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HomeMy WebLinkAbout11-14-2012 Administration Committee Agenda NOTICE OF MEETING ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT Wednesday, November 14, 2012 — 5:30 P.M. Administration Building 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com A regular meeting of the Administration Committee of the Orange County Sanitation District will be held at the above location, date and time. ADMINISTRATION COMMITTEE MEETING DATES Meetinq Date Board Meeting Dates November 14, 2012 November 28, 2012 December 12, 2012 *December 19, 2012 January 2013 — Dark January 23, 2013 February 13, 2013 February 27, 2013 March 13, 2013 March 27, 2013 April 10, 2013 April 24, 2013 May 8, 2013 May 22, 2013 June 12, 2013 June 26, 2013 July 10, 2013 July 24, 2013 August 2013 — Dark August 28, 2013 September 11, 2013 September 25, 2013 October 9, 2013 October 23, 2013 *Meeting held the third Wednesday of the month. " ' +, Wednesday, November 14, 2012 5:30 P.M. Orange County Sanitation District Y Administration Building Regular Meeting of the Board Room Administration Committee .y - 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: ( Wastewater 101: Solids Processing CONSENT CALENDAR: 1. Approve Minutes of the October 10, 2012, Administration Committee meeting. ACTION ITEMS: 2. Recommend to the Board of Directors to: Receive and file the Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2012, prepared by staff and audited by McGladrey, Certified Public Accountants along with the following reports prepared by McGladrey: A. Report to the Administration Committee B. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. 11/14/12 Administration Committee Agenda Page 1 of 2 INFORMATIONAL ITEMS: 3. Leadership Readiness OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY: ADJOURNMENT: The next Administration Committee meeting is scheduled for Wednesday, December 12, 2012, at 5:30 p.m. 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 jruth(@ocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 rghirelliO)ocsd.com Assistant General Manager Jim Herberg (714)593-7300 iherberg a(�ocsd.com Director of Finance and Lorenzo Tyner (714)593-7550 Itvner(cDocsd.com Administrative Services Director of Human Resources Jeff Reed (714)593-7144 jreedCcDocsd.com 11/14/12 Administration Committee Agenda Page 2 of 2 Glossary of Terms and Abbreviations AQMD Air Quality Management District ASCE American Society of Civil Engineers BOD Biochemical Oxygen Demand CARB California Air Resources Board CASA California Association of Sanitation Agencies CCTV Closed Circuit Television CRWQCB California Regional Water Quality Control Board CWA Clean Water Act CWEA California Water Environment Association EIR Environmental Impact Report EMT Executive Management Team EPA U.S. Environmental Protection Agency FOG Fats, Oils, and Grease FSSD Facilities Support Services Department gpd Gallons per day GWR System Groundwater Replenishment System (also called GWRS) LOS Level of Service MGD Million gallons per day NACWA National Association of Clean Water Agencies NPDES National Pollutant Discharge Elimination System NWRI National Water Research Institute O&M Operations and Maintenance OCCOG Orange County Council of Governments OCHCA Orange County Health Care Agency OCSD Orange County Sanitation District OCWD Orange County Water District OOBS Ocean Outfall Booster Station OSHA Occupational Safety and Health Administration POTW Publicly Owned Treatment Works ppm Parts per million RFP Request For Proposal RWQCB Regional Water Quality Control Board SARFPA Santa Ana River Flood Protection Agency SARI Santa Ana River Inceptor SARWQCB Santa Ana Regional Water Quality Control Board Glossary of Terms and Abbreviations SAWPA Santa Ana Watershed Project Authority SCADA Supervisory Control and Data Acquisition system SCAP Southern California Alliance of Publicly Owned Treatment Works SCAQMD South Coast Air Quality Management District SOCWA South Orange County Wastewater Authority SSMP Sanitary Sewer Management Plan SSO Sanitary Sewer Overflow SWRCB State Water Resources Control Board TDS Total Dissolved Solids TMDL Total Maximum Daily Load TSS Total Suspended Solids WDR Waste Discharge Requirements WEF Water Environment Federation WERF Water Environment Research Foundation Activated-sludge process — A secondary biological wastewater treatment process where bacteria reproduce at a high rate with the introduction of excess air or oxygen, and consume dissolved nutrients in the wastewater. Biochemical Oxygen Demand (BOD) —The amount of oxygen used when organic matter undergoes decomposition by microorganisms. Testing for BOD is done to assess the amount of organic matter in water. Biosolids — Biosolids are nutrient rich organic and highly treated solid materials produced by the wastewater treatment process. This high-quality product can be recycled as a soil amendment on farm land or further processed as an earth-like product for commercial and home gardens to improve and maintain fertile soil and stimulate plant growth. Capital Improvement Program (CIP) — Projects for repair, rehabilitation, and replacement of assets. Also includes treatment improvements, additional capacity, and projects for the support facilities. Coliform bacteria —A group of bacteria found in the intestines of humans and other animals, but also occasionally found elsewhere used as indicators of sewage pollution. E. coli are the most common bacteria in wastewater. Collections system — In wastewater, it is the system of typically underground pipes that receive and convey sanitary wastewater or storm water. Certificate of Participation (COP) — A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. Contaminants of Potential Concern (CPC) — Pharmaceuticals, hormones, and other organic wastewater contaminants. Dilution to Threshold (D/T) — the dilution at which the majority of the people detect the odor becomes the D/T for that air sample. Glossary of Terms and Abbreviations Greenhouse gases — In the order of relative abundance water vapor, carbon dioxide, methane, nitrous oxide, and ozone gases that are considered the cause of global warming ("greenhouse effect"). Groundwater Replenishment (GWR) System — A joint water reclamation project that proactively responds to Southern California's current and future water needs. This joint project between the Orange County Water District and the Orange County Sanitation District provides 70 million gallons a day of drinking quality water to replenish the local groundwater supply. Levels of Service (LOS) — Goals to support environmental and public expectations for performance. NDMA — N-Nitrosodimethylamine is an N-nitrosoamine suspected cancer-causing agent. It has been found in the Groundwater Replenishment System process and is eliminated using hydrogen peroxide with extra ultra-violet treatment. National Biosolids Partnership (NBP) — An alliance of the National Association of Clean Water Agencies (NACWA) and Water Environment Federation (WEF), with advisory support from the U.S. Environmental Protection Agency (EPA). NBP is committed to developing and advancing environmentally sound and sustainable biosolids management practices that go beyond regulatory compliance and promote public participation in order to enhance the credibility of local agency biosolids programs and improved communications that lead to public acceptance. Publicly-owned Treatment Works (POTW) — Municipal wastewater treatment plant. Santa Ana River Interceptor (SARI) Line — A regional brine line designed to convey 30 million gallons per day (MGD) of non-reclaimable wastewater from the upper Santa Ana River basin to the ocean for disposal, after treatment. Sanitary sewer — Separate sewer systems specifically for the carrying of domestic and industrial wastewater. Combined sewers carry both wastewater and urban run-off. South Coast Air Quality Management District (SCAQMD) — Regional regulatory agency that develops plans and regulations designed to achieve public health standards by reducing emissions from business and industry. Secondary treatment — Biological wastewater treatment, particularly the activated-sludge process, where bacteria and other microorganisms consume dissolved nutrients in wastewater. Sludge — Untreated solid material created by the treatment of wastewater. Total suspended solids (TSS) —The amount of solids floating and in suspension in wastewater. Trickling filter — A biological secondary treatment process in which bacteria and other microorganisms, growing as slime on the surface of rocks or plastic media, consume nutrients in wastewater as it trickles over them. Urban runoff — Water from city streets and domestic properties that carry pollutants into the storm drains, rivers, lakes, and oceans. Wastewater—Any water that enters the sanitary sewer. Watershed — A land area from which water drains to a particular water body. OCSD's service area is in the Santa Ana River Watershed. Return to Agenda ADMINISTRATION COMMITTEE Meeting Date To Bd.of Dir. 11/14/12 11/28/12 AGENDA REPORT Item Number Item Number 2 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: ORANGE COUNTY SANITATION DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) FOR THE YEAR END JUNE 30, 2012. GENERAL MANAGER'S RECOMMENDATION Receive and file the Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2012, prepared by staff and audited by McGladrey, Certified Public Accountants, along with the following reports prepared by McGladrey: A. Report to the Administration Committee. B. Report on Internal Controls. C. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. SUMMARY The Sanitation District's independent auditors, McGladrey, have completed their examination of the Sanitation District's financial statements for the year ended June 30, 2012, 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, noted no matters involving the internal control over financial reporting and its operations that they consider to be material weakness. McGladrey 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. Page 1 of 2 PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION None. ATTACHMENTS The following attachment(s) are included in hard copy, and may also be viewed on-line at the OCSD website (www.ocsd.com) with the complete agenda package and attachments: 1. Report to the Administration Committee. 2. Report on Internal Controls. 3. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. 4. Comprehensive Annual Financial Report for the Year Ended June 30, 2012. (separately bound document) JDR:LT:MW:jmf Page 2of2 P - 1 ♦ 1 - 1. Orange County Sanitation District Report to the Administration Committee November 14, 2012 McGladrey McGladrey LLP McGladrey November 14, 2012 Members of the Administration Committee Orange County Sanitation District Fountain Valley, CA We are pleased to present this report related to our audit of financial statements and compliance of the Orange County Sanitation District(the District)for the year ended June 30, 2012. 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. Member of the RSM International network of Independent accounting,tax and consuhing firms. Contents RequiredCommunications.......................................................................................................................1 -2 Summary of Accounting Estimates...................................................................................................3-4 Exhibit A—Certain Written Communications between Management and Our Firm..................................... 5 Representation Letter ■ ■ ■ ■ Required Communications 0 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 and 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 June 7, 2012. 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 Judgments and Accounting Summary information about the process used by 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 items as they relate to the neutrality, consistency, and clarity of the disclosures in the financial statements: • Accounting pronouncements issued, but not yet effective. 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 one reclassifying adjustments by management during the course of the audit and that adjustment was evaluated by us as part of our audit. Uncorrected Misstatements Uncorrected misstatements are summarized in the attached "Summaries 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 Following is a description of significant areas arising Management from the audit that were discussed with management: • Capitalized interest • Goodwill recorded related to IRWD • Feasibility studies related to abandoned capital asset projects 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 that are required to be communicated in accordance with Government Auditing Standards. 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. Orange County Sanitation District Summary of Accounting Estimates Year Ended June 30, 2012 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 their 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, 2012, basic financial statements: EstimationArea Accounting Policy . Useful Lives of Long- The estimated useful Management reviews for We tested the Lived Assets lives of assets generally changes in the useful lives of reasonableness of have the following long-lived assets by information underlying ranges: sewage evaluating prominent events management's estimate. collection facilities 50 or changes in circumstances Based on our years; sewage affecting capital assets to procedures,we treatment facilities 40 determine whether concluded that the years; sewage disposal impairment or change in assigned useful lives of facilities 40 years and useful life of a capital asset capital assets are general plant and has occurred.A capital asset reasonable. administrative facilities is considered impaired if both 11.5 years.These the decline in the service assets are depreciated utility of the capital asset is using the straight-line large in magnitude and the method. Construction in event or change in process is not circumstances is outside the depreciated until ready normal life cycle of the capital for use and put into asset. service. Pension Obligations A pension or OPEB For postemployment benefits We tested the and Postemployment asset is recorded if other than pensions, reasonableness of the Benefits Other Than contributions exceed management utilizes an information underlying Pensions the annual required actuarial consulting firm to the actuarial evaluations. contribution.A pension perform an evaluation using Based on our or OPEB liability is the entry age actuarial cost procedures,we recorded if the method. Management concluded that the contributions are less reviewed and approved the pension and that the annual required actuarial assumptions and postemployment benefits contribution. calculations used to other than pension costs determine the recorded are reasonable. postemployment benefit costs. 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 obligation, 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. Exhibit A - Certain Written Communications Between Management and Our Firm °Ns� SAh�Tq'�°N ORANGE COUNTY SANITATION DISTRICT s We protect public health and the environment by providing effective wastewater collection,treatment,and recycling. � n O -I F�TiNG THE ENV\Qoa November 5, 2012 McGladrey LLP 18401 Von Karman Ave., 5t" Floor Irvine, CA 92612 In connection with your audit of the basic financial statements of Orange Serving County Sanitation District (the Sanitation District) as of and for the year ended Anaheim June 30, 2012, we confirm that we are responsible for the fair presentation in Brea the financial statements of financial position, changes in financial position, Buena Park and cash flows in conformity with accounting principles generally accepted in Cypress the United States of America. Fountain Valley We confirm to the best of our knowledge and belief, as of November 5, 2012 Fullerton the following representations made to you during your audit. Garden Grove 1. The financial statements referred to above are fairly presented in Huntington Beach conformity with accounting principles generally accepted in the United Irvine States of America. La Habra 2. We have identified for you all organizations that are a part of this reporting La Palma entity or with which we have a relationship, as these organizations are defined in Section 2100 of the Governmental Accounting Standards Los Alamitos Board's Codification of Governmental Accounting and Financial Reporting Newport Beach Standards that are component units in which we participated. In that Orange regard, the Orange County Sanitation District Financing Corporation is a Placentia blended component unit of the Sanitation District. There are no organizations for which the nature and significance of their relationship Santa Ana with the Sanitation District are such that exclusion would cause the Seal Beach reporting entity's financial statements to be misleading or incomplete or Stanton jointly organized organizations in which we participated. Tustin 3. We have indicated to you that the Sanitation District operates as a single Villa Park proprietary fund. 'YorbaLinda 4. We have properly classified all activities. Costa Mesa 5. We are responsible for compliance with laws and regulations applicable to Sanitary District the Sanitation District including adopting, approving, and amending Midway City budgets. Sanitary District g Irvine Ranch 6. We have identified and disclosed to you all laws and regulations that have Water District a direct and material effect on the determination of financial statement County of Orange amounts including legal and contractual provisions for reporting specific activities in separate funds. 