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HomeMy WebLinkAbout12-14-2011 Administration Committee Agenda Wednesday, December 14, 2011 4 5:30 P.M. Orange County Sanitation District Y Administration Building Regular Meeting of the Board Room Administration Committee .v 10844 Ellis Avenue A Fountain Valley, CA (714) 593-7130 AGENDA PLEDGE OF ALLEGIANCE: DECLARATION OF QUORUM: PUBLIC COMMENTS: If you wish to speak, please complete a Speaker's Form and give it to the Clerk of the Board. Speakers are requested to limit comments to three minutes. REPORTS: The Committee Chair and the General Manager may present verbal reports on miscellaneous matters of general interest to the Committee Members. These reports are for information only and require no action by the Committee. REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES: CONSENT CALENDAR: 1. Approve Minutes of the October 12, 2011, Administration Committee Meeting. ACTION ITEMS: 2. Recommend to the Board of Directors to: Establish an On-Call Services Contract with Project Partners Inc. and Psomas for Enterprise Information Management On-Call Staffing, Specification No. S-2011-505BD, for a one year period, with a total amount not to exceed $211,000 and an option of two additional one year renewals with a total amount not to exceed $211,000 per year. Approve a $21,100 contingency (10%) per year. 12/14/11 Administration Committee Agenda Page 1 of 3 3. Recommend to the Board of Directors to: Authorize staff to issue a Request for Proposal (RFP) seeking competitive proposals, and to subsequently award a contract for the best value to the most responsive and responsible insurance broker for an amount not to exceed $120,000 annually (to be paid as commissions which are part of the cost of insurance policies procured) for a contract with a term up to five years. 4. Recommend to the Board of Directors to: Authorize the General Manager to increase the current Temporary Employment Services (Specification No.CS-2009-421 BD) funding of $150,000 by $119,000 with temporary service firms for a new total amount not to exceed $269,000 for the remainder of the fiscal year (through June 30, 2012). 5. Recommend to the Board of Directors to: Receive and file the Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2011, prepared by staff and audited by McGladrey & Pullen, Certified Public Accountants, along with the following reports prepared by McGladrey & Pullen: A. Report to the Administration Committee; B. Compliance (Single Audit) Report; and C. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY: ADJOURNMENT: The next Administration Committee meeting is scheduled for Wednesday, February 8, 2012, at 5:30 p.m. 12/14/11 Administration Committee Agenda Page 2 of 3 Accommodations for the Disabled: Meeting Rooms are 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. Agenda Posting: In accordance with the requirements of California Government Code Section 54954.2, this agenda has been posted outside the main gate of the Sanitation District's Administration Building located at 10844 Ellis Avenue, Fountain Valley, California, 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 the Board of Directors, are available for public inspection in the office of the Clerk of the Board. NOTICE TO DIRECTORS: To place items on the agenda for the Committee Meeting, items must be submitted to the Clerk of the Board 14 days before the meeting. Maria E.Ayala Clerk of the Board (714)593-7130 mayala(a)ocsd.com For any questions on the agenda, Committee members may contact staff at: General Manager Jim Ruth (714)593-7110 jruth0)ocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 Ighirelli(cDocsd.com Assistant General Manager Jim Herberg (714)593-7300 iherberg(cDocsd.com Director of Finance and Lorenzo Tyner (714)593-7550 Ityner(cDocsd.com Administrative Services Director of Human Resources Jeff Reed (714)593-7144 jreed(cDocsd.com 12/14/11 Administration Committee Agenda Page 3 of 3 ADMINISTRATION COMMITTEE Meeting Date To Bd. of Dir. 12/14/11 12/21/11 AGENDA REPORT Item Number Item Number 2 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director, Finance and Administrative Services SUBJECT: ESTABLISH AN ON-CALL SERVICES CONTRACT GENERAL MANAGER'S RECOMMENDATION A. Reject apparent low bid submitted by Sapphire Technologies, as deemed non- responsible in accordance with specification requirements for Enterprise Information Management On-Call Staffing, Specification No. S-2011-505BD; and, B. Approve Services Contracts with Project Partners, Inc. and Psomas for Enterprise Information Management On-Call Staffing, Specification No. S-2011-50513D, for a one year period, with a total amount not to exceed $211 ,000; and, C. Approve an option of two additional one year renewals with a total amount not to exceed $211,000 per year; and, D. Approve a $21,100 contingency (10%) per year. SUMMARY Enterprise Information Management (EIM), a business unit in OCSD's Information Technology Division, is responsible for facility records management and enterprise data quality and systems. The EIM group also provides Computer Assisted Drawing (CAD), Geographic Information System (GIS), and Engineering Library support at various stages throughout a project's lifecycle. As a result of cyclical workloads, outside on-call staffing support is required. The selected firms will provide specialized support to incorporate records received from Capital Improvement Program (CIP) projects into baseline models, drawings and the Engineering Library and to provide CAD and/or GIS support on a task based approach for in-house design work and general engineering support as needed to process information in a timely manner. The bid package was downloaded by 30 firms and six bids were received. Sapphire Technologies did not meet the minimum qualifications and were deemed non- responsible. The two lowest responsible bidders were chosen. The estimated contract amount for this period was derived by staff considering the average support hours anticipated in support of the CIP. District staff will use these Page 1 of 3 firms on an as-needed basis only. The total agreement cost is not guaranteed nor is it paid to the firms if their services are not used. PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION EIM is charged with receiving, validating, and maintaining the electronic facility records generated for completing CIP projects. These records include engineering drawings and databases, specifications, and sewer system and treatment plant atlas maps. EIM also provides CAD and GIS support for all OCSD and perform drafting and quality assurance services. Staff uses record drawings for completed projects, which are obtained from Contractors and Consultants, to update the official facility records. These records include all the constructed facilities owned by the Orange County Sanitation District (Sanitation District) and must be kept up-to-date to safely maintain and operate the treatment plants and sewers, and provide accurate information for future rehabilitation and improvement designs. The bid process used a baseline of 2,000 hours per year for both the CAD and GIS resources. Actual use of the firms will be on an as-needed basis. This item does not impact the overall CIP budget. Funds are included in the individual project budgets to cover the cost of the proposed professional services contract. Below is the tabulated bid result; Project Partners and Psomas were the lowest responsive bidders. ENTERPRISE INFORMATION MANAGEMENT ON-CALL STAFFING Bid Date — 11/3/2011 @ 2:00 PM S-2011-505BD STAFFING BIDDERS TYPE Getter Darnell Xtron Sapphire Project Technical Software Technologies Partners Psomas Engineering, Services, Services, Inc. Inc. Inc. GIS 70,000 = 112,000 = 116,000 220,000 = 119,600 = 99,960 = $35/hr $56/hr = $58/hr $110/hr $59.80/hr $49.98/hr CAD 105,000 = 99,000 = 120,000 150,000 = 112,200 = 149,960 = $54.5/hr $49.5/hr = $60/hr $75/hr $61.10/hr $74.98/hr Total $175,000 211,000 236,000 370,000 241,800 249,920 CEQA Page 2 of 3 N/A BUDGET/DELEGATION OF AUTHORITY COMPLIANCE This request complies with authority levels of the Sanitation District's Delegation of Authority. This item has been budgeted. Date of Approval Contract Amount Contingency 12/21/2011 $211,000.00 $21,100.00 (10%) Page 3 of 3 ADMINISTRATION COMMITTEE Meeting Date To Bd. of Dir. 12/14/11 12/21/11 AGENDA REPORT Item Number Item Number 3 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Administrative Services SUBJECT: REQUEST FOR PROPOSALS FOR AN INSURANCE BROKER OF RECORD GENERAL MANAGER'S RECOMMENDATION Authorize staff to issue a Request for Proposal (RFP) seeking competitive proposals and to subsequently award a contract for the best value to the most responsive and responsible insurance broker for an amount not to exceed $120,000 annually (to be paid as commissions which are part of the cost of insurance policies procured) for a contract with a term up to five years. SUMMARY In 2007, the Sanitation District received proposals and entered in to a contract for operational insurance brokerage services. That contract is ending, and a new RFP needs to be issued. The Sanitation District's operational insurance includes excess liability (with errors & omissions and employment practices liability), excess workers compensation, property, boiler & machinery, pollution liability, crime, watercraft, and travel accident coverages. The operational insurance broker of record provides advice and counsel regarding operational insurance, markets the Sanitation District's needs to insurance carriers, and places the business once the Sanitation District has chosen carriers. PRIOR COMMITTEE/BOARD ACTIONS This Committee and the Board approved a contract with Alliant Insurance Services as operational insurance broker of record in February 2007. ADDITIONAL INFORMATION This RFP will not include employee benefits or insurance for the owner controlled insurance program ("OCIP") for construction projects. Insurance for both of those items are handled separately. DW-102 Board AR, Rev 10/04/10 Page 1 of 2 RK 11-02-11 CEQA N/A BUDGET/DELEGATION OF AUTHORITY COMPLIANCE There will be no impact on the budget as the cost of insurance policies has been budgeted and the cost of operational insurance brokerage services is to be paid through commissions which are part of the insurance policies procured. Date of Approval Contract Amount Contingency N/A $ N/A N/A DW-102 Board AR, Rev 10/04/10 Page 2 of 2 RK 11-02-11 ADMINISTRATION COMMITTEE Meeting Date To Bd.of Dir. 12/14/11 12/21/11 AGENDA REPORT Item Number Item Number 4 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Jeff Reed, Director of Human Resources SUBJECT: TEMPORARY EMPLOYMENT SERVICES GENERAL MANAGER'S RECOMMENDATION Authorize the General Manager to increase the current Temporary Employment Services (Specification No.CS-2009-421BD) funding of $150,000 by $119,000 with temporary service firms for a new total amount not to exceed $269,000 for the remainder of the fiscal year (through June 30, 2012). SUMMARY Orange County Sanitation District's (OCSD) strategic staffing plan includes utilizing full-time and part-time regular employees, contract employees, and temporary employees. In an effort to reduce the OCSD budget and have staff focus on completing its tasks with existing resources, the budget was reduced to $150,000 from $1,700,000 incrementally over the last five years. However, the last incremental reduction was not effectively achievable and is negatively impacting the day-to-day operations of the departments. Therefore, staff is requesting that the current budget be increased from $150,000 to $300,000. There are four temporary staffing requests: ( Rate Increase Campaign Support- $37,000 ( Processing of Sewer Service Claim Fees - $7,000 ( Maternity Leave Coverage- $45,000 ( Extended Medical Leave Coverage (2 employees) - $30,000 ( Easement Processing - $31,000 The additional funds will come as transfers from the requesting divisions Operating budgets; therefore, this results in no increase to the overall Board approved FY 11/12 budget. PRIOR COMMITTEE/BOARD ACTIONS June 02, 2011 Board Meeting — Entered into contracts for Temporary Employment Services (Specification No CS-2009-421 BD) with temporary service firms for a total amount of $126,000 per year, for a one-year period (July 1, 2011 through June 30, 2012), with a one-year renewal option. A $24,000 increase had been added to the projected budget as a contingency fund for unplanned staffing needs that adversely impacted OCSD staffing resources. June 24, 2009 Board Meeting — Entered into contracts for Temporary Employment Services (Specification No CS-2009-421 BD) with temporary service firms for a total amount of $450,000 Revised: 06/04/03 Page 1 per year, for a one-year period (July 1, 2009 through June 30, 2010), with a one-year renewal option. A $50,000 increase had been added to the projected budget as a contingency fund for unplanned staffing needs that adversely impacted OCSD staffing resources. May 26, 2004 Board Meeting - Temporary Employment Services: (1) Authorize staff to establish contracts for Temporary Employment Services, Specification No. S-2004-181 BD, with temporary service firms for a one year period, July 1, 2004 through June 30, 2005, for a total amount not to exceed $1,700,000 per year; (2) Authorize staff the option of four additional one year contract renewals, cancelable at any time, for a total amount not to exceed $1,700,000 per year; and, (3) Authorize staff to enter into these contracts with temporary service firms, as identified by the Human Resources Department, with the authorization to add or delete such firms as necessary to meet District work requirements. ADDITIONAL INFORMATION This report specifically focuses on temporary services employees who are utilized as a supplement to the regular workforce for accommodating workload demands and workflow fluctuations. The key advantage associated with temporary staffing is flexibility, since temporary employees are used for adjusting staffing levels quickly and for a limited timeframe. Temporary services are utilized for filling approved budgeted positions due to illness, extended leaves of absence, and vacant open positions; in addition, temporary services are also used for approved special projects and budgeted capital improvement projects (CIP) that are non-engineering related. In June 2004, the Board of Directors awarded contracts for Temporary Employment Services for a period of one year, renewable for a period of four years. The Board of Directors authorized staff to utilize a combination of several firms to supply temporary services to OCSD in order to provide staffing flexibility and to comply with the OCSD Purchasing Resolution. These contracts expired on June 30, 2010. Fiscal Year Amount 2011 — 2012 $150,000 2010 —2011 $424,200 2009 —2010 $760,020 2008 —2009 $1,700,000 2007 —2008 $1,700,000 The approved FY11/12 Operating budget for temporary services is $150,000. The Operating budget accounts for projected temporary services expenditures of $126,000. A $24,000 increase was added to the initial budget as a contingency fund for unplanned staffing needs that adversely impact OCSD staffing resources such as Leaves of Absences (LOA's), promotions, and separations of employment. The $24,000 contingency fund has been depleted. OCSD currently utilizes 8 temporary services agencies to provide temporary workers on an as-needed basis to accomplish OCSD work requirements. The cost of a temporary employee includes the temporary's hourly rate. A mark-up rate is the "payment" to the temporary agency to cover the benefits provided to the temporary worker and overhead costs of the temporary agency. The mark-up rates for the current temporary agencies utilized by OCSD range from 30% to 70%. JDR:LT:JR:RS:lc Revised: 06/04/03 Page 2 ADMINISTRATION COMMITTEE Meeting Date To Bd.of Dir. 12/14/11 12/21/11 AGENDA REPORT Item Number Item Number 5 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: ORANGE COUNTY SANITATION DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) FOR THE YEAR END JUNE 30, 2011. GENERAL MANAGER'S RECOMMENDATION Receive and file the: Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2011, prepared by staff and audited by McGladrey & Pullen, Certified Public Accountants, along with the following reports prepared by McGladrey & Pullen: ( Report to the Administration Committee; ( Compliance (Single Audit) Report ; and ( Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets SUMMARY The Sanitation District's independent auditors, McGladrey and Pullen, have completed their examination of the Sanitation District's financial statements for the year ended June 30, 2011 , and have issued an unqualified opinion. Each year, the Administration Committee reviews the results of the audit and the corresponding Auditor's report. During their audit, McGladrey and Pullen, noted no matters involving the internal control over financial reporting and its operations that they consider to be material weakness. McGladrey and Pullen will attend the meeting to respond to any questions of Directors. Staff has prepared the Comprehensive Annual Financial Report, including the audited financial statements. As the Sanitation District has consistently earned the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA), this year's report will be submitted to GFOA for their review. 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, 2011. (separately bound document). 2. Report to the Administration Committee. 3. Compliance (Single Audit) Report. 4. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. JDR:LT:MW:jf Form No.DW-102.3 Revised:09/01/2009 Page 2 Ol'`,I r1 J pe �'C)Ll J'lJ r -1 J 11 JJ�r>✓J J'r ;��f1�f1 �i��� 1 J ibr to P&W ended June 30, 2011 - •- '_ �._- -.mow• - - - ``�• --.z"t '■--�`_ � `fir..,.._---...<.-- .- ���. Go J�jy S A N 1 2 O/� • Q A cT�N6 THE ENv\�o ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2011 Prepared By: Administrative Services Department Financial Management Division Michael D.White, CPA Controller ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30, 2011 Page 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 Statement of Cash Flows.................................................................................................... 12 Notes to Basic Financial Statements................................................................................... 13-38 Supplementary Information: Schedule of Combining Area Net Assets............................................................................ 40 Schedule of Combining Area Revenues, Expenses, and Changes in Net Assets ............ 41 Schedule of Combining Area Cash Flows........................................................................... 42 STATISTICAL SECTION: Net Assets by Component—Last Ten Fiscal Years.................................................................... 44 Revenues and Gross Capital Contributions by Source—Last Ten Fiscal Years........................ 45 Expenses by Type—Last Ten Fiscal Years................................................................................. 46 Change in Net Assets—Last Ten Fiscal Years........................................................................... 47 Cash and Investment Reserve Balances—Last Ten Fiscal Years.............................................. 48 Sewer Service Fees—Last Nine Fiscal Years &Next Fiscal Year.............................................. 49 Number of Accounts and Revenues by Customer Class—Last Ten Fiscal Years...................... 50 Principal Sewer Service Customers—Current Fiscal Year and Nine Years Ago........................ 51 Ratio of Annual Debt Service to Total Expenses—Last Ten Fiscal Years.................................. 52 Debt Coverage Ratios—Last Ten Fiscal Years........................................................................... 53 Computation of Direct and Overlapping Debt—Current Fiscal Year........................................... 54 Ratios of Outstanding Debt—Last Ten Fiscal Years................................................................... 55 Comparison of the Volume of Wastewater Treated —Last Ten Fiscal Years.............................. 56 Authorized Full-time Equivalents by Function—Last Ten Fiscal Years....................................... 57 Biosolids Produced—Last Ten Fiscal Years ............................................................................... 58 Capital Asset Statistics—Last Ten Fiscal Years ......................................................................... 59 Demographic Statistics—Last Ten Fiscal Years......................................................................... 60 Estimated Populations Served by Orange County Sanitation District—Current Fiscal Year...... 61 Principal Orange County Employers—Current Fiscal Year and Nine Years Ago....................... 62 OperatingIndicators..................................................................................................................... 63 OTHER DATA&TRENDS: Cash and Investment Portfolio—As of June 30, 2011................................................................. 66 Property Tax Rates—Direct and Overlapping Governments—Last Ten Fiscal Years............... 67 Assessed and Estimated Actual Value of Taxable Property—Last Ten Fiscal Years................. 68 Property Tax and User Fee Levies and Collections—Last Ten Fiscal Years ............................. 69 Property Value and Construction—Last Ten Fiscal Years.......................................................... 70 Insurance in Force—Next Fiscal Year ........................................................................................ 