Town of Hillsborough
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2006
TABLE OF CONTENTS
INTRODUCTORY SECTION
Letter of Transmittal ----------------------------------------------------------------------------------- 1
GFOA Certificate of Achievement ------------------------------------------------------------------- 6
CSFMO Certificate of Award ------------------------------------------------------------------------- 7
Organizational Chart and Principal Officials ------------------------------------------------------ 8
FINANCIAL SECTION
Independent Auditors’ Report ------------------------------------------------------------------------ 9
Management’s Discussion and Analysis ---------------------------------------------------------- 11
Basic Financial Statements:
Government- wide Financial Statements:
Statement of Net Assets -------------------------------------------------------------------- 21
Statement of Activities ---------------------------------------------------------------------- 22
Fund Financial Statements:
Balance Sheet - Governmental Funds -------------------------------------------------- 23
Statement of Revenues, Expenditures and Changes in Fund
Balances – Governmental Funds ------------------------------------------------------- 24
Reconciliation of the Statement of Revenues, Expenditures
and Changes in Fund Balances of Governmental Funds to
the Statement of Activities ---------------------------------------------------------------- 25
Statement of Net Assets – Proprietary Funds ----------------------------------------- 26
Statement of Revenues, Expenses and Changes in Fund Net
Assets – Proprietary Funds -------------------------------------------------------------- 27
Statement of Cash Flows – Proprietary Funds ---------------------------------------- 28
Notes to the Financial Statements ------------------------------------------------------------- 29
Required Supplementary Information:
Schedule of Funding Progress – Employees Retirement System --------------------- 47
Schedule of Revenues, Expenditures and Changes in Fund
Balances – Budget and Actual – General Fund ------------------------------------- 48
Schedule of Revenues, Expenditures and Changes in Fund
Balances – Budget and Actual – Police and Fire Special Tax Fund ----------- 49
Note to Required Supplementary Information ---------------------------------------------- 50
Combining Statements and Individual Fund Schedules:
Nonmajor Governmental Funds:
Combining Balance Sheet – Nonmajor Governmental Funds -------------------------- 51
Combining Statement of Revenues, Expenditures and Changes in
Fund Balances – Nonmajor Governmental Funds ----------------------------------- 52
Schedule of Revenues, Expenditures and Changes in Fund
Balances – Budget and Actual
Gas Tax Fund --------------------------------------------------------------------------------- 53
Measure “ A” Fund ---------------------------------------------------------------------------- 54
Police Grants Fund -------------------------------------------------------------------------- 55
Capital Assets Used in the Operation of Governmental Funds:
Comparative Schedules by Source ------------------------------------------------------ 57
Schedule by Function and Activity ------------------------------------------------------- 58
Schedule of Changes by Function and Activity --------------------------------------- 59
STATISTICAL SECTION
Net Assets by Component ----------------------------------------------------------------------- 61
Changes in Net Assets --------------------------------------------------------------------------- 62
Governmental Activities Tax Revenues by Source ---------------------------------------- 63
Fund Balances of Governmental Funds ----------------------------------------------------- 64
Changes in Fund Balances --------------------------------------------------------------------- 65
Assessed Values of Taxable Property -------------------------------------------------------- 66
Property Tax Rates -------------------------------------------------------------------------------- 67
Principal Property Taxpayers ------------------------------------------------------------------- 68
Property Tax Levies and Collections ---------------------------------------------------------- 69
Ratio of Outstanding Debt by Type ------------------------------------------------------------ 70
Computation of Direct and Overlapping Debt ----------------------------------------------- 71
Legal Debt Margin Information ----------------------------------------------------------------- 72
Schedule of Enterprise Funds Bond Coverage -------------------------------------------- 73
Water and Sewer Rates -------------------------------------------------------------------------- 74
Demographic and Economic Statistics ------------------------------------------------------- 75
Principal Employers ------------------------------------------------------------------------------- 76
Full- Time Equivalent City Government Employees by Function ----------------------- 77
Operating Indicators by Function --------------------------------------------------------------- 78
Capital Assets Statistics by Function ---------------------------------------------------------- 79
INTRODUCTORY SECTION
2
initially included a series of large estates, some of which, over time, were divided into the now
existing mix of large estate parcels, acreage and minimum one- half acre lots. The Town is
located west of Highway 101 and El Camino Real and east of Highway 280 within a short
commute to San Francisco and minutes from San Francisco International Airport. The
community location offers excellent weather and a geographic advantage to its residents.
Greenbelt canyons are located throughout the community’s hilly topography. The community is
well known for its trees and rural nature.
The community residents provide a commendable level of support to the municipal government
and individual departments through a number of advisory bodies, a community beautification
foundation, enhanced communication through a quarterly newsletter, an annual holiday party for
the employees, and other forms of recognition. The residents work diligently at maintaining the
historical and strong family- based community values. Hillsborough’s community based school
system receives many awards and consistently provides high scholastic achievement. There are
several private schools located in the community.