10844 Ellis Avenue • Fountain Valley,CA 92708-7018 • (714)962-2411 • www.ocsd.com 4�JNjv SAW TgT�oy McGladrey LLP November 5, 2012 • Page 2 9 �2 �N THE E v`Q 7. We have made available to you: a. All financial records and related data of all activities in existence at any time during the period covered by your audit. b. All minutes of the meetings of the governing board and committees of board members or summaries of actions of recent meetings for which minutes have not yet been prepared. 8. We have no knowledge of fraud or suspected fraud affecting the Sanitation District involving: a. Management or employees who have significant roles in the internal control. b. Others where the fraud could have a material effect on the financial statements. 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 Sanitation 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 Sanitation 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. Arrangements with financial institutions involving restrictions on cash balances. b. Security agreements in effect under the Uniform Commercial Code. c. 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. d. The fair value of investments. McGladrey LLP November 5, 2012 • Page 3 � THE EN e. Amounts of contractual obligations for construction and purchase of real property or equipment not included in the liabilities or encumbrances recorded on the books. f. Debt issue repurchase options or agreements, or sinking fund debt repurchase ordinance requirements. g. Debt issue provisions. h. 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. i. Risk financing activities. j. Deposits and investment securities categories of risk. k. Arbitrage rebate liabilities. I. 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, 2012, and/or for expected retroactive insurance premium adjustments applicable to periods through June 30, 2012. c. For pension obligations, post-retirement benefits other than pensions rendered through June 30, 2012. 16.There are no: a. Communications from grantors, lenders, other funding sources, or regulatory agencies concerning noncompliance with: (1) Statutory, regulatory, or contractual provision requirements. V�N9 McGladrey LLP Q November 5, 2012 • Page 4 9 �2 THE ENv`Q (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. Guarantees, whether written or oral, under which the Sanitation District is contingently liable. h. Significant leases or material amounts of rental obligations under long- term leases. i. Liabilities which are subordinated in any way to any other actual or possible liabilities. j. Special and extraordinary items. k. Obsolete, damaged, or excess inventories. I. Investments, intangibles or other assets which have permanently declined in value. m. Material losses to be sustained in the fulfillment of, or from the inability to fulfill, and service commitments. n. Material losses to be sustained as a result of purchase commitments. o. Environmental clean-up obligations. p. Arrangements with financial institutions involving compensating balances. q. Authorized but unissued bonds and/or notes. 4�JNty SANITgT�o9 N9 McGladrey LLP November 5, 2012 • Page 5 90 �? E 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, obligations 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 properly 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.We are aware of and acknowledge the effect on the financial statements of GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position; GASB Statement No. 65, Items Previously Reported As Assets and Liabilities and GASB Statement No. 68, Accounting and Financial Reporting for Pensions-An Amendment of GASB Statement No. 27 which have been issued, but which we have not yet adopted. We have elected to not disclose these in the notes to the financial statements as of June 30, 2012. 26.The Sanitation District incurs certain costs that relate to the construction of capital assets. The Sanitation 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: 27.We are responsible for: a. Compliance with the laws, regulations, and provisions of contracts and grant agreements applicable to the Sanitation District. O�JNjv SANI>•q Troy 9 McGladrey LLP November 5, 2012 • Page 6 a cl/N� THE EN��Qo b. Establishing and maintaining effective internal controls over financial reporting. 28. 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. 29.We have a process to track the status of audit findings and recommendations. In our meeting with you on August 30, 2012 we discussed the accounting treatment of certain transactions including, netting the BAB's interest subsidy against interest expense versus recording as non-operating revenue; recording the amortization of the cost of issuance, premiums/discounts per the straight line method versus the effective rate method; capitalizing interest utilizing the FASB 34 guidance versus FASB 62 guidance; adjusting investment balances for fair market value and variances in the broker statements. Although not GAAP, the Sanitation District prefers netting the BAB's interest subsidy against interest expense to convey the true interest cost the Sanitation District is paying on this debt. We believe it is misleading to the reader when we report the high rate of interest paid on these bonds without netting. These BAB transactions would never have been completed without the Federal interest expense subsidy. Since the netting of this transaction is immaterial to the financial statements taken as a whole, the Sanitation District intends to continue to report BABs interest expense net of the Federal subsidy going forward. In the past, the Sanitation District has reported recording the amortization of the cost of issuance, premiums/discounts per the straight line method versus the GAAP effective rate method. Due to immateriality, the Sanitation District intends to continue recording cost of issuance, premiums/discounts per the straight line method on current debt issues but will begin to record them using the effective rate method on new debt issuances. Also, going forward, the Sanitation District will begin to capitalize interest under both FASB 34 and FASB 62 guidelines. 30.There have been no: a. Violations (and possible violations) of laws, regulations, and provisions of contracts and grant agreements whose effect should be considered for disclosure in the auditor's report on non-compliance. b. Fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that has been reported. O�JNSV SA l rgToy 9 McGladrey LLP November 5, 2012 • Page 7 �2 c. Previous financial audits, attestation agreements 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. Report findings, conclusions, or recommendations, as well as our planned corrective actions for the report. 31.In connection with your engagements to perform, in accordance with attestation standards established by the American Institute of Certified Public Accountants, specified agreed-upon procedures with respect to certain records and transactions of the Sanitation District for the year ended June 30, 2012 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 Sanitation District's net tangible worth is in compliance with the Interconnection Facilities Agreement between the Southern California Edison Company and the Sanitation 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 or 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. 32.We are responsible for determining that significant events or transactions that have occurred since the balance sheet date and through November 5, 2012 have been recognized or disclosed in the financial statements. No events or transactions other than those disclosed in the basic financial statements have occurred subsequent to the balance sheet date and through November 5, 2012 that would require recognition or disclosure in 6�JNjv S ANI Tgroy OWN 9 McGladrey L?_ November 512012 • Page 8 Fc/ THE EN�\Poa the basic financial statements. We further represent that as of November 5, 2012, the basic financial statements were complete in a form and format that complied with accounting principles generally accepted in the United States of America, and all approvals necessary for issuance of the financial statements had been obtained. During the course of your audit, you may have accumulated records containing data that 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, 2012 Below you have provided a listing of what you believe to be uncorrected misstatements. Although we are not in total agreement with this listing, we believe that the effects of this listing 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. GOJNtH SAHITyr/0 q 9 McGladrey LLP November 5, 2012 • Page 9 A 'l HE Effect—Debit(Credit) Description Assets Liabilities Equity Revenue Expenses Reversing Prior Year Misstatements • To adjustCOP premiums,discounts,COls and deferred charges for the difference between straight-line and the effective interest m ethod. $ $ - (1,460,222) $ $ 1,460,222 • To reverse the effects of the preliminary survey other assets accounts which were expensed during the year. 7,079,922 (7,079,922) Current Year Misstatements • To reclassify BAB subs idy rebate received from interest expense to other income. (5,060,034) 5,060,034 • To adjust COP premiums,discounts,COls and deferred charges for the difference between straight-line and the effective interest m ethod. (613,728) (1,075,275) 3,378,006 - (1,689,003) • To adjust for the understatementof investment values based on the year-end statements received byOCSD. 247,288 - (247,288) • To adjustfor the overstatementof investment values based on fair market values. (641,344) - 641,344 • To adjustfor the unamortized goodwill amortization related to the IRWD transaction (2,878,566) 3,536,275 - (657,709) • To record additional capitalized interest on CIP using FASB 34. 655,000 - (655,000) Total effect $ (3,231,350) $ (1,075,275) 12,533,981 $ (4,665,978) $ (3,561,378) Current year effect of change in net assets $ (8,227,356) Effect on ending net assets $ 4,306,625 Totals for the Year Ended June 30, 2012 $3,067,239,027 $1,461,422,094 $1,605,816,933 $352,636,158 $266,241,379 Percentage of Misstatements to Totals -0.11% -0.07% 0.78% -1.32% -1.34% 4oJN.�Y SANITgT�oy 9 McGladrey LLP November 5, 2012 • Page 10 �2 a� THE Orange County Sanitation District 2 es D. Ruth, General Manager Loren o Tyner, Director of Finance and Admin. Services Mike White, Controller M<Gladrey LLP 18401 Von Karman.5"Floor Irvine,CA 92612-8531 O 949.255.6500 F 949.255.5091 McGladrey www.mcgladrey.com ct tb Independent Auditor's Report on Internal Control Over o Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Board of Directors Orange County Sanitation District Fountain Valley, CA We have audited the basic financial statements of the Orange County Sanitation District (the District) as of and for the year ended June 30, 2012, and have issued our report thereon dated November 5, 2012. 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 opinion 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 District's financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of the 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 basic 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 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. wnilx r of the Aw Int?mattonal network of mdeWndent accounting,tax and consulting firms. This report is intended solely for the information and use of the Board of Directors and management and is not intended to be, and should not be, used by anyone other than these specified parties. LG� Irvine, CA November 5, 2012 McGladrey LLP 18401 Von Karman,5"Floor Irvine,CA 92612-8531 O 949.255.6500 F 949.255.5091 ._ M c G l a d rcy www.mcgladrey.com 0 Independent Accountant's Report on P., 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 (the District) for the year ended June 30, 2012. 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. Mr,mtx r of the FSM International network of mckW dont accountsng,tax and cons uhtrg firms 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. G e—locl Irvine, CA November 5, 2012 Orange County Sanitation District Appropriations Limit Calculation Year Ended June 30,2012 Amount Source A. Last year's limit $ 79,329,154 B. Adjustment factors: 1. Population change 1.0069867 State Finance 2. Per capita change 1.0251000 State Finance Total adjustments [(B.1 x B.2)-1.0] 0.0322620 C. Annual adjustment 2,559,319 (BxA) D. Other adjustments: 1. Lost responsibility(-) - 2. Transfer to private(-) - 3. Transfer to fees (-) - 4. Assumed responsibility(+) - Subtotal - E. Total adjustments 2,559,319 (C+D) F. This year's limit $ 81,888,473 (A+E) 2 i i Orange County Sanitation District Comprehensive Annual Financial Report for the Period Ended June 30, 2012 Z Orange ounty, alifornia We're here for you. ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2012 Prepared By: Administrative Services Department Financial Management Division Michael D. White, CPA Controller (THIS PAGE LEFT INTENTIONALLY BLANK) ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30, 2012 Paqe INTRODUCTORY SECTION: Letterof Transmittal..................................................................................................................... i-vii GFOA Certificate of Achievement............................................................................................... viii Boardof Directors........................................................................................................................ ix OrganizationChart....................................................................................................................... x Mapof Service Area.................................................................................................................... xi FINANCIAL SECTION: IndependentAuditors' Report...................................................................................................... 1-2 Management's Discussion and Analysis—Required Supplementary Information...................... 3-8 Basic Financial Statements: Statementof Net Assets..................................................................................................... 10 Statement of Revenues, Expenses, and Changes in Net Assets ..................................... 11 Statementof Cash Flows.................................................................................................... 12 Notes to Basic Financial Statements.................................................................................. 13-37 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, 2012................................................................ 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 (THIS PAGE LEFT INTENTIONALLY BLANK) ONw SANIt4 ORANGE COUNTY SANITATION DISTRICT r. o� ip THE ENJ�Q November 5, 2012 40B•74 Ellis Avenue Fountain Valley,CA The Board of Directors of the 92708-7018 Orange County Sanitation District, Mailing Address Orange County, California P.O. Box 8127 Fountain Valley, CA 92728-8127 Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation District, Orange County, California for the fiscal year ended June 30, 2012. This report includes the v�+.ocad.00m financial position and activity of individual revenue areas, as described within the Governmental Structure Phone below, as of June 30, 2012 and was prepared by the Financial Management Division of the Sanitation (7 7 41 962-241 1 District's Administrative Services Department. Fax (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 enclosed data is accurate in all material respects and is reported in a manner designed to present fairly SBrving the financial position and results of operations of the Sanitation District. All disclosures necessary to Anaheim enable the reader to gain an understanding of the agency's financial activities have been included. Brea Included within the accompanying financial statements are all of the organizations, activities, and functions Buena Park controlled by the Sanitation District's Board of Directors in accordance with the Governmental Accounting Cypress Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting. For the Fountain Valley purpose of this evaluation, control was determined by the Board's responsibility for: (1) adoption of the budget and user charges, (2) taxing authority, and (3) establishment of policies. The reporting entity and Fullerton its services are described in further detail in Note 1 of the financial statements. Garden Grove :Huntington Beach An audit of the books, financial records and transactions of the Sanitation District is conducted annually by Irvine independent certified public accountants. The Sanitation District selected the accounting firm of McGladrey, LLP to perform the audit for the year ended June 30, 2012. The auditors' report on the La Habra Sanitation District's basic financial statements and supplementary information is located on page 1 within La Palms the financial section of this report. This report renders an unqualified opinion on the Sanitation District's Los Alamitos basic financial statements for the year ended June 30, 2012. Newport Beach Orange Management's discussion and analysis (MD&A) immediately follows the independent auditor's report and provides a narrative introduction, overview, and analysis of the basic financial statements. The MD&A Placentia complements this letter of transmittal and should be read in conjunction with it. Santa Ana Seal Beach GOVERNMENTAL STRUCTURE Stanton Tustin The Orange County Sanitation District encompasses the Northern section of Orange County. The Kle Park Sanitation District provides wastewater treatment for an area of the County covering 479 square miles and Yorbe