% per annum as of July 1, 2017 (valuation date) 3.25% per annum as of June 30, 2018(measurement date) Inflation rate 2.50% per annum Projected salary increases 3.00% per annum (for service cost only; benefits not pay-related) The mortality assumptions used in the total pension liability at July 1, 2017 were based on the RP- 2014 Employee Mortality and Health Annuitant Mortality Tables for Males or Females, as appropriate,without projection. 43 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Discount Rate: The discount rate used to measure the total pension liability was 3.25% as of the valuation date, July 1, 2017, and 3.25% as of the measurement date, June 30, 2018. Because there are no assets held in a trust that meets GASS 68 or 71, the discount rate is based on the 20- year, tax exempt general obligation municipal bonds with an average rating of AA or higher. Sensitivity of the Total Pension Liability to Chanaes in the Discount Rate: The following table represents the total pension liability calculated using the discount rate of 3.25% as of the measurement date, as well as what total pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (2.25%) or 1 percentage point higher (4.25%) than the current rate: 1% Decrease Current Discount Rate 1% Increase Total Pension Liability (2.25%) (3.25%) (4.25%) June 30, 2018 $ 23,803,120 $ 20,831,172 $ 18,384,011 (6) Other Postemolovment Benefits(OPEB) Plan Description: The post-employment medical benefits plan is a single-employer defined benefit plan administered by OCSD. This plan was established and may be modified only by action of the OCSD Board of Directors. Stand-alone financial statements are not issued. Benefits Provided: OCSD offers medical insurance to active and retired employees, as well as their qualified dependents. All retirees may choose coverage in an OCSD medical plan, with retirees paying the full premium. However, for employees hired prior to July 1, 1988, medical benefits begin immediately at retirement with OCSD paying 2.5 months of premium for each year of continuous service toward the cost of coverage under OCSD medical plans. At the termination of this period the retiree may elect to continue coverage at his/her own expense. For the fiscal year ended June 30, 2018, premiums ranged between $360 and $3,918 per month, depending on the plan and number of dependents covered. At June 30, 2018, the following employees were covered by the benefit terms: Inactive employees or beneficiaries currently receiving benefits (includes 106 paying premiums and 53 with premiums paid by OCSD) 159 Inactive employees entitled to but not yet receiving benefits 0 Active employees (includes 7 eligible for premiums paid by OCSD) 596 Total 755 Contributions: There are no employee contributions to this plan; OCSD covers 100% of the cost for qualifying employees as stated above. Retirees opting to remain with the plan after employment pay 100% of the premium cost, except for those for whom OCSD pays for a period (see above). OCSD utilizes a pay-as-you-go method for funding the plan. Contributions to the plan from OCSD were $953,656 and the estimated implicit subsidy was $519,941, resulting in total payments of $1,473,597, and retirees contributed $1,023,232 for the year ended June 30, 2018. OPEB Liabilities: As of June 30, 2018, OCSD reported total OPEB liability of $5,025,395 for its post-employment retiree medical benefits plan. The total OPEB liability was determined by an actuarial valuation as of July 1, 2017. OCSD funds benefits on a "pay as you go" basis and 44 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 elected not to pre-fund its OPEB obligation. As a result, there are no plan assets and the total OPEB liability is equal to the net OPEB liability. Standard actuarial update procedures were used to project/discount from July 1, 2017 to the measurement date of June 30, 2018. The actuarial valuation performed as of July 1, 2017 used the entry age, level percent of pay cost method. This method represents the present value of benefits accrued through the valuation date, assuming that each employee's liability is expensed from hire date until retirement date as a level percentage of pay. The following table shows the changes in the total OPEB liability: Total OPEB Liability Increase (Decrease) Beginning balance at July 1, 2017 $ 6,398,694 Changes in the year: Service cost 18,182 Interest on total OPEB liability 177,395 Changes of benefit terms - Changes of assumptions (95,279) Benefit payments(1) (1,473,597) Net changes (1,373,299) Ending balance at June 30, 2018 $ 5,025,395 (1)As part of the July 1,2017 actuarial valuation report,Densey,Flliger 8 Associates prepared a projection of the expected annual cost to the District to pay OPEB benefits. OPEB Expense and Deferred Outflows/Inflows of Resources Related to OPEB: For the year ended June 30, 2018, OCSD recognized OPEB expense of $100,298 for its post-employment retiree medical benefits plan. At June 30, 2018 OCSD reported $0 for its share of deferred outflows/inflows of resources related to OPEB. Actuarial Assumptions and Methods: The total OPEB liability in the July 1, 2017 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 4.00% per annum Discount rate 3.13% per annum as of July 1, 2017 (valuation date) 3.62% per annum as of June 30, 2018 (measurement dale) Healthcare cost trend rate 6.00% for 2017, 5.00%for 2018 and later Projected salary increases 3.00% per annum The mortality assumptions used in total OPEB liability at July 1, 2017 were based on the RP-2014 Employee Mortality Table for Males or Females, as appropriate, without projection for pre- retirement mortality rates and RP-2014 Health Annuitant Mortality Table for Males or Females, as appropriate, without projection for post-retirement mortality rates. 45 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Actuarial assumptions used in the July 1, 2017 valuation were based on a review of plan experience during the period July 1, 2015 through June 30, 2017. Discount Rate: The discount rate used to measure the total OPEB liability was 3.13% as of the valuation date, July 1, 2017, and 3.62% as of the measurement date, June 30, 2018. Because there are no assets held in a trust, for GASB 75 reporting purposes, the discount rate is based on a yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher. Sensitivity of the Total OPEB Liability to Changes in the Discount Rate: The following table represents the total OPEB liability calculated using the discount rate of 3.62% as of the measurement date, as well as what total OPEB liability would be if it were calculated using a discount rate that is 1 percentage point lower (2.62%) or 1 percentage point higher (4.62%) than the current rate: 1% Decrease Current Discount Rate 1% Increase Total OPEB Liability (2.62%) (3.62%) (4.62%) June 30, 2018 $ 5,222,788 $ 5,025,395 $ 4,839,538 Sensitivity of the Total OPEB Liability to Changes in the Healthcare Cost Trend Rates: The following table represents the total OPEB liability calculated using the healthcare cost trend rate of 6.00%decreasing to 5.00%as of the measurement date, as well as what total OPEB liability would be if it were calculated using a healthcare cost trend rate that is 1 percentage point lower(5.00% decreasing to 4.00%) or 1 percentage point higher (7.00% decreasing to 6.00%)than the current rate: 1% Decrease Current Trend Rate 1% Increase (5.00% decreasing (6.00% decreasing (7.00% decreasing Total OPEB Liability to 4.00%) to 5.00%) to 6.00%) June 30, 2018 $ 4,797,343 $ 5,025,395 $ 5,271,841 (7) Transactions with Irvine Ranch Water District—Revenue Area No. 14 Formation of Revenue Area No. 14 S Excess Purchase Price Over Book Value of Acquired Assets On July 1, 1985, Revenue Area No. 14 was formed as an independent special district as a result of a negotiated agreement between OCSD and Irvine Ranch Water District (IRWD). At the time of Revenue Area 14's creation, OCSD consisted of eight independent special districts (see Note 1 — Reporting Entity). The eight existing districts sold a portion of the joint treatment facilities and land to the newly created district and recorded capacity rights revenue at the time of the sale. In accordance with the negotiated agreement between OCSD and IRWD, IRWD paid OCSD $34,532,000 for an initial 15,000,000 gallons per day capacity in OCSD's joint treatment facilities (with an ultimate collection capacity of 32,000,000 gallons per day) and for a pro-rata interest in real property(based on flow of 32,000,000 gallons per day).The book value of the assets acquired was determined to be$14,553,000 as of June 30, 1986: these assets were recorded at book value in Revenue Area 14. The excess of the purchase price over the assets' book value was $19,979,000 and was recorded as an intangible asset in Revenue Area 14. The excess of the purchase price over the assets' book value was amortized over useful lives of the original assets acquired. As of June 30, 2018, the excess of purchase price over the assets' book value was fully amortized. 