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Home My WebLink About11-04-2009 Administration Committee Agenda AGENDA SPECIAL MEETING OF THE ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, NOVEMBER 4, 2009, AT 5:00 P.M. ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com PLEDGE OF ALLEGIANCE DECLARATION OF QUORUM PUBLIC COMMENTS REPORT OF COMMITTEE CHAIR REPORT OF GENERAL MANAGER REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES CONSENT CALENDAR ITEMS (1) 1. Approve minutes of the October 14, 2009, meeting of the Administration Committee. ACTION ITEMS (2) 2. Recommend to the Board of Directors to receive and file: a) Comprehensive Annual Financial Report for the year ended June 30, 2009, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; b) Report on Compliance and Internal Control for the year ended June 30, 2009; and; c) Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. November 4, 2009 Page 2 INFORMATIONAL ITEMS No items. CLOSED SESSION ...................................................................................................................................................................................................................................................................................... During the course of conducting the business set forth on this agenda as a regular meeting of the Committee, the Chair may convene the Committee in closed session to consider matters of pending real estate negotiations, pending or potential litigation, or personnel matters, pursuant to Government Code Sections 54956.8, 54956.9, 54957 or 54957.6, as noted. Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) employee actions or negotiations with employee representatives; or which are exempt from public disclosure under the California Public Records Act, may be reviewed by the Committee during a permitted closed session and are not available for public inspection. At such time as final actions are taken by the Committee on any of these subjects,the minutes will reflect all required disclosures of information. Convene in closed session. Reconvene in regular session. Consideration of action, if any, on matters considered in closed session. Other business and communications or supplemental agenda items, if any. Adjournment: The next regular Administration Committee meeting is scheduled for Wednesday, December 9, 2009, at 5 p.m. November 4, 2009 Page 3 Agenda Posting: In accordance with the requirements of California Government Code Section 54954.2, this agenda has been posted in the main lobby of the District's Administrative offices not less than 72 hours prior to the meeting date and time above. All public records relating to each agenda item, including any public records distributed less than 72 hours prior to the meeting to all, or a majority of all, of the members of District's Board, are available for public inspection in the office of the Clerk of the Board, located at 10844 Ellis Avenue, Fountain Valley, California. Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency item or because there is a need to take immediate action, which need came to the attention of the Committee subsequent to the posting of agenda, or as set forth on a supplemental agenda posted in the manner as above, not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Administration Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be deferred until the specific item is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Committee except as authorized by Section 54954.2(b). Consent Calendar: All matters placed on the consent calendar are considered as not requiring discussion or further explanation, and unless a particular item is requested to be removed from the consent calendar by a Director of staff member, there will be no separate discussion of these items. All items on the consent calendar will be enacted by one action approving all motions, and casting a unanimous ballot for resolutions included on the consent calendar. All items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held within five (5) days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adjournment: This meeting may be adjourned to a later time and items of business from this agenda may be considered at the later meeting by Order of Adjournment and Notice in accordance with Government Code Section 54955 (posted within 24 hours). Accommodations for the Disabled: The Board of Directors Meeting Room is wheelchair accessible. If you require any special disability related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at (714) 593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. Notice to Committee Members: For any questions on the agenda or to place any items on the agenda, Committee members should contact the Committee Chair or Clerk of the Board ten days in advance of the Committee meeting. Committee Chair: Mark Waldman (714)827-1969 Committee Secretary: Lilia Kovac (714)593-7124 Ikovac(a)ocsd.com General Manager: Jim Ruth (714)593-7110 jruth(a�ocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 rghirelli(o)ocsd.com Director of Finance and Lorenzo Tyner (714)593-7550 Ityner cr.ocsd.com Administrative Services Human Resources and Employee Jeff Reed (714)593-7144 ]reed CcDocsd.corn Relations Manager H:\dept\asd\210\crane\AdminComm\ADMIN2009\Admin Committee finals\11-04-09\03 022109 Admin Agenda.docx ADMINISTRATION COMMITTEE Meeting Date To Bd.of Dir. 11/04/09 11/18/09 AGENDA REPORT Item Number Item Number 2 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services GENERAL MANAGER'S RECOMMENDATION Receive and file the: 1) Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2009, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; 2) Report on Compliance and Internal Control for the year ended June 30,2009; and 3) Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets SUMMARY The Sanitation District's independent auditors, Mayer Hoffman McCann P.C. (MHM), have completed their examination of the Sanitation District's financial statements for the year ended June 30, 2009, and have issued an unqualified opinion. Each year, the Administration Committee reviews the results of the audit and the corresponding Auditor's report to the Committee. During the audit performed by MHM, no matters involving the internal control over financial reporting and its operations that the auditors consider to be material weakness were noted. Jennifer Farr, Partner, will attend the meeting to respond to any questions of Directors. This year, staff has again prepared the Comprehensive Annual Financial Report that includes the audited financial statements. For the last fourteen years, the Sanitation District has earned the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA). This year's report will again be submitted to GFOA for their review in anticipation of another award. Form No.DW-102.3 Revised:09/01/2009 Page 1 PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION None. ATTACHMENTS 1. Comprehensive Annual Financial Report for the year ended June 30, 2009. 2. Report on Compliance and Internal Control Over Financial Reporting. 3. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. 4. Report on Required Communication with Those in Governance. JDR:LT:MW:lc Form No.DW-102.3 Revised:09/01/2009 Page 2 ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2009 Prepared By: Administrative Services Department Financial Management Division Michael D. White, CPA Controller (THIS PAGE LEFT INTENTIONALLY BLANK) ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30, 2009 Paqe INTRODUCTORY SECTION: Letterof Transmittal..................................................................................................................... i GFOA Certificate of Achievement ............................................................................................... viii Boardof Directors........................................................................................................................ ix OrganizationChart....................................................................................................................... x Mapof Service Area.................................................................................................................... A FINANCIAL SECTION: Independent Auditors' Report...................................................................................................... 1-2 Management's Discussion and Analysis— Required Supplementary Information....................... 3-8 Basic Financial Statements: Statementof Net Assets..................................................................................................... 10 Statement of Revenues, Expenses, and Changes in Net Assets...................................... 11 Statementof Cash Flows.................................................................................................... 12 Notes to Basic Financial Statements.................................................................................. 13-35 Supplementary Information: Scheduleof Net Assets....................................................................................................... 38 Schedule of Revenues, Expenses, and Changes in Net Assets ....................................... 39 Scheduleof Cash Flows ..................................................................................................... 40 STATISTICAL SECTION: Net Assets by Component— Last Nine Fiscal Years................................................................... 42 Revenues and Gross Capital Contributions by Source— Last Ten Fiscal Years......................... 43 Expenses by Type—Last Ten Fiscal Years ................................................................................ 44 Change in Net Assets— Last Nine Fiscal Years.......................................................................... 45 Cash and Investment Reserve Balances—Last Ten Fiscal Years.............................................. 46 Sewer Service Fees—Last Nine Fiscal Years & Next Fiscal Year.............................................. 47 Number of Accounts and Revenues by Customer Class— Last Ten Fiscal Years ..................... 48 Principal Sewer Service Customers—Current Fiscal Year and Nine Years Ago........................ 49 Ratio of Annual Debt Service to Total Expenses—Last Ten Fiscal Years.................................. 50 Debt Coverage Ratios—Last Ten Fiscal Years........................................................................... 51 Computation of Direct and Overlapping Debt—Current Fiscal Year........................................... 52 Ratios of Outstanding Debt—Last Ten Fiscal Years................................................................... 53 Comparison of the Volume of Wastewater Treated— Last Ten Fiscal Years ............................. 54 Authorized Full-time Equivalents by Function— Last Ten Fiscal Years....................................... 55 Biosolids Produced— Last Ten Fiscal Years............................................................................... 56 Capital Asset Statistics— Last Ten Fiscal Years ......................................................................... 57 Demographic Statistics—Last Ten Fiscal Years......................................................................... 58 Estimated Populations Served by Orange County Sanitation District—Current Fiscal Year....... 59 Principal Orange County Employers—Current Fiscal Year and Nine Years Ago........................ 60 OperatingIndicators .................................................................................................................... 61 OTHER DATA&TRENDS: Cash and Investment Portfolio—As of June 30, 2009 ................................................................ 64 Property Tax Rates—Direct and Overlapping Governments—Last Ten Fiscal Years ............... 65 Assessed and Estimated Actual Value of Taxable Property— Last Ten Fiscal Years................. 66 Property Tax and User Fee Levies and Collections— Last Ten Fiscal Years.............................. 67 Property Value and Construction— Last Ten Fiscal Years.......................................................... 68 Insurance in Force—Next Fiscal Year ........................................................................................ 69 (THIS PAGE LEFT INTENTIONALLY BLANK) oJNZV_S k�H ORANGE COUNTY SANITATION DISTRICT THE ENV\Q October 22, 2009 10844 Ellis Avenue Fountain Valley,CA The Board of Directors of the 9270&7018 Orange County Sanitation District, Mailing Address Orange County, California P.O. Box 8127 Fountain Valley,CA 27 Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation 92728-8127 P P 9 tY District, Orange County, California for the fiscal year ended June 30, 2009. This report includes the www.omd.com financial position and activity of individual revenue areas, as described within the Governmental Phone Structure below, as of June 30, 2009 and was prepared by the Financial Management Division of the (714)962-2411 Sanitation District's Administrative Services Department. Fax Responsibility for both the accuracy of the data and the completeness and fairness of the (714j 962-0356 P y y � P presentation, including all disclosures, rests with the Sanitation District. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a Serving manner designed to present fairly the financial position and results of operations of the Sanitation District. All disclosures necessary to enable the reader to gain an understanding of the agency's Anaheim financial activities have been included. Brea Buena Perk Included within the accompanying financial statements are all of the organizations, activities, and cypress functions controlled by the Sanitation District's Board of Directors in accordance with the Governmental Accounting Standards Board Statement Number 14, "The Financial Reporting Entity". Fountain valley For the purpose of this evaluation, control was determined by the Board's responsibility for: (1) Fullerton adoption of the budget and user charges, (2) taxing authority, and (3) establishment of policies. The Garden Grove reporting entity and its services are described in further detail in Note 1 of the financial statements. Huntington Beach An audit of the books, financial records and transactions of the Sanitation District is conducted Irvine annual) b independent certified y y p public accountants. The Sanitation District selected the Le Habra accounting firm of Mayer Hoffman McCann P.C. to perform the audit for the year ended June 30, Le Palma 2009. The auditors' report on the Sanitation District's basic financial statements and supplementary Los Alamitos information is located on page 1 within the financial section of this report. This report renders an Newport Beech unqualified opinion on the Sanitation District's basic financial statements for the year ended June 30, 2009. Orange Placentia Management's discussion and analysis(MD&A) immediately follows the independent auditor's report Santa Ana and provides a narrative introduction, overview, and analysis of the basic financial statements. The Seel Beach MD&A complements this letter of transmittal and should be read in conjunction with it. Stanton Tustin GOVERNMENTAL STRUCTURE Villa Perk The Orange County Sanitation District encompasses the Northern section of Orange County. The Yorba Linde Sanitation District provides wastewater treatment for an area of the County covering 471 square costa Mesa miles and serving a population of approximately 2.5 million, or 81 percent of the County's population. Sanitary District The Sanitation District was originally incorporated in 1954 as nine separate public corporations, or MidwayC4 districts. In April of 1998, at the Sanitation District's request, the Board of Supervisors of the County Sanitary District of Orange passed Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Irvine Ranch Districts into a new, single sanitation district, to be known as the Orange County Sanitation District, Water District effective July 1, 1998. This action was recommended to the Board by the Local Agency Formation County of Orange Commission in order to simplify governance structures, reduce the size of the Board, ease administrative processes, streamline decision-making and consolidate accounting and auditing i We protect public health and the environment by providing effective wastewater collection, treatment, and recycling. processes. The boundaries of the nine previous districts had remained intact for the purpose of 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 582 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. 