Linda serving a population of approximately 2.5 million, or 81 percent of the County's population. The Sanitation District was originally incorporated in 1954 as nine separate public corporations, or districts. In April of SanitaryDist ct 1998, at the Sanitation District's request, the Board of Supervisors of the County of Orange passed Midway city Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Districts into a new, Sanitary District single sanitation district, to be known as the Orange County Sanitation District, effective July 1, 1998. This Irvine Rench action was recommended to the Board by the Local Agency Formation Commission in order to simplify Water District governance structures, reduce the size of the Board, ease administrative processes, streamline decision- County ofOrange 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, i We protect public health and the environment by 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 572 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 2011-12, greater than 98.8 percent of all 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 2012, the Institute for Economic and Environmental Studies at the California State University Fullerton Mihaylo College of Business and Economics (CSUF) forecasts that the U.S. gross domestic product (GDP) will grow an average of 2.1 percent this year, slow to 1.8 percent in 2013, then rise to 2.7 percent in 2014. The forecast assumes that the U.S. economy will stumble over the next few months as business holds its breath waiting for Washington to act on taxes and the federal deficit and Europe and China to deal with their economic woes. The forecast assumes that Washington will extend all the current Bush tax breaks though the first quarter and delay the major budget cuts scheduled for January 1 before eventually compromising over a combination of tax increases and spending reductions. ii CSUF's forecast reports that Orange County's recovery has recently gathered more strength than the national economy. In particular, after the deep national downturn led the housing sector collapse, the county's housing and construction sectors have shown real signs of a self-sustained, broad based recovery. Housing-related sectors, and construction in particular, were the worst hit sectors during this great recession. This was expected, given that the collapse in the mortgage markets led to an unprecedented decline in home prices, which in turn dramatically precipitated the deeper economic decline. However, CSUF forecasts that although the county will lose 1,500 construction jobs this year, it will add 2,500 workers in that sector in 2013, followed by another 7,000 the following year. Housing permits in Orange County declined steadily from 7,100 in 2007 to 2,200 in 2009, or a year-over year decline of 55.4 percent from 2007 to 2008 and 30.9 percent decline from 2008 to 2009, but have since somewhat recovered to 3,100, or 40.9 percent from 2009 to 2010, and to 4,800, or 54.8 percent from 2010 to 2011, and are now forecasted to rise to 5,200 in 2012, or by 8.3 percent, and to 6,300 in 2013, or by 21.2 percent. Non-residential construction in Orange County fell by 28.2 percent from 2007 to 2008 and by an additional 33.9 percent in 2009, but appears to have recovered from its trough and has been on a steady but moderate path over the second and third quarters of 2012. The CSUF forecast sees Orange County's economy accelerating from an estimated 1.9 percent annual job-growth rate this year to 3.0 percent by 2014. That translate into a projected 26,500 new jobs countywide in 2013, jumping to 42,400 in 2014. In 2009, during the darkest days of the recession, the County lost 110,000 jobs. Although CSUF believes that it will be several years before all the jobs lost during this most recent economic downturn are recovered, the uptrend noticed at the national level and reinforced at the county level will be sustainable unless unexpected events short-circuit the recovery. Recent improvements in the Housing/Construction, Leisure & Hospitality, High-tech, Professional and Business Services, and Retail trade all point to a healthier growth in the near future. Manufacturing likely will be slower to recover because of the slowdown in exports to Europe and China. CSUF believes the Orange County unemployment rate to average 7.9 percent over 2012, 7.3 percent over 2013, and 6.7 percent in 2014. According to the California Association of Realtors, the median price for a detached single-family home in Orange County fell to a low of$442,000 in January 2009 after reaching a high of$775,000 in June 2007. However, in June 2012, the median price came in at $568,000. Compared to year-over-year values, home prices turned positive in June 2012 for the first time in almost two years. The Anderson Center for Economic Research at Chapman University forecasts within their June 2012 Economic and Business Review that housing prices in Orange County, measured by the median price of a single-family home, to show an increase of 2.0 percent in 2012 and by 7.1 percent in 2013. MAJOR INITIATIVES Moving Towards Full Secondary Treatment Standards The Sanitation District's Board of Directors decided in July 2002 to voluntarily give up its modified ocean discharge permit, issued under section 301(h) of the Federal Clean Water Act, which allowed the Sanitation District to discharge a higher level of Suspended Solids and Biochemical Oxygen Demand than otherwise required by the Act if adequate environmental and public health protection was demonstrated. To obtain a renewal of its ocean discharge permit without the modification (often referred to as a"waiver"), the Sanitation District is undertaking a massive capital improvement program ("CIP") of 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 iii 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 six 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. • July 10, 2012—Complete construction of Plant No. 1 secondary treatment expansion. Following is the timeline for the one remaining milestone: • 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 2012, the staff-generated ideas were presented to the Board of Directors during a workshop, where Board Members discussed and deliberated changes and additions to the plan. Driven by the Sanitation District's mission, vision and core values, the 2012 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. Since 2007, 78 percent of the strategic goals identified have been completed. Four new goals were added in the 2012 update and the continuation of ten previous goal was included in the plan. The New Goals include: • Biosolids Management — Update Biosolids Policy to reflect Board of Director's decision to maintain the District's environmental management system that was first certified by the National Biosolids Partnership in 2003, to reaffirm recycling of at least 88 percent of total biosolids with no more than 12 percent deposited in landfills, and to reaffirm the diversity goals pertaining to percentage limits by market, contractor, or facility as originally recommended by the Long Range Biosolids Management Plan. IV • Chemical Sustainability—Develop a diversification model to ensure a reliable and sustainable chemical supply that includes having multiple vendor contracts in place that supports a dependable chemical supply and provides for competitive pricing. • Odor Control Update and Action Plan—Completion of an Odor Control Master Plan to ensure that the District is limiting offsite odor impacts in a comprehensive and cost effective manner and to ensure that the District's investment in current and potentially future process systems will produce the benefits intended. • Workforce Planning and Workforce Development - Integrate workforce planning and workforce development efforts to improve workforce capability, adaptability, efficiency, and accountability. • Business Continuity Planning— Develop a Business Continuity Plan that will define how the District will continue its everyday business functions during an emergency or natural hazard so that services are either uninterrupted or restored rapidly following an interruption. This includes potential financial effects of a crisis as well as having the flexibility to adapt human resource policies to meet the changing needs of employees during an event and to continue providing effective wastewater treatment to the 2.5 million people living in the service area. Continuation of previous Goals: • Full-Cost Recovery: Urban runoff division program — Review the feasibility of implementing 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. • 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 December 2012, the Sanitation District received the 2012 National Environmental Achievement Award in Research and Technology from the National Association of Clean Water its fuel cell demonstration on the Energy and Hydrogen Production project. In April 2012, the Sanitation District received the 2011 Research and Achievement Award from the Santa Ana River Basin Section of the California Water Environment Association for its engine emissions control demonstration project. In June 2012, the Sanitation District received the 2012 Project of the Year Award from Communication Media Management Association for the trickling filter project at Plant No. 2. In July 2012, the Sanitation District received the Gold Peak Performance Award from the National Association of Clean Water Agencies covering Reclamation Plant No. 1 and Treatment Plant No. 2 for v outstanding compliance with the National Pollutant Discharge Elimination System (NPDES) permit limits for 2011-12. ACCOUNTING AND BUDGETARY CONTROLS The Sanitation District's accounting records are maintained on the accrual basis. In developing and evaluating the Sanitation District's accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2) the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the evaluation of costs and benefits requires estimates and judgments by management. We believe that the Sanitation 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 vi 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, 2012 is$69.8 million. 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, 2012, the Sanitation District was in compliance with the Accumulated Funds and Reserves Policy with designated net assets totaled $577 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District's reserve policy: Designated For Cash Flow Contingency $183 million Designated For Self-Insurance 57 million Designated For Capital Improvements 199 million Designated For Debt Service Requirements 138 million Total Designated Net Assets $ 577 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, 2011. This was the eighteenth 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 Lina Hsiao, Accounting Supervisor, 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, C*Zla�elv A 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, 2011 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. ITFO STATES w AIN0 4 A OD��RJiTI01l President sc, C�ICA6a � Executive Director Vlll ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2012 Agency Active Director Alternate Director Cities: Anaheim Gail Eastman Harry Sidhu Brea Don Schweitzer Ron Garcia Buena Park Fred Smith Steve Berry Cypress Prakash Narain Doug Bailey Fountain Valley Larry Crandall Steve Nagel Fullerton Gregory Sebourn Pat McKinley Garden Grove Bill Dalton Kris Beard Huntington Beach Joe Carchio Devin Dwyer Irvine Jeffrey Lalloway Steven Choi La Habra Tom Beamish Rose Espinoza La Palma Mark Waldman Steve Hwangbo Los Alamitos Troy Edgar Gerri Graham-Mejia Newport Beach Steven Rosansky Nancy Gardner Orange Jon Dumitru Denis Bilodeau Placentia Scott Nelson Constance Underhill 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 Rick Barnett 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 Janet Nguyen Shawn Nelson of Supervisors 1X ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30, 2012 Board of General Counsel Office SupportGeneral Manager Assistant Assistant General General Manager Manager Human Administrative Facilities Board Services Resources M Dept. Services Dept. Services Dept. Departmenqtl Administrative FSSD Engineering Public Affairs Services Admin 0&M Admin Admin Financial Equipment- Plant No.1 Planning Mgmt. Rebuild Operations Contracts, Facilities Plant No.2 Project Purchasing& Engineering Operations Management Materials Office Management Collections Mech.Maint. Engineering& Information Construction Technology Asset Instrumentation Management Risk &Electrical Management) Maint Safety Environmental Environmental Compliance Laboratory& Ocean Monitoring X ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2012 LOS ANGELES COUNTY ORANGE UNTY LA _ o °FR HABRA BREA e �F Ro110 o OG�TL COG�TL y YORBA J� FULLERTON PLACENTIA LINDA °mot BUE �so� LA PAR C co PALMA ANAHEIM CYPRESS VILLA © PA It LOS STANTON / ORANGE ;Q ALAMITOS GARDEN ° GROVE %2�7- SEAL BEACH STMINSTER SANTA ANA A NTAIN TUSTIN VA HUNTINGTON Oec aDrnation ,© BEACH lant No. 1 j COSTA - ` �' / ME IRVINE Ocean Pacifrc - ' �CSD � L Treatmen lF Plant No.2 Emergency Pipeline (1.5 mile long) NtWPORT BEACH N OCSD n Offshore Pipeline (10-ft diameter,5 miles long) 0 125 25 5 Miles OCSD Service Area Boundary(463 square miles) Approximately—Map Not To Scale A OCSD Pump Station(15 total) Unincorporated Orange County(white) DISCLAIMER: Map prepared by Orange County Sanitation District.This map is intended for graphical representation only.No level of accuracy is claimed for the base mapping shown hereon and graphics should not be used to obtain coordinate values,bearings or distances. Portions of this derived product contain geographical information copyrighted by Thomas Brothers.All Rights Reserved. SOURCE:OCSO GIS Data.Thomas Brothers 2010 REVISED:01/2012 Xi (THIS PAGE LEFT INTENTIONALLY BLANK) xii McGladrey LLP 18401 Von Karman,50'Floor Irvine,CA 92612-8531 O 949.255.6500 F 949.255.5091 McGladrey 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 (the District) as of and for the years ended June 30, 2012 and 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audits were 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 is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the basic financial statements. The "Combining Area" financial statements have been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information Member of the RSM International network of Independent accounting,tax and oontuMrg firms 1 directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the "Combining Area" financial statements are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The financial statements include partial or summarized prior year comparative information. Such information does not include all of the information required or sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the government's financial statements for the year ended June 30, 2011,from which such partial or summarized information was derived. Irvine, CA November 5,2012 2 Management Discussion and Analysis June 30, 2012 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, 2012. 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, 2012, the assets of the Sanitation District exceeded its liabilities by $1,605.8 million (net assets). Of this amount, $479.9 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 $95.3 million, or 6.3 percent over the prior year. ■ Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $13.3 million, or 0.6 percent over the prior year. ■ Net Assets invested in capital assets, net of related debt decreased $5.1 million, or 0.5 percent. ■ Unrestricted Net Assets increased $100.4 million, or 26.5 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 $95.3 million, or 6.3 percent to $1,605.8 million in FY 2011-12 over the prior year. In comparison, net assets increased $79.4 million, or 5.5 percent, to $1,510.5 million in FY 2010-11 over FY 2009-10. 3 (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2012 2011 (Decrease) (Decrease) Assets Current and other assets $ 653,545 $ 648,994 $ 4,551 0.7% Capital assets, net 2,414,269 2,400,922 13,347 0.6% Total assets 3,067,814 3,049,916 17,898 0.6% Liabilities Current liabilities 276,972 292,307 (15,335) -5.2% Noncurrent liabilities 1,184,450 1,247,123 (62,673) -5.0% Total liabilities 1,461,422 1,539,430 (78,008) -5.1% Net assets: Investment in capital assets, net of related debt 1,125,966 1,131,063 (5,097) -0.5% Unrestricted 479,851 379,423 100,428 26.5% Total net assets $ 1,605,817 $ 1,510,486 $ 95,331 6.3% Current and other assets increased $4.6 million, or 0.7 percent, due primarily to net cash provided by operations of $111.5 million, net non-operating revenues of $20.0 million, and receipt of capital facilities capacity charges of$8.9 million funding offset by $73.9 million in capital improvements and $61.5 million in certificates of participation (COP) debt outlays. Capital assets, net increased $13.3 million, or 0.6 percent, due mostly to the ongoing capital improvement program capital additions of $100.4 million in FY 2011-12 less depreciation of $56.1 million, and the expensing of $27.7 million of feasibility studies previously recorded as capital assets. 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$6.9 million were incurred in FY 2011-12 with total project outlays to date of$252.5 million. The total projected cost is $255.6 million with completion expected in the fall of 2012. 