46 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 Annual Transactions IRWD entered into a separate agreement with Revenue Area 14 on January 1, 1986 whereby IRWD agreed to fund quarterly payments of Revenue Area 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement, for which contributions of $3,840,791 were recorded as contribution from other government during the fiscal year ended June 30, 2018. IRWD also agreed to fund the annual integration adjustment of Revenue Area 14's equity share in OCSD's Joint Works Treatment Facilities based on the flows discharged to OCSD. Integration contributions credited to IRWD of ($632,465) to Revenue Area 14 were recognized and reported as reductions to contributions from other government during the fiscal year ended June 30, 2018. These contributions received from or credited to IRWD for their agreed-upon share of capital assets and equity share in OCSD's Joint Works Treatment Facilities are calculated as prescribed in the agreements. In addition, a separate agreement for transfer of IRWD's wastewater solids residuals to OCSD was entered on April 28, 2010. IRWD agreed to pay OCSD a charge for interim solids handling charge which include annual capital and quarterly operating expense components designed to compensate OCSD for IRWD's share of the cost of operating and maintaining the existing facilities for the treatment of solids. As a result, $1,242,436 in annual solids capital handling charges were reported as operating revenue in Consolidated Revenue Area, and $2,935,007 in quarterly solids operating and maintenance charges were reported as operating revenue in Revenue Area No. 14 during the fiscal year ended June 30, 2018. Any amounts credited to IRWD are not refunded in cash but are held as a credit to satisfy future contributions required of IRWD. Amounts owed from IRWD are invoiced on a quarterly or annual basis. As a result, a balance of$483 was reported in accounts receivable and $18,888,270 in due to other governmental agency as of June 30, 2018. Annual Cash Reserve Requirement The cash reserve contribution requirement from IRWD at June 30, 2018; in accordance with Amendment No. 2 to the Agreement between IRWD and OCSD Acquiring Ownership Interests, Assigning Rights, and Establishing Obligations; is $15.4 million. This cash reserve requirement is recognized as a liability to IRWD. (81 Commitments. Due From Other Governmental Agency. and Contingencies Relocation of the Santa Ana Regional Interceotor: On June 29, 2010, OCSD entered into an agreement to lend the Orange County Flood Control District(OCFCD)60 percent of the amount of the contract awarded to design and construct the relocation of the Santa Ana Regional Interceptor, but not to exceed $72 million. On December 18, 2012, a new agreement was executed that superseded the prior agreement and reduced OCSD's maximum loan obligation to $59,036,400 based on lower than expected construction costs. OCFCD agrees to repay the loan from any subvention funds received by OCFCD, with the total balance repaid by no later than July 1, 2022. Repayment installments will be made within 30 days equal to 60 percent of any subvention funds received by OCFCD. Interest shall accrue on the unpaid balance from July 1, 2018 at an annual interest rate of two percent until the unpaid balance has been repaid. During the fiscal year ended June 30, 2018, OCSD received loan repayments totaling $20,472,023, leaving an outstanding loan receivable balance of$0. Pollution Remediation: An Underground Storage Tank (UST) at Plant No. 1 failed the pressure test to ensure its tank integrity.As a result of the test failure, OCSD voluntarily took this UST out of service and tested the immediate surrounding area and determined that both gasoline and diesel 47 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2018 were present. During the fiscal year ended June 30, 2017, OCSD completed an analysis of remediation alternatives resulting in a less costly remediation plan for the contaminated soil than the plan developed during the previous fiscal year. The new remediation plan received approval from the Orange County Health Care Agency, and based upon their feedback a final design will now be completed. This new remediation plan calls for removal and disposal of approximately 2,200 tons of contaminated soil, and some limited groundwater treatment. This work is anticipated to begin in the spring of 2019 and be completed by January 2020. As of June 30, 2018, actual costs of$290,896 were incurred. Total remaining costs are estimated not to exceed $5,000,000, including post-remediation monitoring costs for a five-year period and a project contingency of 50 percent for the remediation effort. Litigation: Certain claims involving disputed construction costs have arisen in the ordinary course of business. Additionally, OCSD is a defendant in lawsuits.Although the outcome of these matters is not presently determinable, management does not expect that the resolution of these matters will have a material adverse impact on the financial condition of OCSD. (9) Restatement-Adoption of New Accounting Standard During the year ended June 30, 2018, OCSD implemented GASS Statement No. 75. The implementation of GASB Statement No. 75 requires recognizing and measuring OPEB liabilities, deferred outflows of resources, deferred inflows of resources, and expense. The net position was not restated for deferred inflows and deferred outflows because they were not determinable at the time of implementation of GASB 75. The retroactive effect of implementing this change in reporting OPEB costs resulted in a restatement of the beginning net position. The following is a summary of the effect of this adjustment: Beginning net position as predously reported at June 30, 2017 $2.041,225,032 Total OPEB liability (measurement date as of July 1, 2017) (7,591,758) Net position as restated, July 1, 2017 $2,033,633,274 48 ORANGE COUNTY SANITATION DISTRICT REQUIRED SUPPLEMENTARY INFORMATION 49 ORANGE COUNTY SANITATION DISTRICT Proportionate Share of the Net Pension Liability(Asset) Orange County Employees Retirement System(OCERS)Pension Plan Last 10 Fiscal Years(1) Fiscal Year Ended June 30, 2015 2016 2017 2018 District's proportion of the net pension liability(asset) 1.13% 0.74% (0.20%) (0.80%) District's proportionate share of the net pension liability(asset) $ 57,418,760 $ 42,439,759 $ (10,384,508) $ (39,571,100) District's covered payroll (2) $ 58,641,163 $ 59,789,927 $ 60,000,017 $ 62,341,796 District's proportionate share of the net pension liability(asset)as a percentage of its covered payroll 97.92% 70.98% (17.31%) (63.47%) OCERS'fiduciary net position as a percentage of the total pension liability 89.61% 92.74% 101.70% 105.96% (1) The amounts presented were determined as of the measurement date December 31. Data for fiscal years ended June 30,2009 through 2014 is not available in a comparable format. (2) Covered payroll represents compensation earnable and pensionable compensation for the measurement period ended December 31. Only compensation earnable and pensionable compensation that would possibly go into the determination of retirement benefits are included. 50 ORANGE COUNTY SANITATION DISTRICT Schedule of District Contributions Orange County Employees Retirement System(OCERS)Pension Plan Last 10 Fiscal Years(1) Fiscal Year Ended June 30, 2015 2016 2017 2018 Contractually required contribution $ 17,201,569 $ 12,222,849 $ 7,709,734 $ 7,525,655 Contributions in relation to the contractually required contribution $ (17,201,569) $ (12,222,849) $ (7,709,734) $ (7,525,655) Contribution deficiency(excess) $ $ $ $ District's covered payroll (2) $ 60,025,942 $ 60,595,474 $ 62,266,907 $ 65,390,144 Contributions as a percentage of covered payroll 28.66% 20.17% 12.38% 11.51% (1) Data for fiscal years ended June 30, 2009 through 2014 is not available in a comparable formal. (2) Covered payroll represents compensation earnable and pensionable compensation for the fiscal year ended June 30. Only compensation earnable and pensionable compensation that would possibly go into the determination of retirement benefits are included. 51 ORANGE COUNTY SANITATION DISTRICT Total Pension Liability(3) Additional Retiree Benefit Account(ARBA) Last 10 Fiscal Years(1) Fiscal Year Ended June 30, 2015 2016 2017 2018 District's total pension liability $ 16,680,614 $ 18,313,122 $ 18,467,361 $ 20,831,172 District's covered-employee payroll (2) $ 62,139,375 $ 62,977,577 $ 65,120,945 $ 68,126,103 District's total pension liability as a percentage of its covered-employee payroll 26.84% 29.08% 28.36% 30.58% (1) The amounts presented for each fiscal year were determined as of July 1. Data for fiscal years ended June 30, 2009 through 2014 is not available in a comparable format. (2) Covered-employee payroll represents total payroll of employees that are provided benefits through the pension plan for the fiscal year ended June 30. (3) There are no assets in a trust compliant with GASB codification P22.101. OCSD funds benefits on a"pay as you go" basis and elected not to pre-fund its pension obligation. As a result,there are no plan assets and the total pension liability is equal to the net pension liability. 