2 located in the City of Huntington Beach. Plants No. 1 and No. 2 have primary treatment capacities, including standby, of 204 million gallons per day (mgd) and 168 mgd, respectively. In fiscal year 2008-09, approximately 77 percent of the advanced primary effluent also received secondary treatment. Both plants are master-planned for a future primary and secondary treatment capacity of 235 mgd for a combined total of 470 mgd by the year 2070. Outflows of treated wastewater from the two plants 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, Orange County experienced a year-over-year job loss of 4.8 percent, or 72,600 jobs, as of April 2009, totaling 24 consecutive monthly declines in payroll employment. In June 2009, the Anderson Center for Economic Research at Chapman University reported that Orange County entered into a recession as of December 2007 that began with the collapse of home prices and construction activity that quickly spread into other sectors of the economy. The trouble in the construction sector started with a drop in home-building activity and led to the decline in nonresidential sector construction due to higher vacancy rates, lower lease rates, and prices. Chapman University believes that the construction sector will continue to lose jobs through the first quarter of 2010 and is the weakest sector of the Orange County economy. Job losses in financial activities, including real-estate and mortgage-lending services, are directly influenced by construction activity. And many jobs in professional and business services, such as architectural, legal and even accounting services are negatively impacted by the demise of the construction sector. The only exception is the education and health services sector with a year- over-year job gain. With moderate job losses in the first half of 2010 and a rebound in the second half of the year, average annual payroll job losses for all of 2010 are forecasted to be about 2,000 for Orange County and 56,000 for California. Sharp declines in payroll employment and loss of jobs among the self-employed increased unemployment rates to historical highs throughout California. As of April 2009, Fresno had the highest unemployment rate among the ten largest metropolitan areas of the state while Orange County and San Francisco were the best performers at 8.3 percent. With such a rapid increase in unemployment rates, declining home prices coupled with stock market volatility, it is not surprising to see consumer confidence collapsing. Chapman University's quarterly survey of California consumer sentiment index stands at the second lowest level since the survey was in initiated in 2002. Consumers are cutting back on spending and this , in turn, is putting downward pressure directly on employment in the retail, food and leisure sectors and is indirectly impacting employment in the wholesale, transportation and manufacturing sectors. Taxable sales has fallen steadily each year from increases of 8.7 percent, 6.5 percent, 3.9 percent, and 0.2 percent in 2004, 2005, 2006, and 2007, to an actual decrease in 2008 and projected decrease in 2009 of 3.0 percent and 3.1 percent, respectively, before finally rebounding with a projected increase in 2010 of 2.1 percent. According to Chapman University, the year-over-year percentage change in real U.S. exports should bottom-out in the fourth quarter of 2009 and gradually show positive growth rates throughout 2010. On average, real exports is projected to increase at an annual rate of 5.1 percent in 2010 after declining by 13.2 percent in 2009. This trend should positively influence employment in the manufacturing and wholesale trade sectors. Similarly, year-over-year quarterly percentage changes in the real growth domestic product (GDP) should reach a trough in the second quarter of 2009 and steadily increase in 2010. Although the Chapman University forecasts improvements in real exports and GDP, construction spending is projected to remain depressed. Construction spending is based on a lagged total building permit valuation. The rational for using lagged values is that a residential or nonresidential permit taken out in some earlier period will result in construction spending after some period of time. The total value of permit valuation steadily dropped in Orange County from a 31.2 percent increase in 2006 to declines of 19.5 percent and 34.8 percent in 2007 and 2008, respectively, and projected declines of 23.5 percent and 9.4 percent in 2009 and 2010, respectively. Hence, construction spending, computed based on the level of permit valuation in 2008 and 2009, will continue to decline throughout 2010. Chapman University's projection of continuing job losses through the middle of next year will negatively impact the housing market. However, favorable trends in home sales activity, mortgage rates, income, housing affordability, the supply of new and resale housing units will more than offset job losses as the Orange County median resale single-family home price is forecasted to increase 1.6 percent in 2010. MAJOR INITIATIVES Moving Towards Full Secondary Treatment Standards The Sanitation District's Board of Directors decided in July 2002 to voluntarily give up its modified ocean discharge permit, issued under section 301(h) of the Federal Clean Water Act, which allowed the Sanitation District to discharge a higher level of Suspended Solids and Biochemical Oxygen Demand than otherwise required by the Act if adequate environmental and public health protection was demonstrated. To obtain a renewal of its ocean discharge permit without the modification (often referred to as a "waiver"), the Sanitation District is undertaking a massive capital improvement program ("CIP") of iii building new, and rehabilitating existing, facilities in order for the Sanitation District to operate its facilities in a manner that will allow it to achieve secondary treatment standards as defined by the Act. Construction of the capital improvements necessary to achieving secondary treatment standards will take until December 31, 2012. Permits are issued for a five (5) year duration, and the U.S. Environmental Protection Agency (EPA) has no authority to waive the discharge limits requirements or grant a longer permit(except per Sec. 301(h)). In November 2004, a consent decree was signed by EPA and filed with the U.S. District Court that approved the construction schedule and decrees that no penalties will be imposed for discharges that exceed the secondary treatment limits during the period of construction. Seven milestones towards achieving secondary treatment standards were identified within the consent decree along with due dates. The District is in compliance with the decree and has successfully completed four of these milestones within the time permitted, as follows: • On March 15, 2006—Completion of the new$44.4 million"Trickling Filter Facility"at Plant No. 1. • On November 15, 2006 — Completion of the design and advertising for construction of the "New Activated Sludge System"at Plant No. 1. • On January 15, 2007 — Completion of the design and advertising for construction of "Trickling Filters at Plant No. 2". • On March 28, 2008 — Completion of construction for "Rehabilitation of Activated Sludge Plant at Plant No.2." Following are the timeline for the remaining three milestones: • February 15, 2011 —Complete construction of Plant No. 2 secondary treatment expansion. • November 15, 2012—Complete construction of Plant No. 1 secondary treatment expansion. • December 31, 2012 — Achieve full compliance with the Code of Federal Regulations secondary treatment requirements Strategic Planning In November 2007, the Board of Directors adopted a new comprehensive strategic plan to drive OCSD's efforts and engage the organization to envision service and operations for the next five years. In continuing to look at the five-year horizon, the Strategic Plan was updated in November 2008. Following a similar process from the previous plan adoption, the General Manager's Office initiated the planning effort with the Executive Management Team, then solicited input and ideas from managers and supervisors. In October 2008, the staff-generated ideas were presented to the Board of Directors during a workshop, where Board Members discussed and deliberated changes and additions to the plan. Driven by our mission, vision and core values, this Strategic Plan, updated for 2009, continues our aggressive efforts to meet the sanitation, health, and safety needs of the more than 2.5 million people we serve while protecting the environment where we live. In the past year, nearly 30 percent of the goals were completed. For 2009, this Strategic Plan presents five new goals and maintains the high standards set in the past plan. iv These new goals were discussed at the October 15 Board of Directors workshop and include the following: • Reaffirming OCSD's commitment to expand the Groundwater Replenishment System, including completion of the Steve Anderson Lift Station and studying the potential to include flows from the Santa Ana River Interceptor. • Analyzing whether adding chlorine to disinfect effluent into the ocean is cost-effective in comparison to other alternatives that maintain protection of public health and safety. • Evaluating and promoting OCSD's environmental initiatives and seeking additional opportunities to utilize emerging technologies. • Continuing to assess and identify risks to OCSD, including political and financial risks, and developing mitigation strategies. • Developing a comprehensive human resources strategic plan to connect employees with the overall mission, values, and vision of the organization and preparing employees for future leadership opportunities. 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 clear and concise direction to staff, ratepayers, regulatory agencies, the public, and our Board of Directors. SERVICE EFFORTS AND ACCOMPLISHMENTS In July 2008, the Sanitation District received a Gold "Peak Performance" Award from the National Association of Clean Water Agencies. This prestigious award recognizes the Sanitation District's outstanding work in protecting the nation's water resources. The award recognizes both the Sanitation District's Reclamation Plant No. 1 and Treatment Plant No. 2 for 100 percent compliance with its National Pollutant Discharge Elimination System permit for an entire year. In December 2008, the Sanitation District received an "Excellence in Information Technology Award" from the Municipal Information Systems Association of California. This award recognizes public agency efforts in the information technology area and the Sanitation District was one of the only two public agencies within the County of Orange to receive this award. In December 2008, the Sanitation District received the "The Best Vibration Analysis Program of the Year" award at the 2008 Predictive Maintenance Technology Conference. The Sanitation District's Vibration Analysis Program won over 100 government and private entities including power generation plants, chemical manufacturing plants, steel, service automotive companies, and other governmental agencies. 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 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 v 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. CASH MANAGEMENT The Sanitation District's investment portfolio, except for the Sanitation District's debt service reserves, investments with the State Local Agency Investment Fund, and overnight repurchase agreements of idle cash within the Sanitation District's general bank account, are managed by an outside money manager, Pacific Investment Management Company (PIMCO), who performs the daily investment activities, and by Mellon Trust, who serves as the Sanitation District's independent custodian bank. This externally managed portfolio consists of a short term investment pool of $54,316,000 at June 30, 2009 that has average maturities out to 110 days, and a long-term investment pool of$346,345,000 that has average maturities out to 3.6 years. Investments of this externally managed investment portfolio consist of U.S. Government securities, corporate bonds, commercial paper, and money market mutual funds. Investments of the Sanitation District's debt service reserves totaling $95.4 million consist of bank investment contracts of$26.8 million and U.S. Government securities and open-ended mutual funds of $68.6 million. The Bank Investment Contracts are with Bayerische Landesbank Girozentrale ($17.3 million maturing in 2016) and FSA Capital Management Services LLC($9.5 million maturing in 2030). Investment income includes changes in the fair value of investments. Increases or decreases in fair value during the current year do not necessarily represent trends that will continue; nor is it always expected that such amounts will be realized, especially in the instance of temporary changes in the fair value of investments. Investment earnings for the year were $14,836,000, a decrease of $5,399,000 from the prior fiscal year total of$20,235,000. This decrease in investment and interest income is attributable to lower yields earned on investments, as investments earnings yielded 2.9 percent, a decrease from the prior year earnings rate of 4.8 percent. The decrease in the yields earned on investments was partially offset by the change in unrealized gains and losses from year-to-year. As of June 30, 2009, the Sanitation District went from an unrealized loss on investments of$1,312,000 at June 30, 2008 to an unrealized loss of$154,000, or a total increase in market value on investments of$1,158,000. However, the Sanitation District's investment policy is structured conservatively towards liquidity to avoid having to sell investments at a loss and having unrealized losses actually becoming realized losses. As of June 30, 2009, the Sanitation District's designated net assets totaled $534 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District's reserve policy: Designated For Cash Flow Contingency $172 million Designated For Self-Insurance 57 million Designated For Capital Improvements 172 million Designated For Debt Service Requirements 133 million Total Designated Net Assets $534 million vi RISK MANAGEMENT For the year ended June 30, 2009, the Sanitation District was self-insured for a portion of workers' compensation and property damage. The self-insured portion for workers' compensation was $500,000 per person per occurrence with outside excess insurance coverage to the statutory limit. The self-insured portion for property damage covering fire, and other perils other than flood and earthquake was $25,000 per occurrence with outside excess insurance coverage to $1.0 billion. The self-insured portion for property damage covering flood was $100,000 per occurrence with outside excess insurance coverage to $300 million. The Sanitation District was self-insured for all property damage from the perils of earthquakes. The Sanitation District also maintained outside comprehensive boiler and machinery insurance with a $100 million per occurrence combined limit with deductibles ranging from $25,000 to $350,000. The Sanitation District was insured for general liability up to $30 million per occurrence with a self-insured portion of$250,000. The self-insurance portion of the pollution liability exposure is $100,000 per the loss deductible under the outside pollution liability insurance coverage up to$10 million. Sanitation District management believes that there are no outstanding claims as of June 30, 2009 that would materially affect the financial position of the Sanitation District. 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, 2008. This was the fifteenth 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 those who assisted in its preparation. I would also like to thank the Sanitation District's Board of Directors, the General Manager, and the Director of Finance and Administrative Services for their interest and support in conducting the financial operations of the Sanitation District in a responsible and progressive manner. Respectfully submitte 4c Michael D. White, CPA Controller vii 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 30,2008 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports(CAFRs)achieve the highest standards in government accounting and financial reporting. ` a m CQKMIE AM President KFA Executive Director Vlli ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2009 ALTERNATE AGENCY ACTIVE DIRECTOR DIRECTOR Cities: Anaheim Harry Sidhu Lucille Kring Brea Roy Moore Ron Garcia Buena Park Patsy Marshall Fred Smith Cypress Phil Luebben Prakash Narain Fountain Valley Larry Crandall Steve Nagel Fullerton Sharon Quirk Pam Keller Garden Grove Bill Dalton Andrew Do Huntington Beach Keith Bohr Don Hansen Irvine Christina Shea Steven Choi La Habra Tom Beamish Rose Espinoza La Palma Mark Waldman Henry Charoen Los Alamitos Troy Edgar Ken Stephens Newport Beach Don Webb Leslie Daigle Orange Jon Dumitru Denis Bilodeau Placentia Constance Underhill Joseph Aguirre Santa Ana Sal Tinajero David Benavides Seal Beach Charles Antos Gordon Shanks Stanton David Shawver Carol Warren Tustin Doug Davert John Nielson Villa Park Brad Reese Bill MacAloney Yorba Linda John Anderson Jim Winder Sanitary/Water Districts: Costa Mesa Sanitary District James M. Ferryman Robert Ooten Midway City Sanitary District Joy L. Neugebauer Allan P. Krippner Irvine Ranch Water District John Withers Douglas Reinhart County Areas: Member of the Board of Supervisors Chris Norby Janet Nguyen 1X ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30, 2009 BOARD OF DIRECTORS GENERAL GENERAL MANAGER COUNSEL GENERAL OFFICE MANAGEMENT ADMINISTRATION ADMINISTRATIVE TECHNICAL OPERATIONS General SERVICES SERVICES ENGINEERING AND Management MAINTENANCE Administration Assistant General Administrative Technical Services Operations& Engineering Plant No.1 Manager Services Administration& Maintenance Administration Operations Administration Administration Research Administration Environmental Collection Facilities Board Services Financial Compliance& PlanningPlant No.2 Management p Operations& Operations Regulatory Affairs Maintenance Public Information Contracts, Environmental Project Facilities Mechanical& Office Purchasing& Laboratory& Management Maintenance& Reliability Services Materials Mgmt. Ocean Monitoring Office Fleet Services Engineering and Process Instrumentation& Safety and Health Human Resources Source Control Construction Engineering Electrical Maintenance Information Facilities Technology Engineering X ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2009 SANtr�ray LOS ANGELES COUNTY 0 ORANGE UNTY f9le HABRA BREA oG °o J� FULLERTON PLACENTIA 4INDA BUE LA AR Fo PALMA Cr HEIM CYPRESS VILLA -o © J. PAR P LOS STANTON ORANGE ALAMITOS GARDEN GROVEAL EACH STMINSTER _ SANTA ANA G� UNMIN TUSTIN V Y HUNTINGTONOCSD ration BEACH 31ant No. ' / bOSTA � A MESA A rocrfrc — �CSD IRVINE Ocean Treatmen Plant No.2 EM.9-3 NpNne �'1 UIWPORT BEACff N OCSD n Offshore Pipelkw (10-fl diameter.5 miles long 0 125 2 E 5 t.�tes OCSD Service Area Boundary(471 square miles) Approximately—wrap Not To Scale A OCSD Pump Station(16 total) Unincorporated Orange County(white) DISCLAIMER: Map prepared by Orange County Sanitation District.This map is intended for graphical representation only.No level of accuracy is claimed for the base mapping shown hereon and graphics should not be used to obtain coordinate values,bearings Of distances. Portions of this derived product contain geographical information copyrighted by Thomas Brothers.All Rights Reserved. SOURCE:OCSD GAS Data,Thomas Brothers 2008 REVISED:1212008 Xl (THIS PAGE LEFT INTENTIONALLY BLANK) xii R1Mayer Hoffman McCann PC. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine, California 92612 949-474-2020 ph 949-263-5520 N www.mhm-pc.com Board of Directors Orange County Sanitation District Fountain Valley, California Independent Auditors' Report We have audited the accompanying basic financial statements of the Orange County Sanitation District ("District"), as of and for the year ended June 30, 2009, as listed in the table of contents. These financial statements are the responsibility of the management of the District. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year partial comparative information has been derived from the financial statements of the District for the year ended June 30, 2008 and, in our report dated October 30, 2008, we expressed an unqualified opinion on those financial statements We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Govemment Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District, as of June 30, 2009, and the changes in financial position and cash flows of the District for the year then ended in conformity with accounting principles generally accepted in the United States of America. The information identified in the accompanying table of contents as management's discussion and analysis is not a required part of the basic financial statements, but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 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 introductory section, supplementary information, statistical tables and other data and trends are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section, statistical tables 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 express no opinion on them. 1 Board of Directors Orange County Sanitation District Page 2 In accordance with Government Auditing Standards, we have also issued a report dated October 22, 2009 on our consideration of the Orange County Sanitation District's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Irvine, California I October 22, 2009 I I l l L _ L l_ L l_ 2 _ (_ Management Discussion and Analysis June 30, 2009 This section of the financial statements of the Orange County Sanitation District (Sanitation District) is management's narrative overview and analysis of the financial activities of the Sanitation District for the fiscal year ended June 30, 2009. 