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 $3.3 million were incurred in FY 2011-12 with total project outlays to date of $219.6 million. The total projected cost is $220.2 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 replaces 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 2011-12, $9.5 million of the estimated $257.7 million was incurred bringing the total outlay to date to$251.3 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 2011-12. Net assets invested in capital assets, net of related debt decreased $5.1 million, or 0.5 percent over the prior year primarily as a result of the $13.3 million increase in net capital assets offset by an increase of $18.4 million in net related debt. Unrestricted net assets increased $100.4 million, or 26.5 percent over the prior year, and is due to the overall increase in net assets of $95.3 coupled with the decrease in investment in capital assets net of related debt of$5.1 million. Changes in Net Assets Net assets increased $95.3 million in FY 2011-12, a 6.3 percent increase over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2012 2011 (Decrease) (Decrease) Revenues: Operating revenues Service Charges $ 259,491 $ 244,465 $ 15,026 6.1% Permit and inspection fees 1,030 784 246 31.4% Total operating revenues 260,521 245,249 15,272 6.2% Non-operating revenues Property taxes 67,882 64,307 3,575 5.6% Investment and interest income 15,747 10,092 5,655 56.0% Contrib. from other government 7,723 9,708 (1,985) -20.4% Other 763 1,307 (544) -41.6% Total non-operating revenues 92,115 85,414 6,701 7.8% Total revenues 352,636 330,663 21,973 6.6% Expenses: Operating expense other than depreciation and amortization 172,319 143,388 28,931 20.2% Depreciation and amortization 56,051 49,288 6,763 13.7% Non-operating expense 37,871 68,374 (30,503) -44.6% Total expenses 266,241 261,050 5,191 2.0% Income before capital contributions 86,395 69,613 16,782 24.1% Capital facilitites capacity charges 8,936 9,800 (864) -8.8% Increase in net assets 95,331 79,413 15,918 20.0% Beginning net assets 1,510,486 1,431,073 79,413 5.5% Ending net assets $ 1,605,817 $ 1,510,486 $ 95,331 6.3% 5 Sources of Revenue Functional Expenses June 30,2012 June 30,2012 ❑Collections 2% 19% ° 9% ■Treatment& ❑Interest 5% 16/° io Disposal ■User Fees 11% ❑Depreciation & ❑Other Amortization ❑Taxes Levied 43% ❑Interest Expense 4i21% ■Other 74% 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 2011-12, operating revenues increased $15.3 million, or 6.2 percent over the prior year that is predominately reflective of the $15.0 million, or 6.1 percent increase in service charges. The increase in service charges is primarily due to the 9.4 percent increase in the average sewer user fee rate over the prior year. The $6.7 million, or 7.8 percent increase in non-operating revenues primarily consists of a $5.7 million, or 56.0 percent increase in investment and interest income, a $3.6 million, or 5.6 percent increase in property tax revenues, a $2.0 million, or 20.4 percent decrease in contributions from other governments, and a $0.5 million, or 41.6 percent decrease in other non-operating revenues. The increase in investment and interest income is attributable to higher yields earned on investments and higher cash and investment balances. Yields earned on investments increased from 2.0 percent in FY 2011-12 to 2.8 percent in FY 2011-12 while cash balances increased during this same time period from $561 million to $577 million. The increase in property tax revenue is primarily the result of the increase in total assessed valuation of 1.4 percent over the prior year. The decrease in contributions from other governments is reflective of the decrease in capital contributions from the Irvine Ranch Water District (IRWD) primarily as a result of the overall decrease in capital construction in FY 2011-12 as compared to the prior year. The decrease in other non-operating revenues is mostly reflective of the $400,000 decrease in federal grants earned in the current year in comparison with the prior year. Operating expense before depreciation and amortization increased $28.9 million or 20.2 percent over the prior year. The majority of this increase is attributable to the $29.7 million increase in feasibility studies, of which $27.4 million was incurred in prior years and previously recorded as construction in progress, a Non-depreciable Capital Asset on the Statement of Net Assets. Although not deemed material in prior years, management made the decision to expense the costs in the current year to conform to generally accepted accounting principles in regards to accounting for feasibility studies. Excluding feasibility studies, operating expense before depreciation and amortization decreased $0.7 million or 0.5 percent over the prior year. Operating salaries and benefits totaling $75.6 million increased $2.5 million, or 3.3 percent over the prior year. The operating salaries and benefits costs are part of the overall increase of $0.4 million in total salaries and benefits when including the salaries and benefits 6 capitalized within the capital improvement program. Overall, total Sanitation District salaries and benefits were $90.6 million, a 0.4 percent increase over the prior year total of $90.2 million. This increase is mostly attributable to the $0.8 million, or 1.6 percent increase in regular salaries primarily over the prior year that was primarily driven by existing bargaining agreements as total authorized staffing levels were reduced by 4.0 full time equivalent positions to 637.0 in FY 2011-12. Biosolids disposal cost increased $1.0 million, or 5.8 percent over the prior year as the District continued to move towards full secondary treatment standards by the court consent decree date of December 2012. Somewhat offsetting the increased cost in personnel services and biosolids disposal was the decrease of $2.2 million, or 66.0 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 treatment. Also, repairs and maintenance costs decreased $1.4 million, or 12.6 percent as planned co-generation engine overhauls and digester cleanings were able to be deferred. Non-operating expense decreased $30.5 million, or 44.6 percent and is primarily reflective of the decrease in capital distribution back to the Irvine Ranch Water District (IRWD) in FY 2011-12 of $28.6 million over the prior year, as only$4.6 million of capital distribution was owed back to IRWD in FY 2011- 12, as opposed to $33.3 million in FY 2010-11. The decline in the reduction is reflective of IRWD's volume of sewage flow contributions coming into alignment with their corresponding equity share in the District's treatment plant. Capital Facility Capacity Charges decreased $0.9 million, or 8.8 percent over the prior year due to the continuing effects of the last recession and the continuing decline in construction. Capital Assets At June 30, 2012, the Sanitation District had a net investment of $2.414 billion in capital assets. This amount represents a net increase (including additions and deletions) of $13.3 million or 0.6 percent over the prior year. (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2012 2011 (Decrease) (Decrease) Land $ 15,960 $ 19,217 $ (3,257) -16.9% Construction in Progress 1,271,217 1,258,267 12,950 1.0% Sewage collection facilities 337,561 346,959 (9,398) -2.7% Sewage treatment facilities 660,728 639,790 20,938 3.3% Effluent disposal facilities 42,490 44,136 (1,646) -3.7% Solids disposal facilities 346 356 (10) -2.8% General and administrative facilities 83,088 88,660 (5,572) -6.3% Assets acquired in excess of book value 2,879 3,537 (658) -18.6% Capital assets, net $ 2,414,269 $ 2,400,922 $ 13,347 0.6% Major capital asset additions for the current fiscal year included the following: • $ 9.5 million- Headworks Improvements at Plant No. 2 • $ 8.6 million-Sludge Digester Rehabilitation at Plant No. 1 • $ 7.3 million -66-inch Interplant Effluent Pipeline Rehabilitation • $ 6.9 million- New Secondary Treatment Systems at Plant No. 1 • $ 5.9 million - Bitter Point Pump Station 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, 2012, the Sanitation District had $1.3 billion outstanding in COP debt, a net decrease of $71.2 million, or 5.1 percent over the prior year. Other than the schedule of debt service payments, this decrease is due to the advance-refunding of $89.8 million of Series 2000 variable rate debt and the advance-refunding of $83.3 million of Series 2003 fixed rate debt with the issuance of $147.6 million in fixed rate debt, Series 2011A Wastewater Refunding Revenue Obligations; the advance-refunding of the remaining $108.2 million outstanding Series 2003 fixed rate debt with the issuance of $100.6 million Series 2012A Wastewater Refunding Revenue Obligations. In addition, Revenue Refunding Certificate Anticipation Notes, Series 2011 B Certificates of Anticipation Notes (CANs) fixed rate debt was issued in the amount of$143.2 million in November 2010 to refund the $154.7 million outstanding principal balance of the CANs Series 2010B fixed rate debt. Both Standard and Poor's Corporation and Fitch Ratings reaffirmed their AAA rating of the Orange County Sanitation District in the past fiscal year. The Sanitation District's long-range financing plan is designed to maintain this high rating. Over the next five years, the Sanitation District is projecting an additional $1.1 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. No new debt issuances 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 7.9 percent, an increase from the rate of 9.2 percent a year ago. ■ Inflation for Orange County in 2011 increased 2.7 percent based on the 2011 actual percentage change in the consumer price index according to the June 2012 Economic and Business Review report prepared by Chapman University. ■ The actual rate of return on investments increased from the 2.0 percent earnings rate in FY 2010-11 to 2.8 percent for FY 2011-12. All of these factors were considered in preparing the District's biennium budget beginning July 1, 2012. The Sanitation District's user fee schedule was increased by 10.1 percent for FY 2012-13 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 $27.00, from $267.00 to $294.00. This rate increase was necessary to finance the Sanitation District's cash flow needs as capital improvement outlays alone are projected to be $133.9 million in FY 2012-13 and are projected to total $2.0 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and provide for full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the Sanitation District's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Financial Management Division, Orange County Sanitation District, 10844 Ellis Avenue, Fountain Valley, CA 92708-7018. 8 ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS 9 ORANGE COUNTY SANITATION DISTRICT Statement of Net Assets June 30, 2012 (With Comparative Data for June 30, 2011) 2012 2011 Current assets: Cash and cash equivalents $ 135,014,420 $ 127,573,371 Investments 378,937,214 285,952,014 Accounts receivable, net of allowance for uncollectibles $7,693 9,452,589 10,411,347 Accrued interest receivable 1,576,247 1,296,054 Connection fees receivable 647,485 385,765 Property tax receivable 1,542,223 1,408,477 Inventories 5,596,197 5,366,513 Prepaid expenses 858,826 623,907 Prepaid retirement 14,937,778 14,463,000 Total current assets 548,562,979 447,480,448 Noncurrent assets: Restricted: Cash and cash equivalents 36,541,736 120,419,824 Investments 26,829,427 26,829,427 Accrued interest receivable 239,070 210,010 Non-depreciable capital assets 1,287,176,876 1,277,484,094 Depreciable capital assets, net of accumulated depreciation 1,127,092,227 1,123,437,456 Deferred charges 9,934,078 10,975,310 Due from other governmental agency 30,852,290 36,000,000 Other noncurrent assets, net 10,344 7,079,922 Total noncurrent assets 2,518,676,048 2,602,436,043 Total assets 3,067,239,027 3,049,916,491 Current liabilities: Accounts payable 12,232,536 14,722,600 Accrued expenses 7,410,100 6,654,544 Retentions payable 2,045,987 2,260,426 Interest payable 21,839,400 22,525,700 Due to other governmental agency 47,659,381 57,196,110 Current portion of long-term obligations 185,784,283 188,948,106 Total current liabilities 276,971,687 292,307,486 Noncurrent liabilities: Noncurrent portion of long-term obligations 1,184,450,407 1,247,122,884 Total liabilities 1,461,422,094 1,539,430,370 Net assets: Invested in capital assets, net of related debt Collection system 517,578,982 495,641,055 Treatment and disposal -Land 4,475,751 4,475,751 Treatment and disposal system 1,892,214,370 1,900,804,744 Capital assets related debt (1,288,302,786) (1,269,858,548) Subtotal 1,125,966,317 1,131,063,002 Unrestricted 479,850,616 379,423,119 Total net assets $ 1,605,816,933 $ 1,510,486,121 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, 2012 (With Comparative Data for the Year Ended June 30, 2011) 2012 2011 Operating revenues: Service charges $ 259,490,532 $ 244,464,692 Permit and inspection fees 1,030,329 784,458 Total operating revenues 260,520,861 245,249,150 Operating expenses other than depreciation and amortization: Salaries and benefits 75,641,767 73,112,286 Utilities 7,405,843 6,947,781 Supplies, repairs and maintenance 24,254,601 27,018,195 Contractual services 26,698,372 27,048,501 Directors'fees 145,562 152,377 Meetings and training 742,765 613,697 Feasibility studies 34,198,026 4,536,965 Other 3,232,535 3,958,695 Total operating expenses other than depreciation and amortization 172,319,471 143,388,497 Operating income before depreciation and amortization 88,201,390 101,860,653 Depreciation and amortization 56,051,029 49,288,136 Operating income 32,150,361 52,572,517 Non-operating revenues: Property taxes 67,882,072 64,307,594 Investment and interest income 15,747,493 10,092,102 Contributions from other government 7,722,571 9,708,267 Other 763,161 1,306,771 Total non-operating revenues 92,115,297 85,414,734 Non-operating expenses: Interest 29,438,312 29,129,550 Contributions to other government 4,615,468 33,262,610 Loss on disposal of assets and other 3,817,099 5,981,829 Total non-operating expenses 37,870,879 68,373,989 Income before capital contributions 86,394,779 69,613,262 Capital Contributions; Capital facilities capacity charges 8,936,033 9,800,190 Change in net assets 95,330,812 79,413,452 Total net assets- beginning 1,510,486,121 1,431,072,669 Total net assets-ending $ 1,605,816,933 $ 1,510,486,121 See Accompanying Notes to Basic Financial Statements. 11 ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows For the Year Ended June 30, 2012 (With Comparative Data for the Year Ended June 30, 2011) 2012 2011 Cash flows from operating activities: Receipts from customers and users $ 251,972,581 $ 263,032,782 Payments to employees (73,257,661) (72,478,818) Payments to suppliers (72,465,597) (71,041,781) Net cash provided by operations 106,249,323 119,512,183 Cash flows from noncapital financing activities: Proceeds from property taxes 67,748,326 64,939,187 Proceeds from various resources 729,471 - Net cash provided by noncapital financing activities 68,477,797 64,939,187 Cash flows from capital and related financing activities: Capital facilities capacity charges 8,674,313 10,410,855 Additions to property, plant and equipment (73,861,468) (159,563,286) Disposal of other assets - 1,266,387 Interest paid (51,661,572) (46,543,583) Principal payments on debt obligation (462,635,000) (191,760,000) Proceeds from debt issuances 401,099,196 315,341,085 Debt issuance costs (824,812) (495,978) Net cash(used in)capital and related financing activities (179,209,343) (71,344,520) Cash flows from investing activities: Proceeds from the sale of investments 8,625,518,492 3,745,902,911 Purchases of investments (8,710,267,505) (3,723,593,143) SARI project(advance)/payments 5,147,710 (36,000,000) Interest received 7,646,487 12,409,379 Net cash(used in)investing activities (71,954,816) (1,280,853) Net increase(decrease)in cash and cash equivalents (76,437,039) 111,825,997 Cash and cash equivalents, beginning of year 247,993,195 136,167,198 Cash and cash equivalents, end of year $ 171,556,156 $ 247,993,195 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 32,150,361 $ 52,572,517 Adjustments to reconcile operating income to net cash provided by operations: Depreciation and amortization 56,051,029 49,288,136 Bad debt expense(Net recoveries) (29,691) 17,368 Feasibility study amortization 28,979,182 4,536,965 (Increase)/decrease in operating assets: Accounts receivable 988,449 2,640,967 Inventories 992,447 23,824 Prepaid and other assets (709,697) 625,979 Increase/(decrease)in operating liabilities: Accounts payable (2,490,064) (5,369,395) Accrued expenses 499,985 (605,963) Retentions payable (214,439) 672,440 Due to other governmental agency (9,536,729) 15,142,665 Pension/OPEB payable 360,710 718,305 Compensated absences (212,750) (115,481) Other payable 116,907 (1,037,481) Claims and judgments (696,377) 401,337 Net cash provided by operations $ 106,249,323 $ 119,512,183 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ 8,236,187 $ (2,073,978) Contributions from(to)other government 3,107,103 (23,554,343) Capital facilities capacity contribution 2,184,800 2,492,300 Feasibility studies with no cash effect 21,909,604 4,536,965 See Accompanying Notes to Basic Financial Statements. 12 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 (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, 2012, 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, 2012 in conjunction with the government's financial statements for the year ended June 30, 2011, 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. Operating Plans Each year, OCSD staff prepares an annual operating plan which is adopted by the Board of Directors. The annual operating plan is used to serve as a basis for monitoring financial progress, estimating the levy and collection of taxes, and determining future service charge rates. During the year, these plans may be amended as circumstances or levels of operation dictate. Cash and Cash Equivalents Investments with original maturities of three months or less when purchased 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. Uncollectible receivables were $7,693 at June 30, 2012. Unbilled sewer services through June 30, 2012 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. 