52 ORANGE COUNTY SANITATION DISTRICT Changes in Total Pension Liability(3) Additional Retiree Benefit Account(ARBA) Last 10 Fiscal Years(1) Fiscal Year Ended June 30, 2016 2017 2018 Beginning balance at July 1 $ 16,680,614 $ 18,313,122 $ 18,467,361 Changes in the year: Service cost 270,223 278,330 553,795 Interest on total pension liability 626,386 593,711 649,192 Changes of benefit terms - - - Changes of assumptions 1,230,327 (70,952) 1,889,274 Benefit payments(2) (494,428) (646,850) (728,450) Netchanges 1,632,508 154,239 2,363,811 Ending balance at June 30 $ 18,313,122 $ 18,467,361 $ 20,831,172 (1) The amounts presented for each fiscal year were determined as of July 1. Data for fiscal years ended June 30, 2009 through 2015 is not available in a comparable format. (2) As part of the July 1, 2017 actuarial valuation report, Demsey, Filliger&Associates prepared a projection of the expected annual cost to the District to pay ARBA benefits. The District elected to use actual costs rather than the projected annual costs to pay ARBA benefits. (3) OCSD funds benefits on a"pay as you go"basis and elected not to pre-fund its pension obligation. As a result,there are no plan assets and the total pension liability is equal to the net pension liability. 53 ORANGE COUNTY SANITATION DISTRICT Total OPEB Liability(3) Post-Employment Medical Benefits Plan Last 10 Fiscal Years(1) Fiscal Year Ended June 30, 2017 2018 District's total OPEB liability $ 6,398,694 $ 5,025,395 District's covered-employee payroll (2) $ 65,120,945 $ 68,126,103 District's total OPEB liability as a percentage of its covered-employee payroll 9.83% 7.38% (1) The amounts presented for each fiscal year were determined as of July 1. Data for fiscal years ended June 30, 2009 through 2016 is not available in a comparable format. (2) Covered-employee payroll represents total payroll of employees that are provided benefits through the OPEB plan for the fiscal year ended June 30. (3) There are no assets in a trust compliant with GASS codification P52.101. OCSD funds benefits on a"pay as you go"basis and elected not to pre-fund its OPEB obligation. As a result, there are no plan assets and the total OPEB liability is equal to the net OPEB liability. 54 ORANGE COUNTY SANITATION DISTRICT Changes in Total OPEB Liability(3) Post-Employment Medical Benefits Plan Last 10 Fiscal Years(1) Fiscal Year Ended June 30 2018 Beginning balance at July 1 $ 6,398,694 Changes in the year: Service cost 18,182 Interest on total OPEB liability 177,395 Changes of benefit terms - Changes of assumptions (95,279) Benefit payments (2) (1,473,597) Net changes (1,373,299) Ending balance at June 30 $ 5,025,395 (1) The amounts presented for each fiscal year were determined as of July 1. Data for fiscal years ended June 30, 2009 through 2016 is not available in a comparable format. (2) Benefit payments include implicit subsidy associated with benefits paid. (3) OCSD funds benefits on a"pay as you go'basis and elected not to pre-fund its OPEB obligation. As a result,there are no plan assets and the total OPEB liability is equal to the net OPEB liability. 55 (THIS PAGE INTENTIONALLY LEFT BLANK) 56 ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 57 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Net Position June 30,2018 Revenue Consolidated Totals Area No. 14 Revenue Area 2018 Current assets: Cash and cash equivalents $ 3.802,119 $ 132,176.414 $ 135,978,533 Investments 15,085,667 524,436.305 539,521,972 Accounts receivable,net of allowance for uncollectibles$455,979 483 13,202,457 13,202,940 Accrued interest receivable - 2,851,382 2,851,382 Connection fees receivable - 3,871.076 3,871,076 Property tax receivable - 1,227,135 1,227,135 Inventories - 7,243,823 7,243,823 Prepaid expenses - 1,645,412 1,645,412 Total current assets 18,888,269 686,654,004 705,542,273 Noncurrent assets: Restricted Cash and cash equivalents - 4,953.800 4,953,800 Accrued interest receivable - 6,855 6,855 Unresltictetl: Non-depreciable capital assets 13.862,536 443,874,558 457,737,093 Depreciable capital assets,net of accumulated depreciation 78,375,231 2,089,902.503 2,168,277,734 Other noncurrent assets,net - 10,344 10,344 Net pension asset-OCERS 39,571,100 39,571,100 Total noncurrent assets 92.237,766 2,578,319.160 2.670,556,926 Total assets 111,126,035 3,264,973,164 3,376,099,199 Defamed ouHlows of resources: Deferred losses on defeasances - 32,880,203 32,880,203 Deferretl ouHlows related to pensions 51,059.589 51,059,589 Total defered outflows of resources 83,939,792 83,939,792 Total assets and deferred outflows of resources 111.126,035 3,348,912,956 3,460,038,991 Current liabilities: Accounts payable - 13,365.974 13,365,974 Accrued expenses - 15,404,746 15,404,746 Retentions payable - 2,147,719 2,147,719 Interest payable - 17,113.450 17,113,450 Due to other governmental agency 18,888,270 - 18,888,270 Current portion of long-term obligations 50,744,930 50,744,930 Total current liabilities 18,888,270 98,776.819 117,665,089 Noncurrent liabilities: Noncurrent portion of long-term obligations - 1,057,454,621 1,057,454,621 Total OPEB liability - 5,025,395 5,025,395 Net pension liability-OCERS - - - Totalpensionliabilily-ARBA 20,831.172 20,831,172 Total noncurrent liabilities 1,083,311,188 1,083,311,188 Total liabilities 18,888,270 1,182,088,007 1,200,976,277 Defamed inflows of resources: Deferred inflows related to pensions 64,273.306 64,273,306 Total liabilities and deferred inflows of resources 18,888,270 1,246,361,313 1,265,249,583 Net position: Net investment in capital assets: Collection system 16,234,789 517,005,841 533,240,630 Treatment and disposal-land 954,499 18,649,788 19,604,287 Treatment and disposal system 75,048,477 1,998,121,432 2,073,169,909 Capital assets related debt (1,057,896,752) (1,057,896,752) Subtotal 92,237,765 1,475,890,309 1,568,118,074 Unrestricted: 626,671,334 626,671,334 Total net position $ 92,237,765 $ 2,102,551,643 $ 2,194,789,408 58 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, 2018 Revenue Consolidated Totals Area No. 14 Revenue Area 2018 Operating revenues: Service charges $ 5,418,027 $ 310,910,737 $ 316,328,764 Permit and inspection fees 8,245 1,162,084 1,170,329 Total operating revenues 5,426,272 312,072,821 317,499,093 Operating expenses other than depreciation and amortization: Salaries and benefits 2,593,403 64,824,636 67,418,039 Utilities 220,445 7,077,659 7,298,104 Supplies, repairs and maintenance 1,377,135 26,860,367 28,237,502 Contractual services 3,673,256 25,847,030 29,520,286 Feasibility studies 119,025 5,975,031 6,094,056 Other 234,054 6,753,970 6,988,024 Total operating expenses other than depreciation and amortization 8,217,318 137,338,693 145,556,011 Operating income(loss)before depreciation and amortization (2,791,046) 174,734,128 171,943,082 Depreciation and amortization 3,615,330 93,783,904 97,399,234 Operating income(loss) (6,406,376) 80,950,224 74,543,848 Non-operating revenues: Property taxes 2,781,080 91,407,273 94,188,353 Investment and interest income 44,113 3,185,643 3,229,756 Contributions from other government 3,263,403 3,538,879 6,802,282 Other 13,995 795,081 809,076 Total non-operating revenues 6,102,591 98,926,876 105,029,467 Non-operating expenses: Interest 100,319 34,910,707 35,011,026 Other 3,043 1,284,685 1,287,728 Loss on disposal of assets 5,178 190,602 195,780 Total non-operating expenses 108,540 36,385,994 36,494,534 Income(lass)before capital contributions (412,325) 143,491,106 143,078,781 Capital contributions: Capital facilities capacity charges 18,077,353 18,077,353 Change in net position (412,325) 161,568,459 161,156,134 Total net position-beginning,as restated 92,650,090 1,940,983,184 2,033,633,274 Total net position-ending S 92,237765 $ 2,102,551,643 $ 2,194,789,408 59 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Cash Flows For the Year Ended June 30,2018 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2018 Cash flows from operating acivities: Receipts from customers and users $ 24,314,059 $350,121,696 $ - $374,435,755 Payments to employees (2,593,403) (71,373,734) - (73,967,137) Payments to suppliers (5,623,915) (74,272,333) (79,896,248) Net cash provided by operating activities 16,096,741 204,475,629 220,572,370 Cash Bows from noncapital financing activities: Proceeds from property taxes 2,781,080 91,499,190 - 94,280,270 Payments for other obligations 11,095 (489,611) (478,516) Net cash provided by noncapital financing activities 