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, 2009, the assets of the Sanitation District exceeded its liabilities by $1,348.0 million (net assets). Of this amount, $399.5 million (unrestricted net assets) may be used to meet the Sanitation District's ongoing obligations to citizens and creditors. ■ The Sanitation District's total net assets increased $72.3 million, or 5.7 percent over the prior year. ■ Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $271.3 million, or 14.8 percent over the prior year. ■ Net Assets invested in capital assets, net of related debt increased $101.4 million, or 12.0 percent. ■ Unrestricted Net Assets decreased $29.1 million, or 6.8 percent from the prior year. Overview of the Basic Financial Statements The Sanitation 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 Sanitation 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 Governmental Accounting Standards Board (GASB) Statement No. 34, the Sanitation District's financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, and a statement of cash flows. The statement of net assets includes all of the Sanitation District's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Sanitation District creditors (liabilities). It also provides the basis for computing the rate of return, evaluating the capital structure of the Sanitation District, and assessing the liquidity and financial flexibility of the Sanitation District. The statement of revenues, expenses, and changes in net assets accounts for the current year's revenues and expenses. This statement measures the success of the Sanitation District's operations over the past year and can be used to determine the Sanitation District's creditworthiness. It also highlights the Sanitation District's dependency on property tax revenues in supplementing user fees and other charges for recovering total costs. The final required financial statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations and investments during the reporting period. Net Assets As previously stated, net assets increased $72.3 million, or 5.7 percent to $1,348.3 million in FY 2008-09 over the prior year. In comparison, net assets increased $86.3 million, or 7.2 percent, to $1,276.0 million in FY 2007-08 over FY 2006-07. 3 (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2009 2008 (Decrease) (Decrease) Assets Current and other assets $ 599,489 $ 599,545 $ (56) 0.0% Capital assets, net 2,100,697 1,829,383 271,314 14.8% Total assets 2,700,186 2,428,928 271,258 11.2% Liabilities Current liabilities 294,397 84,087 210,310 250.1% Noncurrent liabilities 1,057,468 1,068,854 (11,386) -1.1% Total liabilities 1,351,865 1,152,941 198,924 17.3% Net assets: Investment in capital assets, net of related debt 948,869 847,426 101,443 12.0% Unrestricted 399,452 428,561 (29,109) -6.8% Total net assets $ 1,348,321 $ 1,275,987 $ 72,334 5.7% Current and other assets remained relatively the same as in the prior year, due primarily to the receipt of net certificate of participation (COP) debt proceeds of$163.8 million, net cash provided by operations of $64.3 million, net non-operating revenues of $54.0 million, and capital contributions from other agencies of$8.1 million that was offset by the funding of$290.8 million in capital improvements. Capital assets, net increased $271.3 million, or 14.8 percent, due to the ongoing capital improvement program capital additions of $303.8 million in FY 2008-09 less depreciation of $32.5 million. Included in total capital outlays was the "New Secondary Treatment System at Plant No. 1. This project is one of several capital improvements that are necessary to achieve secondary treatment standards by December 31, 2012 in accordance with a consent decree signed by EPA and filed with the U.S. District Court. This project includes construction of aeration basins, clarifiers, a blower building, and waste sludge pumping stations, that will provide additional secondary treatment capacity of 60 million gallons per day (MGD) at Plant No. 1. Capital outlays of$83.3 million were incurred in FY 2008-09 with total project outlays to date of$155.2 million. The total projected cost is $265.9 million with completion expected in FY 2011-12. Another secondary treatment project underway is the construction of Trickling Filters at Plant No. 2. This project includes the construction of three trickling filters, a solids contact basin, and six clarifiers for additional secondary treatment capacity of 60 MGD at Plant No. 2. Capital outlays of $76.4 million were incurred in FY 2008-09 with total project outlays to date of $132.8 million. The total projected cost is $221.2 million with completion expected in FY 2012-13. The completion of the Steve Anderson Lift Station was another project with significant capital outlays in FY 2008-09. This project replaced the Ellis Avenue Pump Station with the construction of a new pump station, a 66" gravity sewer and 48" forcemain. The Ellis Avenue Pump Station was used to divert wastewater flow from upstream of Plant No. 2 to Plant No. 1 receiving wastewater flow only from the Magnolia trunk sewer, and was rated for only 10 MGD. The new lift station is rated for 50 MGD and will receive wastewater flows from the Magnolia and Knott trunk sewers and discharge to the Plant No. 1 headworks. The increase in diversion flows is necessary to balance wastewater flows between Plant No. 1 and Plant No. 2. Capital outlays of$12.5 million were incurred in FY 2008-09 with total project outlays totaling $72.4 million. 4 See page 7 for the Schedule of Capital Assets and a listing of the other major capital additions for FY 2008-09. Net assets invested in capital assets, net of related debt increased $101.4 million, or 12.0 percent over the prior year primarily as a result of the $271 million increase in net capital assets offset by an increase of$170 in net related debt. Unrestricted net assets decreased $29.1 million, or 6.8 percent over the prior year, and is primarily due to the overall increase in net assets of$72.3 offset by the reduction in investments invested in capital assets net of related debt of$101.4 million. Changes in Net Assets Net assets increased $72.3 million in FY 2008-09, a 5.7 percent increase over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2009 2008 (Decrease) (Decrease) Revenues: Operating revenues Service Charges $ 206,422 $ 184,180 $ 22,242 12.1% Permit and inspection fees 895 1,196 (301) -25.2% Total operating revenues 207,317 185,376 21,941 11.8% Non-operating revenues Property taxes 66,427 65,210 1,217 1.9% Investment and interest income 14,835 20,235 (5,400) -26.7% Capital facilitites capacity charges 9,834 19,816 (9,982) -50.4% Other 1,634 13 1,621 12469.2% Total non-operating revenues 92,730 105,274 (12,544) -11.9% Total revenues 300,047 290,650 9,397 3.2% Expenses: Operating expense other than depreciation and amortization 164,556 131,890 32,666 24.8% Depreciation and amortization 32,520 47,767 (15,247) -31.9% Non-operating expense 38,741 40,334 (1,593) -3.9% Total expenses 235,817 219,991 15,826 7.2% Income before capital contributions 64,230 70,659 (6,429) -9.1% Capital contributions (distributions), net 8,103 15,592 (7,489) -48.0% Increase in net assets 72,333 86,251 (13,918) -16.1% Beginning net assets 1,275,987 1,189,736 86,251 7.2% Ending net assets $ 1,348,320 $ 1,275,987 $ 72,333 5.7% 5 Sources of Revenue Functional Expenses Ocollections June 30,2009 June 30,2009 4% 6% ■Treatment& Olnterest 22% 5% Disposal ■User Fees 10% 24% 0Depreciation& Amortization OTaxes Levied 14% oOther OInterest Expense 69% ■Other As previously stated, an enterprise fund is used to account for the operations of the Sanitation District, which is financed and operated in a manner similar to private business enterprises. This allows the Sanitation 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, maintenance and capital expenditures for providing wastewater management services. Property tax revenues are dedicated for the payment of debt service. In FY 2008-09, operating revenues increased $21.9 million, or 11.8 percent over the prior year that is predominately reflective of the $22.2 million, or 12.1 percent increase in service charges. The increase in service charges is primarily due to the 10.4 percent increase in the average sewer user fee rate over the prior year. The $12.5 million, or 11.9 percent decrease in non-operating revenues consists of a $9.9 million, or 50.4 percent decrease in capital facilities capacity charges, and a $5.4 million, or 26.7 percent decrease in investment and interest income. These decreases are partially offset by a $1.6 million increase in other non-operating revenues and a $1.2 million, or 1.9 percent increase in property tax revenues. The decrease in capital facilities capacity charges is reflective of the decrease in total building permit valuations in calendar year 2008 of 34.8 percent and a projected decrease of 23.5 percent in calendar year 2009. The decrease in investment and interest income is attributable to the lower yields earned on investments while cash and investment balances have remained relatively the same. Yields earned on investments decreased from 4.8 percent in FY 2007-08 to 2.9 percent in FY 2008-09 and cash balances increased slightly during this same time period from $533 million to $534 million. The increase in other non-operating revenues is mostly reflective of the $531,000 in proceeds from the sale of emission reduction credits, $301,000 in proceeds from the disposal of equipment, $237,000 in reimbursement of legal fees, and $115,000 in insurance premium reimbursements due to the overvaluation of plant assets. Property tax revenue increases are primarily the result of the total assessed valuation increase of 3.9 percent over the prior year. Operating expense before depreciation and amortization increased $32.7 million, or 24.8 percent over the prior year. Of this increase, $29.0 million of other operating expense was charged to Consolidated Revenue Area to substantiate Irvine Ranch Water District's (IRWD) owner equity interest in OCSD and to determine the cash reserve contribution required from IRWD in accordance with the November 15, 1995 agreement. Although operating salaries and benefits, totaling $67.5 million, decreased $131,000, or 0.2 percent over the prior year, these operating salaries and benefits cost are part of the overall increase of$1.1 million in total salaries and benefits when including the salaries and benefits capitalized within the capital 6 improvement program. Overall, total Sanitation District salaries and benefits were $84.6 million, a 1.3 percent increase over the prior year total of$83.5 million. This increase is mostly attributable to the $3.2 million increase in regular salaries, or 7.0 percent, that was primarily driven by existing bargaining agreements and the addition of 7 full-time equivalent positions as total authorized staffing levels increased to 641. There were also an increases in retirement premiums and medical insurance of $1.8 million and $0.6 million, respectively, all of which were mostly offset by a decline of $5.4 million in net pension cost of the Additional Retirement Benefit Account pension program that was paid in the prior year as a one-time catch up payment in bringing the net benefit obligation current. Contractual services operating expense increased $5.4 million, or 22.7 percent over the prior year primarily due to the $3.5 million increase in biosolid and other waste disposal. Biosolid cost increase is due to the approximate 18 percent increase in biosolid removal costs. In addition, the volume of biosolids will grow as the District moves towards full secondary treatment standards by December 2012. Capital Assets At June 30, 2009, the Sanitation District had a net investment of $2.101 billion in capital assets. This amount represents a net increase (including additions and deletions) of $271.3 million, or 14.8 percent over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2009 2008 (Decrease) (Decrease) Land $ 13,021 $ 13,021 $ - 0.0% Construction in Progress 1,200,131 937,487 262,644 28.0% Sewage collection facilities 319,759 301,564 18,195 6.0% Sewage treatment facilities 432,651 436,896 (4,245) -1.0% Effluent disposal facilities 47,689 49,940 (2,251) -4.5% Solids disposal facilities 375 384 (9) -2.3% General and administrative facilities 82,218 84,581 (2,363) -2.8% Assets acquired in excess of book value 4,852 5,510 (658) -11.9% Capital assets, net $ 2,100,696 $ 1,829,383 $ 271,313 14.8% Major capital asset additions for the current fiscal year included the following: • $83.3 million- New Secondary Treatment Systems at Plant No. 1 • $76.4 million- New Trickling Filters at Plant No. 2 • $17.4 million- Headworks Replacement at Plant No. 2 • $12.5 million-Steve Anderson Lift Station • $11.2 million- Bitter Point Force Main Rehabilitation • $11.9 million- Primary Treatment Rehabilitation at Plant No. 2 • $10.3 million - New Primary Sludge Feed System at Plant No. 2 • $ 6.3 million-Carbon Canyon Sewer and Pump Station Abandonment • $ 5.2 million-Central Generation More detailed information about the Sanitation District's capital assets is provided in Notes 1 and 3 of Notes to the Financial Statements. 7 Debt Administration At June 30, 2009, the Sanitation District had $1.24 billion outstanding in COP debt, a net increase of $159.1 million, or 14.7 percent over the prior year. This increase is primarily due to the $200.0 million of new COP fixed rate debt issued in May 2009 (COP Series 2009A) to assist in the $303.9 million in capital outlays that had taken place during the year and to assist in the $259.1 million scheduled to be spent in the FY 2009-10. In addition, COP Series 2008B fixed rate debt was issued in the amount of$27.8 million in September 2008 to refund the $26.9 million outstanding principal balance of the COP Series 1993 synthetic variable-to-fixed rate debt and COP Series 2008C Certificates of Anticipation Notes fixed rate debt was issued in the amount of $176.1 million in December 2008 to refund the $196.6 million outstanding principal balance of the COP Series 2006 variable rate debt. The Sanitation District achieved a rating of AAA from Standard and Poor's Corporation, and has maintained a rating of AA from Fitch. The Sanitation District's long-range financing plan is designed to maintain these high ratings. Over the next ten years, the Sanitation District is projecting an additional $2.0 billion in future treatment plant and collection system capital improvements. In accordance with the Sanitation District's long-term debt fiscal policy, the Sanitation District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue. In the spring of 2010, the Sanitation District is scheduled to issue $70 million of new COP fixed rate debt. A total of $410 million in COP debt issuance is being proposed over the next four years. These financings are needed early in the 10-year capital improvement program because the bulk of the construction is scheduled during the same time period. For more information on long-term 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 currently 9.4 percent, which is an increase from a rate of 5.3 percent a year ago. ■ Inflation for Orange County in 2008 increased 3.5 percent based on the 2008 actual percentage change in the consumer price index according to the June 2008 Economic and Business Review report prepared by Chapman University. ■ The actual rate of return on investments decreased from the 4.8 percent earnings rate in FY 2007-08 to 2.9 percent for FY 2008-09. All of these factors were considered in updating the Sanitation District's second year of the two-year budget for FY 2008-09 and FY 2009-10. The Sanitation District's user fee schedule was increased by 10.0 percent for FY 2009-10 over the prior year. The annual fee applicable to the Sanitation District's largest customer base and the underlying basis for all other user rates: the single-family residential fee, increased by $20.00, from $201.00 to $221.00. This rate increase was necessary to finance the Sanitation District's cash flow needs as capital improvement outlays alone are projected to be $259.1 million in FY 2009-10 and are projected to total $2.0 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and provide for full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the Sanitation 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, P.O. Box 8127, Fountain Valley, CA 92728-8127. 8 ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS 9 ORANGE COUNTY SANITATION DISTRICT Statement of Net Assets June 30, 2009 (With Comparative Data for June 30, 2008) 2009 2008 Current assets: Cash and cash equivalents $ 39,199,955 $ 104,012,814 Investments 399,761,799 330,161,649 Accounts receivable, net of allowance for uncollectibles 11,864,637 11,805,761 Accrued interest receivable 2,157,015 2,855,232 Due from other governmental agencies - 5,025,176 Connection fees receivable 388,031 1,286,927 Property tax receivable 3,221,629 3,296,089 Inventories 5,196,457 4,985,388 Prepaid expenses 589,228 814,304 Prepaid retirement 12,605,000 - Total current assets 474,983,751 464,243,340 Noncurrent assets: Restricted: Cash and cash equivalents 68,551,793 50,737,114 Investments 26,829,427 47,829,179 Accrued interest receivable 215,140 386,960 Unrestricted: Non-depreciable capital assets 1,213,152,503 950,508,192 Depreciable capital assets, net of accumulated depreciation 887,544,338 878,875,030 Deferred charges 9,433,482 8,269,966 Other noncurrent assets, net 19,475,424 28,078,450 Total noncurrent assets 2,225,202,107 1,964,684,891 Total assets 2,700,185,858 2,428,928,231 Current liabilities: Accounts payable 30,456,796 27,577,766 Accrued expenses 8,350,733 8,894,308 Retentions payable 1,065,892 7,786,756 Interest payable 16,646,631 12,107,963 Due to other governmental agency 30,999,633 - Current portion of long-term obligations 206,877,712 27,720,592 Total current liabilities 294,397,397 84,087,385 Noncurrent liabilities: Noncurrent portion of long-term obligations 1,057,467,549 1,068,853,560 Total liabilities 1,351,864,946 1,152,940,945 Net assets: Invested in capital assets, net of related debt Collection system 423,243,200 380,465,651 Treatment and disposal -Land 4,475,751 4,475,751 Treatment and disposal system 1,672,977,890 1,444,441,820 Capital assets related debt (1,151,827,717) (981,957,438) Unrestricted: Preliminary Survey 19,465,080 28,068,106 All other unrestricted 379,986,708 400,493,396 Total net assets $ 1,348,320,912 $ 1,275,987,286 See Accompanying Notes to Basic Financial Statements. 