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. 14 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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, 2012, net interest costs of $19.1 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. The distribution between current and long-term portions of the liability is based on historical trends. 15 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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 for. 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, 2012, the outstanding commitments with contractors totaled $69.3 million. Self-Insurance Plans For the year ended June 30, 2012, 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 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 16 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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. There are no significant changes in insurance coverage during the fiscal year ended June 30, 2012. 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, 2012 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. Reclassifications Certain non-operating revenues on the Statement of Revenues, Expenses, and Changes in Net Assets as of June 30, 2011 have been reclassified, with no effect on ending total net assets, to be consistent with the classifications adopted as of June 30, 2012. (2) Cash and Investments Cash and investments as of June 30, 2012 are classified within the accompanying Statement of Net Assets as follows: Statement of Net Assets: Current, Unrestricted: Cash and cash equivalents $ 135,014,420 Investments 378,937,214 Subtotal -current, unrestricted 513,951,634 Restricted: Cash and cash equivalents 36,541,736 Investments 26,829,427 Subtotal - restricted 63,371,163 Total cash and cash equivalents and investments $577,322,797 17 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Cash and investments consist of the following as of June 30, 2012: Cash on hand $ 3,000 Deposits with financial institutions 5,152,164 Managed portfolio - cash and investments (details on page 20) 508,796,470 Subtotal - unrestricted cash and investments 513,951,634 Monies held by trustees: Cash and cash equivalents $ 36,541,736 Investment contracts 26,829,427 Subtotal - monies held by trustees 63,371,163 Grand total cash and investments $ 577,322,797 Investments Authorized by the California Government Code and OCSD's Investment Policy The following table identifies the investment types that are authorized by the California Government Code and OCSD's investment policy. This table, and the subsequent tables on pages 19-22 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. Authorized Maximum by OCSD's Maximum Investment Investment Type-Authorized by the Investment Maximum Percentage in a Single California Government Code Policy? Maturity (1)(1) of Portfolio(1) Issuer(l) Local Agency Bonds Yes 5 years No limit No limit U.S. Treasury Obligations Yes 5 years No limit No limit California State Treasury Obligations Yes 5 years No limit No limit U.S. Agency Securities Yes 5 years No limit No limit 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% No limit Repurchase Agreements Yes 1 year No limit No limit Reverse Repurchase Agreements Yes 90 days (2) 5% (2) No limit Corporate Medium-Term Notes Yes 5 years 30% No limit Mutual Funds Yes N/A 15% (2) 10% Money Market Mutual Funds Yes N/A 15% (2) No limit Mortgage Pass-Through Securities/CMO Yes 5 years 20% No limit County Investment Pools Yes N/A No limit No limit Local Agency Investment Fund (LAIF) Yes N/A No limit No limit Notes (1)Restrictions are in accordance with the California Government Code unless indicated otherwise. (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. 18 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Investments Authorized by Debt Agreements The investment of debt proceeds held by trustees is governed by provisions of the debt covenant agreements, rather than the general provisions of the California Government Code or OCSD's investment policy. The following table identifies the investment types that are authorized for investments held by OCSD's debt trustees. This table, and the subsequent tables on pages 20-22 also identifies certain provisions of the debt covenant agreements that address interest rate risk, credit risk, and concentration of credit risk. Maximum Maximum Investment Investment Type -Authorized by Debt Maximum Percentage in a Single Covenant Agreements Maturity of Portfolio Issuer State and Local Agency Bonds 5 years No limit No limit U.S. Treasury Obligations 5 years No limit No limit U.S. Agency Securities 5 years No limit No limit Banker's 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 No limit No limit Corporate Medium-Term Notes 5 years 30% No limit Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% No limit Local Agency Investment Fund (LAIF) N/A No limit No limit Guaranteed Investment Contracts N/A No limit No limit Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment has before maturity, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that OCSD manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary to provide the cash flow and liquidity needed for operations. OCSD monitors the interest rate risk inherent in its managed portfolio by measuring the modified duration of its portfolio. The duration of monies held for shorter 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 maximum maturity for the Money Market Mutual Funds. The money market mutual funds for Blackrock Institutional Fund and the US Bank Money Market Fund are daily liquid funds available on demand. Following is a table which summarizes OCSD's managed portfolio investments by purpose with the modified duration as of June 30, 2012. 19 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Modified Modified Duration Duration Investment Type Fair Value (in years) (in months) Short-Term Portfolio: U.S. Treasury Bills $ 34,572,613 0.399 4.79 U.S. Agency Securities 2,349,789 0.033 0.40 Corporate Medium-term Notes 6,352,350 0.036 0.43 Repurchase Agreement 10,900,000 0.008 0.10 Local Agency Investment Fund 20,668,660 N/A N/A Money Market Mutual Funds 553,723 0.083 1.00 Short-term portfolio subtotal $ 75,397,135 0.260 3.12 Long-Term Portfolio: U.S. Treasury Bills $ 92,162,132 0.776 9.31 U.S. Treasury Notes 92,220,940 6.093 73.12 U.S. Treasury Obligations 3,770,753 1.097 13.16 U.S. Treasury Inflation-Protected Securities (TIPS) 33,965,088 9.866 118.39 U.S. Agency Securities 20,186,264 1.223 14.68 U.S. Govt. Backed Mortgage Pools 466,693 4.538 54.46 Taxable Municipal Bonds 20,965,667 9.432 113.18 Tax-Exempt Municipal Bonds 601,805 13.859 166.31 Corporate Medium-Term Notes 74,068,544 2.335 28.02 Repurchase Agreement 83,100,000 0.008 0.10 Money Market Mutual Funds 844,381 0.081 0.97 Mortgage Pass-Through Securities/CMO 11,047,068 3.356 40.27 Long-term portfolio subtotal $433,399,335 3.268 39.22 Total Portfolio $508,796,470 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, 2012. Fair Value Maturities Cash equivalents held by fiscal agents: Money Market Mutual Funds: Blackrock Institutional Funds $ 86,725 48 days US Bank Money Market Fund 463,906 N/A Local Agency Investment Fund (LAIF) 35,991,105 N/A Investments held by fiscal agents: Guaranteed Investment Agreements: Bayerische Landesbank Girozentrale -2000 COP 9,888,462 August 1, 2016 FSA Capital Management Services LLC-2007A COP 9,518,000 January 30, 2030 Bayerische Landesbank Girozentrale-2009A COP 7,422,965 August 1, 2016 Fair Value of Investments Held by Fiscal Agents $ 63,371,163 20 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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 $17,423,351 including $11,047,068 of mortgage pass-through securities, $5,909,590 of U.S. agency securities, and $466,693 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: 21 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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 $ 256,691,526 U.S.Agency Securities-GNMA 466,693 Subtotal $ 257,158,219 Investments with no legal minimum rating: U.S.Agency Securities(other than GNMA): Rating of AA+(Standard&Poor's) 21,130,439 Rating of A(Standard&Poor's) 1,405,614 Municipal Bonds: Rating of Aaa(Moody's) 1,436,220 Rating of Aa1(Moody's) 1,538,446 Rating of Aa2(Moody's) 1,625,637 Rating of Aa3(Moody's) 3,313,655 Rating of AA- (Standard&Poor's) 3,337,817 Rating of Al(Moody's) 2,643,914 Rating of A2(Moody's) 390,795 Rating of A3(Moody's) 5,407,953 Rating of A- (Standard&Poor's) 1,873,035 Repurchase Agreements: Not rated at fiscal year end 94,000,000 Local Agency Investment Fund (LAIF): Not rated at fiscal year end 56,659,765 Investments with fiscal agents-Guaranteed Investment Contracts: Not rated at fiscal year end 26,829,427 Subtotal 221,592,717 Investments with a legal minimum rating(or its equivalent) of A: Corporate Medium-Term Notes: Rating of AA+(Standard&Poor's) 29,972,740 Rating of A(Standard&Poor's) 3,415,300 Rating of A2(Moody's) 5,016,279 Rating of A3(Moody's)* 8,770,322 Rating of Baal(Moody's)* 8,045,416 Rating of BBB+(Standard and Poor's)* 6,782,615 Rating of Baal(Moody's)* 12,202,045 Rating of BBB(Fitch)* 4,245,082 Rating of Baa3(Moody's)* 1,383,845 Not rated at fiscal year end 587,250 Money Market Mutual Funds: Rating of Aaa (Moody's) 1,398,104 Invested with fiscal agents: Rating of Aaa-mf(Moody's) 86,725 Rating of A+(Standard &Poor's) 463,906 Subtotal 82,369,629 Investments with a legal minimum rating(or its equivalent) of AA: Mortgage Pass-Through Securities/CMO: Rating of Aaa(Moody's) 424,532 Rating of AA+(Standard&Poor's) 9,902,892 Rating of BBB(Fitch)* 107,357 Rating of BB(Fitch)* 612,287 Subtotal 11,047,068 Total $ 572,167,633 *Investment was in compliance with legal requirements at the time it was purchased. 22 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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 Covenant Agreements." OCSD follows whichever guideline is the most restrictive. 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, 2012, 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, 2012. 23 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 (3) Capital Assets Capital asset activity for the year ended June 30, 2012 is as follows: Balance at Balance at June 30,2011 Additions Deletions June 30,2012 Capital assets not depreciated: Cost: Land $ 19,217,480 $ - $ (3,257,921) $ 15,959,559 Construction in progress 1,258,266,614 100,359,573 (87,408,870) 1,271,217,317 Total nondepreciable assets 1,277,484,094 100,359,573 (90,666,791) 1,287,176,876 Depreciable capital assets: Cost: Sewage collection facilities 600,551,475 4,023,461 - 604,574,936 Sewage treatment facilities 1,144,716,082 53,966,552 - 1,198,682,634 Effluent disposal facilities 97,014,820 - - 97,014,820 Solids disposal facilities 3,463,236 - - 3,463,236 General and administrative facilities 209,975,740 1,715,789 (155,928) 211,535,601 Excess purchase price over book value on acquired assets 19,979,000 - - 19,979,000 Subtotal 2,075,700,353 59,705,802 (155,928) 2,135,250,227 Accumulated depreciation: Sewage collection facilities (253,592,256) (13,421,240) - (267,013,496) Sewage treatment facilities (504,926,403) (33,027,793) - (537,954,196) Effluent disposal facilities (52,878,386) (1,646,535) - (54,524,921) Solids disposal facilities (3,107,660) (9,718) - (3,117,378) General and administrative facilities (121,315,466) (7,288,037) 155,928 (128,447,575) Excess purchase price over book value on acquired assets (16,442,725) (657,709) - (17,100,434) Subtotal (952,262,896) (56,051,032) 155,928 (1,008,158,000 Net depreciable assets 1,123,437,457 3,654,770 - 1,127,092,227 Net capital assets $2,400,921,551 $ 104,014,343 $ (90,666,791) $2,414,269,103 Capital asset additions for the fiscal year ended June 30, 2012 are $27.7 million less than the amount deleted from Construction in Progress primarily due to $27.4 million of accumulated costs for feasibility studies that were removed from Construction in Progress and recorded as expense in accordance with generally accepted accounting principles. (4) Long-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30, 2012: Certificates of Arbitrage Compensated Claims and Participation/Notes Net Pension Net OPEB Payable Absences Judgments and Re\tenue Obligation Obligation Obligation Totals Balance,July 1 $ 290,365 $ 7,812,631 $ 2,143,318 $ 1,407,155,000 $ 7,471,180 $1,035,686 $1,425,908,180 Additions 455,420 7,018,904 (297,894) 391,445,000 978,398 884,446 400,484,274 Deletions (338,513) (7,231,654) (398,483) (462,635,000) (367,210) (1,134,925) (472,105,785) Balance,June 30 407,272 7,599,881 1,446,941 1,335,965,000 8,082,368 785,207 1,354,286,669 Due within one year - (6,822,413) (491,870) (178,470,000) (185,784,283) Unamortized(discount) premium 40,439,784 - - 40,439,784 Unamortized deferred amount on refundings - - - (24,491,763) - - (24,491,763) Long-term amount $ 407,272 $ 777,468 $ 955,071 $ 1,173,443,021 $ 8,082,368 $ 785,207 $1,184,450,407 24 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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, 2012 is $407,272. Compensated Absences OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at June 30, 2012 is $7,599,881 with an estimated $6,822,413 to be paid or used within the next fiscal year. Claims and Judgments Payable OCSD is self-insured in a number of areas as described in Note 1. The following is a summary of the change in claims and judgments payable for the years ended June 30, 2012 and 2011: 2011-12 2010-11 Claims and judgments payable at July 1 $2,143,318 $1,741,981 Claims incurred during the fiscal year (297,894) 858,945 Payments on claims during the fiscal year (398,483) 457,608 Claims and judgments payable at June 30 1,446,941 2,143,318 Less: current portion (491,870) 487,470 Total long-term claims and judgments payable $ 955,071 $1,655,848 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, 2012 are summarized as follows: Amount 2000 refunding certificates of participation $ 91,900,000 2007A refunding certificates of participation 92,845,000 2007B certificates of participation 279,250,000 2008A refunding certificates of participation 25,710,000 2008B refunding certificates of participation 26,550,000 2009A certificates of participation 191,265,000 2010A wastewater revenue obligations 80,000,000 2010C wastewater revenue obligations 157,000,000 2011 A wastewater refunding revenue obligations 147,595,000 2011B revenue refunding certificate anticipation notes 143,205,000 2012A wastewater refunding revenue obligations 100,645,000 Total certificates of participation payable $1,335,965,000 25 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Outstanding Certificates of Participation All of the outstanding debt of OCSD is senior lien debt with rate covenants that require a minimum coverage ratio of 1.25. The minimum coverage ratio is the ratio of net annual revenues available for debt service requirements to total annual debt service requirements. As of June 30, 2012, the coverage ratio for senior lien debt was 3.21. August 2000 Refunding Certificates of Participation, Series 2000 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, 2012 was 0.10 percent. Annual principal payments are due on August 1, beginning August 1, 2001. On October 3, 2011, $89,800,000 of the outstanding principal balance of the 2000 series A and B certificates was advance-refunded with the proceeds of the October 3, 2011 wastewater refunding revenue obligations (see below) in a transaction accounted for as an in-substance defeasance. All of the $89.8 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, 2012, this $89,800,000 represents the amount still outstanding on bonds considered defeased. 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. However, OCSD has refunded the remaining outstanding series prior to the expiration of the SBPA, and there were no purchase of any refunding certificates by Lloyds TSB Bank up through the final refunding date (see Note 10). The required reserve amount at June 30, 2012 is $16,793,580. August 2003 Certificates of Participation, Series 2003 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. 26 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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, 2012, this $88,500,000 represents the amount still outstanding on bonds considered defeased. On October 3, 2011, $83,320,000 of the outstanding principal balance of the 2003 certificates was advance-refunded with the proceeds of the October 3, 2011 wastewater refunding revenue obligations (see below) in a transaction accounted for as an in-substance defeasance. All of the $83.3 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, 2012, this $83,320,000 represents the amount still outstanding on bonds considered defeased. On March 22, 2012, $108,180,000 of the outstanding principal balance of the 2003 certificates was advance-refunded with the proceeds of the March 22, 2012 wastewater refunding revenue obligations (see below) in a transaction accounted for as an in-substance defeasance. All of the $108.2 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, 2012, this $108,180,000 represents the amount still outstanding on bonds considered defeased. Mav 2007 Refunding Certificates of Participation, Series 2007A 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, 2012 reserve of $9,518,000 is held by Union Bank, the trustee, and meets the reserve requirement. December 2007 Certificates of Participation, Series 2007B 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, 2012 reserve of$19,838,777 is held by Union Bank, the trustee, and meets the reserve requirement. Mav 2008 Refunding Certificates of Participation, Series 2008A 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. 