The Town currently has a land area of approximately 6.23 square miles and a population of
10,965. It is empowered to levy a property tax on both real and personal property located within
its boundaries. The Town has also approved a public safety special tax designated for public
safety operations and capital expenditures including paramedic and fire automatic aid response
programs, and a voter- approved ½ % sales tax designated for streets and road purposes.
The Town operates under the council- manager form of government. Policy- making and
legislative authority are vested in the governing city council, which consists of a mayor, a vice-mayor
and three council members. Council members are elected to overlapping four- year terms,
in even numbered years. The Council members select the Mayor and Vice- Mayor every year.
The Council is responsible among other things, for passing ordinances, adopting the budget,
appointing commission and board members and hiring the City Manager and the City Attorney.
The City Manager is responsible for carrying out the policies and ordinances of the governing
council, for overseeing the day- to- day operations of the Town, and for appointing the heads of the
town departments.
The Town of Hillsborough provides a full range of services, including police and fire protection,
construction and maintenance of streets and other infrastructure, sanitation services, delivery of
water service and certain recreational activities and other community services.
The annual budget serves as the foundation for the Town of Hillsborough’s financial planning and
control. The Town’s departments are required to submit requests for appropriation to the City
Manager who uses these requests as the starting point for developing a proposed budget. Prior
to June 30 of each year, the City Manager submits to the City Council a proposed operating
budget for review. The Council holds public hearings and a final budget is adopted on or before
June 30.
The appropriated budget is prepared by fund, function, and department. The department heads
may make transfers of appropriations within a department. The City Manager may transfer
budgeted amounts within any fund. Any revisions that alter the total expenditures of any fund
must be approved by the City Council. The legal level of budgetary control ( i. e., the level at which
expenditures may not legally exceed appropriations) is the fund level.
Budget- to- actual comparisons are provided in this report for each individual governmental fund
for which an appropriated annual budget has been adopted. For the general fund and another
major governmental fund, this comparison is presented on pages 48 and 49 as part of the
required supplementary information. For governmental funds other than the major funds, with
appropriated annual budgets, this comparison is presented in the governmental fund subsection
of this report from pages 53 through 55.
3
Factors Affecting Financial Condition
The information presented in the financial statements is perhaps best understood when it is
considered from the broader perspective of the specific environment within which the Town
operates.
Local economy. The Town which heavily relies on property taxes and construction permit
revenues is experiencing the normal change in demographics as older long- term residents are
replaced with younger families. This change has continued to provide modest increases to
revenues through increased assessed value and residential construction permits. Though, house
sales in the area is expected to go down, based on both recent and long- term trends ( 8.15%
average increase in the last 10 years), property tax revenue is projected to continue increasing by
5% annually.
Long- term financial planning.
Like most cities in the peninsula, the town, faced with rising benefits- related personnel costs, has
been careful in managing expenses and studying ways in sustaining fiscal viability. Most
recently, the Town addressed these challenges by the following preventive measures:
1. Combined fire services with the City of Burlingame with cost savings in excess of $ 1.8 million
a year for the citizens of Burlingame and Hillsborough.
2. Vacant positions were left unfilled and are slowly funded as funds become available.
3. Diversified revenue base by implementing user cost recovery goals ensuring that Town is
reimbursed actual costs for services delivered to consumers other than the general public.
4. Deferred regular transfers to fund vehicle and equipment replacement and the unfunded
liability for retirees’ health insurance costs.
5. Implemented other reductions in various areas and was proactive in seeking additional
revenue sources in the forms of grants and combined services with other municipalities.
The Town continues to face rising costs in areas of health insurance, retirement and workers’
compensation costs. Like other governments, the Town seeks to find some relief from double
digit increases in these areas in the recent years. The graphs below show the dramatic increases
of these costs since FY 99/ 00:
$ 0
$ 500
$ 1,000
$ 1,500
$ 2,000
$ 2,500
Thousands
00 01 02 03 04 05 06 07
Health & Other Insurances - All Funds
Active Retirees
$ 0
$ 500
$ 1,000
$ 1,500
$ 2,000
$ 2,500
$ 3,000
$ 3,500
$ 4,000
Thousands
00 01 02 03 04 05 06 07
Retirement & Workers' Compensation Costs - All Funds
Retirement Costs Workers' Comp
Most recently, the Town’s scheduled transfers to the asset replacement fund and the Other Post
Employment Benefits ( OPEB) fund have been funded only based on available funds.
As in the past, Town management will be closely monitoring these costs to ensure that it
continues to be fiscally prudent while maintaining the usual high level of service to its citizens
4
despite these costs. The Town is committed to an ongoing program of productivity
improvements. It is proud of its ability to cut costs without adversely impacting the level of
service. With the help of the citizen volunteers that make up the Financial Advisory Committee, it
will continue to look for efficiencies in the delivery of services.
Cash management policies and practices. The Town’s cash and investments are managed on
a pooled basis invested mostly in treasuries and the State’s Local Agency Investment Fund
( LAIF). The average investment portfolio was $ 34 million in fiscal year 2005- 2006. Investment
earnings totaled $ 1,344,752 for the fiscal year ended June 30, 2006 earning an average return of
approximately 3.97%.