2,792,175 91.009,579 93,801,754 Cash Bows from capital and related financing activities: Capital facilities capacity charges - 17,918,938 - 17,918,938 Additions to capital assets (3,208,326) (113,517,355) 3,895,868 (112,829,813) Disposal of capital assets - 632,465 (632,465)Interest paid (100,319) (44,140,551) - (44,240,870) Principal payments on debt obligation - (32,141,018) - (32,141,018) Contribution from other government 3,263,403 3,538,879 (3,263,403) 3,538,879 Net cash used in capital and related financing activities (45,242) (167,708,642) (167,753,884) Cash Bows from investing activities: Proceeds from the sale of investments (5,943,508) 187,490,842 - 181,547,334 Purchases of investments (9,284,057) (300,184,495) - (309,468,552) SARI project payments - 20.472,023 - 20,472,023 Interest received 186,010 7,207,876 7,393,886 Net cash used in investing activities (15,041,555) (85,013,754) (100,055,309) Net increase in cash and cash equivalents 3,802,119 42,762,812 - 46,564,931 Cash and cash equivalents,beginning of year 94.367,402 94,367,402 Cash and cash equivalents,and of year $ 3,802,119 $137,130,214 $ - $140,932,333 Reconciliation of operating income(loss)to net cash provided by(used in)operating activities: Operating income(loss) $ (6,406,376) $ 80,950,224 $ - $ 74,543,848 Adjustments to reconcile operating income(loss) to net cash provided by operating activities: Depreciation and amortization 3,615,330 93,783,904 - 97,399,234 Bad debt expense(ni recoveries) - 219,792 - 219,792 (Increase)/decrease in operating assets: Accounts receivable 33,893,622 (1,636,575) - 32,257,047 Inventories - (75,275) - (75,275) Prepaid and other assets - 87,640 - 87,640 Increase/(decrease)in operating liabilities: Accounts payable - (2,012,182) - (2,012,182) Accrued expenses - 150,961 - 150,961 Due to other governmental agency (15,005,835) 39,685,450 - 24,679,615 Net pension/OPEB liability - (8,463,282) - (8,463,282) Pension/OPEB/accrued leave payable - 1.192,318 - 1,192,318 Compensated absences - 209,235 - 209,235 Claims and judgments 383,419 383,419 Net cash provided by(used in)operating activities $ 16,096,741 $204,475,629 $ $220,572,370 Noncash activities: Unrealized(loss)on the fair value of investments $ (141,898) $ (4,932,908) $ (5,074,806) Receivable from non-operating activities - 4,085,372 4,085,372 Capital assets acquired through accounts payable - 5,377,210 5,377,210 Capital facilities capacity charges acquired - 158,415 158,415 60 ORANGE COUNTY SANITATION DISTRICT STATISTICAL SECTION This part of the comprehensive annual financial report of the Orange County Sanitation District (OCSD) presents detailed information as a content for understanding what the information in the financial statements, note disclosures, and required supplementary information says about OCSD's overall financial health. Contents Pages Financial Position and Trends These schedules contain current and trend information to help the reader understand OCSD's financial position and how OCSD's financial performance and well-being have changed over time. 62-66 Revenue Capacity These schedules contain information to help the reader assess OCSD's most significant revenue source of sewer service fees. 67-69 Debt Capacity These schedules present information to help the reader assess the affordability of OCSD's current levels of outstanding debt and OCSD's ability to issue additional debt in the future. All of OCSD's debt is recorded in a proprietary fund; consequently, many 70-73 of the schedules which are applicable to governmental funds are not presented. Operating Information These schedules contain data to help the reader understand how the information in OCSD's financial report relates to the services it provides and the activities it performs. 74-77 Demographic and Economic Factors These schedules offer demographic information to help the reader understand the environment within which OCSD's financial activities take place. 78-81 61 ORANGE COUNTY SANITATION DISTRICT Net Position by Component (Dollars in Thousands) Last Ten Fiscal Years $2,500,000 $2,000,000 $1,500,000 $1,0og000 $500,000 $0 2003-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 201516 201617 2017-18 ONet Investment in Capital Assets 13Unrestrict I Net Investment in Fiscal Year Capital Assets Unrestricted Total Net Position 2008-09 $ 948,869 $ 399,452 $1,348,321 2009-10 1,121,057 310,016 1,431,073 2010-11 1,131,063 379,423 1,510,486 2011-12 1,125,966 471,652 1,597,618 2012-13 1,180,298 520,427 1,700,725 2013-14 1,204,706 617,589 1,822,295 2014-15 1,327,384 434,460 1,761,944 '2' 2015-16 1,429,269 489,303 1,918,572 tat 2016-17 1,504,898 536,327 2,041,225 2017-18 1,568,118 626,671 2,194,789 tot Beginning net position restated due to implementation of GASB 65. 12) Beginning net position restated due to implementation of GASB 68. (3) Beginning net position restated due to implementation of GASB 73. 14) Beginning net position restated due to implementation of GASB 75. Source: Orange County Sanitation District's Financial Management Division. 62 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $325,000 $300,000 $275,000 $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $o -$25,000 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 GOperating Revenue ■Non-Operating Revenue SCapital Contributions Operating Revenue Non-Operating Revenue Permh 8 Total Fiscal Service Inspection Total Property Non- Capital Year Charges Fees Operating Taxes Interest Other Operating Contributions 2008-09 $ 206,422 $ 895 $ 207,317 $ 66,427 $ 14,836 $ 1,634 $ 82,897 $17,937 2009-10 225,059 629 225,688 64,759 19,166 6,939 90,864 (2,406) 2010-11 244,465 784 245,249 64,307 10,092 11,015 85,414 9,800 2011-12 259,491 1,030 260,521 67,882 15,747 8,486 92,115 8,936 2012-13 303,400 1,176 304,576 79,240 (3,913) 3,781 79,108 12,797 2013-14 300,611 848 301,459 74,944 6,498 12,595 94,037 14,093 2014-15 301,548 902 302,450 79,835 4,806 9,996 94,637 17,656 2015-16 314,477 951 315,428 84,407 9,183 14,658 108,248 17,974 2016-17 312,237 1,045 313,282 88,284 3,081 27,146 118,511 16,351 2017-18 316,329 1,170 317,499 94,188 3,230 7,611 105,029 18,077 Source: Orange County Sanitation District's Financial Management Division. 63 ORANGE COUNTY SANITATION DISTRICT Expenses by Type (Dollars in Thousands) Last Ten Fiscal Years $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 ■Operating Expense ■Non-Operating Expense Operating Expense Non-Operating Expense Fiscal Salaries& Maint& Depr& Total Interest Total Non- Year Benefits Utilities Other Amort Operating Expense Other Operating 2008-09 $ 67,498 $ 7,242 $ 89,816 $ 32,520 $ 197,076 $ 24,899 $ 13,842 $ 38,741 2009-10 69,652 6,934 61,499 52,036 190,121 27,537 13,736 41,273 2010-11 73,112 6,948 63,328 49,288 192,676 29,129 39,245 68,374 2011-12 75,642 7,405 89,272 56,051 228,370 28,700 8,433 37,133 2012-13 76,878 6,403 66,536 63,907 213,724 42,315 37,335 79,650 2013-14 79,179 6,381 60,887 99,805 246,252 40,450 1,317 41,767 2014-15 79,657 7,246 62,323 94,186 243,412 34,112 3,168 37,280 2015-16 75,576 7,246 70,679 90,502 244,003 27,597 6,482 34,079 2016-17 74,291 6,119 69,843 96,320 246,573 25,648 53,270 78,918 2017-18 67,418 7,298 70,840 97,399 242,955 35,011 1,483 36,494 Source: Orange County Sanitation District's Financial Management Division. 64 ORANGE COUNTY SANITATION DISTRICT Change in Net Position (Dollars in Thousands) Last Ten Fiscal Years $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 1 1H $0 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Ending Net Position by Fiscal Year Fiscal Total Total Changeln Beginning Ending Year Revenues Expenses Net Position Net Position Net Position 2008-09 $308,151 $ 235,817 $ 72,334 $1,275,987 $ 1,348,321 2009-10 314,146 231,394 82,752 1,348,321 1,431,073 2010-11 340,463 261,050 79,413 1,431,073 1,510,486 2011-12 361,572 265,503 96,069 1,501,549 I'I 1,597,618 2012-13 396,481 293,374 103,107 1,597,618 1,700,725 2013-14 409,589 288,019 121,570 1,700,725 1,822,295 2014-15 414,743 280,692 134,051 1,627,793 (sl 1,761,844 2015-16 441,650 278,082 163,568 1,755,004 (3) 1,918,572 2016-17 448,144 325,491 122,653 1,918,572 2,041,225 2017-18 440,605 279,449 161,156 2,033,633 i41 2,194,789 (f1 Beginning net position restated due to implementation of GASB 65. Ixl Beginning net position restated due to implementation of GASB 68. (3) Beginning net position restated due to implementation of GASB 73. 14I Beginning net position restated due to implementation of GASB 75. Source: Orange County Sanitation District's Financial Management Division. 