27 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2012 reserve of $7,723,355 is held by US Bank, the trustee, and meets the reserve requirement. September 2008 Refunding Certificates of Participation, Series 2008B On September 11, 2008, OCSD completed the sale of$27,800,000 of refunding certificates of participation. The certificates were issued to refund the $26,900,000 outstanding principal balance of the 1993 Series certificates of participation. The interest rate on the refunding certificates is fixed and ranges from 2.80 percent to 3.0 percent. Annual principal payments are due on August 1, beginning August 1, 2009. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2012 reserve of $2,782,485 is held by US Bank, the trustee, and meets the reserve requirement. May 2009 Certificates of Participation, Series 2009A On May 7, 2009, OCSD completed the sale of $200,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the certificates is fixed and 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, 2012 reserve of $13,123,671 is held by US Bank, the trustee, and meets the reserve requirement. May 2010 Wastewater Revenue Obligations, Series 2010A On May 18, 2010, OCSD completed the sale of $80,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and 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. December 2010 Wastewater Revenue Obligations, Series 2010C On December 8, 2010, OCSD completed the sale of $157,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and 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 28 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 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. October 2011 Wastewater Refunding Revenue Obligations, Series 2011A On October 3, 2011, OCSD completed the sale of $147,595,000 of wastewater refunding revenue obligations. The obligations were issued to refund $89,800,000 of the outstanding principal balance of 2000 Series A and B refunding certificates of participation, and $83,320,000 of the outstanding principal balance of 2003 certificates of participation. The stated interest rate on the obligations is fixed and ranges from 3 percent to 5 percent. Annual principal payments are due on August 1 and February 1, beginning August 1, 2012. The aggregate difference in debt service between the refunding debt and the refunded debt is a negative amount of approximately $1.3 million. The total future payments for the new debt provide a net present value gain of approximately $10.7 million to refund the old debts in payments. The trust agreement for the revenue obligations does not require the establishment of a reserve. November 2011 Revenue Refunding Certificate Anticipation Notes, Series 2011 B On November 10, 2011, OCSD completed the sale of $143,205,000 of revenue refunding certificate anticipation notes. The notes were issued to refund the $154,665,000 outstanding principal balance of the November 2010 Series B revenue refunding certificate anticipation notes. The interest rate on the notes is fixed at 2.0 percent. The notes will mature on November 9, 2012. OCSD expects the principal and interest on the notes to be paid from proceeds of the sale, prior to the maturity date, of a future series of certificates of participation, notes or other obligations. The aggregate difference in debt service between the refunding debt and the refunded debt is a negative amount of approximately $23,000. The total future payments for the new debt provides a net present value loss of approximately $266,000 to refund the old debt in payments. The trust agreement for the certificates does not require the establishment of a reserve. March 2012 Wastewater Refunding Revenue Obligations, Series 2012A On March 22, 2012, OCSD completed the sale of $100,645,000 of wastewater refunding revenue obligations. The obligations were issued to refund the $108,180,000 outstanding principal balance of the 2003 certificates of participation. The stated interest rate on the obligations is fixed and ranges from 3 percent to 4 percent. Annual principal payments are due on February 1, beginning February 1, 2031. The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $15.3 million. The total future payments for the new debt provide a net present value gain of approximately $15.3 million 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, 2012 Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation, anticipation notes, and revenue obligations as of June 30, 2012, including the Revenue Refunding Certificates of Anticipation Notes, Series 2011 B that currently matures in November 2012, are as follows: There is no future revenue pledged to make the debt service payments. Year Ending Estimated June 30, Principal Interest Total 2013 $ 178,470,000 $ 50,485,349 $ 228,955,349 2014 52,890,000 47,103,304 99,993,304 2015 39,975,000 45,867,118 85,842,118 2016 41,905,000 44,690,257 86,595,257 2017 53,075,000 43,302,740 96,377,740 2018-2022 131,820,000 199,716,491 331,536,491 2023-2027 166,520,000 169,616,160 336,136,160 2028-2032 253,180,000 123,532,507 376,712,507 2033-2037 277,835,000 59,298,519 337,133,519 2038-2042 128,020,000 13,677,675 141,697,675 2043-2044 12,275,000 397,908 12,672,908 Total $ 1,335,965,000 $797,688,028 $ 2,133,653,028 (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, 2012 consisted of the following: June 30, 2012 Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation $2,414,269,103 Outstanding debt issued to acquire capital assets, net of: unamortized bond discount, deferred amount on refundings, and unspent proceeds (1,288,302,786) Subtotal 1,125,966,317 Unrestricted: All other unrestricted 479,850,616 Total Net Assets $ 1,605,816,933 30 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 (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 five 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. 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%, 8.28% - 14.52% and 7.93% - 14.52%, respectively, of their annual compensation to OCERS. OCSD is required to make periodic contributions to OCERS in amounts that are estimated to remain a constant percentage of covered employees' compensation such that, when combined with covered employees' contributions, will fully provide for all covered employees' benefits by the time they retire. For the fiscal years ended June 30, 2012, 2011, and 2010, 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. 31 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 For the Fiscal Year Ending June 30, 2010 June 30, 2011 June 30, 2012 Total Payroll Costs $ 62,934,336 $62,107,324 $ 62,603,878 Payroll Costs of Employees Covered by OCERS 60,593,735 59,787,560 60,419,910 Contributions Requirements: Contributed by Employees 4,317,182 4,422,908 4,566,386 Contributed by the District on Behalf of Employees 2,071,340 2,078,679 2,089,868 Total Employee Required Contribution 6,388,522 6,501,587 6,656,254 District Required Contribution 13,029,795 14,370,158 15,767,050 Total Contribution $ 19,418,317 $20,871,745 $ 22,423,304 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 10.54% 10.87% 11.02% District Required Contribution as a Percent of Covered Payroll 21.50% 24.04% 26.10% Total Contribution as a Percent of all Participating Entities'Contributions 3.61% 3.66% 3.60% 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 188 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 coverage for 2'/z months per year of service (see Note 7—Other Postemployment Benefits). ARBA benefits begin immediately after this benefit ends. For those hired on or after July 1, 1988, ARBA benefits begin immediately upon retirement and continue for life. Employees hired into the OCEA bargaining group after August 1, 2011 are ineligible for this benefit. Funding: There are no employee contributions for this plan; OCSD covers 100% of the cost. An actuarial evaluation was performed as of July 1, 2011, 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 and an inflation rate of 2.5% were used; no 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, 2012 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 trend information follows. Annual Pension Cost Annual Pension Percentage Net Fiscal Cost of APC Pension Year (APC) Contributed Obligation 6/30/10 851,009 31.9% 6,956,975 6/30/11 842,288 39.0% 7,471,180 6/30/12 978,398 37.5% 8,082,368 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 Actuaria UAAL as a Actuarial Actuarial I Value Percentage Valuation Accrued of Unfunded Funded Covered of Covered Date Liability (AAL) Assets AAL (UAAL) Ratio Payroll Payroll 7/1/2005 N/A N/A N/A N/A N/A N/A 7/1/2007 7,395,472 - 7,395,472 - 49,788,835 14.9% 7/1/2009 8,904,499 - 8,904,499 - 57,681,058 15.4% 7/1/2011 10,753,718 - 10,753,718 - 60,419,910 17.8% *Actuarial valuation not performed for this year. The annual pension cost and net pension obligation for the year ended June 30, 2010, 2011 and 2012 were as follows: For the Fiscal Year Ending June 30, 2010 June 30, 2011 June 30, 2012 Annual required contribution $ 946,999 $ 946,999 $ 1,090,849 Interest on net pension obligation 318,871 347,849 373,559 Adjustment to annual required contribution (414,861) (452,560) 486,010 Annual pension cost 851,009 842,288 978,398 Contributions made (271,470) (328,083) (367,210) Increase in net pension obligation 579,539 514,205 611,188 Net pension obligation, beginning of year 6,377,436 6,956,975 7,471,180 Net pension obligation, end of year $ 6,956,975 $ 7,471,180 $ 8,082,368 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, 2012 (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 (7/1/11), there were 593 active employees, 72 retirees paying premiums, and 64 retirees whose premium is fully paid by OCSD. Premiums ranged between $171.43 and $3,368.32 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, 2011, 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 2012-13 fiscal year, and 7.0% 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 2011-12, OCSD contributed $1,134,925 and retirees contributed $520,757 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 years ended June 30, 2012, 2011, and 2010: June 30, 2010 June 30, 2011 June 30, 2012 Annual required contribution $ 819,692 $ 819,692 $ 900,035 Interest on net OPEB obligation 32,792 41,579 51,784 Adjustment to annual required contribution 42,663 54,096 67,373 Annual OPEB cost 809,821 807,175 884,446 Contributions made 634,067 603,074 1,134,925 Increase in net OPEB obligation 175,754 204,101 (250,479) Net OPEB obligation, beginning of year 655,831 831,585 1,035,686 Net OPEB obligation, end of year $ 831,585 $ 1,035,686 $ 785,207 The District's annual OPEB cost contributed and the net OPEB obligation for the years ended 2012, 2011, and 2010 are shown in the following table. 34 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Annual OPEB Cost Percentage Annual of OPEB Fiscal OPEB Actual Cost Net OPEB Year Cost Contributions Contributed Obligation 6/30/10 809,821 634,067 78.3% 831,585 6/30/11 807,175 603,074 74.7% 1,035,686 6/30/12 884,446 1,134,925 128.3% 785,207 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% 7/1/2011 - 10,706,789 10,706,789 0% 60,419,910 17.72% *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 above, 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 7/1/11 actuarial valuation using the Projected Unit Credit cost method. The actuarial assumptions include a 5% investment rate of return (changed from 6% for the 7/1/07 valuation), an annual rate of inflation of 2.5%, and an annual healthcare cost trend rate of 7%. The UAAL is being amortized ratably over 30 years. 35 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Inflation assumptions are included as part of the healthcare cost trend. No benefit increase is anticipated and the benefit is unaffected by changes in salary. (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, 2012, after recognizing current year amortization of$657,709, the unamortized amount of the excess of purchase price over the assets' book value was $2,878,566. Annual Transactions IRWD entered into a separate agreement with Revenue Area 14 on January 1, 1986 whereby IRWD agreed to fund quarterly payments of Revenue Area 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement, which contribution of$3,677,786 was recorded in 2012. 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$4,615,468 to Revenue Area 14 was recognized and reported as contributions to other government in 2012. 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 $4,044,785 solids capital contribution was recorded in 2012. The total amount of joint capital outlay and solids capital contribution is $7,722,571 and is reported as contributions from other government for the year ended June 30, 2012. 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 $47,659,381 as of June 30, 2012. 36 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 Annual Cash Reserve Requirement The cash reserve contribution requirement from IRWD at June 30, 2012; in accordance with Amendment No. 2 to the Agreement between IRWD and OCSD Acquiring Ownership Interests, Assigning Rights, and Establishing Obligations; is $9.8 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. 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. At the time the consent decree was issued, it was estimated that it would take a total of approximately eleven years and additional capital improvement costs of$623 million to reach secondary treatment discharge standards. As of June 30, 2012, remaining construction commitments totaled $164,237. 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, 2012, $36 million has been loaned to OCFCD, of which $5,147,710 has been repaid leaving an outstanding loan balance of$30,852,290 at June 30, 2012. Litigation: Certain claims involving disputed construction costs have arisen in the ordinary course of business. Additionally, the District is a defendant in lawsuits. Although the outcome of these matters is not presently determinable, management does not expect that the resolution of these matters will have a material adverse impact on the financial condition of the District. (10) Subsequent Events Debt Financing Issued: On August 16, 2012, the District issued fixed rate Wastewater Refunding Revenue Obligations, Series 2012B (Series 2012B), in the amount of $66,395,000. The obligations were issued to refund the remaining $91,900,000 of outstanding Refunding Certificates of Participation, Series 2000A and 2000B (Series 2000A and 2000B). The debt was issued at a premium of 37 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2012 $15,965,000. The total proceeds of $82,360,000 along with $9,901,000 in Series 2000A and 2000B reserves were used to refund the entire outstanding Series 2000A and 2000B obligation. The interest rates on the Series 2012B obligations range from 3.00% - 5.00% and the final maturity date is February 1, 2026. 