71 OJNZV SPN +,=,/y 0 ORANGE COUNTY SANITATION DISTRICT '011 !ti �H E ENV December 2, 2011 10844 Ellie Avenue Fountain Valley, CA 92708-7018 The Board of Directors of the Mailing Address Orange County Sanitation District, P.O. Box 8A County,Orange C California 27 Fountain Valley,,C CA 9272E-8127 Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation www.ocsd.aom District, Orange County, California for the fiscal year ended June 30, 2011. This report includes the Phone financial position and activity of individual revenue areas, as described within the Governmental Structure (714)962-2411 below, as of June 30, 2011 and was prepared by the Financial Management Division of the Sanitation Fax District's Administrative Services Department. (714)962-0356 Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the Sanitation District. To the best of our knowledge and belief, the Serving enclosed data is accurate in all material respects and is reported in a manner designed to present fairly Anaheim the financial position and results of operations of the Sanitation District. All disclosures necessary to Brea enable the reader to gain an understanding of the agency's financial activities have been included. Buena Park Included within the accompanying financial statements are all of the organizations, activities, and functions cypress controlled by the Sanitation District's Board of Directors in accordance with the Governmental Accounting Fountain Valley Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting. For the purpose of this evaluation, control was determined by the Boards responsibility for: (1) adoption of the Fullerton budget and user charges, (2) taxing authority, and (3) establishment of policies. The reporting entity and Garden Grove its services are described in further detail in Note 1 of the financial statements. Huntington Beach Irvine An audit of the books,financial records and transactions of the Sanitation District is conducted annually by independent certified public accountants. The Sanitation District selected the accounting firm of La Habra McGladrey and Pullen, LLP to perform the audit for the year ended June 30, 2011. The auditors' report on La Palma the Sanitation District's basic financial statements and supplementary information is located on page 1 Los Alamitos within the financial section of this report. This report renders an unqualified opinion on the Sanitation Newport Beach District's basic financial statements for the year ended June 30, 2011. Orange Management's discussion and analysis (MD&A) immediately follows the independent auditor's report and Placentia provides a narrative introduction, overview, and analysis of the basic financial statements. The MD&A Santa Ana complements this letter of transmittal and should be read in conjunction with it. Seal Beach Stanton GOVERNMENTAL STRUCTURE Tustin Villa Park The Orange County Sanitation District encompasses the Northern section of Orange County. The Yorba Linda Sanitation District provides wastewater treatment for an area of the County covering 463 square miles and serving a population of approximately 2.5 million, or 81 percent of the County's population. The Sanitation Costa Mesa District was originallyincor incorporated in 1954 as nine separate public corporations, or districts. In April of Sanitary District p p p p p 1998, at the Sanitation District's request, the Board of Supervisors of the County of Orange passed Sanitary �i�t Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Districts into a new, Irvine Ranch single sanitation district, to be known as the Orange County Sanitation District, effective July 1, 1998. This action was recommended to the Board b the Local Agency Formation Commission in order to simplify Water District Y 9 Y P fY County of Orange governance structures, reduce the size of the Board, ease administrative processes, streamline decision- making and consolidate accounting and auditing processes. The boundaries of the nine previous districts had remained intact for the purpose of 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, We protect public health and the environment iy providing effective wastewater collection, treatment, and recycling. 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 587 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 2010-11, approximately 78 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. After wastewater receives secondary treatment at Plant No. 1, it flows to the Groundwater Water Replenishment System (GWRS) at the Orange County Water District, located adjacent to the Sanitation District, where it undergoes a state-of-the-art purification process consisting of microfiltration, reverse osmosis, and ultraviolet light with hydrogen peroxide. The product water is near-distilled-quality. Approximately 35 million gallons (132,500 cubic meters) per day of the GWRS water are pumped into injection wells to create a seawater intrusion barrier.Another 35 million gallons (132,500 cubic meters)are pumped daily to Orange County Water District's percolation basins in Anaheim where the GWRS water naturally filters through sand and gravel to the deep aquifers of the groundwater basin. Remaining outflows of treated wastewater from Plants No. 1 and No. 2 are combined and discharged to the ocean off the Huntington Beach coast through an outfall pipe that is 120 inches in diameter and approximately five miles long. The last mile of the outfall pipe is a diffuser that dilutes the wastewater with seawater in a ratio of 148 parts seawater to one part treated wastewater at an average depth of 185 feet. ECONOMIC CONDITIONS AND OUTLOOK In October 2011, the Institute for Economic and Environmental Studies at the California State University Fullerton Mihaylo College of Business and Economics (CSUF)forecasts that real gross domestic product (GDP) will trend slightly upward in 2012. The concern is that a stalled economy can easily slip back into recession. The fallout from high oil prices, Japan's nuclear power plant disaster, the Eurozone credit crisis, the U.S. credit downgrade, and the overall financial market turmoil have substantially weakened an already fragile recovery. Fears of a double dip recession still exist following the outcome of future decisions from policy makers on both sides of the Atlantic, from an abrupt fiscal tightening in the U.S., further haggling over the U.S. budget cuts, or more confusion from the Eurozone crisis. However, the imbalances that would normally shove the economy back into a recession do not yet exist: housing construction never got off the floor, and now makes up only 2.4 percent of the GDP; inventory to sales ratio, which soared during the recession, is now back to normal levels; employment has yet to pick up after draconian cuts; and production is well below capacity. CSUF reports that while construction has been at a standstill for some time in Orange County, there are early signs of some activity in selected segments. One of these is in the medium to small hotel construction sector as well as refurbishing of existing hotels. Hotel rental rates are climbing providing further incentives for such construction. Given the unprecedented low mortgage rates, the overall sentiment for housing construction is slowly turning the corner and moving upwards. Permitting activity is picking up yet the progress is expected to be painfully slow for the next two years. Given the extremely low construction activity in the past three years, current recorded percentage increases seem impressive but only because these are starting from extremely low bases. In reality, it will take up to three years before normal levels of construction activity and employment in the sector are achieved. According to the California Employment Development Department, Orange County experienced a decline in payroll jobs of 19,200 jobs in 2010, and a decline of 192,800, or 12.7 percent in total payroll jobs since the beginning of the national recession in December of 2007. CSUF forecasts that year-over-year payroll growth will increase from virtually no growth of 0.5 percent in 2011 to 1.2 percent in 2012, well below the historical average for the twenty years preceding the recession. While such growth pales in comparison to historical standards, it points to the creation of 16,200 in net new payroll jobs in Orange County in 2012. According to the June 2011 Anderson Center for Economic Research at Chapman University Economic and Business Review, most of the new jobs in Orange County for 2012 will be created in the services sector. The most rapid growth is forecasted in the professional and business services sector, increase at 3.2 percent, and in the education and health services sector and leisure and hospitality, both increasing at 2.8 percent. Outside of the services sector, the trade, transportation, & utilities and financial activities sectors are forecasted to show recovery in 2012. High unemployment rates, loss of nominal income, and negative wealth effects stemming from declines in home prices and equity markets darkened consumers' sentiment over the 2008-09 period as spending in 2009 on taxable items declined over 14.0 percent in Orange County and California. The composite index, however, has shown a steady increase with the current reading of 88.7. Barring any unexpected oil supply disruption, Chapman University believes that gas prices should remain in the range of$3 to$4 a gallon, and that taxable sales in Orange County should grow by 6.6 percent in 2011 and 6.4 percent in 2012. The recent statistics released by the California Association of Realtors show a year-over-year decline in home sales activity in median prices of single-family detached homes in Orange County and California. Chapman University reports that there is still a large number of stressed properties held by financial institutions in what is known as shadow inventory. In addition to the existing level of inventory, exotic adjustable mortgages originated in 2006 are still due to be refinanced in 2011. These homeowners are underwater and, as a result, many are choosing to short sell or let their properties fall into foreclosure. On the positive side, 2006 was the last year of the mortgage bubble and financial institutions did not originate many exotic adjustable mortgages in 2007 which points to a slowdown in the new supply of stressed properties in 2012. On balance, the Chapman University forecast calls for housing prices in Orange County and California, measured by the median price of a single-family home, to show a decline of about 4.0 to 4.5 percent in 2011 and show virtually no appreciation in 2012. 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. iii 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 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 five 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." • February 15, 2011 —Complete construction of Plant No. 2 secondary treatment expansion. Following are the timeline for the remaining two milestones: • 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 steer OCSD's efforts and engage the organization to envision service levels and operational needs for the next five years. In continuing to look at the five-year horizon, the Strategic Plan has been updated on an annual basis. Each of these strategic plan annual updates has followed a similar process that had been established when the original November 2007 had been adopted with the General Manager's Office initiated the planning effort with the Executive Management Team, and then soliciting input and ideas from managers and supervisors. In October 2010, 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. The strategic plan update for 2011 took a slightly different course as the Sanitation District made the decision to focus on internal operations to make the most of tax dollars and to strive for greater efficiencies. Driven by the Sanitation District's mission, vision and core values, the 2011 Strategic Plan update maintains an aggressive effort to meet the sanitation, health, and safety needs of the 2.5 million people being served in a cost effective manner, while protecting the environment where we live. iv Since 2007, 79 percent of the strategic goals identified in the five-year plan have been completed. Four new goals were added in the 2011 update, one modification to the existing levels of service was made, and a continuation of a previous goal was included in the plan. The New Goals include: • Full-Cost Recovery: Urban runoff division program — Implement a direct charging mechanism to recover the cost of urban runoff treatment starting July 1, 2013 when the new rate structure is in place. • Ocean Protection—Undertake studies to determine the cause of benthic community changes near the ocean outfall and take corrective action to return affected areas to reference conditions. • Update the sewer service fee five-year rate plan—Prepare an updated five-year rate schedule for Board consideration that would be effective for the fiscal year beginning July 1, 2013. Modification to Levels of Service: • The level of service for biosolids will continue to be 95 percent recycled, with an exception of up to 12 percent to landfill during peak solids production through 2017. Continuation of previous Goal: • Providing ongoing leadership development — Maximize the development of a pool of dedicated and talented employees ready to lead OCSD into the future. This strategic plan continues to chart a focused roadmap of success for the future of the Orange County Sanitation District. It addresses critical issues and challenges, and communicates clear and concise future direction to Sanitation District staff. SERVICE EFFORTS AND ACCOMPLISHMENTS In March 2011, the Sanitation District's Reclamation Plant No. 1 received the"Plant of the Year" award for 2010 from the Santa Ana River Basin Section of the California Water Environment Association. Criteria considered in awarding this designation include certification of plant operators, pretreatment strategy, biosolids processes, safety,financial condition, public relations, and energy conservation. In April 2011, the Sanitation District received the 2010 California Water Environment Association "Plant of the Year" award for Reclamation Plant No. 1. This award recognizes this facility for permit compliance, innovative practices, cost effectiveness, and superior plant operations. In July 2011, the Sanitation District received the Gold Peak Performance Award from the National Association of Clean Water Agencies for Reclamation Plant No. 1 and Treatment Plant No. 2 achievement of 100 percent compliance with National Pollutant Discharge Elimination System (NPDES) permits for 2010. 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; v 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 District's internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. Each year the Sanitation District's Board of Directors adopts an annual operating plan. A joint works budget is first prepared that identifies the specific capital projects and operating activities to be undertaken by the Sanitation District during the year. The budgetary level of control, the level at which expenses cannot exceed budget, is exercised at the individual district, or fund level. The Sanitation District has adopted a Uniform Purchasing Policy that identifies the agreed upon purchasing standards. ACCUMULATED FUNDS AND RESERVES POLICY The Board of Directors of the Orange County Sanitation District has established the following Accumulated Funds and Reserves Policy: Cash Flow Reserve: is established to fund operations, maintenance and certificates of participation expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and the sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve will be established as the sum of an amount equal to six months operations and maintenance expenses and the total of the annual debt (COP) service payments due in August each year. Operating Contingency Reserve: is established to provide for non-recurring expenditures that were not anticipated when the annual budget and sewer service fees were considered and adopted. The level of this reserve will be established at an amount equal to ten percent of the annual operating budget. Capital Improvement Reserve: is established to fund annual increments of the capital improvement program. The long-term target is for one half of the capital improvement program to be funded from borrowing and for one half to be funded from current revenues and reserves. With this program in mind, the target level of this reserve has been established at one half of the average annual capital improvement program through the year 2020. Levels higher and lower than the target can be expected while the long- term financing and capital improvement programs are being finalized. Catastrophic Loss or Self-Insurance Reserves: are established for property damage including fire, flood and earthquake;for general liability; and for workers'compensation. These reserves are intended to work with purchased insurance policies, FEMA disaster reimbursements and State disaster reimbursements. Based on the current infrastructure replacement value of$6.26 billion, the reserve level has been set to fund the District's non-reimbursed costs, estimated to be$57 million. Capital Replacement/Renewal Reserve Policy: is established to provide thirty percent of the funding to replace or refurbish the current collection and treatment and disposal facilities at the end of their useful economic lives. The current replacement value of these facilities is estimated to be $3.14 billion for the collection facilities and $3.12 billion for the treatment and disposal facilities. The initial reserve level was established at $50 million, which will be augmented by interest earnings and a small portion of the annual sewer user fees in order to meet projected needs through the year 2030. Provisions of the various Certificate of Participation (COP) issues require debt service reserves to be under the control of the Trustee for that issue. These reserve funds are not available for the general needs of the District and must be maintained at specified levels. The projected level of required COP service reserves at June 30, 2011 is $128.7 million. Vi Accumulated funds exceeding the levels specified by District policy will be maintained in a rate stabilization fund. These funds will be applied to future years' needs in order to maintain rates or to moderate annual fluctuations. There is no established target for this reserve. As of June 30, 2011, the Sanitation District was in compliance with the Accumulated Funds and Reserves Policy with designated net assets totaled $561 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District's reserve policy: Designated For Cash Flow Contingency $187 million Designated For Self-Insurance 57 million Designated For Capital Improvements 175 million Designated For Debt Service Requirements 142 million Total Designated Net Assets $ 561 million CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING The Government Finance Officers' Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Orange County Sanitation District for the Sanitation District's comprehensive annual financial report for the year ended June 30, 2010. This was the seventeenth 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 submitted, e 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, 2010 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. MID CAM s President 44-00-PAW1.0 Executive Director viii ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2011 ALTERNATE AGENCY ACTIVE DIRECTOR DIRECTOR Cities: Anaheim Harry Sidhu Gail Eastman Brea Roy Moore Ron Garcia Buena Park Fred Smith Steve Berry Cypress Prakash Narain Doug Bailey Fountain Valley Larry Crandall Steve Nagel Fullerton Sharon Quirk-Silva Pat McKinley Garden Grove Bill Dalton Kris Beard Huntington Beach Joe Carchio Matthew Harper Irvine Jeffrey Lalloway Steven Choi La Habra Tom Beamish Rose Espinoza La Palma Mark Waldman Steve Hwangbo Los Alamitos Troy Edgar Ken Stephens Newport Beach Steven Rosansky Nancy Gardner Orange Jon Dumitru Denis Bilodeau Placentia Constance Underhill Joseph Aguirre Santa Ana Sal Tinajero David Benavides Seal Beach Michael Levitt Gordon Shanks Stanton David Shawver Carol Warren Tustin John Nielsen Jerry Amante Villa Park Brad Reese Robert Fauteux 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 Janet Nguyen Shawn Nelson ix ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30, 2011 BOARD OF DIRECTORS GENERAL GENERAL MANAGER COUNSEL GENERAL OFFICE MANAGEMENT ADMINISTRATION HUMAN ADMINISTRATIVE FACILITIES OPERATIONS General RESOURCES SERVICES SUPPORT ENGINEERING AND Management SERVICES MAINTENANCE Administration Administrative Facilities Support Operations& Mechanical& Board Services Engineering Services Services Administration Maintenance Reliability Administration Administration Administration Maintenance Planning(includes Instrumentation& Public Affairs Financial Equipment/ Asset Plant No.1 Electrical Management Rebuild Management) Operations Maintenance Contracts, Facilities Project plant No.2 Environmental Purchasing& Management Laboratory& Materials Mgmt. Engineering Office Operations Ocean Monitoring Information Engineering and Technology Collection Facilities Construction Risk Environmental Management Compliance ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2011 LOSANGELES COL,trry s NTY LA o �A HABRA BREA 00, �.. YORBA �5`P FULLERTON PLACENTIA LINDA4 BUE &dsm� PALMA , ANAHEIM e CYPRESS VILLA PARK LOS^. STANTON ORANGE ALAMITQS GARDEN GROVE yes _ SEAL SW=TER BEACH a` _ SANTA ♦ C ANA A NTAIN STl tr VA HUNTINGTON lecla. tion , BEACH ant o.1 COSTA MES A " Pac(ftc C SD IRVINE Ocean Treatimen v Plant No.2 En 0—V Phew t ti re•e brp NtWPORT 4 BEACH N DcsD Offshore Pipeline N (tOfi diameter 5 miles long) 0 1.25 25 5 Mies—OCSD Service Area Boundary(463 square miles) nrpmmnatdy—hop Nat ro scale A OCSD Pump Station(15 total) Unincorporated Orange County(while) DISCLAIMER: Map prepared by Orange Courtly Sanitation District This map is Intended for graphical representa6m only No level of accuracy Is cfatrned for the base mapping shown hereon and graphics should not be used to obtain coordinate values,bearings or distances. Portions of tits derived product contain geographical information copyrighted by Thomas Brothers Ali Rights Reserved SOURCE OCSD GIS Data,Thomas Brothers 2010 REVISED,02/2011 xi L 'r'1 1 T 1 -,� -1� �1 _- 1� 1 _ ���� � 1 McGladrey&Pullen,LLP Certified Public Accountants 18401 Von Karman,5°i Floor Irvine,CA 92612-8531 McGladrey O 949.255.6500 F 949.255.5091 www.mcgladrey.com Independent Auditor's Report Board of Directors Orange County Sanitation District Fountain Valley, CA We have audited the accompanying basic financial statements of the Orange County Sanitation District (District) as of and for the year ended June 30, 2011, as listed in the table of contents. These financial statements are the responsibility of the District's management. 