65 ORANGE COUNTY SANITATION DISTRICT Cash and Investment Reserve Balances (Dollars in Millions) Last Ten Fiscal Years Capital Debt Cash Flow Self- Improvement Service Fiscal Year Contingency Insurance Program Requirements Total 2008-09 $ 172 $ 57 $ 172 $133 $ 534 2009-10 185 57 102 129 473 2010-11 187 57 176 141 561 2011-12 196 57 186 138 577 2012-13 174 57 234 135 600 2013-14 189 57 296 131 673 2014-15 177 57 194 129 557 2015-16 181 57 190 117 545 2016-17 174 57 173 107 511 2017-18 173 57 350 100 680 Notes: The Board of Directors of the Orange County Sanitation District has established the criteria below to determine the total funds required as listed in the Accumulated Funds and Reserves Policy: The Cash Flow Contingency Reserve is to fund operations, maintenance,and certificates of participation debt service expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and sewer service user fees. The Self-Insurance Reserve is to provide requirements for property damage including fire,Flood and earthquake, general liability and workers'compensation. The Capital Improvement Program Reserve is to fund annual increments of the capital improvement program with a target level at one half of the average annual capital improvement program over the next 10 years. The Debt Service Required Reserves are monies held and controlled by a trustee pursuant to the provisions of certificates of participation issues, and the monies are not available for the general needs of the District. Source:Orange County Sanitation Districts Financial Management Division. 66 ORANGE COUNTY SANITATION DISTRICT Sewer Service Fees Single Family Residence Rate Last Nine Fiscal Years and Next Fiscal Year Sewer service fees are comprised of three categories: residential customers, commercial customers, and industrial customers. Although the majority of sewer service fee revenues are from residential and commercial customers(see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. The rates for commercial and industrial customers are derived from the base sewer service fee charged for a single-family residence and are based on the type of business and the strength and volume of waste that is discharged into the sewer system. Due to the complexity of the rate structure for commercial and industrial customers and since the rates are derivatives of the single-family residence rate, only the single-family residence rate is presented within the statistical section. Sewer Service Fiscal Year Charge 2009-10 $ 221.00 2010-11 244.00 2011-12 267.00 2012-13 294.00 2013-14 308.00 2014-15 316.00 2015-16 322.00 2016-17 327.00 2017-18 331.00 2018-19 335.00 Annual Sewer Service Fees Single Family Residence 400 350 u 300 LL 250 Q� 200 K y 150 100 50 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Fiscal Year Source: Orange County Sanitation Districfs Financial Management Division. 67 ORANGE COUNTY SANITATION DISTRICT Number of Accounts and Revenues by Customer Class (Dollars in Millions) Last Ten Fiscal Years Residential/Commercial Industrial Number of Total Percentage Total Percentage Equivalent Sewer Svc. of Sewer Number of Sewer Svc. of Sewer Fiscal Single-Family Charge Service Charge Customer Charge Service Charge Year Dwellings Revenue Revenues Accounts Revenue Revenues 2008-09 887,290 $ 178.3 95% 515 $ 9.9 5% 2009-10 880,213 194.5 95% 487 10.8 5% 2010-11 878,408 214.3 95% 479 10.1 5% 2011-12 874,008 233.4 96% 516 9.5 4% 2012-13 883,477 259.8 96% 527 10.8 4% 2013-14 873,308 269.0 95% 489 14.4 5% 2014-15 824,465 260.5 95% 467 14.2 5% 2015-16 863,317 278.0 96% 450 12.6 4% 2016-17 859,869 281.2 95% 466 13.8 5% 2017-18 871,338 288.4 94% 473 17.9 6% $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 ■Residential/Commercial Users ■Industnal Users Source: Orange County Sanitation District's Financial Management Division. 68 ORANGE COUNTY SANITATION DISTRICT Principal Sewer Service Customers For the Prior Fiscal Year and Nine Years Ago Fiscal Year Ended 6130/17 i'I Fiscal Year Ended 6/30109 Industrial Industrial Permittee %to Total Permittee %to Total Service Service Charge Service Service Charge Customer Charges Rank Revenue Charges Rank Revenue House Foods America Corp. $ 1,328,551 1 0.43% $ 543,277 5 0.26% Kimberly-Clark Worldwide, Inc. 1,139,233 2 0.36% 1,091,757 1 0.51% Pulmuone Wildwood, Inc. 749,655 3 0.24% Stremicks Heritage Foods, LLC 678,705 4 0.22% 573,353 4 0.27% MCP Foods, Inc. 676,563 5 0.22% 1,045,850 2 0.49% Ameripec Inc. 593,679 6 0.19% 459,905 6 0.22% Jazz Semiconductor 549,292 7 0.18% Nor-Cal Beverage Co. Inc(Main) 538,242 8 0.17% 357,354 8 0.17% Van-Law 528,980 9 0.17% Cargill, Inc. 427,204 10 0.14% Alstyle Apparel-A&G Inc. 849,942 3 0.40% Pepsi-Cola Bottling Group 391,780 7 0.18% Favorite Foods 324,637 9 0.15% Orange City Mills Ltd Partnership 346,794 10 0.16% $ 7,210,104 2.32% $ 5,984,649 2.81% Although the majority of sewer service fee revenues are from residential and commercial customers (see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. Consequently, this schedule shows the largest sewer service fee customers. t11 Current fiscal year information not yet available. Prior year information shown has been revised. Source: Orange County Sanitation District's Financial Management Division. 69 ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses (Dollars in Thousands) Last Ten Fiscal Years 70% 60% 50% 40% 30°% 20% 10% 0% 2008-09 2009-10 2019-11 2911-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating Year (1) Interest(4) Service(3) Expenses(2) Expenses 2008-09 $ 21,305 $ 40,840 $ 62,145 $ 164,556 37.77% 2009-10 24,030 46,052 70,082 138,085 50.75 2010-11 25,895 49,426 75,321 143,388 52.53 2011-12 14,370 50,975 65,345 172,319 37.92 2012-13 23,965 53,640 77,605 149,817 51.80 2013-14 39,590 53,163 92,753 146,447 63.34 2014-15 27,875 53,586 81,461 149,226 54.59 2015-16 29,405 50,301 79,706 153,501 51.93 2016-17 35,575 47,143 82,718 150,252 55.05 2017-18 32,140 43,466 75,606 145,556 51.94 Notes (1)-Excludes principal reductions due to advanced refunding. (2)-Excludes depreciation and amortization expense. (3)-Debt consists of certificates of participation, revenue obligations, and anticipation notes. (4)-Excludes amortization of premium/discount and deferred amount. Source: Orange County Sanitation Districts Financial Management Division. 70 ORANGE COUNTY SANITATION DISTRICT Debt Coverage Ratios (Dollars in Millions) Last Ten Fiscal Years The Orange County Sanitation District has no legal debt limits as imposed by State legislation. The District does have contractual covenants within the existing Certificates of Participation indenture agreements which require minimum coverage ratios of 1,25, The coverage ratio is calculated as the ratio of net annual revenues available for debt service payments to total annual debt service requirements. 4.00 3.50 3.00 2.50 2olo 1.50 1.00 0.50 2007-08 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Fiscal Year Ending June 30, Mae 2010 2011 2012 M13 2014 2015 M16 2017 2018 Operating 8 Nor-operating Revenues: Service Charges,Net of Refunds-Regional $ 178.3 $ 194.5 $ 214.3 $ 233.4 $ 259.8 $ 269.0 $260.5 $ 278.0 $ 281.2 $ 288.4 Service Charges,Net of Refunds-Local(3) 5.6 5.6 5.7 5.7 5.8 5.7 5.5 5.7 1.3 (0.1) Industrial sewer Service Charges 9.9 10.8 10.1 9.5 10.8 14.4 14.2 12.6 13.8 17.9 SAWPA Assessment 3.9 6.6 4e 3.6 2.7 2.4 2.7 3.2 3.3 2.7 IRWDAssessmenu 7.7 6.7 18.2 14.2 25.6 19.6 26.4 26.6 36.0 9.9 Ad Valorem Taxes 66.4 64.8 64.3 67.9 79.2 74.9 79.8 "A 68.3 94.2 Interest Earnings 14.8 19.2 10.1 15.7 (3.9) 6.5 4.8 9.2 3.1 3.2 Other Revenues 3.6 8.4 30 2.5 3.7 3.0 3.2 4.0 5.0 6.4 Total Revenues 290.2 316.6 330.E 352.5 383.7 395.5 397.1 423.7 432.0 422.E Operating Expenses(1) 164.6 138.1 lCtA 172.3 149.8 146.4 149.2 153.5 150.3 145.6 Net Revenues $ 125.6 $ 178.5 $ 187.2 $ 180.2 $ 233.9 $ 249.1 $24T9 $ 270.2 $ 281.7 $ 277.0 Debt Service Requirements Pencipal Payments 21.3 24.0 25.9 14.4 24.0 39.6 27.9 29.4 35.6 32.1 Interest Payments 36.3 43.1 46E 51.0 53.6 53.2 53.6 50.3 47.1 43.5 Total Debt Service Requirements $ 57.6 $ 67.1 $ 724 $ 65.4 $ 77.6 $ We $ 81.5 $ 79.7 $ 82,7 $ 75.6 Coverage Ratios 2.18 266 2.59 2.76 3.01 2.68 3.04 3.39 341 3.66 Ending Reserves(2) $ 401.0 $ 344.0 $ 4200. $ 439.0 $ 465.0 $ 542.0 $426.0 $ 428.0 $ 404a $ 580.0 Notes it)-Operating expenses exclude depreciation and amortlxatlon expenses. (2)-Excludes debt service reserves In accordance w1h the Dialect's reserve pellcy. 13)-Local Sewer transferred to East Orange County Water District in FY2016-17. Source:Orange County Sanitation Districts Financial Management Division. 