38 ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 39 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Net Assets June 30, 2012 With Comparative Totals for June 30,2011 Revenue Consolidated Totals Area No. 14 Revenue Area 2012 2011 Current assets: Cash and cash equivalents $ 12,520,057 $ 122,494,363 $ 135,014,420 $ 127,573,371 Investments 35,139,324 343,797,890 378,937,214 285,952,014 Accounts receivable, net of allowance for uncollectibles$7,693 - 9,452,589 9,452,589 10,411,347 Accrued interest receivable - 1,576,247 1,576,247 1,296,054 Connection fees receivable - 647,485 647,485 385,765 Property tax receivable - 1,542,223 1,542,223 1,408,477 Inventories - 5,596,197 5,596,197 5,366,513 Prepaid expenses - 858,826 858,826 623,907 Prepaid retirement - 14,937,778 14,937,778 14,463,000 Total current assets 47,659,381 500,903,598 548,562,979 447,480,448 Noncurrent assets: Restricted: Cash and cash equivalents - 36,541,736 36,541,736 120,419,824 Investments - 26,829,427 26,829,427 26,829,427 Accrued interest receivable - 239,070 239,070 210,010 Non-depreciable capital assets 28,190,418 1,258,986,458 1,287,176,876 1,277,484,094 Depreciable capital assets, net of accumulated depreciation 45,887,558 1,081,204,669 1,127,092,227 1,123,437,456 Deferred charges - 9,934,078 9,934,078 10,975,310 Due from other governmental agency - 30,852,290 30,852,290 36,000,000 Other noncurrent assets, net - 10,344 10,344 7,079,922 Total noncurrent assets 74,077,976 2,444,598,072 2,518,676,048 2,602,436,043 Total assets 121,737,357 2,945,501,670 3,067,239,027 3,049,916,491 Current liabilities: Accounts payable - 12,232,536 12,232,536 14,722,600 Accrued expenses 7,410,100 7,410,100 6,654,544 Retentions payable 2,045,987 2,045,987 2,260,426 Interest payable - 21,839,400 21,839,400 22,525,700 Due to other governmental agency 47,659,381 - 47,659,381 57,196,110 Current portion of long-term obligations - 185,784,283 185,784,283 188,948,106 Total current liabilities 47,659,381 229,312,306 276,971,687 292,307,486 Noncurrent liabilities: Noncurrent portion of long-term obligations - 1,184,450,407 1,184,450,407 1,247,122,884 Total liabilities 47,659,381 1,413,762,713 1,461,422,094 1,539,430,370 Net assets: Invested in capital assets, net of related debt: Collection system 19,116,647 498,462,335 517,578,982 495,641,055 Treatment and disposal-Land 406,846 4,068,905 4,475,751 4,475,751 Treatment and disposal system 54,554,483 1,837,659,887 1,892,214,370 1,900,804,744 Capital assets related debt (1,288,302,786) (1,288,302,786) (1,269,858,548) Subtotal 74,077,976 1,051,888,341 1,125,966,317 1,131,063,002 Unrestricted - 479,850,616 479,850,616 379,423,119 Total net assets $ 74,077,976 $ 1,531,738,957 $ 1,605,816,933 $ 1,510,486,121 40 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30,2012 With Comparative Totals for June 30,2011 Revenue Consolidated Totals Area No. 14 Revenue Area 2012 2011 Operating revenues: Service charges $ 6,502,000 $ 252,988,532 $ 259,490,532 $ 244,464,692 Permit and inspection fees 8,767 1,021,562 1,030,329 784,458 Total operating revenues 6,510,767 254,010,094 260,520,861 245,249,150 Operating expenses other than depreciation and amortization: Salaries and benefits 1,292,451 74,349,316 75,641,767 73,112,286 Utilities 194,826 7,211,017 7,405,843 6,947,781 Supplies, repairs and maintenance 840,847 23,413,754 24,254,601 27,018,195 Contractual services 8,023,120 18,675,252 26,698,372 27,048,501 Directors'fees 20,139 125,423 145,562 152,377 Meetings and training 14,301 728,464 742,765 613,697 Feasibility studies 751,953 33,446,073 34,198,026 4,536,965 Other 56,078 3,176,457 3,232,535 3,958,695 Total operating expenses other than depreciation and amortization 11,193,715 161,125,756 172,319,471 143,388,497 Operating income(loss)before depreciation and amortization (4,682,948) 92,884,338 88,201,390 101,860,653 Depreciation and amortization 2,417,617 53,633,412 56,051,029 49,288,136 Operating income(loss) (7,100,565) 39,250,926 32,150,361 52,572,517 Non-operating revenues: Property taxes 1,894,442 65,987,630 67,882,072 64,307,594 Investment and interest income 1,889,475 13,858,018 15,747,493 10,092,102 Contributions from other government 7,722,571 - 7,722,571 9,708,267 Other 10,199 752,962 763,161 1,306,771 Total non-operating revenues 11,516,687 80,598,610 92,115,297 85,414,734 Non-operating expenses: Interest - 29,438,312 29,438,312 29,129,550 Contributions to other government 4,615,468 - 4,615,468 33,262,610 Loss on disposal of assets and other 80,565 3,736,534 3,817,099 5,981,829 Total non-operating expenses 4,696,033 33,174,846 37,870,879 68,373,989 Income(loss)before transfer and capital contributions (279,911) 86,674,690 86,394,779 69,613,262 Capital Contributions: Capital facilities capacity charges - 8,936,033 8,936,033 9,800,190 Change in net assets (279,911) 95,610,723 95,330,812 79,413,452 Total net assets-beginning 74,357,887 1,436,128,234 1,510,486,121 1,431,072,669 Total net assets-ending $74,077,976 $ 1,531,738,957 $ 1,605,816,933 $ 1,510,486,121 41 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Cash Flows For the Year Ended June 30,2012 With Comparative Totals for June 30,2011 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2012 2011 Cash flows from operating activities: Receipts from customers and users $ (3,025,962) $ 254,998,543 $ $ 251,972,581 $ 263,032,782 Payments to employees (1,312,590) (71,945,071) (73,257,661) (72,478,818) Payments to suppliers (9,217,299) (63,248,298) (72,465,597) (71,041,781) Net cash provided by(used in)operations (13,555,851) 119,805,174 106,249,323 119,512,183 Cash flows from noncapital financing activities: Proceeds from property taxes 1,894,442 65,853,884 67,748,326 64,939,187 Proceeds from various resources 34,185 695,286 - 729,471 - Net cash provided by noncapital financing activities 1,928,627 66,549,170 68,477,797 64,939,187 Cash flows from capital and related financing activities: Capital facilities capacity charges - 8,674,313 8,674,313 10,410,855 Additions to property,plant and equipment (2,906,083) (75,411,565) 4,456,180 (73,861,468) (159,563,286) Disposal of property,plant,and equipment 1,349,077 (1,349,077) - Disposal of other assets - - - - 1,266,387 Interest paid - (51,661,572) - (51,661,572) (46,543,583) Principal payments on debt obligation - (462,635,000) - (462,635,000) (191,760,000) Proceeds from debt issuances - 401,099,196 - 401,099,196 315,341,085 Debt issuance costs - (824,812) - (824,812) (495,978) Contribution from other government 3,107,103 - (3,107,103) Net cash provided by(used in)capital and related financing activities 201,020 (179,410,363) (179,209,343) (71,344,520) Cash flows from investing activities: Proceeds from the sale of investments 789,099,505 7,836,418,987 - 8,625,518,492 3,745,902,911 Purchases of investments (783,924,076) (7,926,343,429) (8,710,267,505) (3,723,593,143) SARI project(advance)/payments - 5,147,710 5,147,710 (36,000,000) Interest received 1,125,723 6,520,764 7,646,487 12,409,379 Net cash provided by(used in)investing activities 6,301,152 (78,255,968) (71,954,816) (1,280,853) Net increase(decrease)in cash and cash equivalents (5,125,052) (71,311,987) (76,437,039) 111,825,997 Cash and cash equivalents,beginning of year 17,645,109 230,348,086 247,993,195 136,167,198 Cash and cash equivalents,end of year $12,520,057 $ 159,036,099 $ $ 171,556,156 $ 247,993,195 Reconciliation of operating income(loss)to net cash provided by operating activities: Operating income(loss) $ (7,100,565) $ 39,250,926 $ $ 32,150,361 $ 52,572,517 Adjustments to reconcile operating income(loss)to net cash provided by operations: Depreciation and amortization 2,417,617 53,633,412 - 56,051,029 49,288,136 Bad debt expense(Net recoveries) - (29,691) (29,691) 17,368 Feasibility study amortization 663,826 28,315,356 28,979,182 4,536,965 (Increase)/decrease in operating assets: Accounts receivable - 988,449 988,449 2,640,967 Inventories 992,447 992,447 23,824 Prepaid and other assets (709,697) (709,697) 625,979 Increase/(decrease)in operating liabilities: Accounts payable (2,490,064) (2,490,064) (5,369,395) Accrued expenses 499,985 499,985 (605,963) Retentions payable (214,439) (214,439) 672,440 Due to other governmental agency (9,536,729) - (9,536,729) 15,142,665 Pension/OPEB payable 360,710 360,710 718,305 Compensated absences (212,750) (212,750) (115,481) Other payable 116,907 116,907 (1,037,481) Claims and judgments (696,377) (696,377) 401,337 Net cash provided by operations $(13,555,851) $ 119,805,174 $ $ 106,249,323 $ 119,512,183 Noncash Activities: Unrealized gain(loss)on the fair value of investments $ 763,752 $ 7,472,435 $ 8,236,187 $ (2,073,978) Contributions from(to)other government 3,107,103 - 3,107,103 (23,554,343) Capital facilities capacity contribution - 2,184,800 2,184,800 2,492,300 Feasibility studies with no cash effect 449,203 21,460,401 21,909,604 4,536,965 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 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 -00 $200,000 $0 LQ, 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 o Invested in Capital Assets,Net of Related Debt ■Restricted for Debt Service&Capital Acquisition o Unrestricted Restricted for Invested in Capital Debt Service Assets, Net of &Capital Fiscal Year Related Debt Acquisition Unrestricted Total Net Assets 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 2011-12 1,125,966 - 479,851 1,605,817 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 $283,151 $259,555 $235,959 $212,363 $188,768 $165,172 $141,576 $117,980 $94,384 $70,788 $47,192 $23,596 $0 -$23,596 - 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 DOperating 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 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 11,015 85,414 9,800 2011-12 259,491 1,030 260,521 67,882 15,748 8,485 92,115 8,936 Source: Orange County Sanitation District's Financial Management Division. 45 ORANGE COUNTY SANITATION DISTRICT Expenses by Type (Dollars in Thousands) Last Ten Fiscal Years $230,000 $220,000 $210,000 $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 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 ■Operating Expense oNon Operating Expense Operating Non -Operating Fiscal Salaries& Maint& Depr& Total Interest Total Non- Year Benefits Utilities Other Amort Operating Expense Other Operating 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 63,328 49,288 192,676 29,129 39,245 68,374 2011-12 75,642 7,405 89,271 56,051 228,369 29,438 8,433 37,871 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 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Ending Net Assets by Fiscal Year Fiscal Total Total Change in Beginning Ending Year Revenues Expenses Net Assets Net Assets Net Assets 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 2010-11 340,463 261,050 79,413 1,431,073 1,510,486 2011-12 361,572 266,241 95,331 1,510,486 1,605,817 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 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 2011-12 196 57 181 143 577 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 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 2012-13 294.00 Annual Sewer Service Fees Single Family Residence 350 300 m LL 250 m c 200 c Q E 150 co 100 50 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 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 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% 2011-12 869,709 232.2 96% 516 9.5 4% $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 ■Reside ntial/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 6/30/12 Fiscal Year Ended 6/30/03 Industrial Industrial Permittee %to Total Permittee %to Total Service Service Charge Service Service Charge User Charges Rank Revenue Charges Rank Revenue Stremicks Heritage Foods, LLC $ 958,066 1 0.37% $ 564,646 1 0.64% Kimberly-Clark Worldwide, Inc. 872,777 2 0.34% 244,106 6 0.28% MCP Foods, Inc. 764,660 3 0.29% 309,590 4 0.35% House Foods America Corp. 719,741 4 0.28% 284,033 5 0.32% Pulmuone Wildwood, Inc. 550,742 5 0.21% Dean Foods Co. of CA Inc. 498,750 6 0.19% Schreiber Foods Inc. 428,853 7 0.17% Jazz Semiconductor 382,420 8 0.15% Pepsi-Cola Bottling Group 368,506 9 0.14% Cargill, Inc. 316,631 10 0.12% Alstyle Apparel-A&G Inc. 488,492 2 0.55% Disneyland Resort& Park 374,719 3 0.42% Royalty Carpet Mills, Inc. 211,966 7 0.24% Nor-Cal Beverage Co. Inc. (Main) 191,326 8 0.22% Seven-Up Bottling Company 186,113 9 0.21% Knotts Berry Farm Foods 180,651 10 0.20% $ 5,861,146 2.26% $ 3,035,642 3.43% 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 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating Year (1) Interest Service(3) Expenses(2) Expenses 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 24,030 46,052 70,082 138,085 50.75 2010-11 25,895 49,426 75,321 143,388 52.53 2011-12 14,370 50,975 65,345 172,318 37.92 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 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, 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Operating&Non-operating Revenues: Service Charges,Net of Refunds-Regional $ 77.0 $ 86.0 $ 99.0 $ 132.0 $ 143.8 $ 159.4 $177.4 $ 193.5 $ 213.3 $ 232.2 Service Charges,Net of Refunds-Local - - - - - - 5.6 5.6 5.7 5.7 Industrial Sewer Service Charges 6.3 7.5 10.5 12.2 13.4 12.1 9.9 10.8 10.1 9.5 Revenue Area No.14 Fees 3.2 5.8 6.9 5.3 5.2 7.1 10.3 10.2 21.4 18.0 Ad Valorem Taxes 44.6 46.9 35.8 40.0 60.6 65.2 66.4 64.8 64.3 67.9 Interest Earnings 25.9 6.8 15.1 10.4 22.2 20.2 14.8 19.2 10.1 15.7 Other Revenues 13.5 13.0 6.1 9.2 8.3 6.9 5.8 12.5 5.7 3.6 Total Revenues 170.5 166.0 173.4 209.1 253.5 270.9 290.2 316.6 330.6 352.6 Operating Expenses(1) 79.7 95.4 101.8 105.6 112.2 131.9 164.6 138.1 143.4 172.3 Net Revenues $ 90.8 $ 70.6 $ 71.6 $ 103.5 $ 141.3 $ 139.0 $125.6 $ 178.5 $ 187.2 $ 180.3 Debt Service Requirements Principal Payments 11.0 11.6 12.0 12.8 13.5 11.0 21.3 24.0 25.9 14.4 Interest Payments 11.7 16.8 25.9 29.1 35.3 31.8 36.3 43.1 46.5 51.0 Total Debt Service Requirements $ 22.7 $ 28.4 $ 37.9 $ 41.9 $ 48.8 $ 42.8 $ 57.6 $ 67.1 $ 72.4 $ 65.4 Coverage Ratios 4.00 2.49 1.89 2.47 2.90 3.25 2.18 2.66 2.59 2.76 Ending Reserves(2) $ 394.0 $ 518.0 $ 407.0 $ 385.0 $ 293.0 $ 425.0 $401.0 $ 344.0 $ 420.0 $ 434.0 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, 2012 2011-12 Assessed Valuation(Land&Improvements Only): $269,668,276,190(after deducting 39,022,673,309 Redevelopment Incremental Valuation) OVERLAPPING TAX AND ASSESSMENT DEBT(Based on redevelopment adjusted all property assessed valuation of$273,998,241,405} Total Debt District's Share of 6/30/12 %Applicable(1) Debt 6/30/12 Metropolitan Water District of Southern California $196,545,000 15.170% $ 29,815,877 Coast Community College District 317,803,867 99A62 316,094,082 North Orange County Joint Community College District 206,464,001 96.946 200,158,590 Rancho Santiago Community College District 302,555,660 99.145 299,968,809 Brea-Olinda and Laguna Beach Unified School Districts 51.884,029 99.955&14.918 25,941,403 Garden Grove Unified School District 128,500,160 100. 128.500,160 Los Alamitos Unified School District School Facilities Improvement District No.1 68,721,127 98.823 67,912,279 Newport Mesa Unified School District 246.399,150 100. 246,399,150 Placentia-Yorba Linda Unified School District 268,181,187 98.648 264,555,377 Saddleback Valley Unified School District 131,925,000 11.959 15.776,911 Sarda Ana Unified School District 302,027,117 100. 302,027,117 Tustin Unified School District School Facilities Improvement District No.2002-1 57,675,577 99.955 57,649,623 Tustin Unified School District School Facilities Improvement District No.2008-1 49,000,000 99.955 48,977,950 Anaheim Union High School District 110,073,955 100. 110,073,955 Fullerton Joint Union High School District 55,152,910 90.243 49,771,641 Huntington Beach Union High School District 225,384,998 98.839 222,768,278 School Districts 367,772,752 97.071-100. 366,990,832 City of Anaheim 3,185,000 99.069 3,155,348 Irvine Ranch Water District Improvement Districts 540,820,240 Various 540,818,950 Rossmoor Community Services District Special Tax Obligations 415,000 100. 415,000 Bonita Canyon Community Facilities District No.98-1 38,330,000 100. 38,330,000 Irvine Unified School District Community Facilities Districts 399.750,838 100. 399,750,838 Tustin Unified School District Community Facilities Districts 251,987,675 100. 251,987,675 City of Tustin Community Facilities Districts 78,620,000 100. 78,620,000 Other Community Facilities Districts 372.494,700 98.935-100. 372,414,283 Orange County Assessment Districts 93,328,295 100. 93,328,295 City of Irvine 1915 Act Bonds 807,707,210 100. 807,707,210 Other 1915 Act bonds 20,475,000 100. 20,475,000 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $5,360,384,633 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations $233,751,000 72.722% $ 169,988,402 Orange County Pension Obligations 214,405,353 72.722 155,919,861 Orange County Board of Education Certificates of Participation 16,000,000 72.722 11.635,520 Coast Community College District General Fund Obligations 20,240,000 99A62 20,131,109 Brea-OHmdaUnified School District Certificates of Participation 25,525,000 99.955 25,513,514 Orange Unified School District Certificates of Participation and Benefit Obligations 138,420,000 98287 136,048,866 Placentia-Yorba Linda Unified School District Certificates of Participation 108,410,670 98.648 106,944,958 Santa Arta Unified School District Certificates of Participation 50.672,741 100. 50,672,740 Other Unified School District Certificates of Participation 58,334,337 Various 57,786,089 Union High School District Certificates of Participation 119,409,185 Various 116,545,042 School District Certificates of Participation 63,955,000 Various 63,423,433 City of Anaheim General Fund Obligations 563,032,465 99.069 557,790,633 City of Costa Mesa General Fund Obligations 33,910,000 100_ 33,910,000 City of Garden Grove General Fund Obligations 18,970,000 100. 18,970,000 City ofHuntimgton Beach General Fund and Judgment Obligations 53,814,000 99.974 53.800,009 City of La Habra General Fund Obligations 19,595,000 100. 19,595,000 City of Santa Ana General Fund Obligations 95,015,000 100. 95.015,000 Other City General Fund Obligations 251,692,551 Various 230.012,869 Orange County Sanitation District 0 100. 0 (2) Irvine Ranch Water District Certificates of Participation 77,190,000 90.001 69,471,772 Municipal Water District of Orange County Water Facilities Corporation 12.145,000 67,859 8,241,476 Yorba Linda County Water District Certificates of Participation 8,965,000 97.704 8 759 164 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $2,010,175,457 Less: City of Anaheim self-supporting obligations 546,808,834 Other City self-supporting obligations 32,100,771 MWDOC Water Facilities Corporation(100%self-supporting) 8241. M TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,423,024,376 GROSS COMBINED TOTAL DEBT $7,370,560,090 (3) NET COMBINED TOTAL DEBT $6,783,409,009 (1) Percentage of overlapping agency's redevelopment adjusted all property assessed valuation 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 1.74% 2.73% 2.69% Adjusted All Property Assessed Valuation N/A 2.52% 2.48% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/12: $0 Source: CalifoniaMunicipalStatistics 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 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 2011-12 1,335,965,000 85,300 0.006% 2,472,122 540.41 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) 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 1,816.62 192,676 68,374 245,249 85,414 2011-12 201 1,871.47 228,369 37,871 260,521 92,115 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$2.0 billion out to 2021-22. Total expenses in FY 2011-12 increased $128.9 million, or 93.9 percent since FY 2002-03, 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 43 percent of the increase, primarily due to the increase in the levels of treatment referred to above and an increase of feasibility study in FY 2011-12. Depreciation expense represents another 11 percent of the increase as a result of the previous expansion in capital facilities and the financing associated with the expansion. In FY 2011-12, personnel expenses rose 3.5 percent over the prior year. This increase is mainly due to increases in health insurance and retirement premiums. The full-time equivalent positions authorized decreased by 4 in FY 2011-12. As depicted from the chart above, actual wastewater treatment flows have generally remained between 229 mgd and 243 mgd in the past. Due to unusually dry weather conditions during the last five years, FY 2007-08, FY 2008-09, FY 2009- 10, FY 2010-11 and FY 2011-12 had flows of only 221 mgd, 211 mgd, 196 mgd, 207 mgd and 201 respectively. Source: Orange County Sanitation District. 