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 District's 2010 financial statements that were audited by another auditor.Accordingly,we express no opinion on that information. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 previously present fairly, in all material respects, the financial position of the District as of June 30, 2011, and the changes in its net assets and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis and other post-employment benefits information, as listed in the table of contents, are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. 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 comprise the District's basic financial statements. The separate"Combining Area" financial statements, listed in the table of contents as supplementary information, are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such 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. 1 McGladrey Is the brand under which RSM McGladrey,Inc and McQadrey&Pullen,LLP serve clients'business needs. Member of RSM International network,a network of The two firms operate as separate legal entities In an alternative practice structure. independent accounting,tax and consulting firms. The accompanying introductory and statistical sections, as listed in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and accordingly,we express no opinion on them. Anrl*�/ "I Z- Irvine, CA December 2,2011 2 Management Discussion and Analysis June 30,2011 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, 2011. 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, 2011, the assets of the Sanitation District exceeded its liabilities by $1,510.5 million (net assets). Of this amount, $379.4 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 $79.4 million, or 5.5 percent over the prior year. ■ Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $100.1 million, or 4.4 percent over the prior year. ■ Net Assets invested in capital assets, net of related debt increased $10.0 million, or 0.9 percent. ■ Unrestricted Net Assets increased $69.4 million, or 22.4 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 the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards, 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 $79.4 million, or 5.5 percent to $1,510.5 million in FY 2010-11 over the prior year. In comparison, net assets increased $82.8 million, or 6.1 percent, to $1,431.1 million in FY 2009-10 over FY 2008-09. 3 (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2011 2010 (Decrease) (Decrease) Assets Current and other assets $ 648,994 $ 533,107 $ 115,887 21.7% Capital assets, net 2,400,922 2,300,819 100,103 4.4% Total assets 3,049,916 2,833,926 215,990 7.6% Liabilities Current liabilities 292,307 290,810 1,497 0.5% Noncurrent liabilities 1,247,123 1,112,044 135,079 12.1% Total liabilities 1,539,430 1,402,854 136,576 9.7% Net assets: Investment in capital assets, net of related debt 1,131,063 1,121,057 10,006 0.9% Unrestricted 379,423 310,015 69,408 22.4% Total net assets $ 1,510,486 $ 1,431,072 $ 79,414 5.5% Current and other assets increased $115.9 million, or 21.7 percent, due primarily to the receipt of net certificates of participation (COP) debt proceeds of $123.6 million, net cash provided by operations of $120.8 million, net non-operating revenues of $36.1 million, and receipt of capital facilities capacity charges of $9.8 million funding offset by $159.6 million in capital improvements and the return of $23.6 million in capital contributions to the Irvine Ranch Water District. Capital assets, net increased $100.1 million, or 4.4 percent, due mostly to the ongoing capital improvement program capital additions of$160.7 million in FY 2010-11 less depreciation of$49.3 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 $24.9 million were incurred in FY 2010-11 with total project outlays to date of $245.6 million. The total projected cost is $260.3 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$15.2 million were incurred in FY 2010-11 with total project outlays to date of $216.3 million. The total projected cost is $223.2 million with completion expected in FY 2012-13. The completion of the Headworks Improvements at Plant No. 2 was another project with significant outlays in FY 2010-11. This project is replacing the existing headworks due to failing gates and the ineffectiveness of the bar screens and grit chambers that are allowing grit screenings to pass through into the downstream processes causing increased operating costs. This project includes an influent diversion and metering structure, bar screens, influent pump station, vortex grit chambers, primary influent splitter and metering structure, ferric chloride feed facilities, headworks and trunk line odor control facilities, screenings handling building including a washer/compactor, grit handling building, and an electrical building that includes standby power. In FY 2010-11, $12.4 million of the estimated $257.7 million was incurred bringing the total outlay to date to$241.7 million with completion expected in FY 2012-13. 4 See page 7 for the Schedule of Capital Assets and a listing of the other major capital additions for FY 2010-11. Net assets invested in capital assets, net of related debt increased $10.0 million, or 0.9 percent over the prior year primarily as a result of the $100.1 million increase in net capital assets offset by an increase of $90.1 million in net related debt. Unrestricted net assets increased $69.4 million, or 22.4 percent over the prior year, and is due to the overall increase in net assets of$79.4 offset by the increase in investment in capital assets net of related debt of$10.0 million. Changes in Net Assets Net assets increased $79.4 million in FY 2010-11, a 5.5 percent increase over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2011 2010 (Decrease) (Decrease) Revenues: Operating revenues Service Charges $ 244,465 $ 225,059 $ 19,406 8.6% Permit and inspection fees 784 629 155 24.6% Total operating revenues 245,249 225,688 19,561 8.7% Non-operating revenues Property taxes 64,307 64,759 (452) -0.7% Investment and interest income 10,092 19,166 (9,074) -47.3% Emmission Reduction Credit Sales - 4,530 (4,530) -100.0% Other 1,307 2,409 (1,102) -45.7% Total non-operating revenues 75,706 90,864 (15,158) -16.7% Total revenues 320,955 316,552 4,403 1.4% Expenses: Operating expense other than depreciation and amortization 138,852 138,085 767 0.6% Depreciation and amortization 49,288 52,036 (2,748) -5.3% Non-operating expense 39,648 41,272 (1,624) -3.9% Total expenses 227,788 231,393 (3,605) -1.6% Income before capital contributions 93,167 85,159 8,008 9.4% Capital facilitites capacity charges 9,800 10,332 (532) -5.1% Capital contributions (distributions), net (23,554) (12,739) (10,815) 84.9% Increase in net assets 79,413 82,752 (3,339) -4.0% Beginning net assets 1,431,073 1,348,321 82,752 6.1% Ending net assets $ 1,510,486 $ 1,431,073 $ 79,413 5.5% 5 Sources of Revenue Functional Expenses June 30,2011 June 30,2011 O Collections 1% 20% 3% 12% 6% 11% ■Treatment& ■Interest Disposal ■User Fees *Depreciation& *Other Amortization *Taxes Levied 22% *Interest Expense 49% ■Other 76% 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 2010-11, operating revenues increased $19.6 million, or 8.7 percent over the prior year that is predominately reflective of the $19.4 million, or 8.6 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 $15.2 million, or 16.7 percent decrease in non-operating revenues consists of a $9.1 million, or 47.3 percent decrease in investment and interest income, a $4.5 million decrease in the one-time sale of excess emission reduction credits as there were no sales in FY 2010-11, a $1.1 million, or 45.7 percent decrease in other non-operating revenues, and a $0.4 million, or 0.7 percent decrease in property tax revenues. The decrease in investment and interest income is attributable to the lower yields earned on investments somewhat offset by the higher cash and investment balances. Yields earned on investments decreased from 3.9 percent in FY 2010-11 to 2.0 percent in FY 2010-11 while cash balances increased during this same time period from $473 million to $561 million. The decrease in other non-operating revenues is mostly reflective of the $1.4 million in federal grants that was awarded in the prior year. The decline in property tax revenue is primarily the result of the decrease in total assessed valuation of 0.3 percent over the prior year. Operating expense before depreciation and amortization increased $0.8 million or 0.6 percent over the prior year. Operating salaries and benefits totaling $73.1 million increased $3.5 million, or 5.0 percent over the prior year. The operating salaries and benefits costs are part of the overall increase of $2.3 million in total salaries and benefits when including the salaries and benefits capitalized within the capital improvement program. Overall, total Sanitation District salaries and benefits were $90.2 million, a 2.6 percent increase over the prior year total of$88.0 million. This increase is mostly attributable to the $3.1 million increase in benefits, or 12.3 percent that was primarily driven by the increase in retirement premiums of $2.0 million, or 13.1 percent. These increases in retirement premiums are the result of revised actuarial valuation assumptions due to the downturn in the economy and underperforming returns on the investments within the retirement portfolio. Actual employee salaries decreased $0.8 million, or 1.3 percent from the prior year. Although total authorized staffing levels remained at the FY 2008-09 levels of 641 full time equivalents, District management re-evaluated newly vacated positions and left 6 many of them unfilled in order to further streamline activities and control costs in these recessionary times. Biosolids disposal cost increased $0.7 million, or 4.3 percent over the prior year as the District continues to move towards full secondary treatment standards by December 2012. Somewhat offsetting the increased cost in personnel services and biosolids disposal was the decrease of $1.1 million, or 24.4 percent in disinfection costs. Conversely to the increases in biosolids disposal due to increased secondary treatment, the use of disinfection chemicals was reduced because of the increased level of wastewater treatment. Also, capital grants to member agencies decreased by$1.5 million as this program was discontinued. Capital contributions decreased $23.6 million, a $10.8 million or 84.9 percent decrease over the prior year. A capital distribution back to the Irvine Ranch Water District (IRWD) is being recognized in FY 2010-11 totaling $33.3 million due to IRWD's decreased sewage flows and corresponding equity share in the District's treatment plant. This equity adjustment is being somewhat offset by $6.8 million in capital lease payments owed by IRWD for the transfer of wastewater solids residuals from FY 2008-09 through FY 2010-11 and by IRWD's share of treatment plant capital improvements of $2.9 million made in FY 2010-11. Capital Assets At June 30, 2011, the Sanitation District had a net investment of $2.401 billion in capital assets. This amount represents a net increase (including additions and deletions) of $100.1 million, or 4.4 percent over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2011 2010 (Decrease) (Decrease) Land $ 19,217 $ 13,021 $ 6,196 47.6% Construction in Progress 1,258,267 1,448,353 (190,086) -13.1% Sewage collection facilities 346,959 348,024 (1,065) -0.3% Sewage treatment facilities 639,790 361,446 278,344 77.0% Effluent disposal facilities 44,136 45,795 (1,659) -3.6% Solids disposal facilities 356 365 (9) -2.5% General and administrative facilities 88,660 79,621 9,039 11.4% Assets acquired in excess of book value 3,537 4,193 (656) -15.6% Capital assets, net $ 2,400,922 $ 2,300,818 $ 100,104 4.4% Major capital asset additions for the current fiscal year included the following: • $24.9 million-New Secondary Treatment Systems at Plant No. 1 • $15.2 million-New Trickling Filters at Plant No. 2 • $12.8 million-Rehabilitation of Magnolia Trunk Line • $12.4 million- Headworks Replacement at Plant No. 2 • $10.3 million-Bitter Point Pump Station • $ 8.8 million-Sludge Digester Rehabilitation at Plant No. 1 • $ 7.2 million-Replacement of the Rocky Point Pump Station • $ 6.7 million-Sludge Dewatering and Odor Control at Plant No. 1 • $ 6.6 million-Bitter Point Force Main Rehabilitation 7 More detailed information about the Sanitation District's capital assets is provided in Notes 1 and 3 of Notes to the Financial Statements. Debt Administration At June 30, 2011, the Sanitation District had $1.4 billion outstanding in COP debt, a net increase of $119.9 million, or 9.3 percent over the prior year. This increase is primarily due to the $157.0 million of new fixed rate debt, Series 2010C Wastewater Revenue Obligations, issued in December 2010 to assist in the $160.7 million in capital outlays that had taken place during the year and to assist in the $129.2 million scheduled to be spent in the FY 2011-12. In addition, Revenue Refunding Certificate Anticipation Notes, Series 2010E Certificates of Anticipation Notes (CANs)fixed rate debt was issued in the amount of $154.7 million in November 2010 to refund the $176.1 million outstanding principal balance of the CANs Series 2009B fixed rate debt. The Sanitation District achieved a rating of AAA from Standard and Poor's Corporation and from Fitch Ratings. The Sanitation District's long-range financing plan is designed to maintain this high rating. Over the next ten years, the Sanitation District is projecting an additional $1.9 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. A total of issuance of$120 million in new money COP debt is being proposed over the next five years to assist with the funding of the system improvements scheduled over this 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 9.2 percent, which is a decrease from the rate of 9.5 percent a year ago. ■ Inflation for Orange County in 2010 increased 1.2 percent based on the 2010 actual percentage change in the consumer price index according to the June 2011 Economic and Business Review report prepared by Chapman University. ■ The actual rate of return on investments decreased from the 3.9 percent earnings rate in FY 2009-10 to 2.0 percent for FY 2010-11. All of these factors were considered in preparing the Sanitation District's FY 2011-12 budget update. The Sanitation District's user fee schedule was increased by 9.4 percent for FY 2011-12 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 $23.00, from $244.00 to $267.00. This rate increase was necessary to finance the Sanitation District's cash flow needs as capital improvement outlays alone are projected to be $129.2 million in FY 2011-12 and are projected to total $1.9 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, 10844 Ellis Avenue, Fountain Valley, CA 92708-7018. 8 9 ORANGE COUNTY SANITATION DISTRICT Statement of Net Assets June 30, 2011 (With Comparative Data for June 30, 2010) 2011 2010 Current assets: Cash and cash equivalents $ 127,573,371 $ 49,537,559 Investments 285,952,014 310,335,760 Accounts receivable, net of allowance for uncollectibles 10,411,347 13,069,682 Accrued interest receivable 1,296,054 1,108,027 Connection fees receivable 385,765 996,430 Property tax receivable 1,408,477 2,040,072 Inventories 5,366,513 5,402,069 Prepaid expenses 623,907 1,134,886 Prepaid retirement 14,463,000 14,578,000 Total current assets 447,480,448 398,202,485 Noncurrent assets: Restricted: Cash and cash equivalents 120,419,824 86,629,639 Investments 26,829,427 26,829,427 Accrued interest receivable 210,010 210,730 Unrestricted: Non-depreciable capital assets 1,277,484,094 1,461,374,037 Depreciable capital assets, net of accumulated depreciation 1,123,437,456 839,444,526 Deferred charges 10,975,310 9,733,908 Due from other governmental agency 36,000,000 - Other noncurrent assets, net 7,079,922 11,501,640 Total noncurrent assets 2,602,436,043 2,435,723,907 Total assets 3,049,916,491 2,833,926,392 Current liabilities: Accounts payable 14,722,600 20,091,995 Accrued expenses 6,654,544 7,259,202 Retentions payable 2,260,426 1,587,986 Interest payable 22,525,700 19,643,344 Due to other governmental agency 57,196,110 42,053,445 Current portion of long-term obligations 188,948,106 200,173,675 Total current liabilities 292,307,486 290,809,647 Noncurrent liabilities: Noncurrent portion of long-term obligations 1,247,122,884 1,112,044,076 Total liabilities 1,539,430,370 1,402,853,723 Net assets: Invested in capital assets, net of related debt Collection system 495,641,055 459,503,200 Treatment and disposal -Land 4,475,751 4,475,751 Treatment and disposal system 1,900,804,744 1,836,839,612 Capital assets related debt (1,269,858,548) (1,179,761,456) Unrestricted 379,423,119 310,015,562 Total net assets $ 1,510,486,121 $ 1,431,072,669 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, 2011 (With Comparative Data for the Year Ended June 30, 2010) 2011 2010 Operating revenues: Service charges $ 244,464,692 $ 225,058,521 Permit and inspection fees 784,458 629,082 Total operating revenues 245,249,150 225,687,603 Operating expenses other than depreciation and amortization: Salaries and benefits 73,112,286 69,651,904 Utilities 6,947,781 6,934,045 Supplies, repairs and maintenance 27,018,195 26,549,945 Contractual services 27,048,501 25,476,063 Directors'fees 152,377 141,313 Meetings and training 613,697 894,865 Other 3,958,695 8,436,969 Total operating expenses other than depreciation and amortization 138,851,532 138,085,104 Operating income before depreciation and amortization 106,397,618 87,602,499 Depreciation and amortization 49,288,136 52,035,796 Operating income 57,109,482 35,566,703 Non-operating revenues: Property taxes 64,307,594 64,759,095 Investment and interest income 10,092,102 19,165,691 Emmission Reduction Credit Sales - 4,530,000 Other 1,306,771 2,409,455 Total non-operating revenues 75,706,467 90,864,241 Non-operating expenses: Interest 29,129,550 27,536,714 Feasibility studies 4,536,965 10,349,999 Capital grants to member agencies - 1,481,590 Loss on disposal of assets and other 5,981,829 1,904,239 Total non-operating expenses 39,648,344 41,272,542 Income before capital contributions 93,167,605 85,158,402 Capital Contributions; Capital facilities capacity charges 9,800,190 10,332,569 Capital contributions received from (credited to)other agency (23,554,343) (12,739,214) Change in net assets 79,413,452 82,751,757 Total net assets-beginning 1,431,072,669 1,348,320,912 Total net assets-ending $ 1,510,486,121 $ 1,431,072,669 See Accompanying Notes to Basic Financial Statements. 11 ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows For the Year Ended June 30,2011 (With Comparative Data for the Year Ended June 30,2010) 2011 2010 Cash flows from operating activities: Receipts from customers and users $ 263,032,782 $ 235,732,351 Payments to employees (72,478,818) (70,296,045) Payments to suppliers (71,041,781) (80,927,051) Net cash provided by operations 119,512,183 84,509,255 Cash flows from noncapital financing activities: Proceeds from property taxes 64,939,187 65,940,652 Capital grants to member agencies - (1,481,590) Net cash provided by noncapital financing activities 64,939,187 64,459,062 Cash flows from capital and related financing activities: Capital facilities capacity charges 10,410,855 9,724,170 Additions to property, plant and equipment (159,563,286) (251,119,750) Disposal of property, plant,and equipment 1,266,387 6,895,719 Interest paid (46,543,583) (43,055,105) Principal payments on debt obligation (191,760,000) (200,145,000) Proceeds from debt issuances 315,341,085 247,740,402 Debt issuance costs (495,978) (554,219) Net cash(used)in capital and related financing activities (71,344,520) (230,513,783) Cash flows from investing activities: Proceeds from the sale of investments 3,745,902,911 3,572,349,413 Purchases of investments (3,723,593,143) (3,476,745,940) SARI project advance (36,000,000) - Interest received 12,409,379 14,357,443 Net cash provided(used)by investing activities (1,280,853) 109,960,916 Net increase in cash and cash equivalents 111,825,997 28,415,450 Cash and cash equivalents, beginning of year 136,167,198 107,751,748 Cash and cash equivalents, end of year $ 247,993,195 $ 136,167,198 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 57,109,482 $ 35,566,703 Adjustments to reconcile operating income to net cash provided by operations: Depreciation and amortization 49,288,136 52,035,796 Bad debt expense(Net recoveries) 17,368 (195,981) (Increase)/decrease in operating assets: Accounts receivable 2,640,967 (1,009,064) Inventories 23,824 (1,354,431) Prepaid and other assets 625,979 (2,518,658) Increase/(decrease)in operating liabilities: Accounts payable (5,369,395) (10,364,801) Accrued expenses (605,963) (1,091,531) Retentions payable 672,440 522,094 Due to other governmental agency 15,142,665 11,053,812 Pension/OPEB payable 718,305 755,295 Compensated absences (115,481) 846,045 Other payable (1,037,481) 308,546 Claims and judgments 401,337 (44,570) Net cash provided by operations $ 119,512,183 $ 84,509,255 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ (2,073,978) $ 6,177,434 Capital contributions from other agencies (23,554,343) (12,739,214) Capital facilities capacity contribution 2,492,300 3,606,925 See Accompanying Notes to Basic Financial Statements. 