Risk management. The town has a limited risk management program for liability and workers’
compensation. The Town is in a public- entity risk pool for workers compensation that is self-insured
for claims up to $ 250,000. Claims in excess of $ 250,000 are insured up to $ 6.1 million.
The Town is self- insured for general liability claims up to $ 50,000 and claims in excess of the self-insurance
retention are insured up to $ 10 million through another public- entity risk pool.
The risk management program of the Town focuses on proactive identification of exposures to
eliminate any potential impacts to public safety and welfare. This is accomplished through the
effective monitoring of the Town programs, particularly those departments with higher risk
exposures, and by providing clear guidance to correct identified exposure.
Pension and other post- employment benefits. The Town provides retirement benefits through
a defined benefit pension plan offered by the public agency portion of the California Public
Employees Retirement System ( CalPERS), an agent multiple- employer public employee plan.
Each year, an independent actuary engaged by CalPERS calculates the amount of the annual
contribution that the Town must make to ensure that the plan will be able to fully meet its
obligations to retired employees on a timely basis. As a matter of policy, the Town fully funds
each year’s annual required contribution to the pension plan as determined by the actuary.
The Town also provides post- retirement health benefits pursuant to various Town Employee
Associations’ Memoranda of Understanding. The benefits vary depending upon a retiree’s years
of service. As of year- end, there are 81 employees who are receiving this benefit. The Town
finances the plan on a pay- as- you- go basis. Long- term costs for the benefits are projected to be
in excess of $ 10 million. The Town has reviewed various means to help reduce the impact of
these benefits to its future financial position and when able, provided annual transfers to reserves
for future health benefit costs since 2001.
Additional information on the Town’s pension arrangement and postemployment benefits can be
found in Notes 13 and 14 in the notes to the financial statements.
Awards and Acknowledgements
The Government Finance Officers Association ( GFOA) awarded a Certificate of Achievement for
Excellence in Financial Reporting to the Town of Hillsborough for its comprehensive annual
financial report ( CAFR) for the fiscal year ended June 30, 2005. This was the fourth year that the
Town has received this prestigious award. In order to be awarded a Certificate of Achievement,
the town published an easily readable and efficient organized CAFR. This report satisfied both
GAAP and applicable legal requirements. A Certificate of Achievement is valid for a period of one
year only. We believe that our current CAFR continues to meet the Certificate of Achievement
Program’s requirements and we are submitting it to the GFOA to determine its eligibility for
another certificate.
The Town also received the GFOA’s Distinguished Budget Presentation Award for its Operating
and Capital Budget for fiscal year 2005- 2006. In order to qualify for the Distinguished Budget
Presentation Award, the town’s budget document was judged to be proficient in several
FINANCIAL SECTION
11
Town of Hillsborough
Management’s Discussion and Analysis
As management of the Town of Hillsborough, we offer readers of the Town’s financial statements
this narrative overview and analysis of the financial activities of the Town of Hillsborough for the
fiscal year ended June 30, 2006. We encourage readers to consider the information presented
here in conjunction with additional information that we have furnished in our letter of transmittal,
which can be found on pages 1- 5 of this report.
Financial Highlights
􀂾 The assets of the Town exceed its liabilities at the close of 2005- 2006 fiscal year by
$ 54,318,795 ( net assets). Of this amount, $ 28,397,839 ( unrestricted net assets) may be
used to meet the Town’s ongoing obligations to citizens and creditors.
􀂾 The Town’s total net assets increased by $ 1,692,273, $ 1,562,599 of which from
governmental activities and the remaining $ 129,674 from enterprise operations. Increase
in net assets by approximately $ 1.7 million in governmental activities resulted from better
than expected revenues and not filling vacant positions ($ 430,800), approximately
$ 852,000 by which capital outlays exceeded depreciation for the year and around
$ 275,000 net revenues of the internal service fund from governmental activities.
􀂾 As of June 30, 2006, the Town’s governmental funds reported combined ending fund
balances of $ 10,601,294 - a 4.2% increase over the prior year. Except for $ 10,896 these
fund balances are available for spending at the Town’s discretion ( unreserved fund
balances).
􀂾 The Town’s general fund reported an increase of $ 689,000 in fund balance. At the end of
the current fiscal year, unreserved fund balance for the general fund was $ 9,802,887 up
from $ 9,114,131 in 2004- 2005. The fund balance reserve is approximately 60 percent of
total general fund expenditures.
􀂾 Water consumption was down for the second year in a row with 14% and 3% decrease in
consumption in 2005 and 2006 respectively; hence, revenues projection was short by 6%
for the year. The 11% increase in revenues resulting from the rate increase, covered a
similar increase in expenses leading to a $ 207,000 decrease in net assets for the water
operations. Sewer operations broke even with a modest increase in net assets in the
amount of $ 322,000. Debt service coverage was $ 2.13 of net revenues for every $ 1 of
debt service. Debt covenant requires $ 1.20 coverage.
􀂾 On April 2006, the Town issued $ 12,000,000 of variable rate certificates of participation
to finance various water and wastewater projects pursuant to its capital improvement
plan. It has also entered into a swap agreement for above issue consistent with its debt
policy as fully discussed on page 19 of this report.