56 ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years 300 250 200 150 100 - L�q 50 0 lit, Im V 4, 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 aGeneral Management ■Human Resources oAdministrative Services ■Facilities Support Services ■Technical Services ■Engineering ■Operations and Maintenance Fiscal Year Ending June 30, 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 General Management 17 17 17 2 25 30 30 15 15 13 Human Resources 21 25 27 28 19 16 16 17 27 20 Administrative Services 86 91 96 117 83 82 81 92 85 111 Facilities Support Services 54 61 62 62 51 57 68 71 70 84 Technical Services 94 100 112 114 119 109 107 105 102 - Engineering 79 80 95 99 98 93 98 96 112 128 Operations and Maintenance 218 224 220 222 249 247 241 245 230 281 Total FTE's 569 598 629 644 644 634 641 641 641 637 Source: Orange County Sanitation District's Financial Management Division. 57 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced Last Ten Fiscal Years 320,000 270,000 220,000 170,000 100 120,000 70,000 20,000 -Itlk Itttitt) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 o Wet Tonnage ■Dry Tonnage Fiscal Year Wet Tonnage Dry Tonnage 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 2011-12 280,572 47,556 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) 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 2011-12 572 17 372 332 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(1) Last Ten Fiscal Years Total (5) (6) (2) Personal Per Capita Median Public (7) Fiscal Population Income Personal Family School Unemployment Year Estimates (in thousands) Income Income Enrollment Rate 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) 52,478 84,200 502,903 9.2% 2011-12 3,056,000 166,345,500 (4) 54,432 85,300 502,195 7.9% 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, 2012 Population as of January 1, 2012 Anaheim 343,793 Brea 40,932 Buena Park 81,460 Costa Mesa 110,757 Cypress 48,273 Fountain Valley 55,810 Fullerton 137,481 Garden Grove 172,648 Huntington Beach 192,524 Irvine 223,729 La Habra 60,871 La Palma 15,700 Los Alamitos 11,557 Newport Beach 85,990 Orange 138,010 Placentia 51,084 Santa Ana 327,731 Seal Beach 24,354 Stanton 38,498 Tustin 76,567 Villa Park 5,867 Westminister 90,677 Yorba Linda 65,777 Subtotal City(1) 2,400,090 Estimated Population Served in Unincorporated Areas (2) 72,032 2,472,122 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 6/30/12 Fiscal Year Ended 6/30/03 Percentage of Percentage of Number of Total County Number of Total County Employers Employees(2) Rank Employment(3) Employees (2) Rank Employment(4) Walt Disney Co. 22,000 1 1.48% 21,275 1 1.45% University of California, Irvine 21,291 2 1.43% 14,981 3 1.02% County of Orange 17,321 3 1.16% 17,741 2 1.21% St. Joseph Health System 12,048 4 0.81% 9,435 6 0.64% Boeing Co. 7,700 5 0.52% 11,179 4 0.76% BankAmerica Corp. 6,300 6 0.42% 4,813 10 0.33% YUM! Brands Inc. 6,300 7 0.42% Kaiser Permanente 5,968 8 0.40% Target Corp. 5,527 9 0.37% 4,878 9 0.33% Cedar Fair LP 5,200 10 0.35% Albertsons Inc. 9,500 5 0.65% Tenet Healthcare Corp. 8,389 7 0.57% SBC Communications, Inc. 7,100 8 0.48% Total 109,655 7.36% 109,291 7.44% 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 1,491,000 as of June 2012. (4)- Data Source: State of California, Employment Development Department. - Percentage is calculated by dividing employees by total employment of 1,469,800 as of June 2003. 62 ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2012 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: 479 square miles Population Served: 2.5 million Total Miles of Sewers (including force mains): 572 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 96 204 182 182 Plant 2 105 168 150 150 Total 201 3-L2 332 332 Source: Orange County Sanitation District's Financial Management Division. 63 (THIS PAGE INTENTIONALLY LEFT BLANK) 64 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 SANITATION DISTRICT Cash and Investment Portfolio As of June 30,2012 Cost Market Value Net Unrealized Gain/Loss Shares Par Base Base %of Total Base INVESTMENT PORTFOLIO: CASH&CASH EQUIVALENTS(U.S.DOLLAR): CASH EQUIVALENTS $ 104,812.50 $ 104,812.50 $ 26,203.13 0.01% $ (78,609.37) REPURCHASE AGREEMENTS 183,900,000.00 183,900,000.00 183,900,000.00 37.67% SHORT TERM INVESTMENT FUNDS(US REGULATED) 1,371,900.94 1,371,900.94 1,371,900.94 0.28% TREASURY BILLS- LESS THAN 1YR 126,900,000.00 126,734,746.22 126,734,746.22 25.96% PENDING TRADES (86,082,604.70) (86,082,604.70) -17.64% SUBTOTAL-CASH&CASH EQUIVALENTS 312,276,713.44 226,028,854.96 225,950,245.59 46.29% (78,609.37) FIXED INCOME SECURITIES(U.S.DOLLAR): ABS-HOME EQUITY 1,207,623.68 1,094,536.64 1,144,175.94 0.23% 49,639.30 ABS-SMALL BUSINESS ADMINISTRATION 568,100.16 568,100.16 633,408.95 0.13% 65,308.79 ABS-STUDENT LOANS 654,128.78 652,677.87 645,016.00 0.13% (7,661.87) AUTOMOBILES&COMPONENTS 1,545,000.00 1,763,478.45 1,656,147.30 0.34% (107,331.15) BANKING&FINANCE 51,972,000.00 52,254,394.43 50,964,803.64 10.44% (1,289,590.79) CMO-US AGENCIES 111,151.38 111,151.38 111,990.57 0.02% 839.19 COLLATERALIZED MORTGAGE OBLIGATION 753,912.88 755,856.57 764,015.31 0.16% 8,158.74 COMMIT TO PURCHASE FNMA POOLS (3,600,000.00) (3,814,312.50) (3,831,192.00) -0.78% (16,879.50) FDIC GUARANTEED BANK&FINANCE 6,350,000.00 6,467,278.15 6,352,349.50 1.30% (114,928.65) FHLMC MULTICLASS 2,738,964.41 3,008,868.43 3,142,594.30 0.64% 133,725.87 FHLMC POOLS 7,068.15 6,895.87 7,492.52 0.00% 596.65 FNMAPOOLS 5,545,421.90 5,556,349.73 5,926,469.90 1.21% 370,120.17 FNMAREMIC 3,351,705.57 3,403,398.04 3,461,340.90 0.71% 57,942.86 FOOD PRODUCTS 2,600,000.00 2,940,824.00 2,950,994.00 0.60% 10,170.00 GNMA MULTI FAMILY POOLS 450,130.91 449,975.02 466,693.26 0.10% 16,718.24 HEALTH CARE 1,000,000.00 996,290.00 1,035,560.00 0.21% 39,270.00 INFLATION INDEXED SECURITIES 30,574,160.00 33,513,033.57 33,965,088.59 6.96% 452,055.02 INSURANCE 5,610,000.00 4,694,792.00 5,753,211.60 1.18% 1,058,419.60 MUNI-MEDICAL 500,000.00 508,595.00 601,805.00 0.12% 93,210.00 OIL&GAS 100,000.00 100,000.00 100,840.00 0.02% 840.00 TAXABLE MUNICIPALS 17,440,000.00 17,738,875.89 20,965,666.80 4.30% 3,226,790.91 TECHNOLOGY 3,200,000.00 3,200,000.00 3,193,024.00 0.65% (6,976.00) US AGENCIES 16,565,000.00 16,811,275.08 16,618,934.55 3.40% (192,340.53) US GOVERNMENTS 92,600,000.00 92,544,698.42 95,991,693.30 19.67% 3,446,994.88 UTILITY-ELECTRIC 5,097,000.00 5,310,583.61 5,952,997.16 1.22% 642,413.55 UTILITY-TELEPHONE 2,020,000.00 2,084,034.00 2,460,966.00 0.50% 376,932.00 WHOLE LOAN-CMO-COLLATERALIZED MTG OBLIG 1,141,123.67 1,141,118.42 1,141,477.42 0.23% 359.00 SUBTOTAL-FIXED INCOME SECURITIES 250,102,491.49 253,862,768.23 262,177,564.51 53.71% 8,314,796.28 TOTAL INVESTMENT PORTFOLIO $562,379,204.93 479,891,623.19 488,127,810.10 100.00% $81236,186.91 DEMAND DEPOSITS AND CASH ON HAND 5,155,163.91 5,155,163.91 MONIES HELD WITH FISCAL AGENTS 63,371,163.29 63,371,163.29 MONIES WITH THE LOCAL AGENCY INVESTMENT FUND 20,643,482.19 20,668,659.87 TOTAL CASH AND INVESTMENTS $569,061,432.58 $577,322,797.17 Source: BNY Mellon Trust and 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 2002-03 1.00% 0.00% 1.00% 1.71% 2003-04 1.00% 0.00% 1.00% 1.68% 2004-05 1.00% 0.00% 1.00% 1.67% 2005-06 1.00% 0.00% 1.00% 1.65% 2006-07 1.00% 0.00% 1.00% 1.65% 2007-08 1.00% 0.00% 1.00% 1.63% 2008-09 1.00% 0.00% 1.00% 1.64% 2009-10 1.00% 0.00% 1.00% 1.63% 2010-11 1.00% 0.00% 1.00% 1.64% 2011-12 1.00% 0.00% 1.00% 1.64% 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 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 ■Secu red O U nsecu red Percent Change in Fiscal Assessed Year Secured Unsecured Total Value 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% 2011-12 302,526,970 6,163,979 308,690,949 1.43% 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 is reassessed at the purchase price of the property sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above. Consequently,the assessed and estimated values are the same. Source: Orange County Auditor-Controller's Office. 68 ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $_ W7,1 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 OTotal Tax and User Fee Levy ■Total Tax and User Fee Collection Current Tax Total Tax %of Total Tax and User Percent of Delin- and User %of Total O/S Delinquen- Fiscal and User ERAF III Fee Levy quent Fee Collection Delinquen- cies to Tax Year Fee Levy Deduction Collection Collected Collection Collection to Levy cies Levy 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) 2011-12 314,077 - 317,249 101.01 121 317,370 101.05 (3,172) (1.01) Source: Orange County Auditor-Controller's Office. 69 ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange (1) (Dollars In Thousands) Last Ten Fiscal Years Non- Assessed Residential Residential Property Value(2) Constr. (3) Construction (3) Total Fiscal Calendar No. of Construction Year Value Year Value Units Value Value (3) 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 3,091 1,029,407 2,181,336 2010-11 420,751,575 2011 1,300,019 4,807 1,236,973 2,536,992 2011-12 424,769,642 2012 (4) 1,381,116 6,118 1,574,992 2,956,108 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, 2012 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 Liabilitv (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 FINANCIAL MANAGEMENT DIVISION 10844 Ellis Avenue Fountain Valley, California 92708-7018 714.962.2411 www.ocsewers.com 06/30/12 Return to Agenda ADMINISTRATION COMMITTEE Meeting Date To Bd. of Dir. 11/14/12 -- AGENDA REPORT Item Number Item Number 3 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Jeff Reed, Director of Human Resources SUBJECT: LEADERSHIP READINESS GENERAL MANAGER'S RECOMMENDATION Informational Only SUMMARY The Orange County Sanitation District (OCSD) remains vulnerable to turnover in leadership and management positions, and in core wastewater occupations. More than 50% of employees in these leadership and management assignments will be eligible to retire over the next three-years. And, about 40% of OCSD staff employed in core wastewater occupations will be eligible to retire over the same three-year time period, which includes technical lead and journey level positions. Leadership is a critical component to the effective operation of OCSD. Leadership occurs at all levels of the organization. Focusing on leadership readiness will continue to prepare OCSD for additional employee turnover. Turnover rates have grown from the low 3% range in the early 2000s to almost 7.5% presently, with some peaks and valleys in between. From March 2010 through March 2012, almost 90 employees departed OCSD taking nearly 1 ,900 years of knowledge and experience with them. OCSD has been implementing workforce development programs to address the losses of knowledge and experience, and to provide for continuity in OCSD's leadership and management. These programs include: ( Leadership training; ( Leadership academies; ( Succession planning; and, most recently, ( BLAST (Building Leaders, Abilities, and Skills for Tomorrow) program. Page 1 of 4 PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION To prepare for OCSD's future workforce needs, steps continue to be taken to develop a pool of talent within OCSD that will meet the leadership requirements. These efforts are internally focused with the intent that they will have improved external impacts in supporting quality of service delivery. In addition, leadership readiness efforts support the Board's strategic focus on organizational efficiency by anticipating future staffing requirements, advancing beyond replacement planning to succession planning, and augmenting capacity in the face of staff reductions through a culture of learning and talent development. As stated in the summary, leadership programs implemented at OCSD include: ( Leadership training: In order to develop current employees and provide for continuity of leadership, OCSD offers a variety of leadership training opportunities for employees at different levels of the organization. Along with formal leadership academies, OCSD offers bi-monthly leadership competency training courses for interested employees at all levels. Training topics align with OCSD's leadership competencies (attached). Also, the organization continuously monitors knowledge gaps and provides appropriate training as needed. ( Leadership academies: Each year OCSD provides a variety of leadership academies to build the skills of current leaders and potential future leaders. These comprehensive multi-day programs provide fundamental skill development for effectively leading staff, focusing on an array of soft skills. OCSD identifies appropriate academies based on the current needs of the workforce and anticipated future gaps. ( Succession planning: OCSD has a commitment to succession planning in order to have the right person, with the right skills, in the right position, at the right time. Departments have developed succession plans that anticipate projected gaps for each of their leadership positions. Additionally, executive management conducts talent readiness assessments to evaluate staff preparedness for potential future roles and discuss focused development needs. Additional tools are being developed to expand upon succession planning and workforce planning efforts throughout the organization. Page 2 of 4 ( BLAST program: Recently leadership development efforts have been driven through the Building Leaders, Abilities, and Skills for Tomorrow (BLAST) program. The program was created by a steering committee comprised of employees from across the organization with the intent to build a culture of leadership at all levels. BLAST offers a variety of leadership development opportunities such as formal leadership training and academies, coaching and mentoring, job shadowing, cross-training, and other leadership learning events. Over time, the program offerings will evolve based on ongoing evaluation of leadership development needs throughout the organization. CEQA N/A BUDGET / DELEGATION OF AUTHORITY COMPLIANCE N/A Page 3 of 4 Return to Agenda OCSD Leadership Competencies COMPETENCY DESCRIPTION Ability to communicate ideas, thoughts, and facts both verbally and written. Ability to interpret, comprehend, or understand ideas, Communication thoughts, and facts expressed by others. Conveying information using correct grammar, appropriate body language, proper tone and inflection, recognizing verbal and nonverbal cues, and respecting and listening to the audience to effectively communicate ideas. Degree to which an individual can be trusted. Operates in an ethical Integrity/ Honesty manner. Degree of trustworthiness and ethical behavior of an individual with consideration for the knowledge one has of the impact and consequences when making a decision or taking action. Interpersonal Skills Extent to which an individual gets along and interacts positively with (Working with Others) co-workers. Degree and style of understanding and relating to others. Conflict Management Ability to effectively resolve disputes among others. Manages disagreements. Methods and style of dealing with disagreements. Requires the ability to remain impartial and unbiased. Team Leadership Ability to effectively manage and guide group efforts. Includes providing appropriate level of feedback concerning group process. Teaching Others Overall concern for the developmental level of an individual or group. Takes steps to explain and provide guidance. Decisiveness Degree to which an individual successfully determines, follows, and persists with a timely course of action. Requires the consideration of multiple factors and influences in making decisions. The concurrent management of projects, time, self, and other Planning and Evaluation resources including prioritizing, planning, goal setting, and coordinating with respect to goals and objectives. Ability to create and follow a set path in order to achieve a goal. Ability to determine the effectiveness of a given plan. Problem Solving The identification of various types of problems along with the creating of workable solutions. Requires the identification and analysis of problems, evaluation of alternatives, and provision of solutions. The extent to which one plans, prioritizes, sets goals, establishes Goal &Task Management standards, coordinates tasks, shows concern for deadlines, and tracks progress with respect to personal performance. Includes the ability to perform under pressure and in stressful situations. Level of concern for own effort and initiative. Refers to effort an employee will display during a particular task. The extent that an Effort& Initiative individual will work and take action without specific direction and without being monitored. Also refers to the degree that an individual is a self-starter, motivated, and is a risk-taker. Vision Understanding of how an organization must change in light of internal and external trends and influences. Organizational Awareness Understanding of the formal and informal structures within an organization, and the ability to operate effectively within them. Career Specific Expertise Extent to which an individual possesses and applies job-related knowledge in the completion of work tasks and activities. Includes knowledge gained through formal and informal education or training. Page 4of4