10 ORANGE COUNTY SANITATION DISTRICT Statement of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2009 (With Comparative Data for the Year Ended June 30, 2008) 2009 2008 Operating revenues: Service charges $ 206,422,467 $ 184,180,220 Permit and inspection fees 894,578 1,196,320 Total operating revenues 207,317,045 185,376,540 Operating expenses other than depreciation and amortization: Salaries and benefits 67,497,961 67,628,651 Utilities 7,242,049 8,092,317 Supplies, repairs and maintenance 26,723,524 25,970,799 Contractual services 28,951,469 23,587,835 Directors'fees 154,870 144,117 Meetings and training 1,034,548 1,007,255 Other 32,952,065 5,458,868 Total operating expenses other than depreciation and amortization 164,556,486 131,889,842 Operating income before depreciation and amortization 42,760,559 53,486,698 Depreciation and amortization 32,520,010 47,766,956 Operating income 10,240,549 5,719,742 Non-operating revenues: Property taxes 66,426,931 65,209,461 Investment and interest income 14,835,561 20,235,214 Capital facilities capacity charges 9,834,369 19,816,293 Other 1,634,235 12,773 Total non-operating revenues 92,731,096 105,273,741 Non-operating expenses: Interest 24,899,193 22,517,174 Feasibility studies 13,652,434 12,994,472 Capital grants to member agencies 189,830 1,769,894 Other - 3,053,282 Total non-operating expenses 38,741,457 40,334,822 Income before capital contributions 64,230,188 70,658,661 Capital contributions from other agencies 8,103,438 15,591,861 Change in net assets 72,333,626 86,250,522 Total net assets - beginning 1,275,987,286 1,189,736,764 Total net assets -ending $ 1,348,320,912 $ 1,275,987,286 See Accompanying Notes to Basic Financial Statements. 11 ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows For the Year Ended June 30, 2009 (With Comparative Data for the Year Ended June 30, 2008) 2009 2008 Cash flows from operating activities: Receipts from customers and users $ 244,803,212 $ 192,439,636 Payments to employees (65,495,757) (58,897,860) Payments to suppliers (115,054,877) (61,790,653) Net cash provided by operations 64,252,578 71,751,123 Cash flows from noncapital financing activities: Proceeds from property taxes 66,501,391 64,373,029 Capital grants to member agencies (189,830) (1,769,894) Net cash provided by noncapital financing activities 66,311,561 62,603,135 Cash flows from capital and related financing activities: Capital facilities capacity charges 10,733,265 19,492,120 Additions to property, plant and equipment (290,787,719) (275,406,057) Arbitrage payment - (307,934) Interest paid (36,301,490) (31,788,973) Principal payments on certificates of participation (244,805,000) (96,530,000) Proceeds from certificates of participation issuance 408,636,386 378,898,628 Certificates of participation issuance costs (775,121) (675,401) Proceeds from capital contributions 8,103,438 10,750,712 Net cash provided(used)by capital and related financing activities (145,196,241) 4,433,095 Cash flows from investing activities: Proceeds from the sale of investments 4,298,378,906 3,793,917,222 Purchases of investments (4,347,133,227) (3,880,733,353) Interest received 16,388,243 23,359,481 Net cash provided (used)by investing activities (32,366,078) (63,456,650) Net increase(decrease)in cash and cash equivalents (46,998,180) 75,330,703 Cash and cash equivalents, beginning of year 154,749,928 79,419,225 Cash and cash equivalents,end of year $ 107,751,748 $ 154,749,928 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 10,240,549 $ 5,719,742 Adjustments to reconcile operating income to net cash provided by operations: Depreciation and amortization 32,520,010 47,766,956 Bad debt expense 26,606 (4,376) Other non-operating revenues and expenses 1,225,332 (289,933) (Increase)/decrease in operating assets: Accounts receivable 25,993 2,022,391 Due from other governmental agencies 4,913,701 5,027,932 Inventories (191,636) (264,741) Prepaid and other assets (12,379,924) 467,220 Increase/(decrease)in operating liabilities: Accounts payable 2,879,030 8,611,125 Accrued expenses (543,575) (6,189,699) Retentions payable (6,720,864) 827,557 Due to other governmental agency 30,999,633 - Pension/OPEB payable 771,789 6,261,477 Compensated absences 650,971 545,278 Other payable 323,801 - Claims and judgments (488,838) 1,250,194 Net cash provided by operations $ 64,252,578 $ 71,751,123 Noncash Activities: Unrealized gain (loss)on the fair value of investments $ (153,923) $ (1,311,560) See Accompanying Notes to Basic Financial Statements. 12 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 (1) Summary of Significant Accounting Policies Reporting 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 2.5 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. 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. 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, 2009, other than principal and interest payments on outstanding certificates of participation (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 provisions of Governmental Accounting Standards Board (GASB) Statement 14. 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 13 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 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. OCSD applies all GASB pronouncements currently in effect as well as Financial Accounting Standards Board Statements and Interpretations, Accounting Principal Board Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. 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 Equivalents Investments with original maturities of three months or less are considered to be cash equivalents. Investments All investments are stated at fair value (the value at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale). 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 changes in fair value. Accounts Receivable Accounts receivable is shown net of the allowance for uncollectible receivables which was $215,997 at June 30, 2009. Any unbilled sewer service receivables are recorded at year-end. Inventory Inventory is stated at cost, which approximates market, on a weighted-average basis. 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 property, 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 assets acquired by contribution, which are recorded at fair market value at the time received. Cost includes labor; materials; outside services; vehicle and equipment usage; allocated indirect charges such as engineering, purchasing, supervision and other fringe benefits; and certain administrative and general expenses. Net interest costs are capitalized on projects. During the fiscal year ended June 30, 2009, net interest costs of$17.71 million were capitalized. 14 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method. OCSD generally follows 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, and General plant and administrative facilities— 11.5 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. Discounts and deferred charges on the certificates of participation are amortized to interest expense over the respective terms of the installment obligations based on their effective interest rates (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 or are maintained by a trustee as a reserve requirement for the certificates of participation. 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. 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. In determining the estimated sick leave liability at June 30 of each year, OCSD assumes that all employees' accumulated sick leave balances will ultimately be paid out at 35 percent of the ending balance. The distribution between current and long-term portions of the liability is based on historical trends. Claims and Judgments OCSD records estimated losses, net of any insurance coverage under its self-insurance program 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. Property Taxes The County is permitted by State 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 attach as an enforceable lien on property as of January 1. Taxes are levied on July 1 and are payable in two installments which become delinquent after December 10 and April 10. 15 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 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 to the extent that they are available to finance current operations. 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 the District'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. Capital Contributions Capital contributions consist of charges to certain special districts and agencies for their agreed- upon share of additions to capital assets. 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, 2009, the outstanding commitments with contractors totaled $227 million. Self-Insurance Plans For the year ended June 30, 2009, 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 $500,000 deductible per occurrence below the outside excess insurance coverage to $300 million. The self-insurance portion of the property damage exposure covering fire and other perils is the $25,000 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. OCSD is self-insured for virtually all property damage from the peril of earthquake. 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 $250,000 per occurrence deductible ($500,000 for employment practices liability) under the outside excess liability coverage to $30 million per occurrence and aggregate. The self-insurance portion of the pollution liability exposure is the $100,000 per loss deductible under the outside pollution liability insurance coverage to $10 million. The significant changes in insurance coverage during the fiscal year ended June 30, 2009 are as follows: • The excess insurance coverage for workers' compensation increased from $300 million to statutory levels. 16 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against OCSD are processed by outside insurance administrators. These claims are charged to claims expense based on amounts which will ultimately be paid. Claims incurred but not yet reported have been considered in determining the accrual for loss contingencies. OCSD management believes that there are no unrecorded claims as of June 30, 2009 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. Pension Accounting OCSD has two pension programs: a pension plan and additional retirement benefit account (ARBA). The pension plan, which is administered by the Orange County Employees' Retirement System (OCERS), has been reported since GASB Statement No. 27, `Accounting for Pensions by State and Local Governmental Employers" was established. The ARBA plan had been administered by OCERS in the past; in the 2007-08 fiscal year it was brought in-house and is now directly administered by OCSD. Since an actuarial study has assigned a value to the liabilities of the program, the ARBA benefit is now recognized on OCSD's statements and reported in note 6. OPEB Accounting OCSD adopted GASB Statement No. 45, `Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions." Issued in June 2004, this statement addresses how state and local governments should account for and report their costs and obligations related to postemployment healthcare and other nonpension benefits, collectively referred to as other postemployment benefits (OPEB). The statement generally requires that state and local governmental employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. OCSD adopted Statement 45 as a "Phase I Agency", required to implement for the fiscal year beginning July 1, 2007. (2) Cash and Investments Cash and investments as of June 30, 2009 are classified within the accompanying Statement of Net Assets as follows: 17 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Statement of Net Assets: Current, Unrestricted: Cash and cash equivalents $ 39,199,955 Investments 399,761,799 Subtotal -current, unrestricted 438,961,754 Restricted: Cash and cash equivalents 68,551,793 Investments 26,829,427 Subtotal -restricted 95,381,220 Total cash and cash equivalents and investments $ 534,342,974 Cash and investments consist of the following as of June 30, 2009: Cash on hand $ 2,000 Deposits with financial institutions 3,185,830 Investments 435,773,924 Monies held by trustees: Investments $ 68,551,793 Investment contracts 26,829,427 Subtotal - monies held by trustees 95,381,220 Grand total cash and investments 534,342,974 Investments Authorized by the California Government Code and OCSD's Investment Policy The table below identifies the investment types that are authorized by the California Government Code and OCSD's investment policy. The table also identifies 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. A separate table addresses investments of debt proceeds that are held by trustees. Those investments are governed by the provisions of the debt agreements rather than the general provisions of the California Government Code or OCSD's investment policy. 18 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Authorized Maximum by OCSD's Maximum Investment Investment Type-Authorized by the Investment Maximum Percentage in a Single California Government Code Policy? Maturity(1)(3) of Portfolio(1) Issuer(1) Local Agency Bonds Yes 5 years None None U.S.Treasury Obligations Yes 5 years None None California State Treasury Obligations Yes 5 years None None U.S.Agency Securities Yes 5 years None None Banker's Acceptances Yes 180 days 40% 30% Commercial Paper Yes 270 days/31 days 15%/25% 10% Negotiable Certificates of Deposit Yes 5 years 30% None Repurchase Agreements Yes 1 year None None Reverse Repurchase Agreements Yes 90 days(2) 5% (2) None Corporate Medium-Term Notes Yes 5 years 30% None Mutual Funds Yes N/A 15%(2) 10% Money Market Mutual Funds Yes N/A 15%(2) None Mortgage Pass-Through Securities/CMO Yes 5 years 20% None County Investment Pools Yes N/A None None Local Agency Investment Fund (LAIF) Yes N/A None None Notes (1)Restrictions are in accordance with the California Government Code unless indicated otherwise. (2)The restriction is in accordance with OCSD's Investment Policy which is more restrictive than the California Government Code. (3)As allowed by California Government Code Section 53601,the Board of Directors has adopted a policy of no maximum maturity for investments purchased by OCSD's external money manager for the long-term investment portfolio. However,the duration of the long-term investment portfolio can never exceed 60 months. Investments purchased for the short-term portfolio are subject to the maturity restrictions noted in this table. Investments Authorized by Debt Agreements The investment of debt proceeds held by trustees is governed by provisions of the debt agreements, rather than the general provisions of the California Government Code on OCSD's investment policy. The table below identifies the investment types that are authorized for investments held by OCSD's trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk. 19 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Maxim um Maximum Investment Investment Type -Authorized by the Maximum Percentage in a Single California Government Code Maturity of Portfolio Issuer State and Local Agency Bonds 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker's Acceptances 180days 40% 10% Commercial Paper 270 days /31 days 15%/30% 10% Negotiable Certificates of Deposit 5 years 30% 10% Repurchase Agreements 1 year None None Corporate Medium-Term Notes 5 vears 30% None Mutual Funds N/A 20% 10% Monev Market Mutual Funds N/A 20% None Local Agency Investment Fund (LAIF) N/A None None Guaranteed Investment Contracts N/A None None 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 term 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 maturity for the Money Market Mutual Funds. Following is a table which summarizes OCSD's investments by purpose with the modified duration. 20 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Modified Modified Duration Duration Investment Type Fair Value (in years) in months Short-Term Portfolio: U.S. Treasury Bills $ 1,497,649 0.346 4.21 U.S. Treasury Notes 6,169,113 0.333 4.05 U.S. Agency Securities 35,835,797 0.470 5.72 Commercial Paper 1,699,764 0.058 0.71 Corporate Medium-Term Notes 2,888,550 0.496 6.03 Repurchase Agreements 5,700,000 - - Money Market Mutual Funds 525,467 0.083 1.01 Short-term portfolio subtotal 54,316,340 0.390 4.75 Long-Term Portfolio: U.S. Treasury Notes $ 306,996 4.614 56.14 U.S. TreasuryTIPS 11,216,044 4.906 59.69 U.S. Agency Securities 212,144,051 3.916 47.64 U.S. Govt. Backed Mortgage Pools 688,330 4.490 54.63 Taxable Municipal Bonds (19,297) 6.266 76.24 Tax-Exempt Municipal Bonds 476,315 14.652 178.27 Corporate Medium-Term Notes 122,897,305 2.706 32.92 Money Market Mutual Funds 544,875 0.083 1.01 Mortgage Pass-Through Securities/CMO 6,154,761 1.471 17.90 Long-term portfolio subtotal $ 354,409,380 3.327 40.48 OCSD monitors the interest rate risk inherent in its other investments using specific identification of the investments. Following is a table of these investments as of fiscal year end. Fair Value Maturities Investments held by fiscal agents: Money Market Mutual Funds: First American Treasury Obligations Fund $ 1,403,186 N/A Blackrock Institutional Funds 19,152,533 N/A Blackrock Institutional Funds 82,135 N/A Blackrock Institutional Funds 19,818,640 N/A First American Government Obligations Fund 7,721,264 N/A First American Government Obligations Fund 3,435,914 N/A Blackrock Institutional Funds 3,809,681 N/A First American Prime Obligations Fund 13,128,440 N/A Guaranteed Investment Agreements: Bayerische Landesbank Girozentrale -2000 COP 17,311,427 August 1, 2016 FSA Capital Management Services LLC -2007A COP 9,518,000 January 30, 2030 Local Agency Investment Fund (LAIF) 23,144,043 235 day average Fair Value of Other Investments 118,525,263 21 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 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 $43,237,041. • Treasury inflation-protection bonds (TIPs): The U.S. Treasury Department pays a fixed, semi- annual coupon on these investments that is based on a Treasury auction plus an adjustment for inflation, making the fair value of these securities highly sensitive to changes in interest rates. At fiscal year end, the fair value of investments in TIPs totaled $11,216,044. 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: 22 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 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 $ 23,093,963 U.S.Agency Securities-GNMA 688,330 Subtotal $ 23,782,293 Investments with no legal minimum rating: U.S.Agency Securities(other than GNMA): Rating of AAA(Standard &Poor's) 11,951,640 Rating of AGY(Standard & Poor's) 236,028,209 Municipal Bonds: Rating of AA2 (Moody) 476,315 Rating of AA3(Moody) (19,297) Repurchase Agreements: Not rated at fiscal year end 5,700,000 Local Agency Investment Fund (LAIF): Not rated at fiscal year end 23,144,043 Investments with fiscal agents-Guaranteed Investment Contracts: Not rated at fiscal year end 26,829,427 Subtotal 304,110,337 Investments with a legal minimum rating (or its equivalent)of A: Commercial Paper: Rating of A-1 (Standard & Poor's) 1,699,764 Corporate Medium-Term Notes: Rating of A+ (Standard &Poor's) 6,152,313 Rating of A(Standard & Poor's) 5,377,526 Rating of A(Fitch) 1,753,059 Rating of Al (Moody) 3,846,045 Rating of A2 (Moody) 19,375,407 Rating of A3 (Moody) 13,542,107 Rating of A-2 (Standard & Poor's) 2,813,832 Rating of AA2 (Moody) 1,655,931 Rating of AA3(Moody) 4,544,535 Rating of AAA(Standard &Poor's) 58,445,727 Rating of BBB+ (Standard & Poor's)* 4,367,445 Rating of BBB (Standard &Poor's)* 1,840,531 Rating of BBB (Fitch)* 1,685,647 Rating of WR(Moody)* 385,750 Money Market Mutual Funds: Rating of AAA(Standard &Poor's) 1,070,341 Invested with fiscal agents: Rating of Aaa (Moody) 68,551,793 Subtotal 197,107,753 Investments with a legal minimum rating (or its equivalent)of AA: Mortgage Pass-Through Securities/CMO: Rating of AAA(Standard &Poor's) 3,314,177 Rating of AGY(Standard & Poor's) 2,456,389 Rating of BAA1 (Moody)* 384,195 Not rated at fiscal year end - Subtotal 6,154,761 Total $531,155,144 *Investment was in compliance with legal requirements at the time it was purchased. 