71 ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt June 30, 2018 Total Debt District's Share 6130cuH8 %Applicable fit of Debt N30118 OVERLAPPING TAX AND ASSESSMENT DEBT argenal on all property,assessed valuation f S418,360,472,026 Metropolitan Water District of Southern Callfolmla $ 601600,000 15.253% $ 9,243,318 Coast Community College District 781,334,504 99.382 776,505,857 North Orange County Joint Community College Distric 201 97.471 200,855 259 Rancho Santiago Community College District and School Facilities Improvement Dist.Na' 368,129,249 99.019&100.000 365,708,786 Garden Grove Unified School District 328,540,160 100.000 328,540.160 Irvine Unified School District School Facilities Improvement District No.1 95,000,000 100.000 95,000,000 Los Alamitos Unified School District School Facilities Improvement District No.1 103,896,227 96.602 100,364,867 Newport Mesa Unified Schad District 266,335,606 99.995 266,322,289 Orange United School District 188,000,000 97.921 184,091,480 Placentia-Yotba Linda Unified School District 236,974,879 98.979 234,555,365 Saddleback Valley Unified School District 113,365,000 11.579 13,126,533 Santa Ana Unified School District 247,026,073 100.000 247,026,073 Tustin Unified School District School Facilities Improvement District No.2002.1 45,091 99.958 45,015,104 Tustin Unified School District School Facilities Improvement District No.2008-1 86,860,000 99.957 86,822,650 Tustin Unified School District School Facilities Improvement District No.2012.1 45,410,000 99.970 45,396,377 Other Unified School Districts 273,876,624 0.146-0.985 16,sal Anaheim Union High School Distrid 200,528,965 100.000 200,528.955 Fullerton Joint Union High School District 169,665,000 91701 155,58Q502 Huntington Beach Union High School Distrid 187,014,998 99.026 185,193p72 School Districts 621,258,502 91.384-100.000 619,508,763 Irvine Ranch Water District Improvement Distrtds 563,322,680 Various 501 City of Anaheim Community Facilities District=. 66,9S0,000 100.000 66,96g000 Imme Unified School District Community Facilities Disalds 635,156,000 100.000 635,756,000 Tustin Unified School District Community Facilities Districts 230,815,000 100.000 230,815,000 City of Tustin Commonly Facilities Oligarchs 99,156,000 100.000 99,155,000 Other Community Facilities Districts, 470,131,990 99.989-100.000 470,131,337 Orange County Assessment Districts 31,850,000 100.000 37850,000 City 0f Irvine 1915 Act Bonds, 808,032,000 100.000 808,032,000 Other 1915 Ad Bonds 9,612,736 100.000 9,612,735 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $7,035,697,155 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations $ 210,347,000 75.026% $ 157,814,940 Orange County Pension Obligation Bonds 383,564,389 75.026 281713,018 Orange County Board of Education Certificates of Participation 13,990,000 75.026 10,496,137 Coast Community College District Certificates of Participation 3,285,000 99.382 3,264,699 North Orange Regional Occupation Program Certificates of connotation 9,610,000 99.499 9,561,854 Los Alamitos unified School District Certificates of Participation 41,431.230 96.891 60,143,133 Orange Unified School District Certificates of Participation and Benefit Obligations 110,343,225 97.921 108,049,190 Plawntia-Yorba Linda Unified School District Cenifestes of Participation 94,115,355 98.979 93,213,825 Santa Ana Unified School District Certificates of Participation 69,811,854 100.000 69,811,854 Other Unified School District General Fund Obligations 21,680,000 Various 16,684,198 Union High School District Certificates of Participation 121,456.090 Various 119,235762 SchOOl District Certificates of Participation 106,498,253 Venous 106,090,325 City of Anaheim General Fund Obligations 60B.34g522 99.215 601,580749 City of Costa Mesa General Fund Obligations 46,500,000 100.000 O'Buro,000 City of Garden Grove General Fund Obligations 23,175.000 100.000 23,115,000 City ofHuntington Beach General Fund Obligations 43,268,254 98728 42,717,882 City of La Habra General Fund Obligations 20,890.000 100.000 20,890,000 City of Newport Beach Central of Padicipation 107,410,000 99.994 101 City of Santa Ana General Fund Obligations 52,325.000 100.000 52,325,000 Other City General Fund Obligations 93,339,428 Various 80,029,118 Orange County Sanitation Diatrid 0 100.000 0 (2) TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $1,996767,439 Lass: City of Anaheim supported obligations 601.580749 TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,395.186,690 OVERLAPPING TAX INCREMENT DEBT(Successor Agencies): $968,560,375 58.495-100.000% $965,136,241 TOTAL DIRECT DEBT $0 GROSS OVERLAPPING&COMBINED TOTAL DEBT $9,991,600,835 (3) NET OVERLAPPING&COMBINED TOTAL DEBT $9,396,020,086 (1) The percentage ofoverlapping debt applicable to the district is,estimated using taxable assessed property value. Applicable percentages were estimated bydemannining the portion of the overlapping district assessed value that is within the boundaries of the sanitation district divided by fire district's total taxable assessed value. (2) ExlludeswaMewatermvenuecertiflcatesofparticipaGon. Previously dossed centralofparticipation have been reclassified as district revenue supported issues and are no longer included as direct debt In the debt statement. (3) Excludes tax and revenue anticipation notes,enterprise revenue,mortgage revenue and non bonded capital lease Obligations.puaNied Zone Academy Bonds are included based on principal due at maturity. Talal Overlapping Tax Gross Combined Net Combined Total Overtopping Ratios to: and Assessment Debt Total Debt Total De N Tax Increment Debt Land and Improvement Assessed Volumed ($416,300,856,819'. 1.69% 2.40% 2.26% All Property Assessed Valuation ($418,360,412,026; 2.39% 2.25% Redevelopment Incremental Valuation ($58p09,931,]11'. 1.65% Source:California Municipal Statistics 72 ORANGE COUNTY SANITATION DISTRICT Ratios of Outstanding Debt Last Ten Fiscal Years Debt as a (5) (3) Percentage Total Median of Median (4) Debt Fiscal Outstanding Family Family Population per Year Debt Income(1) Income Estimate(2) Capita 2008-09 $ 1,262,936,747 $ 86,100 0.007% 2,522,820 500.61 2009-10 1,306,255,753 87,200 0.007% 2,539,990 514.28 2010-11 1,427,792,453 84,200 0.006% 2,563,170 557.04 2011-12 1,376,404,782 85,300 0.006% 2,457,571 560.07 2012-13 1,325,928,512 84,100 0.006% 2,472,122 536.35 2013-14 1,278,998,124 84,900 0.007% 2,491,268 513.39 2014-15 1,241,140,357 85,900 0.007% 2,521,803 492.16 2015-16 1,206,722,347 85,000 0.007% 2,548,745 473.46 2016-17 1,140,679,773 88,000 0.008% 2,578,681 442.35 2017-18 1,095,737,610 92,700 0.008% 2,609,419 419.92 Notes & Data Sources (1)- Data is for the entire County of Orange. (2)- Data is for the estimated population served by the Orange County Sanitation District. (3)- Data Source: U.S. Department of Housing and Urban Development. (4)- Data Source: Demographic Research Unit, California Department of Finance. (5)- Data Source: Orange County Sanitation District. Debt includes certificates of participation, revenue obligations, and anticipation notes and is presented net of original issuance premiums. 73 ORANGE COUNTY SANITATION DISTRICT Comparison of the Volume of Wastewater Treated With Revenues and Expenses Last Ten Fiscal Years Millions of Gallons of Collection, Waste- Treatment water &Disposal Total Total Total Total Treated Cost per Operating Non-Operating Operating Non-Operating Fiscal Per Million Costs Costs Revenues Revenues Year Day Gallons (In Thousands) (In Thousands) (In Thousands) (In Thousands) 2008-09 211 $ 1,576.67 $ 197,076 $ 38,741 $ 207,317 $ 82,897 2009-10 196 1,588.72 190,121 41,273 225,688 90,864 2010-11 207 1,816.62 192,676 68,374 245,249 85,414 2011-12 201 1,871.47 228,370 37,133 260,521 92,115 2012-13 200 1,906.01 213,724 79,650 304,576 79,108 2013-14 198 1,936.64 246,252 41,767 301,459 94,037 2014-15 187 2,070.97 243,412 37,280 302,450 94,637 2015-16 183 2,110.43 244,003 34,079 315,428 108,248 2016-17 188 2,054.56 246,573 78,918 313,282 118,511 2017-18 185 2,069.30 242,955 36,494 317,499 105,029 Total expenses in FY 2017-18 increased $43.6 million, or 18.5 percent since FY 2008-09, primarily as a result of expansion of the Capital Improvement Program (CIP)and increase in operational services levels with OCSD's decision beginning in FY 2002-03 to maximize existing secondary treatment facilities as OCSD moved from a 50/50 mix of primary and secondary effluent treatment to meeting secondary treatment standards as of December 31, 2012. Depreciation expense represents 148.7 percent of the increase as a result of the expansion in capital facilities and the financing associated with the expansion. This increase is offset by a decrease in maintenance, chemicals, other operating and non-operating costs. In FY 2017-18 personnel expenses decreased 9.3 percent over the prior year.This decrease is mainly caused by a reduction in the OCERS retirement contribution rate as a result of paying down the unfunded actuarial accrued liability over the previous three years. The full-time equivalent positions authorized increased by 8 in FY 2017-1& As depicted from the chart above, actual wastewater treatment flows were 211 mgd in FY 2008-09. The last several years of California's record-breaking drought and water conservation efforts have resulted in FY 2017-18 flows of only 185 mgd, a decrease of 26 mgd or 12.3 percent since FY 2008-09. Source: Orange County Sanitation District. 