Overview of the Financial Statements
This discussion and analysis is intended to serve as an introduction to the Town’s basic financial
statements made up of three components: 1) government- wide financial statements, 2) fund
financial statements, and 3) notes to the financial statements. This report also contains other
supplementary information in addition to the basic financial statements such as this
management’s discussion and analysis.
Government- wide financial statements. The government- wide financial statements are
designed to provide readers with a broad overview of the Town’s finances, in a manner similar to
a private- sector business.
The statement of net assets presents information on all of the Town of Hillsborough’s assets and
liabilities, with the difference between the two, reported as net assets. Over time, increases or
12
decreases in net assets may serve as a useful indicator of whether the financial position of the
Town is improving or deteriorating.
The statement of activities presents information showing how the Town’s net assets changed
during the most recent fiscal year. All changes in net assets are reported as soon as the
underlying event giving rise to the change occurs, regardless of the timing of related cash flows.
Thus, revenues and expenses are reported in this statement for some items that will only result in
cash flows in future fiscal periods ( e. g. earned but unused vacation leave).
Both of these government- wide financial statements distinguish functions of the Town of
Hillsborough that are principally supported by taxes and intergovernmental revenues
( governmental activities) from other functions that are intended to recover all or a significant
portion of their costs through user fees and charges ( business- type activities). The governmental
activities of the Town include general government, public safety, community services and streets.
The business- type activities of the Town include the water and sewer operations.
The government- wide financial statements can be found on pages 21- 22 of this report.
Fund financial statements. A fund is a grouping of related accounts that is used to maintain
control over resources that have been segregated for specific activities of objectives. The Town
of Hillsborough, like other state and local governments, uses fund accounting to ensure and
demonstrate compliance with finance- related legal requirements. All of the funds of the Town of
Hillsborough can be divided into two categories: governmental funds and proprietary funds.
Governmental funds. Governmental funds are used to account for essentially the same
functions reported as governmental activities in the government- wide financial statements.
However, unlike the government- wide financial statements, governmental fund financial
statements focus on near- term inflows and outflows of spendable resources, as well as on
balances of spendable resources available at the end of the fiscal year. Such information may be
useful in evaluating a government’s near- term financing requirements.
Because the focus of governmental funds is narrower than that of the government- wide financials
statements, it is useful to compare the information presented for governmental funds with similar
information presented for governmental activities in the government- wide financial statements.
By doing so, readers may better understand the long- term impact of the government’s near- term
financing decisions. Both the governmental fund balance sheet and the governmental fund
statement of revenues, expenditures, and changes in fund balances provide a reconciliation to
facilitate this comparison between governmental funds and governmental activities.
The Town maintains six individual governmental funds. Information is presented separately in the
governmental fund balance sheet and in the governmental fund statement of revenues,
expenditures and changes in fund balances for the general fund and the police and fire special
tax fund which are considered to be major funds. Data from the other four governmental funds
are combined into a single, aggregated presentation. Individual fund data for each of these
nonmajor governmental funds is provided in the form of combining statements elsewhere in this
report.
The Town of Hillsborough adopts an annual appropriated budget for its general fund. A
budgetary comparison statement has been provided for the general fund to demonstrate
compliance with this budget.
The basic governmental fund financial statements can be found on pages 23- 25 of this report.
Proprietary funds. The Town of Hillsborough maintains two different types of proprietary funds.
Enterprise funds are used to report the same functions presented as business- type activities in
the government- wide financial statements. The Town uses enterprise funds to account for the
13
water and sewer operations. Internal service funds are an accounting device used to accumulate
and allocate costs internally among the Town of Hillsborough’s various functions. The Town uses
an internal service fund to account for the replacement of the fleet and other equipments.
Because this service predominantly benefits governmental rather than business- type function, it
has been included within governmental activities in the government- wide financial statements.
Proprietary funds provide the same type of information as the government- wide financial
statements, only in more detail. The proprietary fund financial statements provide separate
information for the internal service fund and the water and sewer operations, with the latter being
considered major funds.
The basic proprietary fund financial statements can be found on pages 26- 28 of this report.
Notes to the financial statements. The notes provide additional information that is essential to
a full understanding of the data provided in the government- wide and fund financial statements.
The notes to the financial statements can be found on pages 29- 46 of this report.
Other information. In addition to the basic financial statements and accompanying notes, this
report also presents certain required supplementary information concerning the Town of
Hillsborough’s general fund budgetary schedule and progress in funding its obligation to provide
pension benefits to its employees. Required supplementary information can be found on pages
47- 50 of this report.
The combining statements referred to earlier in connection with nonmajor governmental funds are
presented immediately following the required supplementary information. Combining statements
and individual fund schedules can be found on pages 51- 59 of this report.
Government- wide Financial Analysis
As noted earlier, net assets may serve over time as a useful indicator of a government’s financial
position. The Town’s assets exceeded liabilities by $ 54,318,795 at June 30, 2006.