12 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 (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, 2011, 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 Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards. Comparative Information The financial statements include partial prior-year comparative information. Such information does not include all of the information required for a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read 13 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 in conjunction with the government's financial statements for the year ended June 30, 2010, from which such partial information was derived. Measurement Focus and Basis of Accounting OCSD operates as an enterprise activity. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the Board of Directors is that the costs (expenses, including depreciation and amortization) of providing services to the general public on a continuing basis be financed or recovered primarily through user charges. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of related cash flows. 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. Oi)erating 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 when purchased 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 $37,384 at June 30, 2011. Unbilled sewer services through June 30, 2011 are recorded as revenue and receivables. Management determines the allowance for uncollectible receivables by evaluating individual accounts receivable at least one year past due and considering a customer's financial condition, credit history and current economic conditions. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received. 14 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Inventory Inventory, which is held for consumption and not resale, is stated at cost on a weighted-average basis, and then is expensed when used. Capital Assets Outlays for property, plant, equipment, and construction in progress are recorded in the revenue area which will use the asset. Such outlays may be for individual revenue area assets or for a revenue area's share of joint assets. Capital assets of 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; full overhead costs consisting of direct and allocated indirect charges such as engineering, purchasing, supervision, fringe benefits, and other indirect costs. Net interest costs are capitalized on projects. During the fiscal year ended June 30, 2011, net interest costs of$19.43 million were capitalized. Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method in accordance with generally accepted accounting principles. OCSD also considers the guidelines of estimated useful lives as recommended in the State of California Controller's Uniform System of Accounts for Waste Disposal Districts, which range from 3 to 75 years. The following are estimated useful lives for major classes of depreciable assets: Sewage collection facilities — 50 years, Sewage treatment facilities — 40 years, Sewage disposal facilities—40 years, 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 the straight-line method which approximates the effective interest method (note 4). Restricted Assets Certain assets are classified as restricted because their use is limited by applicable debt covenants. Specifically, the assets are restricted for installment payments due on certificates of participation 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 15 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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 are determined annually as of January 1 and attached as enforceable liens on real property as of July 1 and are payable in two installments which become delinquent after December 10 and April 10. The County bills and collects the property taxes and remits them to OCSD in installments during the year. Property tax revenues are recognized when levied. The Board of Directors has designated property tax revenue to be used for the annual debt service requirements prior to being used as funding for current operations. Capital Facilities Capacity Charges Capital facilities capacity charges represent fees imposed at the time a structure is newly connected to 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. 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, 2011, the outstanding commitments with contractors totaled $48 million. Self-Insurance Plans For the year ended June 30, 2011, 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 $750,000 deductible per occurrence under the outside excess insurance coverage to statutory levels. The self-insurance portion of the property damage exposure covering fire and other perils is the $250,000 per occurrence deductible (for most perils) under the outside excess 16 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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, 2011 are as follows: • The self-insurance portion of the workers compensation exposure increased from $500,000 to $750,000 per occurrence below the outside excess insurance coverage. 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, 2011 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. (2) Cash and Investments Cash and investments as of June 30, 2011 are classified within the accompanying Statement of Net Assets as follows: Statement of Net Assets: Current, Unrestricted: Cash and cash equivalents $127,573,371 Investments 285,952,013 Subtotal -current, unrestricted 413,525,384 Restricted: Cash and cash equivalents 120,419,824 Investments 26,829,427 Subtotal -restricted 147,249,251 Total cash and cash equivalents and investments $560,774,635 17 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Cash and investments consist of the following as of June 30, 2011: Cash on hand $ 2,000 Deposits with financial institutions 1,140,438 Managed portfolio-cash and investments 412,382,946 Subtotal -unresticted cash and investments $413,525,384 Monies held by trustees: Cash and cash equivalents $ 120,419,824 Investment contracts 26,829,427 Subtotal -monies held by trustees 147,249,251 Grand total cash and investments $560,774,635 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, 2011 Authorized Maximum by OCSD's Maximum Imestment Investment Type-Authorized by the Imestment Maximum Percentage in a Single California Govemment Code Policy? Maturity(1(3) of Portfolio(p Issuer(p 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 w ith the California Government Code unless indicated otherw ise. (2)The restriction is in accordance w ith OCSD's Investment Policy w hich 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, 2011 Maximum 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 Bankers Acceptances 180 days 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 years 30% None Mutual Funds N/A 20% 10% Money 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 managed portfolio investments by purpose with the modified duration as of June 30, 2011. 20 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Modified Modified Duration Duration Investment Type Fair Value (in years) (in months) Short-Term Portfolio: U.S. Treasury Bills $ 25,089,710 0.154 1.87 U.S. Agency Securities 34,144,141 0.197 2.40 Corporate Medium-Term Notes 38,695,367 0.449 5.46 Local Agency Investment Fund (LAIF) 33,038,027 N/A N/A Money Market Mutual Funds 517,637 0.083 1.01 Short-term portfolio subtotal $ 131,484,882 0.304 3.70 Long-Term Portfolio: U.S. Treasury Bills $ 65,096,479 0.153 1.86 U.S. Treasury Notes 57,632,329 4.598 55.94 U.S. Treasury Obligations 3,896,562 2.025 24.64 U.S. Agency Securities 28,077,366 3.267 39.75 U.S. Govt. Backed Mortgage Pools 519,513 3.492 42.49 Taxable Municipal Bonds 18,714,542 9.355 113.82 Tax-Exempt Municipal Bonds 537,255 13.416 163.23 Corporate Medium-Term Notes 93,278,717 2.857 34.76 Repurchase Agreements 200,000 0.003 0.04 Money Market Mutual Funds 614,894 0.080 0.97 Mortgage Pass-Through Securities/CMO 12,330,407 4.008 48.76 Long-term portfolio subtotal $ 280,898,064 2.946 35.84 Total Portfolio $412,382,946 OCSD monitors the interest rate risk inherent in its other investments using specific identification of the investments. Following is a table of these investments all held by trustees, as of June 30, 2011. Fair Value Maturities Cash equivalents held by fiscal agents: Money Market Mutual Funds: First American Treasury Obligations Fund $ 309,421 35 days Blackrock Institutional Funds 19,150,428 19 days Blackrock Institutional Funds 1 19 days Blackrock Institutional Funds 19,816,447 19 days First American Government Obligations Fund 7,723,061 44 days First American Government Obligations Fund 2,782,365 44 days US Bank Money Market Fund 13,075,146 N/A US Bank Money Market Fund 28,379 N/A Blackrock Institutional Funds 20,845 19 days Local Agency Investment Fund (LAIF) 57,513,731 N/A Investments held by fiscal agents: 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 Fair Value of Investments Held by Fiscal Agents $ 147,249,251 21 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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 $22,009,358 including $12,330,407 of mortgage pass-through securities, $9,159,438 of U.S. agency securities, and $519,513 of U.S. government backed mortgage pools. 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, 2011 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 $ 151,715,080 U.S. Agency Securities -GNMA 519,513 Subtotal $152,234,593 Investments with no legal minimum rating: U.S. Agency Securities (other than GNMA): Rating of (Standard& Poor's) 1,472,772 Rating of AGY (Standard& Poor's) 60,748,735 Municipal Bonds: Rating of AAA (Standard & Poor's) 1,261,524 Rating ofAA1 (Moody) 1,427,748 Rating of Al (Moody) 2,394,285 Rating of AA2 (Moody) 1,402,089 Rating ofA2(Moody) 330,360 Rating of AA-(Standard & Poor's) 3,061,828 Rating ofAA3 (Moody) 3,065,455 Rating ofA3 (Moody) 4,635,798 Rating of A-(Standard& Poor's) 1,672,710 Repurchase Agreements: Not rated at fiscal year end 200,000 Local Agency Investment Fund (LAIF): Not rated at fiscal year end 90,551,758 Investments with fiscal agents -Guaranteed Investment Contracts: Not rated at fiscal year end 26,829,427 Subtotal 199,054,489 Investments with a legal minimum rating (or its equivalent)of A: Corporate Medium-Term Notes: Rating of (Standard& Poor's) 6,547,423 Rating of A+ (Fitch) 897,489 Rating of (Fitch) 2,025,324 Rating of A-(Fitch) 719,415 Rating of Al (Moody) 4,610,645 Rating ofA2(Moody) 15,103,584 Rating ofA3 (Moody) 13,282,147 Rating ofAA2 (Moody) 5,533,371 Rating of AAA (Standard & Poor's) 61,271,567 Rating of B3 (Moody)* 515,000 Rating of BAA1 (Moody)* 2,415,046 Rating of BAA2(Moody)* 3,813,616 Rating of BBB+ (Standard & Poor's)* 9,456,710 Rating of BBB (Standard & Poor's)* 2,004,560 Rating of BBB (Fitch)* 3,619,187 Rating of WR (Moody)* 159,000 Money Market Mutual Funds: Rating of AAA (Standard& Poor's) 1,132,531 Invested with fiscal agents: Rating of Aaa-mf(Moody) 49,802,568 Not rated at fiscal year end 13,103,525 Subtotal 196,012,708 Investments with a legal minimum rating (or its equivalent)of AA: Mortgage Pass-Through Securities/CMO: Rating of (Fitch) 110,586 Rating of AAA (Standard & Poor's) 3,744,981 Rating of AGY (Standard& Poor's) 8,474,840 Subtotal 12,330,407 Total $559,632,197 *Investment w as in compliance w ith legal requirements at the time it w as purchased. 23 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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 type of securities, which represent more than 5 percent of OCSD's investments: • Federal National Mortgage Association (U.S. Agency Securities), totaling $43,188,306 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, 2011, in accordance with OCSD's investment policy, none of OCSD's investments were held with a counterparty. All of OCSD's investments were held with an independent third party custodian bank. OCSD uses Bank of New York (BNY) Mellon as a third party custody and safekeeping service for its investment securities. Investment in State Investment Pool OCSD is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of OCSD's investment in this pool is reported in the accompanying financial statements at amounts based upon OCSD's pro-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. The amounts invested in LAIF are recorded as cash and cash equivalents at June 30, 2011. 24 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 (3) Capital Assets Capital asset activity for the year ended June 30, 2011 is as follows: Balance at Balance at June 30,2010 Additions Deletions June 30,2011 Capital assets not depreciated: Cost: Land $ 13,021,480 $ 6,196,000 $ - $ 19,217,480 Construction in progress 1,448,352,557 154,499,642 (344,585,585) 1,258,266,614 Total nondepreciable assets 1,461,374,037 160,695,642 (344,585,585) 1,277,484,094 Depreciable capital assets: Cost: Sewage collection facilities 591,947,037 12,731,107 (4,126,669) 600,551,475 Sewage treatment facilities 840,834,621 303,928,761 (47,300) 1,144,716,082 Effluent disposal facilities 97,014,820 - - 97,014,820 Solids disposal facilities 3,463,236 - - 3,463,236 General and administrative facilities 194,544,427 16,643,774 (1,212,461) 209,975,740 Excess purchase price over book value on acquired assets 19,979,000 - - 19,979,000 Subtotal 1,747,783,141 333,303,642 (5,386,430) 2,075,700,353 Accumulated depreciation: Sewage collection facilities (243,923,082) (13,795,843) 4,126,669 (253,592,256) Sewage treatment facilities (479,388,866) (25,584,013) 46,476 (504,926,403) Effluent disposal facilities (51,220,316) (1,658,070) - (52,878,386) Solids disposal facilities (3,097,941) (9,719) - (3,107,660) General and administrative facilities (114,923,394) (7,582,782) 1,190,710 (121,315,466) Excess purchase price over book value on acquired assets (15,785,016) (657,709) - (16,442,725) Subtotal (908,338,615) (49,288,136) 5,363,855 (952,262,896) Net depreciable assets 839,444,526 284,015,506 (22,575) 1,123,437,457 Net capital assets $2,300,818,563 $444,711,148 $(344,608,160) $2,400,921,551 (4) Long-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30, 2011: Certificates of Arbitrage Compensated Claims and Participation/Notes Net Pension Net OPEB Payable Absences Judgments and Revenue Obligation Obligation Obligation Totals Balance,July 1 $1,327,846 $ 7,928,112 $ 1,741,981 $ 1,287,250,000 $6,956,975 $ 831,585 $1,306,036,499 Additions 54,367 7,337,633 858,945 311,665,000 842,288 807,175 321,565,408 Deletions (1,091,848) (7,453,114) (457,608) (191,760,000) (328,083) (603,074) (201,693,727) Balance,June 30 290,365 7,812,631 2,143,318 1,407,155,000 7,471,180 1,035,686 1,425,908,180 Due within one year (290,365) (6,835,271) (487,470) (181,335,000) (188,948,106) Unamortized(discount) premium 20,637,453 - - 20,637,453 Unamortined deferred amount on refundings - - (10,474,643) (10,474,643) Long-term amount $ $ 977,360 $ 1,655,848 $ 1,235,982,810 $7,471,180 $1,035,686 $1,247,122,884 25 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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, 2011 is $290,365. Compensated Absences OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at June 30, 2011 is $7,812,631 with an estimated $6,835,271 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, 2011 and 2010: 2010-11 2009-10 Claims and judgments payable at July 1 $1,741,981 $1,786,551 Claims incurred during the fiscal year 858,945 599,305 Payments on claims during the fiscal year (457,608) (643,875) Claims and judgments payable at June 30 2,143,318 1,741,981 Less: current portion (487,470) (447,830) Total long-term claims and judgments payable $1,655,848 $1,294,151 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, 2011 are summarized as follows: Amount 2000 refunding certificates of participation $ 194,000,000 2003 certificates of participation 191,500,000 2007A refunding certificates of participation 93,060,000 2007B certificates of participation 284,825,000 2008A refunding certificates of participation 30,535,000 2008B refunding certificates of participation 26,975,000 2009A certificates of participation 194,595,000 2010A wastewater revenue obligations 80,000,000 2010B refunding certificates of anticipation notes 154,665,000 2010C wastewater revenue obligations 157,000,000 Total certificates of participation payable $ 1,407,155,000 26 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Outstandin4 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, 2011, the coverage ratio for senior lien debt was 2.18. 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, 2011 was 0.20 percent. Annual principal payments are due on August 1, beginning August 1, 2001. The refunding certificates are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on seven days' notice and delivery to OCSD's applicable remarketing agent, Bank of America Merrill Lynch. The remarketing agent is required to use its best efforts to sell the repurchased bonds at a price equal to 100% of the principal amount by adjusting the interest rate. The refunding certificates are secured by Standby Bond Purchase Agreement (SBPA) with Lloyds TSB Bank that expires on August 24, 2012. Under the SBPA, if the refunding certificates are not successfully remarketed or repaid according to their terms or if the existing SBPA is not renewed and OCSD does not replace the SBPA or otherwise refinance the refunding certificates, Lloyds TSB Bank is required to purchase the refunding certificates. Any of the refunding certificates purchased by Lloyds TSB Bank constitute bank bonds that bear interest at the bank rate, which may not exceed the maximum rate of 18%. If the OCSD does not reimburse Lloyds TSB Bank within 180 days following Lloyds TSB Bank's purchase of any refunding certificates or the expiration of the SBPA, the District would be required to redeem the bank bonds over a period of four years. The required reserve amount is $16,793,580. Following is the annual debt service requirements for the succeeding fiscal years based on an assumed interest rate of 9.00% if the SBPA with Lloyds TSB Bank is not renewed or replaced upon expiration in August 2012: Year Ending June 30, Principal Interest Total 2013 $22,980,000 $6,184,000 $29,164,000 2014 30,635,000 4,720,300 35,355,300 2015 30,630,000 1,965,452 32,595,452 2016 7,655,000 62,289 7,717,289 $91,900,000 $12,932,041 $104,832,041 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. 27 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 On May 22, 2007, $88,500,000 of the outstanding principal balance of the 2003 certificates was advance-refunded with the proceeds of the May 2007 refunding certificates of participation (see below) in a transaction accounted for as an in-substance defeasance. All of the $88.5 million is held in an escrow account that is not reflected on OCSD's financial statements because it has been legally defeased. At June 30, 2011, this $88,500,000 represents the amount still outstanding on bonds considered defeased. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2011 reserve of$19,150,426 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, 2011 reserve of $9,518,000 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, 2011 reserve of$19,816,441 is held by Union Bank, the trustee, and meets the reserve requirement. 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 trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2011 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 28 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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 trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2011 reserve of $2,782,363 is held by US Bank, the trustee, and meets the reserve requirement. 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. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2011 reserve of $13,075,103 is held by US Bank, the trustee, and meets the reserve requirement. May 2010 Wastewater Revenue Obligations On May 18, 2010, OCSD completed the sale of $80,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and ranges from 5.56 percent to 5.58 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. Thus, the net interest rate on the obligations is fixed and ranges from 3.614 percent to 3.627 percent. Annual principal payments are due on February 1, beginning February 1, 2034. The trust agreement for the revenue obligations does not require the establishment of a reserve. November 2010 Revenue Refunding Certificate Anticipation Notes On November 23, 2010, OCSD completed the sale of $154,665,000 of revenue refunding certificate anticipation notes. The notes were issued to refund the $165,865,000 outstanding principal balance of the 2009 Series B refunding certificates anticipation notes. The interest rate on the notes is fixed at 2.0 percent. The notes will mature on November 23, 2011. 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 negative amount of approximately $18,000. The total future payments for the new debt provides a net present value loss of approximately $272,000 to refund the old debt in payments. The trust agreement for the certificates does not require the establishment of a reserve. 29 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 December 2010 Wastewater Revenue Obligations On December 8, 2010, OCSD completed the sale of $157,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and ranges from 6.35 percent to 6.40 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. Thus, the net interest rate on the obligations is fixed and ranges from 4.1275 percent to 4.16 percent. Annual principal payments are due on February 1, beginning February 1, 2031. The trust agreement for the revenue obligations does not require the establishment of a reserve. Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation as of June 30, 2011, assuming OCSD will remarket the August 2000 Refunding Certificates of Participation over the term of the debt and either renew or replace the SBPA for the August 2000 Refunding Certificates of Participation throughout the term of the debt that currently expires in August 2012, are as follows: Year Ending Estimated June 30, Principal Interest Total 2012 $ 181,335,000 $ 49,732,512 $ 231,067,512 2013 27,865,000 47,811,380 75,676,380 2014 43,040,000 46,994,571 90,034,571 2015 30,920,000 46,086,475 77,006,475 2016 32,080,000 45,327,265 77,407,265 2017-2021 193,135,000 215,732,515 408,867,515 2022-2026 172,530,000 186,894,879 359,424,879 2027-2031 227,395,000 141,441,776 368,836,776 2032-2036 306,950,000 73,220,798 380,170,798 2037-2041 167,200,000 20,046,187 187,246,187 2042-2046 24,705,000 1,203,836 25,908,836 Total $ 1,407,155,000 $874,492,194 $2,281,647,194 (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, 2011 consisted of the following: 30 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 June 30, 2011 Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation $2,400,921,551 Outstanding debt issued to acquire capital assets, net of: unamortized bond discount, deferred amount on refundings, and unspent proceeds (1,269,858,548) Subtotal 1,131,063,003 Unrestricted: Preliminary Survey 7,069,578 All other unrestricted 372,353,540 Total Net Assets $ 1,510,486,121 (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 and the Board of Directors 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 Plan under which the employee is covered. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. Eligible employees are covered under one of three plans, depending on their entry date into the plan. Plans G and H provide 2.5% of final average compensation per year of service at age 55; Plan B provides 1.667% per year of service at age 57.5. Plan G members' retirement benefit are calculated using the highest single year of compensation, while Plans B and H are based on the average of the highest three consecutive years of compensation. 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. Employees covered by Plans B, G, and H are required to contribute 5.76% - 11.58%, 8.30% - 14.55% and 7.94% - 14.55%, 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 31 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 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, 2011, 2010, and 2009, the "Annual Required Contribution" equaled the contributions 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. For the Fiscal Year Ending June 30, 2009 June 30, 2010 June 30, 2011 Total Payroll Costs $ 61,110,535 $62,934,336 $62,107,324 Payroll Costs of Employees Covered by OCERS 57,681,058 60,593,735 59,787,560 Contributions Requirements: Contributed by Employees 4,031,980 4,317,182 4,422,908 Contributed by the District on Behalf of Employees 1,986,386 2,071,340 2,078,679 Total Employee Required Contribution 6,018,366 6,388,522 6,501,587 District Required Contribution 12,193,601 13,029,795 14,370,158 Total Contribution $ 18,211,967 $ 19,418,317 $ 20,871,745 Total Actual Contribution as a Percent of the"Annual Required Contribution (ARC)" 100.00% 100.00% 100.00% Employee Required Contribution as a Percent of Covered Payroll 10.43% 10.54% 10.87% District Required Contribution as a Percent of Covered Payroll 21.14% 21.50% 24.04% Total Contribution as a Percent of all Participating Entities' Contributions 4.97% 3.61% 3.66% 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 159 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% 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. Employees hired into the OCEA bargaining group after August 1, 2011 are ineligible for this benefit. Funding: There are no employee contributions for this plan; OCSD covers 100% of the cost. An actuarial evaluation was performed as of June 30, 2009, 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 5.0% 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 an open period of 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. 32 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Trend Information and Funding Progress: Trend information gives an indication of the progress made in accumulating sufficient assets to pay benefits when due. The District's specific three-year trend information follows. Annual Pension Cost Annual Pension Percentage Net Fiscal Cost of APC Pension Year (APC) Contributed Obligation 6/30/09 705,246 35.29/6 6,377,436 6/30/10 851,009 31.9% 6,956,975 6/30/11 842,288 39.0% 7,471,180 The Schedule of Funding Progress shows the recent history of the actuarial value of assets, actuarial accrued liability, their relationship, and the relationship of the unfunded actuarial accrued liability to payroll. This schedule presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. Entry Age Actuarial UAAL as a Actuarial Accrued Actuarial Unfunded Percentage Valuation Liability Value of AAL Funded Coeered of Co\,ered Date (AAL) Assets (UAAL) Ratio Payroll Payroll 6/30/2005 N/A N/A N/A N/A N/A N/A 6/30/2007 7,395,472 - 7,395,472 - 49,788,835 14.9% 6/30/2009 8,904,499 - 8,904,499 - 57,681,058 15.4% *Actuarial valuation not performed for this year. The annual pension cost and net pension obligation for the year ended June 30, 2009, 2010 and 2011 were as follows. For the Fiscal Year Ending June 30, 2009 June 30, 2010 June 30, 2011 Annual required contribution $ 780,135 $ 946,999 $ 946,999 Interest on net pension obligation 355,236 318,871 347,849 Adjustment to annual required contribution (430,125) (414,861) (452,560) Annual pension cost 705,246 851,009 842,288 Contributions made (248,410) (271,470) (328,083) Increase in net pension obligation 456,836 579,539 514,205 Net pension obligation, beginning of year 5,920,600 6,377,436 6,956,975 Net pension obligation, end of year $ 6,377,436 $ 6,956,975 $ 7,471,180 The net pension obligation is reported in the noncurrent portion of long-term obligations on the Statement of Net Assets. 33 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 (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 latest actuarial valuation (6/30/09), there were 605 active employees, 169 retirees paying premiums, and 45 retirees whose premium is fully paid by OCSD. Premiums ranged between $367.50 and $2,678.42 per month, depending on the plan and number of dependents covered. Funding Policy. There are no employee contributions to this plan; OCSD covers 100% of the cost. Retirees opting to remain with the plan after employment pay 100% of the premium cost, except for those for whom the District pays for a period (see above). An actuarial evaluation was performed as of July 1, 2009, 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 5.0% per year was used. The rate of increase for healthcare premium was set as 7.0% for the 2009-10 fiscal year, 6.0% for FY 2010- 11, and 5.0% for years thereafter. The unfunded actuarial liability was amortized on a level dollar basis over an open period of 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. For fiscal year 2010-11, OCSD contributed $603,074 and retirees contributed $443,904 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, 2011: Annual required contribution $ 819,692 Interest on net OPEB obligation 41,579 Adjustment to annual required contribution (54,096) Annual OPEB cost 807,175 Contributions made (603,074) Increase in net OPEB obligation 204,101 Net OPEB obligation, beginning of year 831,585 Net OPEB obligation, end of year $ 1,035,686 34 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 The District's annual OPEB cost contributed and the net OPEB obligation for 2011, 2010, and 2009 are shown in the following table. Annual OPEB Cost Percentage Annual of OPEB Fiscal OPEB Actual Cost Net OPEB Year Cost Contributions Contributed Obligation 6/30/09 937,649 622,696 66.4% 655,831 6/30/10 809,821 634,067 78.3% 831,585 6/30/11 807,175 603,074 74.7% 1,035,686 The net OPEB obligation is reported in the noncurrent portion of long-term obligations on the Statement of Net Assets. Funded Status and Progress: The funding status of the plan as of the most recent actuarial valuation dates are 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 7/1/2005" N/A N/A N/A N/A N/A N/A 7/1/2007 - 9,949,638 9,949,638 0% 49,788,835 19.98% 7/1/2009 - 8,799,624 8,799,624 0% 57,681,058 15.26% "GASB Statement 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions was implemented on June 30, 2008 and thus earlier valuations were not done. 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 7/1/09 actuarial valuation using the Projected Unit Credit cost method. The actuarial assumptions include a 5% investment rate of 35 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 return (changed from 6% for the 7/1/07 valuation) and an annual healthcare cost trend rate of 7% reduced by decrements of 1% per year to an ultimate rate of 5%. 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 14. The excess of the purchase 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, 2011, after recognizing current year amortization of$657,709, the unamortized amount of the excess of purchase price over the assets' book value was$3,536,275. Annual Transactions IRWD entered into a separate agreement with Revenue Area 14 whereby IRWD agreed to fund quarterly payments of Revenue Area 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement, which contribution of$2,939,111 was recorded in 2011. IRWD also agreed to fund the annual integration adjustment of Revenue Area 14's equity share in OCSD's Joint Works Treatment Facilities based on the flows discharged to OCSD. As the flows decreased during the year, a return of capital contributions of$33,262,611 to Revenue Area 14 was recognized in 2011. These capital contributions received from or credited to IRWD for their agreed-upon share of capital assets and equity share in OCSD's Joint Works Treatment Facilities are calculated as prescribed in the agreements. In addition, a separate agreement for transfer of IRWD's wastewater solids residuals to OCSD was entered on April 28, 2010. IRWD agreed to pay OCSD a charge for interim solids handling charge which include annual capital and quarterly operating expense components designed to compensate OCSD for IRWD's share of the cost of operating and maintaining the existing facilities for the treatment of solids. As a result, a total of $6,769,157 solids capital contribution was recorded in 2011. The net amount of these transactions is $23,554,343 and is reported as capital contributions received from (credited to) other agency for the year ended June 30, 2011. Any amounts credited to IRWD are not refunded in cash but are held as a credit to satisfy future contributions required of IRWD resulting in a balance due to other governmental agency of $57,196,110 as of June 30, 2011. 36 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2011 Annual Cash Reserve Requirement The cash reserve contribution requirement from IRWD at June 30, 2011; in accordance with Amendment No. 2 to the Agreement between IRWD and OCSD Acquiring Ownership Interests, Assigning Rights, and Establishing Obligations; is $11.3 million. This cash reserve requirement is recognized as a liability to IRWD. (9) Commitments and Due From Other Governmental Agency 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. OCSD estimates that it will take a total of approximately eleven years and additional capital improvement costs of$623 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. Relocation of the Santa Ana Regional Interceptor: On June 29, 2010, the District entered into an agreement to lend the Orange County Flood Control District (OCFCD) 60 percent of the amount of the contract awarded to design and construct the relocation of the Santa Ana Regional Interceptor, but not to exceed $72 million. OCFCD agrees to repay the loan from any subvention funds received by OCFCD, with the total balance repaid by no later than July 1, 2022. Repayment installments will be made within 30 days equal to 60 percent of any subvention funds received by OCFCD. Interest shall accrue on the unpaid balance from July 1, 2018 at an annual interest rate of three percent until the unpaid balance has been repaid. As of June 30, 2011, $36 million has been loaned to OCFCD. (10) Subsequent Events Debt Financings Issued: On September 15, 2011, the District issued Wastewater Refunding Revenue Obligations, Series 2011 A, in the amount of$147,595,000. The obligations were issued to refund $89,800,000 of the $194,000,000 outstanding 2000 Refunding Certificates of Participation and $83,320,000 of the $181,700,000 outstanding 2003 Certificates of Participation. The interest rate on the obligations range from 3.00% -5.00% and the final maturity date is February 1, 2026. On November 10, 2011, the District issued Revenue Refunding Certificate of Anticipation Notes, Series 2011 B, in the amount of$143,205,000. The notes were issued to pay off all of the Revenue Refunding Certificate of Anticipation Notes, Series 2010B. The interest rate on the note is 0.0227% and it matures on November 9, 2012. 37 (THIS PAGE INTENTIONALLY LEFT BLANK) 38 ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 39 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Net Assets June 30,2011 With Comparative Totals for June 30,2010 Revenue Consolidated Totals Area No. 14 Revenue Area 2011 2010 Current assets: Cash and cash equivalents $ 17,645,109 $ 109,928,262 $ 127,573,371 $ 49,537,559 Investments 39,551,001 246,401,013 285,952,014 310,335,760 Accounts receivable, net of allowance for uncollectibles - 10,411,347 10,411,347 13,069,682 Accrued interest receivable - 1,296,054 1,296,054 1,108,027 Connection fees receivable - 385,765 385,765 996,430 Property tax receivable - 1,408,477 1,408,477 2,040,072 Inventories - 5,366,513 5,366,513 5,402,069 Prepaid expenses - 623,907 623,907 1,134,886 Prepaid retirement - 14,463,000 14,463,000 14,578,000 Total current assets 57,196,110 390,284,338 447,480,448 398,202,485 Noncurrent assets: Restricted: Cash and cash equivalents - 120,419,824 120,419,824 86,629,639 Investments - 26,829,427 26,829,427 26,829,427 Accrued interest receivable 210,010 210,010 210,730 Unrestricted: Non-depreciable capital assets 30,490,611 1,246,993,483 1,277,484,094 1,461,374,037 Depreciable capital assets, net of accumulated depreciation 43,652,653 1,079,784,803 1,123,437,456 839,444,526 Deferred charges - 10,975,310 10,975,310 9,733,908 Due from other governmental agency - 36,000,000 36,000,000 - Other noncurrent assets, net 214,623 6,865,299 7,079,922 11,501,640 Total noncurrent assets 74,357,887 2,528,078,156 2,602,436,043 2,435,723,907 Total assets 131,553,997 2,918,362,494 3,049,916,491 2,833,926,392 Current liabilities: Accounts payable - 14,722,600 14,722,600 20,091,995 Accrued expenses - 6,654,544 6,654,544 7,259,202 Retentions payable - 2,260,426 2,260,426 1,587,986 Interest payable - 22,525,700 22,525,700 19,643,344 Due to other governmental agency 57,196,110 - 57,196,110 42,053,445 Current portion of long-term obligations - 188,948,106 188,948,106 200,173,675 Total current liabilities 57,196,110 235,111,376 292,307,486 290,809,647 Noncurrent liabilities: Noncurrent portion of long-term obligations - 1,247,122,884 1,247,122,884 1,112,044,076 Total liabilities 57,196,110 1,482,234,260 1,539,430,370 1,402,853,723 Net assets: Invested in capital assets, net of related debt: Collection system 20,442,023 475,199,032 495,641,055 459,503,200 Treatment and disposal-Land 406,846 4,068,905 4,475,751 4,475,751 Treatment and disposal system 53,294,395 1,847,510,349 1,900,804,744 1,836,839,612 Capital assets related debt - (1,269,858,548) (1,269,858,548) (1,179,761,456) Unrestricted 214,623 379,208,496 379,423,119 310,015,562 Total net assets $74,357,887 $ 1,436,128,234 $ 1,510,486,121 $ 1,431,072,669 40 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Revenues, Expenses,and Changes in Net Assets For the Year Ended June 30,2011 With Comparative Totals for June 30,2010 Revenue Consolidated Totals Area No. 14 Revenue Area 2011 2010 Operating revenues: Service charges $ 8,481,939 $ 235,982,753 $ 244,464,692 $ 225,058,521 Permit and inspection fees 3,779 780,679 784,458 629,082 Total operating revenues 8,485,718 236,763,432 245,249,150 225,687,603 Operating expenses other than depreciation and amortization: Salaries and benefits 962,120 72,150,166 73,112,286 69,651,904 Utilities 152,319 6,795,462 6,947,781 6,934,045 Supplies, repairs and maintenance 675,792 26,342,403 27,018,195 26,549,945 Contractual services 7,061,847 19,986,654 27,048,501 25,476,063 Directors'fees 21,806 130,571 152,377 141,313 Meetings and training 8,928 604,769 613,697 894,865 Other 2,917,002 1,041,693 3,958,695 8,436,969 Total operating expenses other than depreciation and amortization 11,799,814 127,051,718 138,851,532 138,085,104 Operating income(loss)before depreciation and amortization (3,314,096) 109,711,714 106,397,618 87,602,499 Depreciation and amortization 2,240,260 47,047,876 49,288,136 52,035,796 Operating income(loss) (5,554,356) 62,663,838 57,109,482 35,566,703 Non-operating revenues: Property taxes 1,947,775 62,359,819 64,307,594 64,759,095 Investment and interest income 1,232,860 8,859,242 10,092,102 19,165,691 Emmission Reduction Credit Sales - - - 4,530,000 Other 37,817 1,268,954 1,306,771 2,409,455 Total non-operating revenues 3,218,452 72,488,015 75,706,467 90,864,241 Non-operating expenses: Interest - 29,129,550 29,129,550 27,536,714 Feasibility studies 109,623 4,427,342 4,536,965 10,349,999 Capital grants to member agencies - - - 1,481,590 Loss on disposal of assets and other 119,107 5,862,722 5,981,829 1,904,239 Total non-operating expenses 228,730 39,419,614 39,648,344 41,272,542 Income(loss)before transfer and capital contributions (2,564,634) 95,732,239 93,167,605 85,158,402 Capital Contributions: Capital facilities capacity charges - 9,800,190 9,800,190 10,332,569 Capital contributions received from(credited to)other agency (23,554,343) - (23,554,343) (12,739,214) Change in net assets (26,118,977) 105,532,429 79,413,452 82,751,757 Total net assets-beginning 100,476,864 1,330,595,805 1,431,072,669 1,348,320,912 Total net assets-ending $ 74,357,887 $ 1,436,128,234 $1,510,486,121 $ 1,431,072,669 41 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Cash Flows For the Year Ended June 30,2011 With Comparative Totals for June 30,2010 Revenue Consolidated Totals Area No.14 Revenue Area Eliminations 2011 2010 Cash flows from operating activities: Receipts from customers and users $ 23,628,383 $ 239,404,399 $ - $ 263,032,782 $ 235,732,351 Payments to employees (983,926) (71,494,892) - (72,478,818) (70,296,045) Payments to suppliers (10,816,452) (60,225,329) - (71,041,781) (80,927,051) Net cash provided by operations 11,828,005 107,684,178 - 119,512,183 84,509,255 Cash flows from noncapital financing activities: Proceeds from property taxes 1,947,775 62,991,412 - 64,939,187 65,940,652 Grants to member agencies - - - (1,481,590) Net cash provided by noncapital financing activitie: 1,947,775 62,991,412 64,939,187 64,459,062 Cash flows from capital and related financing activities: Capital facilities capacity charges - 10,410,855 10,410,855 9,724,170 Additions to property,plant and equipment 23,554,343 (126,300,675) (56,816,954) (159,563,286) (251,119,750) Disposal of property,plant,and equipment - (33,262,611) 33,262,611 - Arbitrage payment - - - - Additions to other assets 96,692 - (96,692) - - Disposal of other assets 37,333 1,132,362 96,692 1,266,387 6,895,719 Interest paid - (46,543,583) - (46,543,583) (43,055,105) Principal payments on debt obligation - (191,760,000) - (191,760,000) (200,145,000) Proceeds from debt issuances - 315,341,085 - 315,341,085 247,740,402 Debt issuance costs - (495,978) - (495,978) (554,219) Proceeds from capital contributions (23,554,343) - 23,554,343 Net cash provided(used)by capital and related financing activities 134,025 (71,478,545) - (71,344,520) (230,513,783) Cash flows from investing activities: Proceeds from the sale of investments 517,729,852 3,228,173,059 - 3,745,902,911 3,572,349,413 Purchases of investments (521,303,040) (3,202,290,103) - (3,723,593,143) (3,476,745,940) SARI project advance - (36,000,000) - (36,000,000) - Interest received 1,519,719 10,889,660 12,409,379 14,357,443 Net cash provided(used)by investing activities (2,053,469) 772,616 - (1,280,853) 109,960,916 Net increase in cash and cash equivalents 11,856,336 99,969,661 - 111,825,997 28,415,450 Cash and cash equivalents,beginning of year 5,788,773 130,378,425 - 136,167,198 107,751,748 Cash and cash equivalents,end of year $ 17,645,109 $ 230,348,086 $ - $ 247,993,195 $ 136,167,198 Reconciliation of operating income(loss)to net cash provided by operating activities: Operating income(loss) $ (5,554,356) $ 62,663,838 $ - $ 57,109,482 $ 35,566,703 Adjustments to reconcile operating income(loss)to net cash provided by operations: Depreciation and amortization 2,240,260 47,047,876 - 49,288,136 52,035,796 Bad debt expense(Net recoveries) - 17,368 - 17,368 (195,981) (Increase)/decrease in operating assets: Accounts receivable - 2,640,967 - 2,640,967 (1,009,064) Inventories (564) 24,388 - 23,824 (1,354,431) Prepaid and other assets - 625,979 - 625,979 (2,518,658) Increase/(decrease)in operating liabilities: Accounts payable - (5,369,395) - (5,369,395) (10,364,801) Accrued expenses - (605,963) - (605,963) (1,091,531) Retentions payable - 672,440 - 672,440 522,094 Due to other governmental agency 15,142,665 - - 15,142,665 11,053,812 Pension/OPEB payable - 718,305 - 718,305 755,295 Compensated absences - (115,481) - (115,481) 846,045 Other payable - (1,037,481) - (1,037,481) 308,546 Claims and judgments - 401,337 - 401,337 (44,570) Net cash provided by operations $ 11,828,005 $ 107,684,178 $ - $ 119,512,183 $ 84,509,255 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ (286,859) $ (1,787,119) $ - $ (2,073,978) $ 6,177,434 Capital contriubtions from other agency (23,554,343) - (23,554,343) (12,739,214) Capital facilities capacity contribution - 2,492,300 2,492,300 3,606,925 42 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. 44-48 Revenue Capacity These schedules contain information to help the reader assess OCSD's most significant revenue source of sewer service fees. 49-51 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 52-55 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. 