74 ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Weneral Management(1) ■Human Resources (2) OAdministrative Services (2) ■Environmental Services (3) ■Facilities Support Services(3) •Technical Services mEngineedng •Operations and Maintenance Fiscal Year Ending June 30, 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 General Management(1) 26 13 13 13 12 12 14 15 15 15 Human Resources (2) 16 17 27 17 16 18 16 27 27 27 Administrative Services (2) 81 92 85 111 111 110 111 98 99 99 Environmental Services (3) - - - - - - - - 91 91 Facilities Support Services(3) 68 71 70 84 81 78 76 63 - - Technical Services 107 105 102 - - - - - - - Engineering 98 96 112 128 125 123 123 127 116 116 Operations and Maintenance 241 245 230 281 281 283 284 294 279 287 Total FTE's 637 639 639 634 626 624 624 624 627 635 Notes (1)-Management Discretion positions used on a temporary basis have been excluded from FTE count. (2)- In 2016, Risk Management moved from Administrative Services to Human Resources Department. (3)- In 2017, District reorganization created Environmental Services and eliminated Facilities Support Services. Source: Orange County Sanitation District's Financial Management Division. 75 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced Last Ten Fiscal Years 300,000 250,000 200,000 150,000 100,000 50,000 2008-09 2009-10 2010-11 2011-12 2012-13 201314 2014-15 201516 2016-17 2017-18 DWet Tonnage DDryTonnage Fiscal Year Wet Tonnaae Dry Tonnage 2008-09 249,202 51,342 2009-10 245,668 50,799 2010-11 253,557 49,133 2011-12 280,572 47,556 2012-13 274,957 43,365 2013-14 279,362 50,764 2014-15 275,943 45,515 2015-16 283,052 50,439 2016-17 288,771 50,641 2017-18 284,039 58,325 Source:Orange County Sanitation District's Environmental Compliance Division. 76 ORANGE COUNTY SANITATION DISTRICT Capital Asset Statistics Last Ten Fiscal Years Mlles of Trunk& Number Primary Secondary Fiscal Subtrunk of Pump Treatment Treatment Year Sewers Stations Capacity(1) Capacity(1) 2008-09 582 17 376 212 2009-10 579 17 376 212 2010-11 587 17 376 212 2011-12 572 17 376 332 2012-13 572 17 376 332 2013-14 580 17 376 332 2014-15 580 17 376 332 2015-16 570 17 376 332 2016-17 396 (2) 17 376 332 2017-18 396 17 376 332 Notes (1) -Capacity is presented as million gallons treated per day. (2) -In FY 2016-17, local sewers were transferred to East Orange County Water District. Source: Orange County Sanitation District 77 ORANGE COUNTY SANITATION DISTRICT Demographic Statistics Covering The Entire County of Orange(1) Last Ten Fiscal Years Total (5) (6) (2) Personal Per Capita Median Public (7) Fiscal Population Income Personal Family School Unemployment Year Estimates (in thousands) Income Income Enrollment Rate 2008-09 3,135,000 $ 145,247,447 (3) $ 46,331 $ 86,100 504,136 9.3% 2009-10 3,166,000 147,138,449 (3) 46,475 87,200 502,239 9.5% 2010-11 3,030,000 154,131,535 (3) 50,868 84,200 502,903 9.2% 2011-12 3,056,000 169,584,000 (4) 55,492 85,300 502,195 7.9% 2012-13 3,082,000 166,370,000 (4) 53,981 84,100 501,801 6.1% 2013-14 3,114,000 174,586,000 (4) 56,065 84,900 500,487 5.2% 2014-15 3,148,000 188,472,000 (4) 59,870 85,900 497,116 4.3% 2015-16 3,183,000 196,921,000 (4) 61,866 85,000 493,030 4.4% 2016-17 3,194,000 205,389,000 (4) 64,305 88,000 490,430 3.8% 2017-18 3,221,000 215,479,000 (4),(s) 66,898 92,700 485,835 3.3% Notes and Data Sources (1) - The Orange County Sanitation District services 479 square miles or 60% of the total 799 square miles that make up the boundaries of the County of Orange. (2) -Data Source: Demographic Research Unit, California Department of Finance. (3) -Data Source: Bureau of Economic Analysis, U.S. Department of Commerce. (4) -Data Source:A. Gary Anderson Center for Economic Research,Chapman University. (5) -Data Source: U.S. Department of Housing and Urban Development. (6) -Data Source: California Department of Education, Educational Demographics Unit. (7) -Data Source: State of California, Employment Development Department as of June 30 of each fiscal year. (8) -Forecasted number. 78 ORANGE COUNTY SANITATION DISTRICT Estimated Population Served by the Orange County Sanitation District June 30, 2018 Population as of January 1,2018 Anaheim 357,084 Brea 44,890 Buena Park 83,995 Costa Mesa 115,296 Cypress 49,978 Fountain Valley 56,920 Fullerton 144,214 Garden Grove 176,896 Huntington Beach 202,648 Irvine 276,176 La Habra 62,850 La Palma 15,948 Los Alamitos 11,863 Newport Beach 87,182 Orange 141,952 Placentia 52,755 Santa Ana 338,247 Seal Beach 25,984 Stanton 39,470 Tustin 82,344 Villa Park 5,951 Westminster 94,476 Yorba Linda 69,121 Subtotal Cities I'I 2,536,240 Estimated Population Served in Unincorporated Areas(2) 73,179 2,609,419 Data Sources: (1)Demographic Research Unit, State of California Department of Finance (2)Center for Demographic Research, California State University, Fullerton. 79 ORANGE COUNTY SANITATION DISTRICT Principal Orange County Employers(1) For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6130/18 Fiscal Year Ended 6130109 Percentage of Percentage of Number of Total County Number of Total County Employers Employees(2) Rank Employment(3) Employees(2) Rank Employment(4) Walt Disney Co. 30,000 1 1.93% 20,000 1 1.35% University of Califomia, Irvine 23,605 2 1.52% 17,500 3 1.18% County of Orange 17,146 3 1.11% 18,668 2 1.26% St.Joseph Health 13,786 4 0.89% 10,656 4 0.72% Kaiser Permanents 7,800 5 0.50% Boeing Co. 6,103 6 0.39% 8,100 5 0.55% Albertsons Southern California 6,057 7 0.39% Wal-Mart Stores Inc. 6,000 8 0.39% Hoag Memorial Hospital 5,680 9 0.37% Target Corp. 5,400 10 0.35% 6,100 7 0.41% Yuml Brands Incorporated 7,000 6 0.47% SuperValu, Inc. 6,082 8 0.41% California State University, Fullerton 5,768 9 0.39% Bank of America Corp. 5,500 10 0.37% Total 121,577 7.84% 105,374 7.11% Notes&Data Sources (1)-Data is for the entire County of Orange. (2)-Data Sources: Orange County Business Journal Book of Lists, County of Orange (3)-Data Source:State of California, Employment Development Department. -Percentage is calculated by dividing employees by total employment of 1,551,100 as of June 2018. (4)-Data Source:State of California, Employment Development Department. -Percentage is calculated by dividing employees by total employment of 1,477,500 as of June 2009. 80 ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2018 District Organization: The Orange County Sanitation District is one consolidated district made up of two revenue areas which service unincorporated county areas and twenty-three cities and related special districts, as follows: Consolidated Revenue Area County of Orange(unincorporated areas) Cities: Anaheim Huntington Beach Santa Ana Brea Irvine Seal Beach Buena Park La Habra Stanton Costa Mesa La Palma Tustin Cypress Los Alamitos Villa Park Fountain Valley Newport Beach Westminster Fullerton Orange Yorba Linda Garden Grove Placentia Special Districts: Midway City Sanitary Districl Costa Mesa Sanitary District Yorba Linda Water District Revenue Area No. 14 County of Orange(unincorporated areas) Cities: Irvine Orange Tustin Special District: Irvine Ranch Water District Governing Body: 25-member Board of Directors Authorized Full-Time Equivalent Employees: 635 Operational Date: July 1, 1954 Authority: California Health & Safely Code Section 4700 at. seq. Services: Wastewater collection,treatment,and disposal Service Area: 479 square miles Population Served: 2.6 million Total Miles of Sewers (including force mains): 396 miles Number of Pumping Stations: 17 Wastewater System Treatment Capacities (Million Gallons per Day) Actual Flows Existing Primary Existing Secondary FY17-18 Treatment Capacity Treatment Capacity Plant 1 121 208 182 Plant 2 64 168 150 Total 1$5 376 332 Source: Orange County Sanitation District's Financial Management Division. 81 (THIS PAGE INTENTIONALLY LEFT BLANK) 82 ORANGE COUNTY SANITATION DISTRICT OTHER DATA &TRENDS Information within this section consists of other data and trends including additional annual disclosures as required by the Sanitation Districts debt covenants beyond what is allowed to be reported in the Statistical Section. 