TOWN OF HILLSBOROUGH’S NET ASSETS
Governmental Activities Business- type Activities Total
2006 2005 2006 2005 2006 2005
Current and other assets $ 16,819,344 $ 14,898,872 $ 33,156,691 $ 24,604,367 $ 49,976,035 $ 39,503,239
Capital assets 10,337,671 9,522,619 41,289,738 37,407,437 51,627,409 46,930,056
Total assets 27,157,015 24,421,491 74,446,429 62,011,804 101,603,444 86,433,295
Long- term liabilities 1,143,579 1,250,804 39,823,731 28,305,526 40,967,310 29,556,330
Other liabilities 3,422,377 2,142,227 2,894,962 2,108,216 6,317,339 4,250,443
Total liabilities 4,565,956 3,393,031 42,718,693 30,413,742 47,284,649 33,806,773
Net assets:
Invested in capital assets,
Net of related debt
10,134,525
9,118,260
15,036,431
17,504,142
25,170,956
26,622,402
Restricted 20,261 750,000 500,000 750,000 520,261
Unrestricted 12,456,534 11,889,939 15,941,305 13,593,920 28,397,839 25,483,859
Total net assets $ 22,591,059 $ 21,028,460 $ 31,727,736 $ 31,598,062 $ 54,318,795 $ 52,626,522
By far the largest portion of the Town’s net assets ( 46 percent) reflects its investment in capital
assets ( e. g. land, buildings, machinery, equipment and infrastructure) less any related debt used
to acquire those assets that is still outstanding. The Town of Hillsborough uses these capital
assets to provide services to citizens; consequently, these assets are not available for future
spending. Although the Town’s investment in its capital assets is reported net of related debt, it
should be noted that the resources needed to repay this debt must be provided from other
sources, since the capital assets themselves cannot be used to liquidate these liabilities.
14
An additional portion of the Town of Hillsborough’s net assets ( 1.4 percent) represents resources
that are subject to external restrictions on how they may be used. The remaining balance of
unrestricted net assets ($ 28,397,839) may be used to meet the Town’s ongoing obligations to
citizens and creditors.
At June 30, 2006, the Town of Hillsborough is able to report positive balances in all three
categories of net assets, both for the government as a whole, as well as for its separate
governmental and business- type activities.
The Town’s net assets increased $ 1,692,273. Net assets increased by approximately $ 1.5
million in governmental activities; the remaining $ 129,674 from enterprise operations. Increase in
net assets in governmental activities resulted from better than expected revenues and not filling
vacant positions ($ 430,800); approximately $ 852,000 by which capital outlays exceeded
depreciation for the year; and around $ 275,000 net revenues of the internal service fund from
governmental activities.
Governmental activities. Governmental activities increased the Town of Hillsborough’s net
assets by $ 1,562,599 accounting for 92 percent of the total growth in the net assets of the Town.
TOWN OF HILLSBOROUGH’S CHANGES IN NET ASSETS
Governmental Activities Business- type Activities Total
2006 2005 2006 2005 2006 2005
REVENUES
Program revenues:
Charges for services $ 2,437,164 $ 2,351,693 $ 11,696,005 $ 10,983,732 $ 14,133,169 $ 13,335,425
Operating grants and
Functional taxes
3,424,755
2,973,402
3,424,755
2,973,402
Capital grants, contributions
& Other Non- Operating 151,000 88,206 1,175,603 239,206 1,175,603
General revenues:
Property taxes 8,279,497 7,863,429 8,279,497 7,863,429
Other taxes 2,602,832 2,277,574 2,602,832 2,277,574
Gain on sale of assets 9,932 9,932
Investment earnings 416,927 298,670 798,270 391,634 1,215,197 690,304
All others 825,774 700,775 825,774 700,775
Total revenues 18,137,949 16,475,475 12,582,481 12,550,969 30,720,430 29,026,444
EXPENSES
General government 961,498 849,893 961,498 849,893
Public safety 11,841,571 10,408,830 11,841,571 10,408,830
Community services 2,016,079 2,155,271 2,016,079 2,155,271
Streets 1,741,566 1,512,620 1,741,566 1,512,620
Interest on long- term debt 14,636 22,716 14,636 22,716
Water 7,132,750 6,387,594 7,132,750 6,387,594
Sewer 5,320,057 4,655,389 5,320,057 4,655,389
Total expenses 16,575,350 14,949,330 12,452,807 11,042,983 29,028,157 25,992,313
Increase in net assets 1,562,599 1,526,145 129,674 1,507,986 1,692,273 3,034,131
Net assets– July 1, 2005 21,028,460 19,502,315 31,598,062 30,090,076 52,626,522 49,592,391
Net assets– June 30, 2006 $ 22,591,059 $ 21,028,460 $ 31,727,736 $ 31,598,062 $ 54,318,795 $ 52,626,522
The graph below breaks down expenses by function and compares them to corresponding
program revenues for governmental activities.
Expenses and Program Revenues – Governmental Activities
15
$ 0
$ 2,000
$ 4,000
$ 6,000
$ 8,000
$ 10,000
$ 12,000
$ 14,000
General
government
Public safety Community
services
Streets Interest on long-term
debt
Thousands
Expenses Program Revenues
The following breaks down revenues by source.