23 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 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 fiscal year end, OCSD has investments in the following types of securities, each of which represents more than 5 percent of OCSD's investments: • Bank of America Corporation (Corporate Medium-term Notes), totaling $30,207,985 • Federal Home Loan Bank (U.S. Agency Securities), totaling $43,283,488 • Federal Home Loan Mortgage Corporation (U.S. Agency Securities), totaling $103,535,280 • Federal National Mortgage Association (U.S. Agency Securities), totaling $82,790,305 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, 2009, OCSD's investments in the following investment types were held by the fiscal agent's safekeeping department of the broker-dealer(counterparty) used to buy the securities. Money market mutual funds $ 68,551,793 Guaranteed investment contracts 26,829,427 Total $95 381 220 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-rata 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. 24 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 (3) Capital Assets Capital asset activity for the year ended June 30, 2009 is as follows: Balance at Balance at June 30,2008 Additions Deletions June 30,2009 Capital assets not depreciated: Cost: Land $ 13,021,480 $ - $ - $ 13,021,480 Construction in progress 937,486,712 303,860,742 (41,216,431) 1,200,131,023 Total nondepreciable assets 950,508,192 303,860,742 (41,216,431) 1,213,152,503 Depreciable capital assets: Cost: Sewage collection facilities 513,589,655 26,246,062 - 539,835,717 Sewage treatment facilities 874,865,165 12,978,795 (7,880) 887,836,080 Effluent disposal facilities 97,014,820 - - 97,014,820 Solids disposal facilities 3,463,236 - - 3,463,236 General and administrative facilities 194,642,004 1,991,574 (471,071) 196,162,507 Excess purchase price over book value on acquired assets 19,979,000 - - 19,979,000 Subtotal 1,703,553,880 41,216,431 (478,951) 1,744,291,360 Accumulated depreciation: Sewage collection facilities (212,025,952) (8,050,902) - (220,076,854) Sewage treatment facilities (437,968,826) (17,223,103) 7,027 (455,184,902) Effluent disposal facilities (47,075,215) (2,250,326) - (49,325,541) Solids disposal facilities (3,078,505) (9,719) - (3,088,224) General and administrative facilities (110,060,754) (4,328,251) 444,811 (113,944,194) Excess purchase price over book value on acquired assets (14,469,598) (657,709) - (15,127,307) Subtotal (824,678,850) (32,520,010) 451,838 (856,747,022) Net depreciable assets 878,875,030 8,696,421 (27,113) 887,544,338 Net capital assets $ 1,829,383,222 $ 312,557,163 $ (41,243,544) $ 2,100,696,841 (4) Long-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30, 2009: Certificates Arbitrage Compensated Claims and of Net Pension Net OPEB Payable Absences Judgments Participation Obligation Obligation Totals Balance,July 1 $ 695,500 $ 6,431,096 $ 2,275,389 $ 1,082,420,000 $ 5,920,600 $ 340,877 $ 1,098,083,462 Additions 1,060,619 6,545,305 (21,338) 403,915,000 705,246 937,649 413,142,481 Deletions (736,819) (5,894,334) (467,500) (244,805,000) (248,410) (622,696) (252,774,759) Balance,June 30 1,019,300 7,082,067 1,786,551 1,241,530,000 6,377,436 655,831 1,258,451,185 Due within one year - 6,392,982 339,730 200,145,000 206,877,712 Unamortized discount (premium) - - (21,406,747) - - (21,406,747) Unamortized deferred amount on refundings - - - 15,512,670 - - 15,512,670 Long-term amount $ 1,019,300 $ 689,085 $ 1,446,821 $ 1,047,279,077 $ 6,377,436 $ 655,831 $ 1,057,467,549 25 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Arbitrage Payable The Tax Reform Act of 1986 (the Act) requires OCSD to calculate and remit rebatable arbitrage earnings to the Internal Revenue Service. Certain of OCSD's debt and interest earnings on the proceeds thereof are subject to the requirements of the Act. OCSD's liability at June 30, 2009 is $1,019,300 for future years' remittances. Compensated Absences OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at June 30, 2009 is $7,082,067 with an estimated $6,392,982 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 claims and judgments payable as of June 30, 2009 and 2008: 2008-09 2007-08 Claims and judgments payable at July 1 $2,275,389 $1,025,195 Claims incurred during the fiscal year 163,264 87,463 Adjustments to the prior year (184,602) 1 ,543,617 Payments on claims during the fiscal year (467,500) 380,886 Claims and judgments payable at June 30 1 ,786,551 2,275,389 Less: current portion (339,730) 284,010 Total long-term claims and judgments payable $1 ,446,821 $1 ,991,379 Certificates of Participation OCSD issues certificates of participation in order to finance construction of the treatment facilities. Each certificate of participation 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 at June 30, 2009 are summarized as follows: Amount 2000 refunding certificates of participation $ 195,800,000 2003 certificates of participation 191,500,000 2007A refunding certificates of participation 93,465,000 2007B certificates of participation 295,185,000 2008A refunding certificates of participation 61,665,000 2008B refunding certificates of participation 27,800,000 2008C refunding certificates of participation 176,115,000 2009A certificates of participation 200,000,000 Total certificates of participation payable $ 1,241,530,000 Outstanding Certificates of Participation 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, 2009, the coverage ratio for senior lien debt was 2.18. 26 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 August 2000 Refunding Certificates of Participation On August 31, 2000, OCSD completed the sale of $218,600,000 of refunding certificates of participation. The certificates were issued to refund the remaining outstanding principal balance of the 1990-92 Series A, B, and C certificates of participation and to reimburse OCSD for improvements made to the wastewater system. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2009 was 1.29 percent. Annual principal payments are due on August 1, beginning August 1, 2001. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of $18,513,947 is held by US Bank, the trustee, and meets the reserve requirement. August 2003 Certificates of Participation On August 26, 2003, OCSD completed the sale of$280,000,000 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 ranges from 5.00 percent to 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2021. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of$19,152,521 is held by Union Bank, the trustee, and meets the reserve requirement. May 2007 Refunding Certificates of Participation On May 22, 2007, OCSD completed the sale of $95,180,000 of refunding certificates of participation. The certificates were issued to refund $88,500,000 of the outstanding principal balance of the 2003 Series certificates of participation (see above) . The interest rate on the refunding certificates is fixed and ranges from 4.00 percent to 4.5 percent. Annual principal payments are due on February 1, beginning February 1, 2008. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of $9,600,130 is held by Union Bank, the trustee, and meets the reserve requirement. December 2007 Certificates of Participation On December 20, 2007, OCSD completed the sale of $300,000,000 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 refunding certificates is fixed and ranges from 4.00 percent to 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2008. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of$19,818,611 is held by Union Bank, the trustee, and meets the reserve requirement. 27 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 May 2008 Refunding Certificates of Participation On May 29, 2008, OCSD completed the sale of $77,165,000 of refunding certificates of participation. The certificates were issued to refund the $85,505,000 outstanding principal balance of the 1992 Series certificates of participation. The interest rate on the refunding certificates is fixed and ranges from 2.95 percent to 4.0 percent. Annual principal payments are due on February 1, beginning February 1, 2009. The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $6.3 million. The total future payments for the new debt provides a net present value loss of approximately $1.0 million to refund the old debt in payments. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of$7,716,500 is held by US Bank, the trustee, and meets the reserve requirement. September 2008 Refunding Certificates of Participation On September 11, 2008, OCSD completed the sale of$27,800,000 of refunding certificates of participation. The certificates were issued to refund the $26,900,000 outstanding principal balance of the 1993 Series certificates of participation. The interest rate on the refunding certificates is fixed and ranges from 2.80 percent to 3.0 percent. Annual principal payments are due on August 1, beginning August 1, 2009. The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $3.0 million. The total future payments for the new debt provides a net present value loss of approximately $381,000 to refund the old debt in payments. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of$2,801,578 is held by US Bank, the trustee, and meets the reserve requirement. December 2008 Refunding Certificates of Participation (Certificate Anticipation Notes) On December 10, 2008, OCSD completed the sale of$176,115,000 of refunding certificates of participation (certificate anticipation notes.) The notes were issued to refund the $196,600,000 outstanding principal balance of the 2006 Series certificates of participation. The interest rate on the notes is fixed at 2.50 percent. The notes will mature on December 10, 2009. OCSD expects the principal of 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. The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $5.1 million. The total future payments for the new debt provides a net present value saving of approximately $5 million to refund the old debt in payments. The trust agreement for the certificates does not require the establishment of a reserve. May 2009 Certificates of Participation 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 ranges from 3.00 percent to 5.00 percent. Annual principal payments are due on February 1, beginning February 1, 2010. 28 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2009 reserve of $13,066,269 is held by US Bank, the trustee, and meets the reserve requirement. Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation as of June 30, 2009, are as follows: Year Ending Estimated June 30, Principal Interest Total 2010 $ 200,145,000 $ 49,612,654 $ 249,757,654 2011 25,895,000 46,826,338 72,721,338 2012 26,670,000 45,602,508 72,272,508 2013 27,865,000 44,545,201 72,410,201 2014 43,040,000 43,083,593 86,123,593 2015-2019 173,065,000 196,651,555 369,716,555 2020-2024 181,575,000 155,936,141 337,511,141 2025-2029 199,125,000 119,025,267 318,150,267 2030-2034 253,645,000 64,804,485 318,449,485 2035-2039 110,505,000 14,241,250 124,746,250 Total $ 1,241,530,000 $ 780,328,990 $ 2,021,858,990 (5) Net Assets The difference between assets and liabilities is reported as net assets. Net assets are classified as restricted, unrestricted, or invested in capital assets, net of related debt. Net assets at June 30, 2009 consisted of the following: June 30, 2009 Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation $ 2,100,696,841 Outstanding debt issued to acquire capital assets, net of: unamortized bond discount, deferred amount on refundings, and unspent proceeds (1,151,827,717) Subtotal 948,869,124 Unrestricted 399,451,788 Total Net Assets $ 1,348,320,912 29 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 (6) Pension Benefits OCSD has two pension plans for retirees: a defined benefit pension plan maintained through and by the Orange County Employees' Retirement System (OCERS) and the Additional Retiree Benefit Account (ARBA) administered directly by OCSD. Pension Plan OCSD participates in the Orange County Employee's Retirement System (OCERS), a cost-sharing multiple-employer, defined benefit pension plan which is governed and administered by a nine member Board of Retirement. OCERS was established in 1945 under the provisions of the County Employees Retirement Law of 1937, and provides members with retirement, death, disability, and cost-of-living benefits. OCERS issues a stand-alone comprehensive annual financial report which can be obtained from OCERS at 2223 Wellington Avenue, Santa Ana, California 92701. Benefits: All OCSD employees except for interns participate in OCERS. Employees who retire at or after age 50 with ten or more years of service are entitled to an annual retirement allowance. The amount of the retirement allowance is based upon the member's age at retirement, the member's "final compensation" as defined in Section 31462 of the Retirement Law of 1937, the total years of service under OCERS, and the employee's classification as a Tier I or Tier II member. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. Contributions: As a condition of participation under the provisions of the County Employees Retirement Law of 1937, members are required to contribute a percentage of their annual compensation to OCERS. Tier I and Tier 11 covered employees are required to contribute 9.72% - 14.14% and 9.30% - 14.14%, respectively, of their annual compensation to OCERS. OCSD is required to make periodic contributions to OCERS in amounts that are estimated to remain a constant percentage of covered employees' compensation such that, when combined with covered employees' contributions, will fully provide for all covered employees' benefits by the time they retire. For the fiscal years ended June 30, 2009, 2008, and 2007, the required contribution equaled the contribution actually made. Required contributions, which are actuarially determined, are set by OCERS. The following table provides salary and contributions requirements for the two previous fiscal years and the current year. 30 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 For the Fiscal Year Ending June 30, 2007 June 30, 2008 June 30, 2009 Total Payroll Costs $ 53,175,199 $ 56,671,683 $ 61,110,535 Payroll Costs of Employees Covered by OCERS 49,788,835 53,576,940 57,681,058 Contributions Requirements: Contributed by Employees 3,513,302 3,753,147 4,031,980 Contributed by the District on Behalf of Employees 1,732,296 1 ,851,089 1,986,386 Total Employee Required Contribution 5,245,598 5,604,236 6,018,366 District Required Contribution 9,848,854 11 ,011 ,693 12,193,601 Total Contribution $ 15,094,452 $ 16,615,929 $ 18,211,967 Total Actual Contribution as a Percent of Required Contribution 100.00% 100.00% 100.00% Employee Required Contribution as a Percent of Covered Payroll 10.54% 10.46% 10.43% District Required Contribution as a Percent of Covered Payroll 19.78% 20.55% 21.14% Total Contribution as a Percent of all Participating Entities' Contributions 5.51% 6.21% 4.97% Additional Retiree Benefit Account(ARBA) 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 125 retirees. The plan is included in OCSD's financial statements; stand-alone financial statements are not issued for the plan. Benefits: 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 the District cannot ensure the use of the benefit for payment of eligible health insurance expenditures, 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 for coverage for 2'/2 months per year of service. 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. Funding: There are no employee contributions for this plan; OCSD covers 100% of the cost. An actuarial evaluation was performed as of June 30, 2007, using the Projected Unit Credit Cost method. This method represents the present value of benefits earned to date assuming that an employee earns benefits ratably over his/her career. An investment rate of return of 6.0% per year was used, and no cost of living or salary adjustment was used due to the flat dollar nature of the benefit. The unfunded actuarial liability was amortized on a level dollar basis over 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. 31 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 The annual pension cost and net pension obligation for the year ended June 30, 2007, 2008 and 2009 were as follows. For the Fiscal Year Ending June 30, 2007 June 30, 2008 June 30, 2009 Annual required contribution $ 727,037 $ 727,037 $ 780,135 Interest on net pension obligation 303,663 329,603 355,236 Adjustment to annual required contribution (367,680) (399,088) (430,125 Annual pension cost 663,020 657,552 705,246 Contributions made (230,698) (230,330) (248,410) Increase in net pension obligation 432,322 427,222 456,836 Net pension obligation, beginning of year 5,061,056 5,493,378 5,920,600 Net pension obligation, end of year $ 5,493,378 $ 5,920,600 $ 6,377,436 (7) Other Postemployment Benefits OCSD offers medical insurance to active and retired employees, as well as their qualified dependents. This is a single-employer defined benefit plan administered by OCSD. 