56-59 Demographic and Economic Factors These schedules offer demographic information to help the reader understand the environment within which OCSD's financial activities take place. 60-63 43 ORANGE COUNTY SANITATION DISTRICT Net Assets by Component (Dollars in Thousands) Last Ten Fiscal Years(Note 1) $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 — 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 olnvested 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 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 2009-10 1,121,057 - 310,016 1,431,073 2010-11 1,131,063 - 379,423 1,510,486 Note 1: Net Assets are calculated as a result of GASB 34, which was implemented in FY 2001- 2, retrospective to 2000-01. Source: Orange County Sanitation District's Financial Management Division. 44 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $259,555 $235,959 $212,363 $188,768 $165,172 $141,576 $117,980 $94,384 $70,788 ,: F $47,192 $23,596 $0 -$23,596 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 oOperating Revenue ■Non-Operating Revenue oContributed Capital Operating Revenue Non-Operating Revenue Permit& Total Fiscal Service Inspection Total Property Non- Capital Year Charges Fees Operating Taxes Interest Other Operating Contributions 2001-02 $ 79,609 $ 396 $ 80,005 $ 41,140 $ 28,073 $ 2,202 $ 71,415 $19,163 2002-03 88,640 524 89,164 44,591 25,889 706 71,186 13,312 2003-04 101,995 332 102,327 46,943 6,786 928 54,657 18,243 2004-05 120,917 498 121,415 35,764 15,118 1,051 51,933 19,350 2005-06 154,291 874 155,165 39,958 10,426 3,477 53,861 32,990 2006-07 167,790 1,866 169,656 60,565 22,243 1,068 83,876 50,207 2007-08 184,180 1,196 185,376 65,210 20,235 13 85,458 35,408 2008-09 206,422 895 207,317 66,427 14,836 1,634 82,897 17,937 2009-10 225,059 629 225,688 64,759 19,166 6,939 90,864 (2,406) 2010-11 244,465 784 245,249 64,307 10,092 1,307 75,706 (13,754) Source: Orange County Sanitation District's Financial Management Division. 45 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 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 ■Operating Expense allon Operating Expense Operating Non-Operating Fiscal Salaries& Maint& Depr& Total Interest Total Non- Year Benefits Utilities Other Amort Operating Expense Other Operating 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 2009-10 69,652 6,934 61,499 52,036 190,121 27,537 13,736 41,273 2010-11 73,112 6,948 58,792 49,288 188,140 29,129 10,519 39,648 Source: Orange County Sanitation District's Financial Management Division. 46 ORANGE COUNTY SANITATION DISTRICT Change in Net Assets (Dollars in Thousands) Last Ten Fiscal Years (Note 1) $1,600,000 $1,400,000 $1,200,000 $1,000,000 1 $800,000 $600,000 $400,000 $200,000 $0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Ending Net Assets by Fiscal Year Fiscal Total Total Change in Beginning Ending Year Revenues Expenses Net Assets Net Assets Net Assets 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 2008-09 308,151 235,817 72,334 1,275,987 1,348,321 2009-10 314,146 231,394 82,752 1,348,321 1,431,073 2010-11 307,201 227,788 79,413 1,431,073 1,510,486 Note 1: Net Assets are calculated as a result of GASB 34, which was implemented in FY 2001-02, retrospective to 2000-01. Source: Orange County Sanitation District's Financial Management Division. 47 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 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 2005-06 132 57 196 105 490 2006-07 132 57 104 79 372 2007-08 149 57 219 108 533 2008-09 172 57 172 133 534 2009-10 185 57 102 129 473 2010-11 187 57 176 141 561 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. 48 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 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 2010-11 244.00 2011-12 267.00 Annual Sewer Service Fees Single Family Residence 300 250 LL LL 200 �o c a 150 LL N 100 50 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Fiscal Year Source: Orange County Sanitation District's Financial Management Division. 49 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 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% 2008-09 882,747 177.4 95% 515 9.9 5% 2009-10 875,442 193.5 95% 487 10.8 5% 2010-11 874,130 213.3 95% 479 10.1 5% $250,000,000 $200,000,000 ; $150,000,000 $100,000,000 $50,000,000 $0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 ■Residential/Commercial Users ■Industrial Users Source: Orange County Sanitation District's Financial Management Division. 50 ORANGE COUNTY SANITATION DISTRICT Principal Sewer Service Customers For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/11 Fiscal Year Ended 6/30/02 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. $1,533,243 1 0.63% $228,142 6 0.29% MCP Foods Inc. 1,036,648 2 0.42% 221,760 8 0.28% Alstyle Apparel-A&G Inc. 909,188 3 0.37% 394,300 3 0.50% Stremicks Heritage Foods, LLC 756,778 4 0.31% 397,103 2 0.50% House Foods America Corp. 588,739 5 0.24% 244,030 5 0.31% Pepsi-Cola Bottling Group 440,707 6 0.18% Jazz Semiconductor 344,671 7 0.14% Dean Foods Co. of CA Inc. 316,641 8 0.13% Schreiber Foods Inc. 298,157 9 0.12% Pulmuone Wildwood, Inc. 293,669 10 0.12% Disneyland, Inc. 417,759 1 0.52% Van Law Food Products, Inc. 269,384 4 0.34% Knotts Berry Farm Foods 226,962 7 0.29% Nor-Cal Beverage Co. (Main) 184,230 9 0.23% John A. Thomas 173,590 10 0.22% $6,518,441 2.66% $2,757,260 3.48% 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. 51 ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses (Dollars in Thousands) Last Ten Fiscal Years 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating Year (1) Interest Service(3) Expenses(2) Expenses 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 2009-10 34,280 46,052 80,332 138,085 58.18 2010-11 37,095 49,426 86,521 138,852 62.31 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. 52 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 I + � 1.00 0.50 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Fiscal Year Ending June 30, 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Operating&Non-operating Revenues: Service Charges,Net of Refunds-Regional $ 70.3 $ 77.0 $ 86.0 $ 99.0 $ 132.0 $ 143.8 $159.4 $ 177.4 $ 193.5 $ 213.3 Service Charges,Net of Refunds-Local - - - - - - - 5.6 5.6 5.7 Industrial Sewer Service Charges 7.5 6.3 7.5 10.5 12.2 13.4 12.1 9.9 10.8 10.1 Revenue Area No.14 Fees 2.2 3.2 5.8 6.9 5.3 5.2 7.1 10.3 10.2 11.7 Ad Valorem Taxes 41.1 44.6 46.9 35.8 40.0 60.6 65.2 66.4 64.8 64.3 Interest Earnings 27.8 25.9 6.8 15.1 10.4 22.2 20.2 14.8 19.2 10.1 Other Revenues 2.5 13.5 13.0 6.1 9.2 8.3 6.9 5.8 12.5 5.8 Total Revenues 151.4 170.5 166.0 173.4 209.1 253.5 270.9 290.2 316.6 321.0 Operating Expenses(1) 68.6 79.7 95.4 101.8 105.6 112.2 131.9 164.6 138.1 138.9 Net Revenues $ 82.8 $ 90.8 $ 70.6 $ 71.6 $ 103.5 $ 141.3 $139.0 $ 125.6 $ 178.5 $ 182.1 Debt Service Requirements Principal Payments 10.4 11.0 11.6 12.0 12.8 13.5 11.0 21.3 34.2 37.1 Interest Payments 13.1 11.7 16.8 25.9 29.1 35.3 31.8 36.3 43.1 46.5 Total Debt Service Requirements $ 23.5 $ 22.7 $ 28.4 $ 37.9 $ 41.9 $ 48.8 $ 42.8 $ 57.6 $ 77.3 $ 83.6 Coverage Ratios 3.52 4.00 2.49 1.89 2.47 2.90 3.25 2.18 2.31 2.18 Ending Reserves(2) $ 430.0 $ 394.0 $ 518.0 $ 407.0 $ 385.0 $ 293.0 $425.0 $ 401.0 $ 344.0 $ 420.0 Notes (1)-Operating expenses exclude depreciation and amortization expenses. (2)-Excludes debt service reserves in accordance with the District's reserve policy. Source:Orange County Sanitation District's Financial Management Division. 53 ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt June 30, 2011 2010-11 Assessed Valuation(Land 8c Improvements Only)_ $266.289,398.474(after deducting$38,048,469,605 Redevelopment Incremental Valuation) OVERLAPPING TAX AND ASSESSMENT DEBT(Based on redevelopment adjusted all property assessed valuation of$270,884,975,258): Total Debt District's Share of 6/30111 %Applicable(1) Debt6/30/11 Metropolitan Water District of Southern California $227,670,000 15.163% S 34.521.602 Coast Community College District 326,768,867 99.481 325,072,937 North Orange County Joint Community College District 214,514,001 96.969 208,012,082 Rancho Santiago Community College District 309,908.025 98.967 306,706,675 Brea-Olinda and Laguna Beach Unified School Districts 53,719,029 99 948&14.722 26,959.960 Garden Grove Unified School District 130,000,160 100. 130.000,160 Los Alamitos Unified School District School Facilities Improvement District No 1 50,000,032 98.956 49,478.032 Newport Mesa Unified School District 253,714,150 100. 253,714,150 Placentia-Yorba Linda Unified School District 273,148,041 98.619 269,375,867 Saddleback Valley Unified School District 134,935,000 12.007 16,201,645 Santa Ana Unified School District 310,984,745 100. 310,994,745 Tustin Unified School District School Facilities Improvement District No 2002-1 60,148,766 99.951 60,1 19,293 Tustin Unified School District School Facilities Improvement District No 2008-1 50,000,000 99.952 49,976.000 Anaheim Union High School District 113,873,955 100. 113,873,955 Fullerton Joint Union High School District 56,767,910 90.374 51,303,431 Huntington Beach Union High School District 227,824,998 98.863 225,234,628 School Districts 345,454,629 97.152-100 344,655,613 City of Anaheim 3,735,000 99.055 3,699,704 Irvine Ranch Water District Improvement Districts 550,551,700 Various 550,407,022 Rossmoor Community Services District Special Tax Obligations 470,000 100. 470,000 Bonita Canyon Community Facilities District No 98-1 40,465.000 100. 40,465,000 Irvine Unified School District Community Facilities Districts 340,375,117 99.999-100 340,374,233 Tustin Unified School District Community Facilities Districts 255,027,675 100. 255,027,675 Orange County Community Facilities District No.87-4 46,656,787 99.992 46,653,054 Other Community Facilities Districts 429,293,000 99.056-100 429,219,982 Orange County Assessment Districts 103,468,295 100. 103,468,295 City of Irvine 1915 Act Bonds 866,236,799 100 886,236,799 City of Tustin 1915 Act Bonds 32,161.000 100 32,161,000 Other 1915 Act bonds 24,160,000 100 24,160,000 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $5,488,533,579 DIRECT AND OVERLAPPING GENERAL FUND DEBT Orange County General Fund Obligations $316.898.000 72.512% $ 229,789,078 Orange County Pension Obligations 54.682,497 72.512 39,651.372 Orange County Board of Education Certificates of Participation 19,000,000 72.512 13,777,280 South Orange County Community College District Certificates of Participation 17,375.000 36.768 6,388,440 Brea-Olinda Unified School District Certificates of Participation 26,695,000 99.948 26,681,119 Orange Unified School District Certificates of Participation and Benefit Obligations 140,715,000 97.907 137,769,836 Placentia-Yorba Linda Unified School District Certificates of Participation 108,660,670 98.619 107,160,066 Santa Ana Unified School District Certificates ofParticipahon 52,212.863 100. 52,212,863 Other Unified School District Certificates of Participation 36,565,234 Various 36,327,556 Union High School District Certificates of Participation 121,006.090 Various 118,184,170 School District Certificates of Participation 66,685,000 Various 66,154,955 City of Anaheim General Fund Obligations 584,657,465 99.055 579,132,452 City of Costa Mesa General Fund Obligations 37.240,000 100. 37,240,000 City of Garden Grove General Fund Obligations 29,465,000 100 29,465,000 City of Huntington Beach General Fund and Judgment Obligations 60,564.000 99 969 60,545,226 City of La Habra General Fund Obligations 20,145,000 100, 20,145,000 City of Santa Ana General Fund Obligations 100,785,000 100 100,785,000 Other City General Fund Obligations 259,110,961 Various 236.068,829 Orange County Sanitation District 0 100 0 (2) Irvine Ranch Water District Certificates ofParucipation 81,400,000 89.742 73,049,988 Municipal Water District of Orange County Water Facilities Corporation 14,120,000 67.611 9,546,673 Yorba Linda County Water District Certificates of Participation 9.200.000 97 636 8.982512 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $1.989.057.415 Less- City of Anaheim self-supporting obligations 567,176,513 Other City self-supporting obligations 35,494,356 MWDOC Water Facilities Corporation(100%self-supporting) 9,546.673 TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,376,839.873 GROSS COMBINED TOTAL DEBT $7,477,590,954 (3) NET COMBINED TOTAL DEBT $6,865,373,452 (1) Percentage of overlapping agency's redevelopment adjusted all property assessed valuation($271,322,083,143)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. Qualified Zone Academy Bonds are included based on principal due at maturity. Ratios to Total Overlapping Tax and Assessment Debt Gross Combined Total Debt Net Combined Total Debt Adjusted Land and Improvement Assessed Valuation 1.80% 2.81% 2 58% Adjusted All Property Assessed Valuation NIA 2.76% 2 53% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/11 $0 Source California Mumcipal Statistics 54 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 2001-02 $ 376,000,000 $ 75,600 0.020% 2,336,400 $ 160.93 2002-03 364,975,000 70,000 0.019% 2,408,050 151.56 2003-04 633,365,000 74,200 0.012% 2,441,350 259.43 2004-05 621,325,000 75,700 0.012% 2,467,850 251.77 2005-06 808,570,000 78,300 0.010% 2,481,540 325.83 2006-07 801,785,000 78,700 0.010% 2,505,180 320.05 2007-08 1,082,420,000 84,100 0.008% 2,522,820 429.05 2008-09 1,241,530,000 86,100 0.007% 2,539,990 488.79 2009-10 1,287,250,000 87,200 0.007% 2,563,170 502.21 2010-11 1,407,155,000 84,200 0.006% 2,457,571 572.58 Notes &Data Sources (1) - Data is for the entire County of Orange. (2)-Data is for the estimated population served by the Orange County Sanitation District. (3)-Data Source: U.S. Department of Housing and Urban Development. (4) - Data Source: Demographic Research Unit, California Department of Finance. (5)-Data Source: Orange County Sanitation District. 55 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) 2001-02 234 794.05 $ 114,266 $ 23,302 $ 80,005 $ 71,415 2002-03 239 880.25 121,635 15,653 89,164 71,186 2003-04 238 1,068.43 139,815 21,626 102,327 54,657 2004-05 243 1,095.79 149,941 25,642 121,415 51,933 2005-06 235 1,216.77 155,519 38,645 155,165 53,861 2006-07 229 1,268.38 165,266 37,836 169,656 83,876 2007-08 221 1,541.18 179,657 40,335 185,376 85,458 2008-09 211 1,576.67 197,076 38,741 207,317 82,897 2009-10 196 1,588.72 190,121 41,273 225,688 90,864 2010-11 207 1,816.62 188,140 39,648 245,249 75,706 A Facilities Master Plan to the year 2030 was completed in December 2009 that projects wastewater treatment flows to increase to 279 millions of gallons per day(mgd)in 2020, to 286 mgd in 2025, and to 294 mgd in the year 2030. The anticipated need to meet the projected flows is included in the overall CIP program of$1.9 billion out to 2020-21. Total expenses in FY 2010-11 increased $90.2 million, or 65.6 percent since FY 2001-02, primarily as a result of(1) OCSD's decision beginning in FY 2002-03 to maximize existing secondary treatment facilities as OCSD moves from a 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 effluent beginning in FY 2002-03 at an additional cost in chemicals of$7 million annually. Maintenance, chemicals, utilities, and other operating costs represent 36 percent of the increase, primarily due to the increase in the levels of treatment referred to above. Depreciation expense represents another 4 percent of the increase as a result of the previous expansion in capital facilities and the financing associated with the expansion. In FY 2010-11, personnel expenses rose 5.0 percent over the prior year. This increase is mainly due to increases in health insurance and retirement premiums. The full-time equivalent positions authorized remained constant in FY 2010-11. As depicted from the chart above, actual wastewater treatment flows have generally remained between 234 mgd and 244 mgd in the past. Due to unusually dry weather conditions during the last five years, FY 2006-07, FY 2007-08, FY 2008-09, FY 2009-10 and FY 2010-11 had flows of only 229 mgd , 221 mgd,211 mgd, 196 mgd, and 207 mgd respectively. Source: Orange County Sanitation District. 56 ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years 350 300 250 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 oGeneral Management ■Administrative Services OTechnical Services oEngineering 00perations and Maintenance Fiscal Year Ending June 30, 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 General Management 17 17 17 17 2 25 30 30 15 15 Administrative Services 97 107 116 123 145 102 98 97 109 112 Technical Services 95 94 100 112 114 119 109 107 105 102 Engineering 104 79 80 95 99 98 104 108 106 121 Operations and Maintenance 261 272 285 282 284 300 293 299 306 291 Total FTE's 574 569 598 629 644 644 634 641 641 641 Source: Orange County Sanitation District's Financial Management Division. 57 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced Last Ten Fiscal Years 270,000 220,000 170,000 II 120,000 * 7 70,000 20,000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 D Wet Tonnage o Dry Tonnage Fiscal Year Wet Tonnage Dry Tonnage 2001-02 196,600 42,505 2002-03 214,600 47,631 2003-04 239,426 50,519 2004-05 246,194 51,700 2005-06 233,996 49,554 2006-07 236,460 49,184 2007-08 248,717 50,884 2008-09 249,202 51,342 2009-10 245,668 50,799 2010-11 253,557 49,133 Source:Orange County Sanitation District's Environmental Compliance&Regulatory Affairs Division. 58 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) 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 2009-10 579 17 372 212 2010-11 587 17 372 212 Notes (1)-Capacity is presented as million gallons treated per day. Source: Orange County Sanitation District 59 ORANGE COUNTY SANITATION DISTRICT Demographic Statistics Covering The Entire County of Orange(i) Last Ten Fiscal Years Total (5) (6) (2) Personal Per Capita Median Public (7) Fiscal Population Income Personal Family School Unemployment Year Estimates (in thousands) Income Income Enrollment Rate 2001-02 2,940,000 $ 116,004,953 (3) $ 39,457 $ 75,600 503,000 4.1% 2002-03 2,979,000 122,427,855 (3) 41,097 70,000 512,000 4.0% 2003-04 3,017,000 130,621,396 (3) 43,295 74,200 517,000 3.6% 2004-05 3,047,000 139,408,948 (3) 45,753 75,700 514,000 3.9% 2005-06 3,072,000 150,598,354 (3) 49,023 78,300 510,114 3.7% 2006-07 3,090,000 153,446,600 (4) 49,659 78,700 503,955 3.9% 2007-08 3,108,000 155,068,400 (4) 49,893 84,100 503,492 5.3% 2008-09 3,135,000 148,372,600 (4) 47,328 86,100 504,136 9.3% 2009-10 3,166,000 153,098,600 (4) 48,357 87,200 502,239 9.5% 2010-11 3,030,000 159,007,100 (4),(s) 52,478 84,200 502,903 9.2% 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: U.S. Department of Housing and Urban Development. (6)- Data Source: California Department of Education, Educational Demographics Unit. (7)-Data Source: State of California, Employment Development Department as of June 30 of each fiscal year. (8)- Forecasted number 60 ORANGE COUNTY SANITATION DISTRICT Estimated Populations Served by the Orange County Sanitation District June 30, 2011 Population as of January 1,2011 Anaheim 341,034 Brea 40,065 Buena Park 80,868 Costa Mesa 110,146 Cypress 47,907 Fountain Valley 55,423 Fullerton 135,574 Garden Grove 171,327 Huntington Beach 190,377 Irvine 219,156 La Habra 60,432 La Palma 15,596 Los Alamitos 11,474 Newport Beach 85,376 Orange 136,995 Placentia 50,665 Santa Ana 325,228 Seal Beach 24,215 Stanton 38,317 Tustin 75,781 Villa Park 5,823 Westminister 89,937 Yorba Linda 64,855 Subtotal City(1) 2,376,571 Estimated Population Served in Unincorporated Areas(2) 81,000 2,457,571 Data Sources: (1) Demographic Research Unit, California Department of Finance. (2) Orange County Sanitation District Financial Management Division. 61 ORANGE COUNTY SANITATION DISTRICT Principal Orange County Employers(1) For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/11 Fiscal Year Ended 6/30/02 Percentage of Percentage of Number of Total County Number of Total County Employers Employees(2) Rank Employment(3) Employees(2) Rank Employment(4) University of California, Irvine 20,650 1 1.45% 14,981 3 1.04% Walt Disney Co. 20,000 2 1.40% 21,275 1 1.47% County of Orange 17,655 3 1.24% 17,290 2 1.19% St.Joseph Health System 11,965 4 0.84% 9,435 6 0.65% Boeing Co. 8,060 5 0.57% 11,179 4 0.77% BankAmerica Corp. 6,500 6 0.46% 4,813 10 0.33% YUM! Brands Inc. 6,500 7 0.46% SuperValu, Inc. 5,900 8 0.41% Kaiser Permanente 5,397 9 0.38% Target Corp. 5,325 10 0.37% 4,878 9 0.34% Albertsons Inc. 9,500 5 0.66% Tenet Healthcare Corp. 8,389 7 0.58% SBC Communications, Inc. 7,100 8 0.49% BankAmerica Corp. Total 107,952 7.58% 108,840 7.52% 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 1,423,600 as of June 2011. (4)-Data Source: State of California, Employment Development Department. -Percentage is calculated by dividing employees by total employment of 1,447,000 as of June 2002. 62 ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2011 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: 637 Operational Date: July 1, 1954 Authority: California Health &Safety Code Section 4700 et. seq. Services: Wastewater collection, treatment, and disposal Service Area: 463 square miles Population Served: 2.5 million Total Miles of Sewers (including force mains): 587 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 96 204 122 182 Plant 2 111 168 90 150 Total 2n 3 1�?, Source: Orange County Sanitation District's Financial Management Division. 63 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. 