Revenues by Source – Governmental Activities
Property tax
46%
Functional taxes
19% Franchise tax
Business license 4%
tax
Motor vehicle 4%
license fee
5%
Other taxes
2%
All others
5%
User charges
13%
Investment
earnings
2%
Approximately $ 875,000 of the change in governmental net assets resulted from the General
Fund’s operations where revenues increased by 5.5% over the previous year. However,
expenditures increased by 9% or approximately $ 1.4 mainly from personnel related costs.
The table below summarizes the major revenue increases in the General Fund during the year:
05/ 06 04/ 05 Increase %
REVENUES
Property taxes $ 8,279,497 $ 7,863,429 $ 416,068 5%
ERAF refund 623,026 422,229 200,797 48%
Vehicle license fee 963,199 705,311 257,888 37%
Total $ 9,865,722 $ 8,990,969 $ 874,753 10%
16
Budget projections for almost all revenue segments were met or exceeded with the Town
realizing 3% more of total budget. This year’s refund from the Educational Revenue
Augmentation Fund ( ERAF) included the return of previous years’ revenues that the County held
back in previous years. The increase in the vehicle license fee included a one- time payment
($ 186,000) of these revenues borrowed by the State in fiscal year 2003/ 04.
General fund expenditures increased by 11%, mostly from personnel related costs:
05/ 06 04/ 05 Increase %
EXPENDITURES
Salaries $ 7,996,467 $ 7,711,009 $ 285,458 4%
Overtime 876,916 631,748 245,168 39%
Medicare/ FICA 296,634 275,197 21,437 8%
Retirement 2,243,859 1,534,816 709,043 46%
Insurances 1,101,405 924,489 176,916 19%
Retirees’ health insurance 538,101 472,235 65,866 14%
Workers compensation 549,664 395,028 154,636 39%
All others 622,400 550,720 71,680 13%
Total personnel costs 14,225,446 12,495,242 1,730,204 14%
Materials & services 3,539,772 3,311,893 227,879 7%
Reimbursements from other programs ( 2,097,820) ( 1,874,630) ( 223,190) 12%
Transfers 527,825 694,110 ( 166,285) - 24%
Total $ 16,195,223 $ 14,626,615 $ 1,568,608 11%
Business- type activities. Business- type activities of the Town resulted to a modest increase in
net assets of approximately $ 130,000. Water consumption was down for the second year in a
row with 14% and 3% decrease in consumption in 2005 and 2006 respectively; hence, revenues
projection was short by 6% for the year. The 11% increase in revenues resulting from the rate
increase, covered a similar increase in expenses leading to a $ 207,000 decrease in net assets for
the water operations. Sewer operations broke even with a modest increase in net assets in the
amount of $ 322,000. Debt service coverage was $ 2.13 of net revenues for every $ 1 of debt
service. Debt covenant requires $ 1.20 coverage.
$ 6,921
$ 5,662
$ 7,128
$ 5,340
$ 0
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
$ 6,000
$ 7,000
$ 8,000
Water Sewer
Thousands Revenues Expenses
17
Financial Analysis of the Government’s Funds
As noted earlier, the Town of Hillsborough uses fund accounting to ensure and demonstrate
compliance with finance- related legal requirements.
Governmental funds. The focus of the Town of Hillsborough’s governmental funds is to provide
information on near- term inflows, outflows, and balances of spendable resources. Such
information is useful in assessing the Town’s financing requirements. In particular, unreserved
fund balance may serve as a useful measure of the Town’s net resources available for spending
at the end of a fiscal year.
As of June 30, 2006, the Town’s governmental funds reported combined ending fund balances of
$ 10,601,294, up $ 430,863 from the previous year. $ 9,791,991 of this amount constitute
unreserved – undesignated fund balance, which is available for spending at the Town’s
discretion, all of which is in the general fund, the Town’s chief operating fund. The remainder of
the fund balance is either reserved or designated to indicate that it is not available for new
spending as it has already been committed for a variety of restricted purposes.
The Town’s general fund reserve balance increased by $ 688,756 during the current fiscal year.
Town realized an increase in revenues of approximately $ 875,000 from property taxes, ERAF
refund and the motor vehicle license fee. However, expenditures increased by $ 1,569,000 mainly
from personnel- related costs.
Proprietary funds. The Town’s proprietary funds provide the same type of information found in
the government- wide financial statements, but with more details.
Unrestricted net assets of the Water fund at the end of the year amounted to $ 9,952,599 up from
$ 9,403,171 and Sewer fund unrestricted net assets increased to $ 5,685,656 from $ 3,902,218
mostly from increase in capital assets. Factors concerning the finances of these two funds have
already been addressed in the discussion of the business- type activities.