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. This plan was established and may be modified only by action of the OCSD Board of Directors. The plan is included in the OCSD financial statements; stand-alone financial statements are not issued. As of the date of the actuarial valuation, there were 585 active employees, 158 retirees paying premiums, and 44 retirees whose premium is fully paid by OCSD. Premiums ranged between $322.69 and $1,587.96 per month, depending on the plan and number of dependents covered. Funding Policy: OCSD funds the plan on a pay-as-you-go basis. For fiscal year 2008-09, OCSD contributed $622,696 and retirees contributed $248,410 to cover current year expenditures. Annual OPEB Cost and Net OPEB Obligation: The annual OPEB cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize the unfunded actuarial liabilities over 30 years. The following OPEB cost and net OPEB obligation was determined for the year ended June 30, 2009: Annual required contribution $ 941,961 Interest on net OPEB obligation 20,453 Adjustment to annual required contribution 24,764 Annual OPEB cost 937,649 Contributions made (622,696) Increase in net OPEB obligation 314,954 Net OPEB obligation, beginning of year 340,877 Net OPEB obligation, end of year $ 655,831 32 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 Funded Status and Progress: The funding status of the plan as of the most recent actuarial valuation date is as follows: Unfunded AAL Actuarial as a Actuarial Actuarial Accrued Unfunded Percentage of Valuation Value of Liability AAL Funded Covered Covered Date Assets (AAL) (UAAL) Ratio Payroll Payroll 7/1/2007 - 9,949,638 9,949,638 0% 49,788,835 19.98% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Actuarially determined amounts are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, compares whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial liabilities for benefits. Actuarial methods and assumptions: Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The ARC for the current year was determined as part of the 7/1/07 actuarial valuation using the Projected Unit Credit cost method. The actuarial assumptions include a 6% investment rate of return and an annual healthcare cost trend rate of 9% reduced by decrements of 1% per year to an ultimate rate of 5% after the 6th year. The UAAL is being amortized ratably over 30 years. Inflation assumptions are included as part of the healthcare cost trend. (8) Transactions with Irvine Ranch Water District— Revenue Area No. 14 Formation of Revenue Area No. 14 & 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 No. 14. The excess of the purchase 33 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 price over the assets' book value is being amortized over the remainder of the useful lives of the original assets acquired. As of June 30, 2009, after recognizing current year amortization of $657,709, the unamortized amount of the excess of purchase price over the assets' book value was $4,851,693. Annual Transactions IRWD entered into a separate agreement with Revenue Area No. 14 whereby IRWD agreed to annually fund payment of Revenue Area No. 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement, which contribution amounted to $8,103,438 in 2009. Annual Cash Reserve Requirement During the fiscal year ended June 30, 2009, independent agreed-upon procedures were conducted on Revenue Area 14 to substantiate IRWD's owner equity interest in OCSD and to determine the cash reserve contribution required from IRWD in accordance with the November 15, 1995 agreement. As a result, $29 million of other operating expense was charged to the Consolidated Revenue Area for the year ended June 30, 2009 and, in conjunction with other adjustments, a total amount of $31 million, including $11 million of the current year cash reserve requirement, was recognized as a liability to IRWD. (9) Commitments Groundwater Replenishment System In March 2001, OCSD entered into an agreement with the Orange County Water District, California, to design and construct Phase 1 of the "Groundwater Replenishment System" (GWRS). OCSD has no explicit, measurable equity interest in GWRS. No separate financial statements are prepared for GWRS. The cost of this project is to be paid equally (50 percent shares) by each agency. The GWRS is a joint effort by the two agencies to provide reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. The first phase of the GWRS became operational in January 2008 with an annual production goal of approximately 72,000 acre- feet per year of recycled water. Future phases of the GWRS will be built in increments over the next 20-25 years based on availability of wastewater flows to a planned built-out capacity of 145,600 acre-feet per year. With the completion of Phase 1, the GWRS has the capacity to divert up to 100 million gallons per day of flow from OCSD's ocean discharge for peak flow storm relief. As of June 30, 2009, the total estimated cost of GWRS Phase 1 was $496.80 million. Of this amount, up to $92.50 million may be reimbursed through grants from the U.S. Environmental Protection Agency, the U.S. Bureau of Reclamation, the State Water Resources Control Board, and others. OCSD's estimated gross and net share is $248.40 million and $202.15 million, respectively, assuming all grant funds are received. Costs incurred by OCSD through June 30, 2009 total $203.4 million. Secondary Treatment: On July 17, 2002, the Board of Directors Approved Resolution No. OCSD- 14, "Establishing the Policy for Level of Treatment of Wastewater Discharged into the Ocean". This resolution established OCSD's policy to treat all wastewater discharges into the ocean to secondary treatment standards thereby providing for continued public safety, marine ecosystem protection, and water reclamation opportunities. To implement this policy, OCSD staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the agency to meet Federal Clean Water Act secondary treatment standards. 34 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2009 OCSD estimates that it will take a total of approximately eleven years and additional capital improvement costs of$627 million to reach secondary treatment discharge standards. Secondary treatment discharge standards are scheduled to be reached at the end of 2012. In the interim, OCSD will operate the plants to meet the requirements of the consent decree and the NPDES permit and will complete planning, design, construction, and operation of facilities per the schedule and the details of the consent decree. 35 (THIS PAGE INTENTIONALLY LEFT BLANK) 36 ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 37 ORANGE COUNTY SANITATION DISTRICT Schedule of Net Assets June 30,2009 With Comparative Totals for June 30,2008 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2009 2008 Current assets: Cash and cash equivalents $ 2,864,450 $ 36,335,505 $ - $ 39,199,955 $ 104,012,814 Investments 28,135,183 371,626,616 - 399,761,799 330,161,649 Accounts receivable, net of allowance for uncollectibles - 11,864,637 - 11,864,637 11,805,761 Accrued interest receivable - 2,157,015 - 2,157,015 2,855,232 Due from other governmental agencies - - - 5,025,176 Connection fees receivable - 388,031 - 388,031 1,286,927 Property tax receivable - 3,221,629 - 3,221,629 3,296,089 Inventories - 5,196,457 - 5,196,457 4,985,388 Prepaid expenses - 589,228 - 589,228 814,304 Prepaid retirement - 12,605,000 - 12,605,000 - Total current assets 30,999,633 443,984,118 - 474,983,751 464,243,340 Noncurrent assets: Restricted: Cash and cash equivalents - 68,551,793 - 68,551,793 50,737,114 Investments - 26,829,427 - 26,829,427 47,829,179 Accrued interest receivable - 215,140 - 215,140 386,960 Unrestricted: Non-depreciable capital assets 62,385,455 1,150,767,048 - 1,213,152,503 950,508,192 Depreciable capital assets, net of accumulated depreciation 56,473,446 831,070,892 - 887,544,338 878,875,030 Deferred charges - 9,433,482 - 9,433,482 8,269,966 Other noncurrent assets, net 1,034,237 18,441,187 - 19,475,424 28,078,450 Total noncurrent assets 119,893,138 2,105,308,969 - 2,225,202,107 1,964,684,891 Total assets 150,892,771 2,549,293,087 - 2,700,185,858 2,428,928,231 Current liabilities: Accounts payable - 30,456,796 - 30,456,796 27,577,766 Accrued expenses - 8,350,733 - 8,350,733 8,894,308 Retentions payable - 1,065,892 - 1,065,892 7,786,756 Interest payable - 16,646,631 - 16,646,631 12,107,963 Due to other governmental agency 30,999,633 - - 30,999,633 - Current portion of long-term obligations - 206,877,712 - 206,877,712 27,720,592 Total current liabilities 30,999,633 263,397,764 - 294,397,397 84,087,385 Noncurrent liabilities: Noncurrent portion of long-term obligations - 1,057,467,549 - 1,057,467,549 1,068,853,560 Total liabilities 30,999,633 1,320,865,313 - 1,351,864,946 1,152,940,945 Net assets: Invested in capital assets, net of related debt: Collection system 23,092,746 400,150,454 - 423,243,200 380,465,651 Treatment and disposal-Land 406,846 4,068,905 4,475,751 4,475,751 Treatment and disposal system 95,359,309 1,577,618,581 - 1,672,977,890 1,444,441,820 Capital assets related debt - (1,151,827,717) - (1,151,827,717) (981,957,438) Unrestricted: Preliminary Survey 1,034,237 18,430,843 19,465,080 28,068,106 All other unrestricted - 379,986,708 - 379,986,708 400,493,396 Total net assets $ 119,893,138 $ 1,228,427,774 $ - $1,348,320,912 $ 1,275,987,286 38 ORANGE COUNTY SANITATION DISTRICT Schedule of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2009 With Comparative Totals for June 30, 2008 Revenue Consolidated Totals Area No. 14 Revenue Area 2009 2008 Operating revenues: Service charges $ 7,576,457 $ 198,846,010 $ 206,422,467 $ 184,180,220 Permit and inspection fees 11,104 883,474 894,578 1,196,320 Total operating revenues 7,587,561 199,729,484 207,317,045 185,376,540 Operating expenses other than depreciation and amortization: Salaries and benefits 1,679,929 65,818,032 67,497,961 67,628,651 Utilities 244,138 6,997,911 7,242,049 8,092,317 Supplies, repairs and maintenance 538,416 26,185,108 26,723,524 25,970,799 Contractual services 6,954,285 21,997,184 28,951,469 23,587,835 Directors'fees 23,405 131,465 154,870 144,117 Meetings and training 29,718 1,004,830 1,034,548 1,007,255 Other - 32,952,065 32,952,065 5,458,868 Total operating expenses other than depreciation and amortization 9,469,891 155,086,595 164,556,486 131,889,842 Operating income (loss) before depreciation and amortization (1,882,330) 44,642,889 42,760,559 53,486,698 Depreciation and amortization 1,942,068 30,577,942 32,520,010 47,766,956 Operating income(loss) (3,824,398) 14,064,947 10,240,549 5,719,742 Non-operating revenues: Property taxes 2,180,938 64,245,993 66,426,931 65,209,461 Investment and interest income (loss) 476,064 14,359,497 14,835,561 20,235,214 Capital facilities capacity charges - 9,834,369 9,834,369 19,816,293 Other 57,449 1,576,786 1,634,235 12,773 Total non-operating revenues 2,714,451 90,016,645 92,731,096 105,273,741 Non-operating expenses: Interest - 24,899,193 24,899,193 22,517,174 Feasibility studies 778,189 12,874,245 13,652,434 12,994,472 Capital grants to member agencies - 189,830 189,830 1,769,894 Other - - 3,053,282 Total non-operating expenses 778,189 37,963,268 38,741,457 40,334,822 Income(loss) before transfer and capital contributions (1,888,136) 66,118,324 64,230,188 70,658,661 Transfer 2,844,316 (2,844,316) - - Capital contributions from other agencies 8,103,438 - 8,103,438 15,591,861 Change in net assets 9,059,618 63,274,008 72,333,626 86,250,522 Total net assets-beginning 110,833,520 1,165,153,766 1,275,987,286 1,189,736,764 Total net assets-ending $ 119,893,138 $ 1,228,427,774 $ 1,348,320,912 $ 1,275,987,286 39 ORANGE COUNTY SANITATION DISTRICT Schedule of Cash Flows For the Year Ended June 30,2009 With Comparative Totals for June 30,2008 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2009 2008 Cash flows from operating activities: Receipts from customers and users $ 37,988,739 $ 206,814,473 $ $ 244,803,212 $ 192,439,636 Payments to employees (2,675,296) (62,820,461) (65,495,757) (58,897,860) Payments to suppliers (9,708,000) (105,346,877) (115,054,877) (61,790,653) Net cash provided by operations 25,605,443 38,647,135 64,252,578 71,751,123 Cash flows from noncapital financing activities: Proceeds from property taxes 2,282,010 64,219,381 66,501,391 64,373,029 Grants to member agencies - (189,830) (189,830) (1,769,894) Net cash provided by noncapital financing activities 2,282,010 64,029,551 66,311,561 62,603,135 Cash flows from capital and related financing activities: Capital facilities capacity charges - 10,733,265 10,733,265 19,492,120 Additions to property,plant and equipment (5,708,123) (276,395,246) (8,684,350) (290,787,719) (275,406,057) Disposal of property,plant,and equipment (8,684,350) 8,684,350 Arbitrage payment - (307,934) Additions to other assets 78,053 (78,053) Disposal of other assets - (78,053) 78,053 Interest paid (36,301,490) - (36,301,490) (31,788,973) Principal payments on certificates of participation (244,805,000) (244,805,000) (96,530,000) Proceeds from certificates of participation issuance 408,636,386 408,636,386 378,898,628 Certificates of participation issuance costs (775,121) (775,121) (675,401) Proceeds from capital contributions 8,103,438 8,103,438 10,750,712 Net cash provided(used)by capital and related financing activities 2,473,368 (147,669,609) (145,196,241) 4,433,095 Cash flows from investing activities: Proceeds from the sale of investments 275,076,373 4,023,302,533 4,298,378,906 3,793,917,222 Purchases of investments (303,222,804) (4,043,910,423) (4,347,133,227) (3,880,733,353) Interest received 650,060 15,738,183 16,388,243 23,359,481 Net cash provided(used)by investing activities (27,496,371) (4,869,707) (32,366,078) (63,456,650) Net increase(decrease)in cash and cash equivalents 2,864,450 (49,862,630) (46,998,180) 75,330,703 Cash and cash equivalents,beginning of year - 154,749,928 154,749,928 79,419,225 Cash and cash equivalents,end of year $ 2,864,450 $ 104,887,298 $ $ 107,751,748 $ 154,749,928 Reconciliation of operating income(loss)to net cash provided by operating activities: Operating income(loss) $ (3,824,398) $ 14,064,947 $ $ 10,240,549 $ 5,719,742 Adjustments to reconcile operating income(loss)to net cash provided by operations: Depreciation and amortization 1,942,068 30,577,942 32,520,010 47,766,956 Bad debt expense (1,335) 27,941 26,606 (4,376) Other non-operating revenues and expenses 30,207 1,195,125 1,225,332 (289,933) (Increase)/decrease in operating assets: Due from other Revenue Area - 5,595,020 (5,595,020) - - Accounts receivable 112,810 (86,817) 25,993 2,022,391 Due from other governmental agencies 4,913,701 4,913,701 5,027,932 Inventories 288,152 (479,788) (191,636) (264,741) Prepaid and other assets 46,418 (12,426,342) (12,379,924) 467,220 Increase/(decrease)in operating liabilities: Accounts payable (1,566,096) 4,445,126 2,879,030 8,611,125 Accrued expenses (413,627) (129,948) (543,575) (6,189,699) Due to other Revenue Area (5,595,020) - 5,595,020 - Retentions payable (453,959) (6,266,905) - (6,720,864) 827,557 Due to other governmental agency 30,999,633 - 30,999,633 - Pension/OPEB payable (356,904) 1,128,693 771,789 6,261,477 Compensated absences (386,509) 1,037,480 650,971 545,278 Other payable 323,801 323,801 - Claims and judgments (129,698) (359,140) (488,838) 1,250,194 Net cash provided by operations $ 25,605,443 $ 38,647,135 $ $ 64,252,578 $ 71,751,123 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ (11,248) $ (142,675) $ $ (153,923) $ (1,311,560) 40 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 context 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. 42 -46 Revenue Capacity These schedules contain information to help the reader assess OCSD's most significant revenue source of sewer service fees. 47-49 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 50-53 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. 54-57 Demographic and Economic Factors These schedules offer demographic information to help the reader understand the environment within which OCSD's financial activities take place. 58-61 41 ORANGE COUNTY SANITATION DISTRICT Net Assets by Component (Dollars in Thousands) Last Nine Fiscal Years (Note 1) $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0Invested in Capital Assets,Net of Related Debt ■Restricted for Debt Service&Capital Acquisition OUnrestricted Invested in Restricted for Capital Assets, Debt Service Net of Related &Capital Fiscal Year Debt Acquisition Unrestricted Total Net Assets 2000-01 $463,935 $36,468 $446,558 $ 946,961 2001-02 501,997 36,070 435,906 973,973 2002-03 578,647 35,182 396,518 1,010,347 2003-04 418,267 88,519 517,346 1,024,132 2004-05 558,391 64,514 418,342 1,041,247 2005-06 664,060 3,003 422,036 1,089,099 2006-07 886,463 3,904 299,370 1,189,737 2007-08 847,426 - 428,561 1,275,987 2008-09 948,869 - 399,452 1,348,321 Note 1: Net Assets are calculated as a result of GASB 34, which was implemented in FY 2001-2, retrospective to 2000-01. Ten years data will eventually be presented as data is accumulated. Source: Orange County Sanitation District's Financial Management Division. 42 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $212,363 $188,768 $165,172 $141,576 $117,980 $94,384 $70,788 $47,192 $23,596 $0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 OOperating Revenue ■Non-Operating Revenue OContributed Capital Capacity Operating Revenue Non-Operating Revenue Rights& Permit& Cap.Facilities Total Capital Fiscal Service Inspection Total Property Capacity Non- Contrib- Year Charges Fees Operating Taxes Interest Charges Other Operating utions 1999-00 $ 81,241 $ 396 $ 81,637 $ 35,557 $ 20,836 $ 7,867 $ 2,573 $ 66,833 $ 4,589 2000-01 72,566 688 73,254 38,411 39,868 7,332 1,835 87,446 1,271 2001-02 79,609 396 80,005 41,140 28,073 10,560 2,202 81,975 8,603 2002-03 88,640 524 89,164 44,591 25,889 10,146 706 81,332 3,166 2003-04 101,995 332 102,327 46,943 6,786 8,998 928 63,655 9,245 2004-05 120,917 498 121,415 35,764 15,118 9,814 1,051 61,747 9,536 2005-06 154,291 874 155,165 39,958 10,426 15,632 3,477 69,493 17,358 2006-07 167,790 1,866 169,656 60,565 22,243 31,278 1,068 115,154 18,929 2007-08 184,180 1,196 185,376 65,210 20,235 19,816 13 105,274 15,592 2008-09 206,422 895 207,317 66,427 14,836 9,834 1,634 92,731 8,103 Source: Orange County Sanitation District's Financial Management Division. 43 ORANGE COUNTY SANITATION DISTRICT Expenses by Type (Dollars in Thousands) Last Ten Fiscal Years $200,000 $190,000 $180,000 $170,000 $160,000 $150,000 $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 ■Operating Expense Mon Operating Expense Operating Non -Operating Fiscal Personnel Maint& Depr& Total Interest Total Non- Year Services Utilities Other Amort Operating Expense Other(1) Operating 1999-00 $ 33,581 $ 3,621 $ 22,213 $ 36,333 $ 95,748 $ 18,151 $ 23,123 $ 41,274 2000-01 33,734 5,524 23,062 42,797 105,117 17,923 1,479 19,402 2001-02 35,629 4,967 27,967 45,703 114,266 14,406 8,896 23,302 2002-03 38,733 4,622 36,314 41,966 121,635 12,731 2,922 15,653 2003-04 48,711 5,408 41,284 44,412 139,815 15,524 6,102 21,626 2004-05 53,048 6,473 42,325 48,095 149,941 17,470 8,172 25,642 2005-06 53,246 7,563 44,823 49,887 155,519 20,078 18,567 38,645 2006-07 57,802 8,072 46,281 53,111 165,266 21,747 16,089 37,836 2007-08 67,629 8,092 56,169 47,767 179,657 22,517 17,818 40,335 2008-09 67,498 7,242 89,816 32,520 197,076 24,899 13,842 38,741 Notes (1) - For FY 1999-00, Other Non-Operating Expense includes $22,994,647 for the loss on investment in the Orange County Investment Pool. Source: Orange County Sanitation District's Financial Management Division. 44 ORANGE COUNTY SANITATION DISTRICT Change in Net Assets (Dollars in Thousands) Last Nine Fiscal Years (Note 1) $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Ending Net Assets by Fiscal Year Fiscal Total Total Change in Beginning Ending Year Revenues Expenses Net Assets Net Assets Net Assets 2000-01 $161,971 $ 133,543 $ 28,428 $ 918,533 $ 946,961 2001-02 164,580 137,568 27,012 946,961 973,973 2002-03 173,662 137,288 36,374 973,973 1,010,347 2003-04 175,227 161,441 13,786 1,010,347 1,024,133 2004-05 192,698 175,583 17,115 1,024,133 1,041,248 2005-06 242,016 194,164 47,852 1,041,248 1,089,100 2006-07 303,739 203,102 100,637 1,089,100 1,189,737 2007-08 306,242 219,992 86,250 1,189,737 1,275,987 2008-09 308,151 235,818 72,333 1,275,987 1,348,320 Note 1: Net Assets are calculated as a result of GASB 34, which was implemented in FY 2001-02, retrospective to 2000-01. Ten years information will eventually be presented as data is accumulated. Source: Orange County Sanitation District's Financial Management Division. 