83 ORANGE COUNTY SANITATION DISTRICT Cash and Investment Portfolio As of June 30, 2018 Net Unrealized Cost Markel Value Gain/(LOSS) Shares Par Base Base %of Total Base INVESTMENT PORTFOLIO: CASH&CASH EQUIVALENTS(U.S. DOLLAR): FINANCE $ 2,000,000 $ 2,003,880 $ 2,000,730 0.32% $ (3,150) FIRST AMERICAN SHORT TERM FOS 15,255,857 15,255,857 15,255,857 2.47% - SHORT TERM FUNDS 2,000,000 1,998,300 1,999,700 0.32% 1,400 SUPRANATIONAL 5,000,000 4,979,075 4,997,100 0.81% 18,025 U.S.GOVERNMENT 21,000,000 20,932,717 21,000,000 3.40% 67,283 US AGY-SHORT TERM CASH EQUIV 33,255,000 33,194,553 33,206,423 5.37% 11,870 SUBTOTAL-CASH&CASH EQUIVALENTS 78,510,857 78,364,382 78,459,810 12.70% 95,428 FIXED INCOME SECURITIES(U.S. DOLLAR): COMMERCIAL PAPER 27,100,000 26,893,589 26,964,147 4.36% 70,558 CONSUMER DISCRETIONARY 5,500,000 5,544,240 5,476,800 0.89% (67,440) CONSUMER STAPLES 3,880,000 3,878,991 3,908,867 0.63% 29,876 ENERGY 8,850,000 8,856,037 8,661,562 1.40% (194,475) FINANCE 62,008,000 61,419,298 58,744,606 9.51% (2,674,692) FIXED INCOME FUNDS OTHER 2,950,000 2,941,423 2,943,775 0.48% 2,352 HEALTH CARE 4,000,000 4,009,675 3,981,040 0.64% (28,635) INDUSTRIAL 9,860,000 9,883,495 9,820,463 1.59% (63,032) INFORMATION TECHNOLOGY 20,715,000 20,582,925 20,178,517 3.27% (404,408) INVESTMENT GRADE-MUNI REVENUE 4,240,000 4,307,634 4,382,355 0.71% 74,721 MATERIALS TRANSPORTATION 1,205,000 1,198,514 1,199,324 0.19% 810 MTG RELATED SECURITY 36,310,853 36,260,363 36,224,006 5.86% (36,357) SHORT TERM FUNDS 10,825,000 10,817,731 10,817,523 1.75% (208) SUPRANATIONAL 36,005,000 35,739,638 35,062,238 5.67% (677,400) U. S.GOVERNMENT 210,908,222 208,980,724 207,253,688 33.54% (1,727,036) U.S.GOVERNMENT TIPS 10,972,312 10,827,592 10,665,636 1.73% (161,956) US AGY-LONG TERM ISSUES 94,865,000 94,552,136 93,237,425 15.09% (1,314,711) SUBTOTAL-FIXED INCOME SECURITIES 550,194,387 546,694,005 539,521,972 87.30% (7,172,033) TOTAL INVESTMENT PORTFOLIO $ 62&705,244 625,058,387 617,981,782 100,00% $ (7,076,605) DEMAND DEPOSITS AND CASH ON HAND 2,414,045 2,414,045 MONIES HELD WITH FISCAL AGENTS 4,953,800 4,953,800 MONIES WITH THE LOCAL AGENCY INVESTMENT FUND 55,208,090 55,104,678 TOTAL CASH AND INVESTMENTS $ 687,634,322 $ 680,454,305 Source: US Bank and Orange County Sanitation Districts Financial Management Division. 84 ORANGE COUNTY SANITATION DISTRICT Property Tax Rates-Direct and Overlapping Governments Last Ten Fiscal Years Tax Rate OCSD 1958 OCSD's General Average Fiscal Basic Obligation Total Share of Year Levy Bonds Tax Rate Basic Levy 2008-09 1.00% 0.00% 1.00% 1.64% 2009-10 1.00% 0.00% 1.00% 1.63% 2010-11 1.00% 0.00% 1.00% 1.64% 2011-12 1.00% 0.00% 1.00% 1.64% 2012-13 1.00% 0.00% 1.00% 1.64% 2013-14 1.00% 0.00% 1.00% 1.65% 2014-15 1.00% 0.00% 1.00% 1.63% 2015-16 1.00% 0.00% 1.00% 1.62% 2016-17 1.00% 0.00% 1.00% 1.61% 2017-18 1.00% 0.00% 1.00% 1.59% Notes In 1978, California voters passed Proposition 13 which set the property tax rate at a 1.00% fixed amount of assessed value. This 1.00% is shared by all taxing agencies within which the subject property resides. In addition to the 1.00% fixed amount, property owners were charged taxes as a percentage of assessed property values for the payment of OCSD general obligation bonds (which were paid in full in fiscal year 1998-99). Source: County of Orange Auditor-Controller's Office. 85 ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property (Dollars In Thousands) Last Ten Fiscal Years sasoa0a 000 ' 95owoo E]00.0000 Qso,a0011 10 NO"I Ss0,w0.000 L 9 9 0 1 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 201617 201]48 Percent Changein Fiscal Assessed Year Secured Unsecured Total Value 2008-09 $ 301,717,479 $ 5,894,003 $ 307,611,482 5.08% 2009-10 299,038,654 6,116,530 305,155,184 -0.80% 2010-11 298,099,034 6,238,834 304,337,868 -0.27% 2011-12 302,526,970 6,163,979 308.690.949 1.43% 2012-13 310,451,986 5,901,040 316,353,026 2.48% 2013-14 323,064,994 6,220,505 329,285,499 4.09% 2014-15 343,102,030 7,378,643 350,480,673 6.44% 2015-16 365,267,850 6,936,768 372,204.618 6.20% 2016-17 385,137,024 6,642,312 391,779,336 5.26% 2017-18 409,310,248 6,990,609 416,300,857 6.26% In 1978,the voters of the Stale of California passed Proposition 13 which limited property taxes to a total maximum rate of 1% based upon the assessed value of the property being taxed. Each year,the assessed value of property may be increased by an inflation factor which is limited to a maximum increase of 2%. With a few exceptions, property is only reassessed at the time that it is sold to a new owner. At that point, the new assessed value is reassessed at the purchase price of the property sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above. Consequently,the assessed and estimated values are the same. Source: Orange County Auditor-Controllers Office. 86 ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 290e oe 209910 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016 n 2917-18 (11 Total Tax Current Tax Percent Total Tax %of Total %of Pass. Fiscal and User and User Fee of Levy Delinquerd and User Fee Collection Off; Delinquencies Through Year Fee Levy Collection Collected Collection Collection W Levy Delinquencies to Levy Payments 2008-09 $254,092 $ 254,106 100.01 $ 395 $ 254,501 100.16 $ (14) (0.01) $ - 2009-10 272,050 272,110 100.02 226 272,336 100.11 (60) (0.02) - 2010-11 292,646 292,689 100.01 120 292,809 100.06 (43) (0.01) - 2011-12 314,077 314,133 100.02 121 314,254 100.06 (56) (0.02) 3,116 2012-13 340,298 340,156 99.96 64 340,220 99.98 142 0.04 14,687 2013-14 356,607 356,108 99.86 76 356,194 99.88 499 0.14 7,274 2014-15 362,978 362.927 99.99 108 363,035 100.02 51 0.01 8,447 (2) 2015-16 371,502 370,170 99.64 637 370,807 99.81 1,332 0.36 9,199 (2) 2016-17 381,226 380,078 99.70 608 380,686 99.86 1,148 0.30 9,751 2017-18 386,538 385,673 99.78 741 386,414 99.97 865 0.22 11,353 Notes (1) Upon dissolution of California redevelopment agencies during fiscal year 2011-12, property tax increment formerly remitted to OCSD by its member city redevelopment agencies was instead deposited into the newly formed Redevelopment Property Tax Trust Fund(RPTTF)from which the Auditor/Controller makes disbursements on behalf of the successor agencies. There is no tax levy associated with these collections; thus,they have been excluded from the"%of Total Collection to Levy"calculation. (2)In fiscal year 20W5 and 2015-16,the County did not bill user fees for wholly exempt agencies not subject to property, taxes. In fiscal year 2014-15 and 2015-16,OCSD internally billed user fees of$5 million and $4.5 million, respectively,to wholly exempt agencies. These amounts have been excluded from the levy and collection amounts above,as only tax and user fees included on County property tax billings are shown in this schedule. Source:Orange County Auditor-Controller's Office. 87 ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange(t) (Dollars In Thousands) Last Ten Fiscal Years Non- Assessed Residential Residential Property Value(2) Construction(3) Construction(3) Total Fiscal Calendar No.of Construction Year Value Year Value Units Value Value(3) 2008-09 $ 428,809,224 2009 $ 952,480 2,200 $ 855,193 $ 1,807,673 2009-10 422,965,596 2010 1,151,929 3,091 1,029,407 2,181,336 2010-11 420,751,575 2011 1,300,019 4,807 1,236,973 2,536,992 2011-12 424,769,642 2012 1,265,430 6,163 1,560,509 2,825,939 2012-13 432,902,274 2013 1,521,280 10,453 2,653,728 4,175,008 2013-14 447,749,156 2014 1,993,154 10,636 2,640,484 4,633,638 2014-15 476,303,290 2015 2,196,000 10,897 2,834,000 5,030,000 2015-16 504,650,360 2016 2,487,000 12,134 3,160,000 5,647,000 2016-17 531,052,158 2017 2,284,000 9,593 3,321,000 5,605,000 2017-18 563,662,044 2018 2,787,000 11,204 3,908,000 6,695,000 (4) Notes and Data Sources (1) -The Orange County Sanitation District services 479 square miles or 60% of the total 799 square miles that make up the boundaries of the County of Orange. (2)-Data Source: Orange County Auditor-Controller's Office. (3)-Data Source: A. Gary Anderson Center for Economic Research, Chapman University. (4)-Forecasted numbers. 88 ORANGE COUNTY SANITATION DISTRICT Insurance in Force As of June 30, 2018 Type Insurer Deductible Limit All-Risk Property Fire and Other Perils Public Entity Property $500,000 per $1 billion/occurrence Insurance Program occurrence (multiple insurers) Flood Public Entity Property $100,000 per $300 million/occurrence Insurance Program occurrence Earthquake Three insurers 5% per structure, $25 million (certain structures only) min.$5,000,000 Boiler&Machine ry Public Entity Property $25,000 to $100 million/occurrence Insurance Program $350,000 (multiple insurers) Crime Insurance National Union Fire $25,000 $5 million Cvber Insurance Lloyd's of London(Beazley) $100,000 $2 million Excess Great American $500,000 $40 million/occurrence General Liability (first$10 million layer); and annual aggregate Berkley National ($20 million layer excess$10 million) Great American ($10 million layer excess$30 million) Travel &Accident Chubb Group of Insurance None Accidental Death& Dismemberment: Companies Class 1: Elected Officials, $500,000 per occurrence Class 2: Employees, 10X annual salary, up to$500,000 per occur. Excess Workers' CSAC Excess Insurance $1,000,000 Unlimited statutory coverage Compensation Authority Program Each Accident each accident,each employee $4 million employers liability Pollution Liability CSAC Excess Insurance $75,000 to $10,000,000 per loss Authority Program $250,000 Watercraft Liability Atlantic Specialty $10,000 $10 million Hull &Machinery Atlantic Specialty $10,000 $1.3 million Pollution Liability Great American Ins. Co, None $5 million Source: Orange County Sanitation District's Risk Management Office. 89 (THIS PAGE INTENTIONALLY LEFT BLANK) 90 O iMF ORANGE COUNTY SANITATION DISTRICT FINANCIAL MANAGEMENT DIVISION 10844 Ellis Avenue Fountain Valley, California 92708-7018 714.962.2411 www.ocsd.com 06/30/18