General Fund Budgetary Highlights
The chart below summarizes the budget variances:
ORIGINAL
BUDGET
REVISED
BUDGET
ACTUAL
VARIANCE
SOURCES
Taxes $ 9,934,390 $ 10,137,722 $ 10,361,630 $ 223,908
Permits 980,236 886,017 973,812 87,795
Intergovernmental 836,199 1,057,509 1,150,207 92,698
Service charges 1,080,571 1,051,854 1,149,151 97,297
Fines and forfeitures 29,500 125,250 106,319 ( 18,931)
All others 405,666 453,310 514,300 60,990
Operating transfers in 2,618,556 2,608,556 2,628,560 20,004
Total 15,885,118 16,320,218 16,883,979 563,761
USES
General government 729,372 820,894 799,102 21,792
Public safety 11,644,437 11,896,196 11,740,930 155,266
Community services 2,030,471 2,072,753 2,037,695 35,058
Streets 1,379,583 1,429,120 1,516,241 ( 87,121)
Operating transfers out 101,255 101,255 101,255
Total 15,885,118 16,320,218 16,195,223 124,995
GRAND TOTAL $ 688,756
The positive variances on the sources of funds came from supplemental property taxes
($ 214,000) distributed towards the end of the year. Similarly, there was a surge of building and
18
grading permits together with planning and building plan check fees ($ 135,400) received during
May and June of the fiscal year. The Town also received reimbursements from the Office of
Emergency Relief for the winter windstorm and the Katrina disaster response that were not
budgeted. Lastly, due to efforts to get more residents to sign up for the alarm monitoring
services, Town earned $ 72,000 more revenues than budgeted for this line item.
On the Expenditures side, a Police Officer position was unfilled through most of the fiscal year.
The Streets Department exceeded appropriations for $ 87,121 from unexpected increased
activities, higher utilities, park maintenance costs and need for outside professional services.
This shortfall was covered by the expenditures savings from the rest of the General Fund
departments.
Capital Asset and Debt Administration
Capital assets. The Town of Hillsborough’s investment in capital assets for its governmental and
business type activities as of June 30, 2006, amounts to $ 51,627,409 ( net of accumulated
depreciation). This investment in capital assets includes land, buildings and system,
improvements, machinery and equipment, roads, highways, and bridges.
Major capital asset events during the year included the following:
Water Main Replacement Phase IV – This project will include 3 miles of new water mains. Town
expended approximately $ 2.3 million in fiscal year 2005/ 06.
El Arroyo Water Tank Replacement – This project will replace 2- 500,000 gallon water tanks at El
Arroyo Tank site and construct additional mains on Eucalyptus, San Raymundo and El Arroyo.
Costs incurred in fiscal year 2005/ 06 amounted to $ 385,000. Project is expected to be finished
by July 2007.
Sanitary Sewer Lining Phase II - This project rehabilitates sewer lines identified in the video
inspection project with a target completion date of October 2006. Costs through June 30, 2006
were approximately $ 585,000.
Sanitary Sewer Cleaning & Inspection Phase III – This project completed on March 2006 cleaned
and inspected 21,000 linear feet of mains at a cost of $ 377,000.
Shady Creek Retaining Wall/ Erosion Repair - This project repaired failed walls and slopes to
protect a sanitary sewer main located in an easement at a cost of $ 514,000.
Pinehill/ Ralston Sewer Relocation – This project installed a new sewer main on Pinehill between
Ralston and Robin to divert flows from two sewer mains currently located in steep easement
areas for approximately $ 242,000.
Main Cleaning & Inspection Phase IV ( Cherry Creek Easement) – This project cleaned 6,800
linear feet of main in a difficult to access easement. Cost was $ 405,000.
Easton Creek Sewer Rehabilitation – This project consists of a reimbursement paid to the City of
Burlingame for the repair of the Easton Creek Sewer main, and other contiguous sewer mains
that serve Town. The rehabilitation was needed to prevent sanitary sewer overflows.
Contribution to Burlingame was for $ 550,000.
Street Pavement Maintenance and Rehabilitation Project – Street resurfacing for approximately
$ 860,000 was completed during the year.
19
Vista Park Renovation - This park renovation expected to be completed in October 2006, incurred
costs of approximately $ 470,000 through June 2006.
TOWN OF HILLSBOROUGH’S CAPITAL ASSETS
( Net of depreciation)
Governmental Activities Business- type Activities Total
2006 2005 2006 2005 2006 2005
Land $ 1,456,560 $ 1,456,560 $ 1,456,560 $ 1,456,560
Land improvements 1,673,831 1,302,403 1,673,831 1,302,403
Buildings 669,794 704,429 $ 103,728 $ 115,409 773,522 819,838
Machinery and equipment 1,545,651 1,676,363 460,317 489,088 2,005,968 2,165,451
Infrastructure 4,991,835 4,382,864 4,991,835 4,382,864
Water and sewer lines 40,725,693 36,802,940 40,725,693 36,802,940
Total $ 10,337,671 $ 9,522,619 $ 41,289,738 $ 37,407,437 $ 51,627,409 $ 46,930,056
Additional information on the Town of Hillsborough’s capital assets can be found in Note 5
starting from page 37 of this report.
Long- term debt.