45 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 1999-00 $ 60 $ 57 $ 284 $ 32 $ 433 2000-01 77 56 311 33 477 2001-02 70 57 303 35 465 2002-03 100 57 237 33 427 2003-04 71 57 390 88 606 2004-05 71 57 242 65 472 2005-06 92 57 257 84 490 2006-07 139 57 91 85 372 2007-08 191 57 186 99 533 2008-09 277 58 104 95 534 Notes: 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 through the year 2020. 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 District's Financial Management Division. 46 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 2000-01 $ 78.00 2001-02 80.00 2002-03 87.50 2003-04 100.00 2004-05 115.00 2005-06 151.00 2006-07 165.80 2007-08 182.00 2008-09 201.00 2009-10 221.00 Annual Sewer Service Fees Single Family Residence 250 d 200 d LL l4 150 c Q y 100 50 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009 Fiscal Year Source: Orange County Sanitation District's Financial Management Division. 47 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 Single-Family Charge Service Charge Customer Charge Service Charge Fiscal Dwellings Revenue Revenues Accounts Revenue Revenues 1999-00 919,072 72.0 89% 649 9.1 11% 2000-01 883,603 64.5 91% 596 6.6 9% 2001-02 898,031 70.3 90% 573 7.5 10% 2002-03 897,757 77.0 92% 603 6.3 8% 2003-04 860,156 86.0 92% 530 7.5 8% 2004-05 860,634 99.0 90% 568 10.5 10% 2005-06 872,859 132.0 92% 557 12.2 8% 2006-07 867,035 143.8 91% 531 13.4 9% 2007-08 875,739 159.4 93% 520 12.1 7% 2008-09 910,637 183.0 95% 515 9.9 5% $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 OResidential/Commercial Users ■Industrial Users Source: Orange County Sanitation District's Financial Management Division. 48 ORANGE COUNTY SANITATION DISTRICT Principal Sewer Service Customers For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/09 Fiscal Year Ended 6/30/00 Industrial Industrial Permittee %to Total Permittee %to Total Service Service Charge Service Service Charge User Charges Rank Revenue Charges Rank Revenue Kimberly-Clark Worldwide, Inc. $1,091,757 1 0.51% $299,519 2 0.37% MCP Foods, Inc. 1,045,850 2 0.49% 206,067 3 0.25% Alstyle Apparel-A&G Inc. 849,942 3 0.40% Stremicks Heritage Foods, LLC 573,353 4 0.27% House Foods America Corp. 543,277 5 0.26% 116,621 9 0.14% Ameripec Inc. 459,905 6 0.22% Pepsi-Cola Bottling Group 391,780 7 0.18% Nor-Cal Beverage Co. 357,354 8 0.17% Favorite Foods 324,637 9 0.15% 200,503 4 0.25% Orange City Mills Ltd Partnership 346,794 10 0.16% Adohr Farms 345,670 1 0.43% AERA Energy 180,439 5 0.22% U.S. Dyeing & Finishing 151,751 6 0.19% Chroma Systems 136,235 7 0.17% Rockwell Semiconductor 134,148 8 0.17% Knotts Berry Farm Foods 106,376 10 0.13% $5,984,649 2.81% $1,877,329 2.32% 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. Source: Orange County Sanitation District's Financial Management Division. 49 ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses (Dollars in Thousands) Last Ten Fiscal Years 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating Year (1) Interest Service(3) Expenses (2) Expenses 1999-00 $ 12,880 $ 16,927 $ 29,807 $ 59,415 50.17% 2000-01 13,790 16,690 30,480 62,320 48.91 2001-02 10,370 13,051 23,421 68,563 34.16 2002-03 11,025 11,433 22,458 79,669 28.19 2003-04 11,610 22,508 34,118 95,403 35.76 2004-05 12,040 25,871 37,911 101,846 37.22 2005-06 12,755 29,563 42,318 105,632 40.06 2006-07 13,465 32,673 46,138 112,155 41.14 2007-08 11,025 36,484 47,509 131,890 36.02 2008-09 21,305 40,840 62,145 164,556 37.77 Notes (1) - Excludes principal reductions due to advanced refunding. (2) - Excludes depreciation and amortization expense. (3) -All debt consists of certificates of participation. Source: Orange County Sanitation District's Financial Management Division. 50 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 2.00 1.50 1.00 0.50 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Fiscal Year Ending June 30, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Operating&Non-operating Revenues: Service Charges,Net of Refunds $ 72.0 $ 64.5 $ 70.3 $ 77.0 $ 86.0 $ 99.0 $ 132.0 $ 143.8 $ 159.4 $ 183.0 Industrial Sewer Service Charges 9.1 6.6 7.5 6.3 7.5 10.5 12.2 13.4 12.1 9.9 Revenue Area No. 14 Fees 2.2 2.0 2.2 3.2 5.8 6.9 5.3 5.2 7.1 10.3 Ad Valorem Taxes 35.6 38.4 41.1 44.6 46.9 35.8 40.0 60.6 65.2 66.4 Interest Earnings 20.5 39.4 27.8 25.9 6.8 15.1 10.4 22.2 20.2 14.8 Capital Facilities Capacity Charges 7.9 7.3 10.6 10.1 9.0 9.8 15.6 31.3 19.8 9.8 Other Revenues 1.2 2.5 2.5 3.4 4.0 6.1 9.2 8.3 6.9 5.8 Total Revenues 148.5 160.7 162.0 170.5 166.0 183.2 224.7 284.8 290.7 300.0 Operating Expenses(1) 59.4 62.3 68.6 79.7 95.4 101.8 105.6 112.2 131.9 164.6 Revenues in Excess of Oper.Exp. $ 89.1 $ 98.4 $ 93.4 $ 90.8 $ 70.6 $ 81.4 $ 119.1 $ 172.6 $ 158.8 $ 135.4 Less Capital Fac.Capacity Charges (7.9) (7.3) (10.6) (10.1) (9.0) (9.8) (15.6) (31.3) (19.8) (9.8) Net Revenues(2) $ 81.2 $ 91.1 $ 82.8 $ 80.7 $ 61.6 $ 71.6 $ 103.5 $ 141.3 $ 139.0 $ 125.6 Debt Service Requirements Principal Payments 12.9 13.8 10.4 11.0 11.6 12.0 12.8 13.5 11.0 21.3 Interest Payments 17.2 17.8 13.1 11.7 16.8 25.9 29.1 35.3 31.8 36.3 Total Debt Service Requirements $ 30.1 $ 31.6 $ 23.5 $ 22.7 $ 28.4 $ 37.9 $ 41.9 $ 48.8 $ 42.8 $ 57.6 Coverage Ratios(2) 2.70 2.88 3.52 3.56 2.17 1.89 2.47 2.90 3.25 2.18 Ending Reserves(3) $ 401.0 $ 444.0 $ 430.0 $ 394.0 $ 518.0 $ 407.0 $406.0 $ 287.0 $ 434.0 $ 439.0 Notes (1)-Operating expenses exclude depreciation and amortization expenses. (2)-Calculated in accordance with the Debt Service Master Agreements which exclude Capital Facilities Capacity Charges from Net Revenues. (3)-Ending reserve balances exclude monies in debt service funds. Source: Orange County Sanitation District's Financial Management Division. 51 ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt June 30, 2009 2008-09 Assessed Valuation(Land&Improvements Only): $268,132,967,248(after deducting$39,478,515,588 Redevelopment Incremental Valuation) OVERLAPPING TAX AND ASSESSMENT DEBT(Based on redevelopment adjusted all property assessed valuation of$273,700,529,675): Total Debt District's Share of 6/30/09 %Applicable(1) Debt 6/30/09 Metropolitan Water District of Southern California $293,425,000 14.820% $ 43,485,585 Coast Community College District 341,668,867 99.508 339,987,856 North Orange County Joint Community College District 227,859,001 96.926 220,854,615 Rancho Santiago Community College District 316,405,071 98.342 311,159,075 Brea-Olinda and Laguna Beach Unified School Districts 58,434,029 99.941&14.596 29,113,416 Los Alamitos Unified School District School Facilities Improvement District No.1 27,000,000 99.152 26,771,040 Newport Mesa Unified School District 166,073,480 100. 166,073,480 Placentia-Yorba Linda Unified School District 165,776,100 98.703 163,625,984 Saddleback Valley Unified School District 140,200,000 12.165 17,055,330 Santa Ana Unified School District 221,191,491 100. 221,191,491 Tustin Unified School District School Facilities Improvement District No.2002-1 40,345,617 99.103 39,983,717 Anaheim Union High School District 120,553,955 100. 120,553,955 Fullerton Joint Union High School District 60,452,910 90.157 54,502,530 Huntington Beach Union High School District 231,234,998 98.910 228,714,537 School Districts 271,819,367 97.309-100. 271,051,518 City of Anaheim 4,750,000 99.079 4,706,253 Irvine Ranch Water District Improvement Districts 404,407,929 Various 404,290,738 Rossmoor Community Services District Special Tax Obligations 575,000 100. 575,000 Bonita Canyon Community Facilities District No.98-1 41,990,000 100. 41,990,000 Irvine Unified School District Community Facilities Districts 447,406,803 99.998-100. 447,405,247 Tustin Unified School District Community Facilities Districts 230,680,345 100. 230,680,345 Orange County Community Facilities District No.87-4 55,931,062 99.934 55,894,147 Other Community Facilities Districts 400,332,000 99.998-100. 400,257,842 Orange County Assessment Districts 112,907,296 100. 112,907,296 City of Irvine 1915 Act Bonds 887,163,771 100. 887,163,771 City of Tustin 1915 Act Bonds 48,755,000 100. 49,755,000 Other 1915 Act bonds 25,436,549 100. 25,436,549 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $4,914,186,317 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations $462,152,000 72.151% $ 333,447,290 Orange County Pension Obligations 69,713,001 72.151 50,298,627 Orange County Board of Education Certificates of Participation 19,430,000 72.151 14,018,939 South Orange County Community College District Certificates of Participation 32,875,000 36.253 11,918,174 Brea-Olinda Unified School District Certificates of Participation 28,830,000 99.941 28,812,990 Orange Unified School District Certificates of Participation and Benefit Obligations 144,265,000 96.879 139,762,489 Placentia-Yorba Linda Unified School District Certificates of Participation 86,810,315 98.703 85,684,385 Santa Ana Unified School District Certificates of Participation 62,396,493 100. 62,396,493 Other Unified School District Certificates of Participation 38,285,651 Various 38,007,622 Union High School District Certificates of Participation 116,036,090 Various 113,278,500 School District Certificates of Participation 57,230,000 Various 56,928,705 City of Anaheim General Fund Obligations 660,722,465 99.079 654,637,211 City of Costa Mesa General Fund Obligations 43,335,000 100. 43,335,000 City of Garden Grove General Fund Obligations 31,745,000 100. 31,475,000 City of Huntington Beach General Fund and Judgment Obligations 72,330,000 99.979 72,314,811 City of La Habra General Fund Obligations 21,020,000 100. 21,020,000 City of Santa Ana General Fund Obligations 111,345,000 100. 111,345,000 Other City General Fund Obligations 152,123,055 Various 126,640,634 Orange County Sanitation District Certificates of Participation 0 100. 0 (2) Irvine Ranch Water District Certificates of Participation 103,100,000 89.701 92,481,731 Municipal Water District of Orange County Water Facilities Corporation 17,685,000 67.032 11,854,609 Yorba Linda County Water District Certificates of Participation 9,645,000 97.765 9,429,434 Orange County Fire Authority 7,040,000 51.049 3,593,850 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $2,112,681,494 Less: Santa Ana Unified and Anaheim Union High School District Qualified Zone Academy Bonds supported by investment fund payments 16,500,000 City of Anaheim self-supporting obligations 640,924,677 Other City self-supporting obligations 35,556,258 MWDOC Water Facilities Corporation(100%self-supporting) 11,854,609 TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,407,845,950 GROSS COMBINED TOTAL DEBT $7,026,867,811 (3) NET COMBINED TOTAL DEBT $6,322,032,267 (1) Percentage of overlapping agency's redevelopment adjusted all property assessed valuation($273,700,529,675)located within boundaries of the district. (2) Excludes wastewater revenue certificates of participation. Previously classified certificates of participation 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 tax allocation bonds and non-bonded capital lease obligations. Ratios to: Total Overlapping Tax and Assessment Debt Gross Combined Total Debt Net Combined Total Debt Adjusted Land and Improvement Assessed Valuation 1.60% 2.62% 2.36% Adjusted All Property Assessed Valuation N/A 2.57% 2.31% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source:California Municipal Statistics 52 ORANGE COUNTY SANITATION DISTRICT Ratios of Outstanding Debt Last Ten Fiscal Years (5) Debt as a Total (3) Percentage Outstanding Median of Median (4) Debt Fiscal COP Family Family Population per Year Debt Income (1) Income Estimate (2) Capita 1999-00 $ 361,255,000 $ 69,310 0.019% 2,213,925 $ 163.17 2000-01 386,370,000 70,577 0.018% 2,400,425 160.96 2001-02 376,000,000 72,998 0.019% 2,336,400 160.93 2002-03 364,975,000 73,572 0.020% 2,408,050 151.56 2003-04 633,365,000 70,900 0.011% 2,441,350 259.43 2004-05 621,325,000 73,545 0.012% 2,467,850 251.77 2005-06 808,570,000 76,443 0.009% 2,481,540 325.83 2006-07 801,785,000 79,639 0.010% 2,505,180 320.05 2007-08 1,082,420,000 79,814 0.007% 2,522,820 429.05 2008-09 1,241,530,000 78,331 (6) 0.006% 2,539,990 488.79 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: Center for Economic Research, Chapman University. (4) - Data Source: Demographic Research Unit, California Department of Finance. (5) - Data Source: Orange County Sanitation District. (6) - Forecasted number. 53 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) 1999-00 241 620.42 $ 95,748 $ 41,274 $ 81,637 $ 66,833 2000-01 246 647.46 105,117 19,402 73,254 87,446 2001-02 234 794.05 114,266 23,302 80,005 81,975 2002-03 239 880.25 121,635 15,653 89,164 81,332 2003-04 238 1,068.43 139,815 21,626 102,327 63,655 2004-05 243 1,095.79 149,941 25,642 121,415 61,747 2005-06 235 1,216.77 155,519 38,645 155,165 69,493 2006-07 229 1,268.38 165,266 37,836 169,656 115,154 2007-08 221 1,541.18 179,657 40,335 185,376 105,274 2008-09 211 1,576.67 197,076 38,741 207,317 92,731 An Interim Strategic Plan Update to the year 2020 was completed in September 2002 that projects wastewater treatment flows to increase to 284 millions of gallons per day (mgd) in 2010, to 302 mgd in 2015, and to 321 mgd it year 2020. In order to manage the anticipated increase in wastewater flows, the District has identified a $2.4 billior capital expansion plan through 2020. Total expenses in FY 2008-09 increased $98.8 million, or 72.1 percent since FY 1999-00, primarily as a result of(1 OCSD's decision beginning in FY 2002-03 to maximize existing secondary treatment facilities as OCSD moves frm 50/50 mix of primary and secondary effluent treatment to meeting secondary treatment standards by December 31 2012, and (2) OCSD's decision to eliminate most bacteria from the ocean outfall discharge by disinfecting the efflue beginning in FY 2002-03 at an additional cost in chemicals of$7 million annually. Maintenance, chemicals, utilities, and other operating costs represent 72 percent of the increase, primarily due to tl increase in the levels of treatment referred to above. Depreciation expense decrease represents a 4 percent offset the increase as a result of the previous expansion in capital facilities and the financing associated with the expansic FY 2008-09, personnel expenses fell 0.2 percent over the prior year. This decrease is mainly due to a reduction in pension and OPEB obligations recognized in this year compared to initial recognition in the previous year; this reds was partially offset by increases in health insurance and retirement premiums. The full-time equivalent positions authorized increased by 7 in FY 2008-09. As depicted from the chart above, actual wastewater treatment flows have generally remained between 234 mgd a 244 mgd in the past, other than in FY 2000-01 which reached 246 mgd. Due to unusually dry weather conditions d the last three years, FY 2006-07, FY 2007-08 and FY 2008-09 had flows of only 229 mgd , 221 mgd and 211 mgd Source: Orange County Sanitation District. 54 ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years 350 300 250 / 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 OGeneral Management EAdministrative Services OTechnical Services ■Engineering ■Operations and Maintenance Fiscal Year Ending June 30, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 General Management 13 12 17 17 17 17 2 25 30 30 Administrative Services 87 88 97 107 116 123 145 102 98 97 Technical Services 88 87 95 94 100 112 114 119 109 107 Engineering 75 73 104 79 80 95 99 98 104 108 Operations and Maintenance 255 250 261 272 285 282 284 300 293 299 Total FTE's 518 510 574 569 598 629 644 644 634 641 Source: Orange County Sanitation District's Financial Management Division. 55 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced Last Ten Fiscal Years 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 01999-00 ■2000-01 02001-02 02002-03 02003-04 ■2004-05 02005-06 02006-07 02007-08 ■2008-09 Fiscal Year Tonnage 1999-00 42,831 2000-01 42,254 2001-02 42,505 2002-03 47,631 2003-04 50,519 2004-05 51,700 2005-06 49,554 2006-07 49,184 2007-08 50,884 2008-09 51,342 Source: Orange County Sanitation District's Environmental Compliance& Regulatory Affairs Division. 56 ORANGE COUNTY SANITATION DISTRICT Capital Asset Statistics Last Ten Fiscal Years Miles of Number Primary Secondary Trunk & of Treatment Treatment Fiscal Subtrunk Pump Capacity Capacity Year Sewers Stations (1) (1) 1999-00 650 20 276 200 2000-01 650 20 266 200 2001-02 650 20 276 200 2002-03 650 20 276 200 2003-04 650 20 276 170 2004-05 620 18 306 170 2005-06 584 16 366 200 2006-07 581 16 372 200 2007-08 568 17 372 200 2008-09 582 17 372 212 Notes (1) - Capacity is presented as million gallons treated per day. Source: Orange County Sanitation District 57 ORANGE COUNTY SANITATION DISTRICT Demographic Statistics Covering The Entire County of Orange (1) Last Ten Fiscal Years Total (4) (5) (2) Personal Per Capita Median Public (6) Fiscal Population Income Personal Family School Unemployment Year Estimates (in thousands) Income Income Enrollment Rate 1999-00 2,828,000 $ 106,003,904 (3) $ 37,484 $ 69,310 483,000 2.9% 2000-01 2,880,000 109,010,278 (3) 37,851 70,577 494,000 3.0% 2001-02 2,940,000 111,750,294 (3) 38,010 72,998 503,000 4.1% 2002-03 2,979,000 117,722,500 (3) 39,517 73,572 512,000 4.0% 2003-04 3,017,000 125,798,400 (3) 41,697 70,900 517,000 3.6% 2004-05 3,047,000 135,070,500 (4) 44,329 73,545 514,000 3.9% 2005-06 3,072,000 145,435,600 (4) 47,342 76,443 510,114 3.7% 2006-07 3,090,000 150,214,300 (4) 48,613 79,639 503,955 3.9% 2007-08 3,108,000 153,833,900 (4) 49,496 79,814 503,492 5.3% 2008-09 3,139,000 154,348,400 (4),(7) 49,171 78,331 (7) 504,136 9.3% Notes and Data Sources (1) - The Orange County Sanitation District services 471 square miles or 59% 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: Anderson Center for Economic Research, Chapman University. (5) - Data Source: California Department of Education, Educational Demographics Unit. (6) - Data Source: State of California, Employment Development Department as of June 30 of each fiscal year. (7) - Forecasted number. 58 ORANGE COUNTY SANITATION DISTRICT Estimated Populations Served by the Orange County Sanitation District June 30, 2009 Population as of January 1, 2009 Anaheim 348,470 Brea 40,180 Buena Park 83,390 Costa Mesa 116,480 Cypress 49,650 Fountain Valley 58,310 Fullerton 137,620 Garden Grove 174,720 Huntington Beach 202,480 Irvine 212,790 La Habra 62,820 La Palma 16,210 Los Alamitos 12,220 Newport Beach 86,250 Orange 141,630 Placentia 51,930 Santa Ana 355,660 Seal Beach 25,910 Stanton 39,480 Tustin 74,830 Villa Park 6,280 Westminister 93,280 Yorba Linda 68,400 Subtotal City(1) 2,458,990 Estimated Population Served in Unincorporated Areas (2) 81,000 2,539,990 Data Sources: (1) Demographic Research Unit, California Department of Finance. (2) Orange County Sanitation District Financial Management Division. 