65 ORANGE COUNTY SANITIATION DISTRICT Cash and Investment Portfolio as of June 30,2011 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 $ - $ 6,623,985.67 $ 6,623,985.67 1.75% $ - Cash Equivalents 104,812.50 104,812.50 26,203.13 0.01% (78,609.37) Fed Hm Loan Bnk-Less Than 1 Year 4,055,000.00 4,049,479.27 4,049,479.27 1.07% Federal Home Loan Mortgage-Less Than 1 Yr 8,700,000.00 8,698,345.63 8,698,345.63 2.29% FNMA Issues-Less Than 1 Year 19,400,000.00 19,396,275.06 19,396,275.06 5.11% - Repurchase Agreements 600,000.00 600,000.00 600,000.00 0.16% - Short Term Investment Funds(US Regulated) 1,106,328.43 1,106,328.43 1,106,328.43 0.29% - Treasury Bills-Less Than 1 Year 83,172,000.00 83,165,296.26 83,165,296.26 21.92% - Subtotal 117,138,140.93 123,744,522.82 123,665,913.45 32.60% (78,609.37) Fixed Income Securities(U.S. Dollar): Asset Backed Securities-Car Loans 501,712.33 508,336.50 505,058.75 0.13% (3,277.75) Asset Backed Securities-Home Equity 133,743.29 100,432.85 110,585.64 0.03% 10,152.79 Asset Backed Securities-Small Bus Admin 804,717.20 804,717.20 878,276.40 0.23% 73,559.20 Asset Backed Securities-Student Loans 889,474.78 887,538.58 890,655.47 0.23% 3,116.89 Automobiles&Components 1,545,000.00 1,763,478.45 1,718,797.05 0.45% (44,681.40) Banking&Finance 70,172,000.00 69,495,080.31 69,988,093.84 18.45% 493,013.53 Collateralized Mortgage Obligation 2,350,515.67 2,352,704.17 2,349,266.46 0.62% (3,437.71) FDIC Guaranteed Bank&Finance 36,924,000.00 37,673,156.12 37,393,597.26 9.86% (279,558.86) FHLMC Multiclass 2,950,884.77 3,243,138.64 3,229,521.88 0.85% (13,616.76) FHLMC Pools 11,622.13 11,338.85 12,116.30 0.00% 777.45 FNMA Pools 9,156,661.71 9,089,927.14 9,159,438.49 2.41% 69,511.35 FNMA Remic 4,145,679.84 4,204,519.46 4,230,694.38 1.12% 26,174.92 Food Products 2,600,000.00 2,940,824.00 2,859,482.00 0.75% (81,342.00) GNMA Multi Family Pools 499,802.68 499,507.32 519,512.97 0.14% 20,005.65 Health Care 1,000,000.00 996,290.00 953,510.00 0.25% (42,780.00) Insurance 6,010,000.00 5,093,792.00 6,183,031.70 1.63% 1,089,239.70 Muni-Medical 500,000.00 508,595.00 537,255.00 0.14% 28,660.00 Oil&Gas 100,000.00 100,000.00 100,950.00 0.03% 950.00 Taxable Municipals 17,440,000.00 17,738,875.89 18,714,541.60 4.93% 975,665.71 Technology 3,200,000.00 3,200,000.00 3,207,264.00 0.85% 7,264.00 U.S.Agencies 20,848,061.88 21,139,154.46 21,039,106.93 5.55% (100,047.53) U.S.Governments 61,210,000.00 61,437,796.80 61,528,890.80 16.22% 91,094.00 Utility-Electric 7,097,000.00 7,317,343.61 7,254,539.52 1.91% (62,804.09) Utility-Telephone 2,020,000.00 2,084,034.00 2,314,819.00 0.61% 230,785.00 Subtotal 252,110,876.28 253,190,581.35 255,679,005.44 67.40% 2,488,424.09 Total Investment Portfolio $369,249,017.21 376,935,104.17 379,344,918.89 100.00% $2,409,814.72 Demand Cash Accounts 1,142,438.00 1,142,438.00 Monies Held With Fiscal Agents 147,249,251.00 147,249,251.00 Monies with the Local Agency Investment Fund 32,986,025.91 33,038,027.00 Total Cash and Investments $558,312,819.08 $560,774,634.89 Source: BNY Mellon Trust and the Orange County Sanitation District's Financial Management Division. 66 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 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% 2009-10 1.00% 0.00% 1.00% 2.80% 2010-11 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. 67 ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years $360.000,000 $300,000,000 $250,000,000 $200,000.000 $150,00o,000 $100,000.000 $50,OOo,000 $0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 ■Secured DUnsecured Percent Change in Fiscal Assessed Year Secured Unsecured Total Value 2001-02 169,357,000 4,066,000 173,423,000 9.40% 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% 2009-10 299,038,654 6,116,530 305,155,184 -0.80% 2010-11 298,099,034 6,238,834 304,337,868 -0.27% 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. 68 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 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 oTotal Tax and User Fee Levy aTotal Tax and User Fee Collection Current Total Tax %of 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 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) 2009-10 272,050 - 272,110 100.02 226 272,336 100.11 (60) (0.02) 2010-11 292,646 - 292,689 100.01 120 292,809 100.06 (43) (0.01) Source: Orange County Auditor-Controller's Office. 69 ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange(i) (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) 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 2,005,198 7,072 1,792,270 3,797,468 2007-08 412,669,779 2008 1,439,120 3,159 1,037,713 2,476,833 2008-09 428,809,224 2009 952,480 2,200 855,193 1,807,673 2009-10 422,965,596 2010 1,151,929 3,181 1,026,857 2,178,786 2010-11 420,751,575 2011 (4) 1,118,417 3,975 1,223,446 2,341,863 Notes and Data Sources (1) - The Orange County Sanitation District services 480 square miles or 60% of the total 799 square miles that make up the boundaries of the County of Orange. (2)- Data Source-Orange County Auditor-Controller's Office. (3)-Data Source-'The Chapman University Economic& Business Review." (4)- Forecasted numbers. 70 ORANGE COUNTY SANITATION DISTRICT Insurance in Force As of July 1,2011 Type Insurer Deductible Limit All-Risk Property Fire and Other Perils Public Entity Property $250,000 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) Crime Insurance National Union Fire $25,000 $5 million Excess Security National Insurance $250,000 $30 million/occurrence General Liability (first$10 million layer); $500,000 for and annual aggregate Starr Indemnity&Liability EPLI ($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 $750,000 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. 71 (THIS PAGE INTENTIONALLY LEFT BLANK) 72 Orange County Sanitation District Report to the Administration Committee December 5, 2011 _ McGladrey McGladrey&Pullen,LLP Certified Public Accountants McGladrey&Pullen,LLP Certified P.blic Accountants McGladrey December 5, 2011 Members of the Administration Committee Orange County Sanitation District Fountain Valley, CA We are pleased to present this report related to our audit of the financial statements and compliance of the Orange County Sanitation District (the District) for the year ended June 30, 2011. This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for the District's financial reporting process. This report is intended solely for the information and use of the Administration Committee, Board of Directors and management, and is not intended to be, and should not be, used by anyone other than these specified parties. It will be our pleasure to respond to any questions you have regarding this report. We appreciate the opportunity to continue to be of service to the District. McGladrey.s the brand under wh d,RSM McGladrey Inc and McGladrey&PL'len.L:P serve,penis bus ness neec's. Member of RSht Internal ona'network,a network of The two firms operate as separate legaa entities n an alternat ve practice structure ndependent account ng tax and consuftmg firms. Contents Required Communications 1-2 Summary of Accounting Estimates 3-4 Exhibit A—Certain Written Communications Between Management and Our Firm Representation Letter Required Communications Statement on Auditing Standards No. 114 requires the auditor to communicate certain matters to keep those charged with governance adequately informed about matters related to the financial statement audit that are, in our professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. The following summarizes these communications: Area Comments Auditor's Responsibility Under Our responsibility under auditing standards generally Professional Standards accepted in the United States of America; Government Auditing Standards, issued by the Comptroller General of the United States; the provisions of the Single Audit Act, OMB Circular A-133 and OMB's Compliance Supplement, has been described to you in our arrangement letter dated July 29, 2011. Accounting Practices Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by the District. The District did not adopt any significant new accounting policies nor have there been any changes in existing significant accounting policies during the current period. Significant or Unusual Transactions We did not identify any significant or unusual transactions or significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Alternative Treatments Discussed With Management We did not discuss with management any alternative treatments within generally accepted accounting principles for accounting policies and practices related to material items during the current audit period. Management's Judgments and Summary information about the process used by Accounting Estimates management in formulating particularly sensitive accounting estimates and about our conclusions regarding the reasonableness of those estimates is in the attached Summary of Accounting Estimates. Financial Statement Disclosures In our meeting with you, we will discuss with you the following item as it relates to the neutrality, consistency and clarity of the disclosures in the financial statements: • Debt issuances including amortization of costs of issuance, bond premium/discounts and deferred charges over the effective interest method 1 Area Comments Audit Adjustments There were no audit adjustments made by us to the original trial balance presented to us to begin our audit. However, we were provided several adjustments by management during the course of the audit and those adjustments were evaluated by us as part of our audit. Uncorrected Misstatements Uncorrected misstatements are summarized in the attached Summary of Uncorrected Misstatements included within Exhibit A. Disagreements With Management We encountered no disagreements with management over the application of significant accounting principles, the basis for management's judgments on any significant matters, the scope of the audit or significant disclosures to be included in the financial statements. Consultations With Other Accountants We are not aware of any consultations management had with other accountants about accounting or auditing matters. Significant Issues Discussed With No significant issues arising from the audit were Management discussed or were the subject of correspondence with management. Difficulties Encountered in Performing the We did not encounter any difficulties in dealing with Audit management during the audit. Letter Communicating Internal Control We did not identify any material weaknesses or and Compliance Matters noncompliance during our audit of the financial statements and major awards that are required to be communicated in accordance with Government Auditing Standards and OMB Circular A-133. Certain Written Communications Between Copies of certain written communications between our Management and Our Firm Firm and the management of the District are attached as Exhibit A. 2 Orange County Sanitation District Summary of Accounting Estimates Year Ended June 30, 2011 Accounting estimates are an integral part of the preparation of financial statements and are based upon management's current judgment. The process used by management encompasses its knowledge and experience about past and current events, and certain assumptions about future events. You may wish to monitor throughout the year the process used to compute and record these accounting estimates. The following describes the significant accounting estimates reflected in the District's June 30, 2011 basic financial statements: Area Accounting Policy Estimation Process Comments Useful Lives of Long- The estimated useful Management reviews We tested the Lived Assets lives of assets for changes in the reasonableness of generally have the useful lives of long- information underlying following ranges: lived assets by management's estimate. sewage collection evaluating prominent Based on our procedures, facilities 50 years; events or changes in we concluded that the sewage treatment circumstances assigned useful lives of facilities 40 years; affecting capital assets capital assets are sewage disposal to determine whether reasonable. facilities 40 years and impairment of a capital general plant and asset has occurred. A administrative facilities capital asset is 11.5 years. These considered impaired if assets are depreciated both the decline in the using the straight-line service utility of the method. Land and capital asset is large in construction in process magnitude and the is not depreciated until event or change in ready for service and circumstances is capitalized. outside the normal life cycle of the capital asset. Common indicators of impairment include evidence of physical damage where effort is needed to restore service utility, enactment or approval of laws or regulations setting standards that the capital asset would not be able to meet, technological development or evidence of obsolescence, a change in the manner or expected duration of use of a capital asset, or construction stoppage. 3 Area Accounting Policy Estimation Process Comments Pension Obligations Pension and For postemployment We tested the and Postemployment postemployment benefits other than reasonableness of the Benefits Other Than benefits other than pensions, management information underlying the Pensions pensions (OPEBs) are utilizes an actuarial actuarial evaluations. recorded at cost based consulting firm to Based on our procedures, on an estimated annual perform an evaluation we concluded that the contribution rate. A using the entry age pension and pension or OPEB asset actuarial cost method. postemployment benefits is recorded if Management reviewed other than pension costs contributions exceed and approved the recorded are reasonable. the annual required actuarial assumptions contribution. A pension and calculations used or OPEB liability is to determine the recorded if postemployment contributions are less benefit costs. than the annual required contribution. For pension obligations, management utilizes Orange County Employees' Retirement System (OCERS) actuaries for its defined benefit plan. Management reviewed and approved the actuarial assumptions and calculations used to determine the pension costs. For the Additional Retiree Benefit Account (ARBA) defined benefit plan obligations, management utilizes an actuarial consulting firm to perform an evaluation using the projected unit credit cost method. Management reviewed and approved the actuarial assumptions and calculations used to determine the ARBA costs. 4 Exhibit A—Certain Written Communications Between Management and Our Firm S N a ORANGE COUNTY SANITATION DISTRICT • December 2, 2011 McGladrey& Pullen, LLP 18401 Von Karman Ave., 50 Floor Irvine, CA 92612 �:n 1 krA CA In connection with your audit of the basic financial statements of the Orange County Vaielc a 92706-7018 Sanitation District(the District)as of and for the year ended June 30, 2011, we confirm Meke Ad*vss that we are responsible for the fair presentation in the financial statements of financial Po.Box 9127 position, changes in financial position, and cash flows in conformity with accounting Fcwtain ter,Ca principles generally accepted in the United States of America. 9272"127 rrww.ocad.com We confirm to the best of our knowledge and belief, as of December 2, 2011 the following Phone representations made to you during your audit. t7141 s82-2411 1. The financial statements referred to above are fairly presented in conformity with Fax accounting principles generally accepted in the United States of America. (714)ee240 3 56 2. We have identified for you all organizations that are a part of this reporting entity or with which we have a relationship, as these organizations are defined in Section 2100 of the Governmental Accounting Standards Board's Codification of min Governmental Accounting and Financial Reporting Standards, that are area component units in which we participated. In that regard, the Orange County Sanitation District Financing Corporation is a blended component unit of the SLOW Park District. There are no organizations for which the nature and significance of their relationship with the District are such that exclusion would cause the reporting i Foutam VWey entity's financial statements to be misleading or incomplete or jointly governed h,seltrin organizations in which we participated. Go-don Gh" 3. We have indicated to you that the District operates as a single proprietary fund. Beech 4. We have property classified all activities. a.v,e Le Mhbne 5. We are responsible for compliance with laws and regulations applicable to the ce Palma District including adopting, approving, and amending budgets. A4,mos 6. We have identified and disclosed to you all laws and regulations that have a > Beach direct and material effect on the determination of financial statement amounts including legal and contractual provisions for reporting specific activities. 7. We have made available to you: sallra Ana a. All financial records and related data of all activities in existence at any sedBeach time during the period covered by your audit Skan an b. All minutes of the meetings of the governing board and committees of ram„ board members or summaries of actions of recent meetings for which ryb pto* minutes have not yet been prepared. *rte Unda 8. We have no knowledge of fraud or suspected fraud affecting the District rlwma Mesa involving: Smviary[hstr-rcx at a. Management or employees who have significant roles in the internal say control. Irwe Rencn b. Others where the fraud could have a material effect on the financial water awns statements. Courxy of Orange We protect public heath and the environment by prohdmg effective wastawawr collection, treatment, and recycling 9. We acknowledge our responsibility for the design and implementation of programs and controls to provide reasonable assurance that fraud is prevented and detected. 10. We have no knowledge of any allegations of fraud or suspected fraud affecting the District received in communications from employees, former employees, analysts, regulators, short sellers, or others. 11. We are aware of no significant deficiencies, including material weaknesses, in the design or operation of internal controls that could adversely affect the District's ability to record, process, summarize, and report financial data. 12. There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices. 13. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. 14. The following have been properly recorded and/or disclosed in the financial statements: a. Guarantees, whether written or oral, under which the District is contingently liable. b. Arrangements with financial institutions involving restrictions on cash balances. c. Security agreements in effect under the Uniform Commercial Code. d. Any other liens or encumbrances on assets or revenues or any assets or revenues which were pledged as collateral for any liability or which were subordinated in any way. e. The fair value of investments. f. Amounts of contractual obligations for construction and purchase of real property or equipment not included in the liabilities or encumbrances recorded on the books. g. Debt issue repurchase options or agreements, or sinking fund debt repurchase ordinance requirements. h. Any liabilities which are subordinated in any way to any other actual or possible liabilities. i. Debt issue provisions. j. All significant estimates and material concentrations known to management which are required to be disclosed in accordance with the AICPA's Statement of Position No. 94-6, Disclosure of Certain Significant Risks and Uncertainties. Significant estimates are estimates at the balance sheet date which could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets for which events could occur which would significantly disrupt normal finances within the next year. k. Risk financing activities. I. The effect on the financial statements of GASB Statement No. 57, OPES Measurements by Agent Employers and Agent Multiple-Employer Plans;GASB Statement No. 60,Accounting and Financial Reporting for Service Concession Arrangements; GASB Statement No. 61, The Financial Reporting Entity. Omnibus—an amendment of GASB Statements No. 14 and No. 34; GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and A/CPA Pronouncements,GASB Statement No.63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position; and GASB Statement No. 64, Derivative Instruments:Application of Hedge Accounting Termination Provisions—an amendment of GASB Statement No. 53 which have been issued, but which we have not yet adopted. m. Deposits and investment securities category of custodial credit risk. n. Arbitrage rebate liabilities. o. Defined pension plan disclosures 15. We are responsible for making the accounting estimates included in the financial statements. Those estimates reflect our judgment based on our knowledge and experience about past and current events and our assumptions about conditions we expect to exist and courses of action we expect to take. In that regard, adequate provisions have been made: a. To reduce receivables to their estimated net collectable amounts. b. For risk retention, including uninsured losses or loss retentions (deductibles)attributable to events occurring through June 30, 2011 and/or for expected retroactive insurance premium adjustments applicable to periods through June 30, 2011. c. For pension obligations and post-retirement benefits other than pensions rendered through June 30, 2011. 16. There are no: a. Communications from grantors, lenders, other funding sources, or regulatory agencies concerning noncompliance with: (1) Statutory, regulatory, or contractual provisions or requirements. (2) Financial reporting practices that could have a material effect on the financial statements. b. Material transactions that have not been properly recorded in the accounting records underlying the financial statements. c. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. In that regard, we specifically represent that we have not been designated as, or alleged to be, a "potentially responsible party" by the Federal Environmental Protection Agency or any equivalent state agencies in connection with any environmental contamination. d. Other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by Statement of Financial Accounting Standards No. 5 and/or GASB Statement No. 10. e. Related-party transactions as defined in Section 2100 of the Governmental Accounting Standards Board's Codification of Governmental Accounting and Financial Reporting Standards. f. Line of credit or similar arrangements. g. Significant leases or material amounts of rental obligations under long-term leases. h. Special and extraordinary items. i. Obsolete, damaged, or excess inventories. j. Investments, intangibles or other assets which have permanently declined in value. k. Material losses to be sustained in the fulfillment of, or from the inability to fulfill, any service commitments. I. Material losses to be sustained as a result of purchase commitments. m. Environmental clean-up obligations. n. Arrangements with financial institutions involving compensating balances. o. Authorized but unissued bonds and/or notes. 