59 ORANGE COUNTY SANITATION DISTRICT Principal Orange County Employers (1) For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/09 Fiscal Year Ended 6/30/00 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. 20,000 1 1.35% 13,850 3 0.98% County of Orange 18,668 2 1.26% 16,013 1 1.13% University of California, Irvine 17,500 3 1.18% 13,457 4 0.95% St. Joseph Health System 10,656 4 0.72% 7,670 6 0.54% Boeing Co. 8,100 5 0.55% 13,854 2 0.98% YUM! Brands Inc. 7,000 6 0.47% Target Corp. 6,100 7 0.41% 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% 5,409 10 0.38% Albertsons Inc. 9,300 5 0.66% Tenet Healthcare Corp. 6,639 7 0.47% Tricon Global Restaurants, Inc. 5,695 8 0.40% Pacific Bell 5,600 9 0.39% Total 105,374 7.11% 97,487 6.88% 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 1,477,500 as of June 2009. (4)- Data Source: State of California, Employment Development Department. - Percentage is calculated by dividing employees by total employment of 1,417,900 as of June 2000. 60 ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2009 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 District Costa Mesa Sanitary 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: 641 Operational Date: July 1, 1954 Authority: California Health & Safety Code Section 4700 et. seq. Services: Wastewater collection, treatment, and disposal Service Area: 471 square miles Population Served: 2.5 million Total Miles of Sewers (including force mains): 582 miles Number of Pumping Stations: 17 Wastewater System Treatment Capacities (Million Gallons per Day) Existing Primary Existing Secondary Planned Secondary Actual Flows Treatment Capacity Treatment Capacity Capacity by 2020 Plant 1 86 204 122 182 Plant 2 125 168 90 150 Total 211 312 212 Source: Orange County Sanitation District's Financial Management Division. 61 (THIS PAGE INTENTIONALLY LEFT BLANK) 62 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 District's Certificates of Participation debt covenants beyond what is allowed to be reported in the Statistical Section. 63 ORANGE COUNTY SANITIATION DISTRICT Cash and Investment Portfolio as of June 30,2009 Cost Market Value Net Unrealized Gain/Loss Shares Par Base Base %of Total Base Investment Portfolio: Cash and Cash Equivalents(U.S. Dollar): Pending Trades $ - $ (16,316,876.67) $ (16,316,876.67) -3.95% $ Cash - 202.43 202.43 0.00% Cash Equivalents 64,812.50 64,812.50 (19,037.50) 0.00% (83,850.00) Commercial Paper-Discount 1,700,000.00 1,699,763.89 1,699,763.89 0.41% Fed Hm Loan Bnk-Less Than 1 Year 8,100,000.00 8,078,427.36 8,078,427.36 1.96% Federal Home Loan Mortgage-Less Tht 10,900,000.00 10,870,713.64 10,870,713.64 2.63% FNMA Issues-Less Than 1 Year 6,500,000.00 6,476,880.22 6,476,880.22 1.57% Mutual Funds 1,089,378.04 1,089,378.04 1,089,378.04 0.26% Other U.S.Govt Obligations 5,900,000.00 5,897,603.55 5,897,603.55 1.43% Repurchase Agreements 5,700,000.00 5,700,000.00 5,700,000.00 1.38% Treasury Bills-Less Than 1 Year 1,500,000.00 1,497,649.17 1,497,649.17 0.36% Subtotal 41,454,190.54 25,058,554.13 24,974,704.13 6.05% (83,850.00) Fixed Income Securities(U.S. Dollar): Asset Backed Securities-Car Loan 2,946,355.06 2,949,577.63 2,948,535.36 0.71% (1,042.27) Asset Backed Securities-Home Equity 537,124.66 528,732.10 384,194.53 0.09% (144,537.57) Asset Backed Securities-Small Bus Ac 1,454,926.92 1,454,926.92 1,556,727.61 0.38% 101,800.69 Asset Backed Securities-Student Loar 98,221.90 97,823.37 100,180.44 0.02% 2,357.07 Banking&Finance 93,912,000.00 90,226,988.50 88,071,595.87 21.34% (2,155,392.63) Collateralized Mortgage Obligation 265,013.71 265,013.71 265,461.58 0.06% 447.87 Commit to Purchase GNMA Pool 8,400,000.00 8,147,343.75 8,119,125.00 1.97% (28,218.75) FDIC Guaranteed Bank&Finance 46,050,000.00 47,003,340.50 46,820,180.00 11.35% (183,160.50) FHLMC Multiclass 525,961.02 523,353.66 525,195.65 0.13% 1,841.99 FHLMC Pools 20,478,749.17 21,098,444.74 21,267,012.45 5.15% 168,567.71 FNMA Pools 12,665,165.81 12,852,506.39 12,729,762.40 3.09% (122,743.99) FNMA Remic 200,000.00 190,250.00 181,430.00 0.04% (8,820.00) GNMA Multi Family Pools 695,172.70 694,392.75 713,722.83 0.17% 19,330.08 GNMA Single Family Pools 2,633.19 2,763.59 2,827.07 0.00% 63.48 Health Care 5,000,000.00 5,146,025.00 5,144,910.00 1.25% (1,115.00) Industrial 2,500,000.00 2,579,337.50 2,575,650.00 0.62% (3,687.50) Inflation Indexed Securities 19,518,072.00 19,964,318.38 20,042,717.78 4.86% 78,399.40 Insurance 2,910,000.00 1,876,950.00 1,685,646.60 0.41% (191,303.40) Muni-Education 500,000.00 483,415.00 476,315.00 0.12% (7,100.00) Taxable Municipals 10,340,000.00 10,389,871.50 10,405,023.00 2.52% 15,151.50 Technology 6,500,000.00 6,599,590.00 6,589,275.00 1.60% (10,315.00) U.S.Agencies 134,054,569.91 136,470,142.56 137,180,311.01 33.25% 710,168.45 U.S.Governments 9,710,000.00 9,911,757.73 10,073,273.85 2.44% 161,516.12 Utility-Electric 6,200,000.00 6,307,780.00 6,301,416.00 1.53% (6,364.00) Utility-Telephone 3,500,000.00 3,500,525.00 3,494,890.00 0.85% (5,635.00) Subtotal 388,963,966.05 389,265,170.28 387,655,379.03 93.95% (1,609,791.25) Total Investment Portfolio $ 430,418,156.59 414,323,724.41 412,630,083.16 100.00% $ (1,693,641.25) Demand Cash Accounts 3,187,628.00 3,187,628.00 Monies Held With Fiscal Agents 95,381,220.00 95,381,220.00 Monies with the Local Agency Investment Fund 23,113,885.17 23,144,043.00 Total Cash and Investments $ 536,006,457.58 $ 534,342,974.16 Source: Mellon Trust and the Orange County Sanitation District's Financial Management Division. 64 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 1999-00 1.00% 0.00% 1.00% 2.80% 2000-01 1.00% 0.00% 1.00% 2.80% 2001-02 1.00% 0.00% 1.00% 2.80% 2002-03 1.00% 0.00% 1.00% 2.80% 2003-04 1.00% 0.00% 1.00% 2.80% 2004-05 1.00% 0.00% 1.00% 1.60% 2005-06 1.00% 0.00% 1.00% 1.60% 2006-07 1.00% 0.00% 1.00% 2.80% 2007-08 1.00% 0.00% 1.00% 2.80% 2008-09 1.00% 0.00% 1.00% 2.80% 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. 65 ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 ■Secured oUnsecured cnange in Fiscal Assessed Year Secured Unsecured Total Value 1999-00 142,126,000 3,507,000 145,633,000 2.21% 2000-01 155,544,000 3,778,000 159,322,000 9.40% 2001-02 169,357,000 4,066,000 173,423,000 8.85% 2002-03 183,223,000 5,657,000 188,880,000 8.91% 2003-04 197,143,000 4,309,000 201,452,000 6.66% 2004-05 214,529,000 4,743,000 219,272,000 8.85% 2005-06 236,826,573 5,023,423 241,849,996 10.30% 2006-07 264,241,033 6,452,111 270,693,144 11.93% 2007-08 288,051,467 4,681,838 292,733,305 8.14% 2008-09 301,717,479 5,894,003 307,611,482 5.08% In 1978, the voters of the State 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 few exceptions, property is only reassessed at the time that it is sold to a new owner. At that point, the new assessed value in 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-Controller's Office. 66 ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $- 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 OTotal Tax and User Fee Levy ■Total Tax and User Fee Collection Total Tax Tax and Percent of Delin- and User %of Total O/S Delinquen- Fiscal and User ERAF III User Fee Levy quent Fee Collection Delinquen- cies to Tax Year Fee Levy Deduction Collection Collected Collection Collection to Levy cies Levy 1999-00 $ 107,948 $ $ 107,794 99.86 $ 72 $ 107,866 99.92 $ 291 0.27 2000-01 105,890 105,646 99.77 94 105,740 99.86 154 0.15 2001-02 112,419 112,087 99.70 83 112,170 99.78 245 0.22 2002-03 122,450 122,210 99.80 98 122,308 99.88 332 0.27 2003-04 134,389 134,132 99.81 94 134,226 99.88 241 0.18 2004-05 153,187 (16,198) 152,745 99.71 92 152,837 99.77 257 0.17 2005-06 191,711 (16,198) 191,290 99.78 122 191,412 99.84 421 0.22 2006-07 209,766 209,206 99.73 215 209,421 99.84 560 0.27 2007-08 228,622 228,635 100.01 329 228,964 100.15 (13) (0.01) 2008-09 254,092 254,106 100.01 395 254,501 100.16 (14) (0.01) Source: Orange County Auditor-Controller's Office. 67 ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange (1) (Dollars In Thousands) Last Ten Fiscal Years Non- Assessed Residential Residential Property Value (2) Constr. (3) Construction (3) Total Fiscal Calendar No. of Construction Year Value Year Value Units Value Value (3) 1999-00 $ 209,136,472 2000 $ 1,762,142 12,367 $ 2,210,775 $ 3,972,917 2000-01 228,548,301 2001 1,349,607 8,646 1,905,321 3,254,928 2001-02 248,966,581 2002 1,208,626 12,020 2,328,123 3,536,749 2002-03 269,684,864 2003 1,005,547 9,311 2,076,976 3,082,523 2003-04 287,923,828 2004 1,132,848 9,322 2,243,642 3,376,490 2004-05 311,802,395 2005 1,494,759 7,206 2,100,436 3,595,195 2005-06 342,576,859 2006 2,400,569 8,371 2,316,948 4,717,517 2006-07 381,007,391 2007 2,005,173 7,070 1,791,488 3,796,661 2007-08 412,669,779 2008 1,439,120 3,160 1,037,087 2,476,207 2008-09 428,809,224 2009 (4) 1,031,205 1,992 862,084 1,893,289 Notes and Data Sources (1) - The Orange County Sanitation District services 471 square miles or 59% 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 - "The Chapman University Economic& Business Review." (4) - Forecasted numbers. 68 ORANGE COUNTY SANITATION DISTRICT Insurance in Force As of July 1, 2009 Type Insurer Deductible Limit All-Risk Property Fire and Other Perils Public Entity Property $25,000 per $1 billion/occurrence Insurance Program occurrence (Lexington and others) Flood Public Entity Property $100,000 per $300 million/occurrence Insurance Program occurrence Earthquake Not Applicable Not Applicable Self-insured Boiler&Machinery Public Entity Property $25,000 to $100 million/occurrence Insurance Program $350,000 (Lexington and others) Employee Dishonesty/ National Union Fire $25,000 $1 million/loss; Faithful Performance/ $4 million excess policy Errors &Ommissions Excess Everest National Insurance Co. $250,000 $30 million/occurrence General Liability (first$10 million layer); $500,000 for and annual aggregate American Merchants Casualty EPLI Ins. Co. ($20 million layer excess$10 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 $500,000 Unlimited statutory coverage Compensation Authority Program Each Accident each accident, each employee $4.5 million employer's liability Pollution Liability CSAC Excess Insurance $100,000 $10,000,000 per loss Authority Program Watercraft Liability Northern Assurance Co. of Am. $15,000 $10 million Hull & Machinery Northern Assurance Co. of Am. $15,000 $1.3 million Pollution Liability Great American Ins. Co, None $5 million OCIP Main Basket("OCIP" = Owner Contolled Ins. Program for Construction) Workers Comp. Liberty Mutual $250,000/occur. Unlimited statutory coverage General Liability Liberty Mutual $250,000/occur. $2 million/occurrence; $4 million agg. OCIP Excess Liability AIG $10,000 $100 million OCIP Pollution Liability Liberty Surplus $250,000 $15 million Source: Orange County Sanitation District's Risk Management Office. 69 (THIS PAGE INTENTIONALLY LEFT BLANK) 70 Mayer Hoffman A&Cann PC. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine, California 92612 949-474-2020 ph 949-263-5520 fx www.mhm-pc.com Board of Directors Orange County Sanitation District Fountain Valley, CA In planning and performing our audit of the financial statements of the Orange County Sanitation District ("District") as of and for the year ended June 30, 2009, in accordance with auditing standards generally accepted in the United States of America, we considered Orange County Sanitation District's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we do not express an opinion on the effectiveness of the District's internal control. Our consideration of internal control was for the limited purpose described in. the preceding paragraph and. would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the District's financial statements that is more than inconsequential will not be prevented or detected by the District's internal control. Matters conforming to this definition are as follows: (1) Capital Asset Deletions The District has good controls to identify and write off old furniture and equipment that has been disposed of. For disposal of larger capital assets (pipelines, facilities), the Project Manager informs the Finance Department of replacement projects when the capital project is established in the accounting system. During our testing of capital asset additions, we noted certain projects that involved the removal or replacement of fully- depreciated assets. Since the Finance Department was not made aware of the disposal of these removed assets, the assets were not deleted from the accounting system. The financial statements arc not misstated as a result of this issue because the assets involved. have been fully depreciated. However, it is important that the District's subsidiary listing of capital assets only.include assets currently in use. Recommendation We recommend that the District review the capital asset detail for fully depreciated assets that may no longer be in use. These assets should be removed from the District's accounting records. Orange County Sanitation District Page 2 This communication is intended solely for the information and use of management, Board of Directors and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. Irvine, California October 22, 2009 Mayer Huffirnan McCann IPC. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine, California 92612 949-474-2020 ph ( 949-263-5520 fx E www.mhm-pe.com Board of Directors Orange County Sanitation District Fountain Valley, California Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets We have applied the procedures enumerated below to the appropriations limit worksheets prepared by the Orange County Sanitation District for the year ended June 30, 2009. These procedures, which were agreed to by the Orange County Sanitation District and the League of California Cities (as presented in the League publication entitled Article XIIIB Appropriations Limitation Uniform Guidelines) were performed solely to assist the Orange County Sanitation District in meeting the requirements of Section 1.5 of Article XIIIB of the California Constitution. This engagement to apply agreed-upon procedures was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results of those procedures were as follows: 1. We obtained the worksheets referred to above and compared the limit and annual adjustment factors ineluded in those worksheets to the limit and annual adjustment factors that were adopted by resolution of the Board of Directors. We also compared the population and inflation options included in the aforementioned worksheets to those that were selected by a recorded vote. Results: No exceptions were noted as a result of our procedures. 2. We recalculated the mathematical computations reflected in the District worksheets. Results: No exceptions were noted as a result of our procedures. Board of Directors Orange County Sanitation District Page Two 3. We compared the current year information used to determine the current year limit and found that it agreed to worksheets prepared by the District and to information provided by the State Department of Finance. Results: No exceptions were noted as a result of our procedures. 4. We compared the amount of the prior year appropriations limit presented in the worksheets to the amount adopted by the Board of Directors for the prior year. Results: No exceptions were noted as a result of our procedures. We were not engaged to, and did not, perform an audit, the objective of which would be the expression of an opinion on the worksheets referred to above. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriation limit for the base year, as defined by the League publication entitled Article XIIIB Appropriations Limitation Uniform Guidelines. This report is intended solely for the information and use of the specified users listed above and is not intended to be and should not be used by anyone other than these specified parties. Irvine, California October 22, 2009 Mayer Noff inn McCann 'FIC. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine, California 92612 949-474-2020 ph 949-263-5520 N www.mhm-pc.com Administration Committee Orange County Sanitation District Fountain Valley, California SUMMARY OF AUDIT RESULTS We have audited the financial statements of the Orange County Sanitation District for the year ended June 30, 2009 and have issued our report thereon dated October 22, 2009. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards Our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. In planning and performing our audit, we considered the District's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. As part of obtaining reasonable assurance about whether District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit. Scope and Tinging of the Audit The scope and timing of the audit was communicated to the Chair of the Administration Committee in a separate letter. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. We advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the District's are described in note one to the financial statements. We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensus. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. An example of the significant subjective judgments inherent in the financial reporting process is management's judgment Administration Committee Orange County Sanitation District Page 2 concerning which projects should be expensed as ordinary maintenance activities necessary to keep an asset operational. for its originally established useful life versus those significant improvement, replacement, and life extending projects that should be capitalized as additions to capital assets. Significant Difficulties in Performing the Audit We encountered.no difficulties in performing our audit. Material and Immaterial Misstatements Professional standards require us to accumulate all known and likely misstatements identified. during the audit, other than those that are trivial, and conununicate them to the appropriate level of management. No material misstatements were determined by the audit process. The accompanying financial statements do not reflect the effect of adjustments determined to be immaterial including the capitalization of interest costs associated with. capital projects that did not have bond funding and recording as prior period adjustments the results of certain contractual audits. Accordingly, these items were recognized by the District as expenses of the audit period. The aggregate effect of these immaterial items represented less than 1% of the District's total assets. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have obtained certain representations from management that are included in the manageivcnt representation letter dated October 22, 2009. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the District's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our.knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the District's auditors. Administration Committee Orange County Sanitation District Page 3 However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Tlus information is intended solely for the use of the Administration Committee and management of the District and is not intended to be and should not be used by anyone other than these specified parties. October 22, 2009 Irvine, California