17. There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with Statement of Financial Accounting Standards No.5 and/or GASB Statement No.10. 18. We have no direct or indirect, legal or moral, obligation for any debt of any organization, public or private that is not disclosed in the financial statements. 19. We have satisfactory title to all owned assets. 20. We have complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. 21. Net asset components(invested in capital assets, net of related debt; restricted; and unrestricted) are properly classified and, if applicable, approved. 22, Capital assets, including infrastructure assets, are property capitalized, reported, and depreciated. 23. Required supplementary information is properly measured and presented. 24, We have reviewed, approved, and are responsible for overseeing the preparation and completion of the basic financial statements and related notes. 25. The District incurs certain costs that relate to the construction of capital assets. The District capitalizes only those costs that are incremental to the construction of capital assets. In connection with your audit, conducted in accordance with Government Auditing Standards, we confirm: 26. We are responsible for. a. Compliance with the laws, regulations, and provisions of contracts and grant agreements applicable to the District. b. Establishing and maintaining effective internal control over financial reporting. 27. We have identified and disclosed to you all laws, regulations, and provisions of contracts and grant agreements that have a direct and material effect on the determinations of financial statement amounts or other financial data significant to audit objectives. 28. We have a process to track the status of audit findings and recommendations. In our meeting with you on September 1, 2011 we discussed the accounting treatment of certain transactions including, capitalizing preliminary studies costs not associated with specific projects versus expensing these costs; netting the BAB's interest subsidy against interest expense versus recording as non-operating revenue; recording the discount on the prepayment of the OCERS pension liability as other income versus a reduction of pension expense; and recording the amortization of costs of issuance, premiums/disoounts per the straight line method versus the effective rate method.We are committed to implementing your recommendations for accounting for these transactions going forward commencing in FY 2011/2012. 29. There have been no: a. Violations(and possible violations)of laws, regulations, and provisions of contracts and grant agreements whose effects should be considered for disclosure in the auditor's report on noncompliance. b. Fraud, illegal acts,violations of provisions of contracts or grant agreements, or abuse that has been reported. c. Previous financial audits, attestation engagements, performance audits, or other studies related to the objectives of the audit being undertaken and the corrective action taken to address significant findings and recommendations. d. Reported findings, conclusions, or recommendations, as well as our planned corrective actions for the report. In connection with your audit of federal awards conducted in accordance with OMB Circular A-133,Audits of States, Local Governments, and Non-Profit Organizations, we confirm: 30. We are responsible for complying, and have complied,with the requirements of Circular A-133. 31. We have prepared the schedule of expenditures of federal awards in accordance with CircularA-133 and have included expenditures made during the period being audited for all awards provided by federal agencies in the form of grants, federal cost-reimbursement contracts, loans, loan guarantees, property(including donated surplus property, cooperative agreements, interest subsidies, insurance, food commodities, direct appropriations, and other assistance. 32. We are responsible for establishing and maintaining, and have established and maintained, effective internal control over compliance for federal programs that provides reasonable assurance that the District is managing federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on our federal program. 33. We are responsible for complying with the requirements of laws, regulations, and the provisions of contracts and grant agreements related to the District's federal program and have complied, in all material respects, with those requirements. 34. We have identified and disclosed to you the requirements of laws, regulations, and the provisions of contracts and grant agreements that are considered to have a direct and material effect on the major program. 35. We are not aware of any compliance requirements that have varying interpretations. 36. We have made available all contracts and grant agreements(including amendments, if any)and any other correspondence that has taken place with federal agencies or pass-through entities related to our federal program. 37. We have charged costs to federal awards in accordance with applicable cost principles. 38. We have made available to you all documentation related to the compliance requirements, including information related to federal program financial reports and claims for advances and reimbursements. 39. Federal program financial reports and claims for advances and reimbursements are supported by the books and records from which the basic financial statements have been prepared. 40. The copies of federal program financial reports provided to you are true copies of the reports submitted, or electronically transmitted, to the federal agency or pass-through entity, as applicable. 41. We are responsible for and have accurately prepared the summary schedule of prior audit findings to include all findings required to be included by Circular A-133. 42. We were not required to have a Single Audit performed for the year ended June 30, 2009 due to our federal expenditures for that year being less than the$500,000 threshold specified by Circular A-133. 43. We have accurately completed the appropriate sections of the data collection form. 44. We have disclosed all contracts or other agreements with service organizations. 45. There have been no: a. Amounts questioned or known compliance with the requirements of federal awards, including those resulting from other audits or program reviews. b. Subrecipients which receive pass-through assistance as outlined in Circular A-133.We have disclosed to you all communications from service organizations relating to noncompliance at those organizations. c. Prior audit findings by federal awarding agencies and pass-through entities, including all management decisions. d. Communications from service organizations relating to noncompliance at those organizations. e. Instances of known noncompliance occurring subsequent to the period for which compliance is audited. f. Changes in intemal control over compliance or other factors that might significantly affect internal control, including any corrective action taken by management with regard to significant deficiencies(including material weaknesses), have occurred subsequent of the date as of which compliance is audited. 46. In connection with your engagements to perform, in accordance with attestation standards established by the American Institute of Certified Public Accounts, specified agreed-upon procedures with respect to certain records and transactions of the District for the year ended June 30, 2011 for the purpose of determining as to whether OCSD's appropriation limitation calculation was computed in accordance with Article XIIIB of the Constitution of the State of California and whether the District's net tangible worth is in compliance with the Interconnection Facilities Agreement between the Southern California Edison Company and the District,we confirm the following: a. We understand that we have the responsibility for determining the appropriation limitation calculation and the tangible net worth calculation and the selection of the criteria against which the calculations are capable of being evaluated. b. We understand that we have the responsibility for determining that such criteria are appropriate for our purposes. c. There are no known matters contradicting the calculations nor any communication from regulatory agencies affecting the calculations. d. We have made available to you all records and related data relevant to the subject matter and the agreed-upon procedures. e. We have responded fully to all inquiries made to us by you during your engagement. No events or transactions other than those disclosed in the financial statements have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements. During the course of your audit, you may have accumulated records containing data which should be reflected in our books and records. All such data have been so reflected. Accordingly, copies of such records in your possession are no longer needed by us. As of and for the Year Ended June 30, 2011 We believe that the effects of the uncorrected misstatements aggregated by you and summarized below are immaterial, both individually and in the aggregate to the financial statements taken as a whole. For purposes of this representation, we consider items to be material, regardless of their size, if they involve the misstatement or omission of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. Effect—Debit(Credit) Description Assets Liabilities Equity Revenue Evenses Current Year Misstatement • To expense the preliminary survey other assets accounts as they should be expensed as incurred $ (7,079.922) $ $11.501,640 $ $ (4,421,718) • To reclassify BAB s ubsidy rebate received from interest expense to other income (1,607.125) 1.607,125 • To reclassify OCERS discount recorded as other revenue to offset e)pense 1,129,795 (1,129,795) • To adjust interest expense for the overaccrual of Interest as of 6/30/10 for the 2003 COPS - (1,935.500) - 1.935.500 • To adjust COls for the difference between straight-line and the effective Interest method (827,167) - 623,773 203,394 • To adjust unamortized bond premiums for the difference between straight-line and the effective interest method 2,357,035 (2,354,261) (2,774) • To adjust unamortized bond discounts and deferred charges for the difference between straight-line and the effective interest method (3,506.648) 3,190,710 315,938 Total effect $ (7,907,089) $ (1,149.613) 11.026.362 $ (477.330) $ (1,492,330) Current year effect of change in net assets $ (1,969,660) Effect on ending net assets $ 9,056,702 Orange County Sanitation District i mes D. Ruth, General Manager v L/1 Lorenzo Tyner, irector of Finance and Admin. Services /Z,/,/1141 ////o/' ike White, Controller AOL Orange County Sanitation District Compliance Report Year Ended June 30, 2011 Contents Schedule of Expenditures of Federal Awards 1 Notes to Schedule of Expenditures of Federal Awards 2 Independent Auditor's Report on: Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 3-4 Compliance With Requirements that Could Have a Direct and Material Effect On Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 5-6 Schedule of Findings and Questioned Costs 7-8 Summary Schedule of Prior Year Audit Findings 9 Orange County Sanitation District Schedule of Expenditures of Federal Awards Year Ended June 30, 2011 Catalog of Federal Domestic Pass-Through Assistance Entity Identifying/ Federal Federal Grantor/Pass-Through Grantor/Program Title Number Grant Number Expenditures U.S. Environmental Protection Agency Direct Program: Congressionally Mandated Projects Sludge Dewatering and Odor Control Project 66.202 XP-96924401-1 $ 597,355 Total U.S. Environmental Protection Agency $ 597,355 Total expenditures of federal awards $ 597,355 * Denotes major program See Notes to Schedule of Expenditures of Federal Awards. 1 Orange County Sanitation District Notes to Schedule of Expenditures of Federal Awards Note 1. Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule) presents the activity of all federal award programs of the Orange County Sanitation District (the District) for the year ended June 30, 2011. The Schedule includes federal awards received directly from federal agencies. The information in this Schedule is presented in accordance with the requirements of the Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Because the Schedule presents only a selected portion of the operations of the District, it is not intended to, and does not, present the financial position, changes in net assets or cash flows of the District. The District's reporting entity is defined in Note 1 to the District's basic financial statements. Note 2. Summary of Significant Accounting Policies Expenditures on the accompanying Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Note 3. Subrecipients Of the federal expenditures presented in the Schedule, the District did not provide any federal awards to subrecipients for the fiscal year ended June 30, 2011. 2 McGladrey&Pullen,LLP Certified Public Accountants McGladrey Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards To the Board of Directors Orange County Sanitation District Fountain Valley, CA We have audited the financial statements of the Orange County Sanitation District (the District) as of and for the year ended June 30, 2011, and have issued our report thereon dated December 2, 2011. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the District is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the District's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those 3 McGladrey Is the brand under which RSM McGladrey,Inc and McGladrey&Pullen,LLP serve cllents'business needs. Member of RSM International network,a network of The two firms operate as separate legal entities In an alternative practice structure. Independent accounting,tax and consulting firms. provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Board of Directors, management and federal awarding agencies, and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, CA December 2, 2011 4 McGladrey&Pullen,LLP Certified Public Accountants McGladrey Independent Auditor's Report on Compliance With Requirements that Could Have a Direct and Material Effect On Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 To the Board of Directors Orange County Sanitation District Fountain Valley, CA Compliance We have audited the Orange County Sanitation District's (the District) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133, Compliance Supplement, that could have a direct and material effect on the District's major federal program for the year ended June 30, 2011. The District's major federal program is identified in the summary of auditor's results section of the accompanying Schedule of Findings and Questioned Costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the District's management. Our responsibility is to express an opinion on the District's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the District's compliance with those requirements. In our opinion, the District complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, 2011. Internal Control Over Compliance Management of the District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the District's internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over compliance. 5 McGladrey Is the brand under which RSM McGladrey,Inc.and McGladrey&Pullen,LLP serve clients'business needs. Member of RSM International network a network of The two firms operate as separate legal entitles In an alternative practice structure. Independent accounting,tax and consulting firms. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. Schedule of Expenditures of Federal Awards We have audited the basic financial statements of the District, as of and for the year ended June 30, 2011, and have issued our report thereon dated December2, 2011. Our audit was performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by OMB Circular A-133, and is not a required part of the basic financial statements. Such 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. This report is intended solely for the information and use of the Board of Directors, management and federal awarding agencies, and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, CA December 2, 2011 6 Orange County Sanitation District Schedule of Findings and Questioned Costs Year Ended June 30, 2011 I. Summary of Auditor's Results Financial Statements Type of auditor's report issued: Unqualified Internal control over financial reporting: • Material weakness(es) identified? Yes X No • Significant deficiency(ies) identified that are not considered to be material weakness(es)? Yes X None Reported Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major programs: • Material weakness(es) identified? Yes X No • Significant deficiency(ies) identified that are not considered to be material weakness(es)? Yes X None Reported Type of auditor's report issued on compliance for major programs: Unqualified • Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of OMB Circular A-133? Yes X No Identification of major programs: CFDA Numbers Names of Federal Programs 66.202 Congressionally Mandated Projects Dollar threshold used to distinguish between Type A and Type B programs: 300,000 Auditee qualified as low-risk auditee? Yes X No 7 Orange County Sanitation District Schedule of Findings and Questioned Costs (Continued) Year Ended June 30, 2011 II. Financial Statement Findings A. Internal Control Deficiencies None reported. B. Compliance Findings None reported. III. Findings and Questioned Costs for Federal Awards A. Internal Control Deficiencies None reported. B. Compliance Findings None reported. 8 Orange County Sanitation District Summary Schedule of Prior Year Audit Findings Year Ended June 30, 2011 There were no audit findings reported for the fiscal year ended June 30, 2010. 9 McGladrey&Pullen,LLP Certified Public Accountants McGladrey Independent Accountant's Report on Applying Agreed-upon Procedures Board of Directors Orange County Sanitation District Fountain Valley, CA We have performed the procedures enumerated below to the accompanying Appropriations Limit Calculation of the Orange County Sanitation District (District) for the year ended June 30, 2011. These procedures, which were agreed to by the District and the League of California Cities (as presented in the publication entitled Agreed-upon Procedures Applied to the Appropriations Limitation Prescribed by Article XIII-B of the California Constitution), were performed solely to assist the District in meeting the requirements of Section 1.5 of Article XIII-B of the California Constitution. The District's management is responsible for the Appropriations Limit Calculation. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and our findings were as follows: 1. We obtained the completed internal calculations from management and compared the limit and annual adjustment factors included in those calculations to the limit and annual adjustment factors that were adopted by a resolution of the Board of Directors. We also compared the population and inflation options included in the aforementioned calculations to those that were selected by a recorded vote of the Board of Directors. Finding: No exceptions were noted as a result of our procedures. 2. For the accompanying Appropriations Limit Calculation, we added line A, last year's limit, to line E, total adjustments, and compared the resulting amount to line F, this year's limit. Finding: No exceptions were noted as a result of our procedures. 3. We compared the current year information presented in the accompanying Appropriations Limit Calculation to the supporting calculations described in item 1 above. Finding: No exceptions were noted as a result of our procedures. McGladrey Is the brand under which RSM McGladrey,Inc and McGladrey&Pullen,LLP serve cllents'business needs. Member of RSM International network,a network of The two firms operate as separate legal entities In an alternative practice structure. Independent accounting,tax and consulting firms. Orange County Sanitation District Page 2 4. We compared the prior year Appropriations Limit presented in the accompanying Appropriations Limit Calculation to the prior year Appropriations Limit adopted by the Board of Directors during the prior year. Finding: No exceptions were noted as a result of our procedures. We were not engaged to, and did not, conduct an audit, the objective of which would be the expression of an opinion on the accompanying Appropriations Limit Calculation of the District. 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 appropriations limit for the base year, as defined by Article XIII-B of the California Constitution. This report is intended solely for the information and use of the Board of Directors and management of the District, and is not intended to be, and should not be, used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. Irvine, CA December 2, 2011 Orange County Sanitation District Appropriations Limit Calculation Year Ended June 30, 2011 Amount Source A. Last year's limit $ 80,476,278 B. Adjustment factors: 1. Population change 1.0114363 State Finance 2. Per capita change 0.9746000 State Finance Total adjustments [(B.1 x B.2)-1.0] (0.0142542) C. Annual adjustment (1,147,124) (BxA) D. Other adjustments: 1. Lost responsibility(-) - 2. Transfer to private (-) - 3. Transfer to fees (-) - 4. Assumed responsibility(+) - Subtotal - E. Total adjustments (1,147,124) (C+D) F. This year's limit $ 79,329,154 (A+E)