On April 2006, the Town issued $ 12,000,000 of variable rate certificates of participation ( COPs)
( water and sewer system projects) 2006 Series A to finance various water and wastewater
projects consistent with the enterprise’s ten year capital improvement plan. The debt bears
variable rates with principal payments payable annually at June 1, 2009 through 2035. Earlier on
December 27, 2005, the Town entered into a “ forward starting 68% of LIBOR interest rate swap”
agreement converting the $ 12,000,000 variable- rate COPs discussed above, to a synthetic fixed
rate of 3.507% until they mature on June 1, 2035. The Town received ratings of AA+ from Fitch
and AA from Standard & Poor’s for the above bond issue.
At June 30, 2006, the Town of Hillsborough had total debt outstanding excluding compensated
absences in the amount of $ 40,403,146.
TOWN OF HILLSBOROUGH’S OUTSTANDING DEBT
( Certificates of Participation and Capital Lease Obligations)
Governmental Activities Business- type Activities Total
2006 2005 2006 2005 2006 2005
Certificates of participation $ 40,200,000 $ 28,700,000 $ 40,200,000 $ 28,700,000
Capital lease obligations $ 203,146 $ 404,359 203,146 404,359
Total $ 203,146 $ 404,359 $ 40,200,000 $ 28,700,000 $ 40,403,146 $ 29,104,359
Total debt paid during the year was $ 701,213. The certificates of participation recorded in the
business- type activities were issued through the Public Improvement Corporation to finance the
acquisition, construction and installation of certain improvements to the water and sewer systems.
The debt is secured by a pledge of the net revenues of the water and sewer funds.
The Town of Hillsborough maintains ratings of AA from Standard & Poor’s and AA+ from Fitch for
the older bond issues.
Additional information on the Town’s long- term debt can be found in Note 9 on pages 40- 42 of
this report.
20
Economic Factors and Future Challenges
As in the most recent years, the Town’s capital improvement plan program continues to be a
major component of its financial picture.
The Town continues to face rising costs in the areas of health insurance, retirement and workers
compensation costs. Like other governments, the Town seeks to find some relief from double-digit
increases in these areas. As in the past, Town management will be closely monitoring these
costs to ensure that it continues to be fiscally prudent while maintaining the usual high level of
service to its citizens despite these higher costs. The Town is committed to an ongoing program
of productivity improvements. It is proud of its ability to cut costs without adversely impacting the
level of service. It will continue to look for efficiencies in the delivery of services and doing more
with less.
Requests for Information
This financial report is designed to provide a general overview of the Town of Hillsborough’s
finances for all those with an interest in the Town’s finances. Questions concerning any of the
information provided in this report or requests for additional financial information should be
addressed to the Finance Director, Town of Hillsborough, 1600 Floribunda Avenue, Hillsborough,
CA 94010.
BASIC FINANCIAL STATEMENTS
GOVERNMENT- WIDE FINANCIAL STATEMENTS
Governmental Business- type
Activities Activities Total
ASSETS
Cash and investments:
Town Treasury $ 16,367,934 $ 16,071,322 $ 32,439,256
Trustee ( Restricted) 13,946,693 13,946,693
Receivables, net of estimated uncollectibles:
Accounts 204,902 1,785,435 1,990,337
Interest 186,756 142,379 329,135
Property tax receivable from County 294,343 294,343
Internal balances ( 303,050) 303,050
Due from other governments 57,563 99,268 156,831
Prepaids 10,896 - 10,896
Supplies 60,909 60,909
Cost of bond issuance ( net of accumulated amortization) 747,635 747,635
Capital assets ( net of accumulated depreciation):
Land 1,456,560 1,456,560
Land improvements 1,673,831 1,673,831
Buildings 669,794 103,728 773,522
Machinery and equipment 1,545,651 460,317 2,005,968
Infrastructure 4,991,835 4,991,835
Water and sewer lines 40,725,693 40,725,693
Total Assets 27,157,015 74,446,429 101,603,444
LIABILITIES
Accounts payable and other current liabilities 493,912 1,404,211 1,898,123
Accrued payroll liabilities 210,366 210,366
Deposits 1,843,839 798,836 2,642,675
Uninsured claims 12,783 38,054 50,837
Deferred revenue ( unearned) 657,912 657,912
Accrued interest payable 419 153,861 154,280
Current portion of long- term debt 203,146 500,000 703,146
Non- current liabilities:
Due in more than one year 1,143,579 39,823,731 40,967,310
Total Liabilities 4,565,956 42,718,693 47,284,649
NET ASSETS
Invested in capital assets, net of related debt 10,134,525 15,036,431 25,170,956
Restricted for:
Debt Service 750,000 750,000
Unrestricted 12,456,534 15,941,305 28,397,839
Total Net Assets $ 22,591,059 $ 31,727,736 $ 54,318,795
The notes to the financial statements are an integral part of this statement.
TOWN OF HILLSBOROUGH
STATEMENT OF NET ASSETS
JUNE 30, 2006
21
Operating Capital Grants
Grants and Contributions
Charges for Functional and other Non- Governmental Business- type
Functions/ Programs Expenses Services Taxes Operating Rev Activities Activities Total
Governmental Activities:
General government $ 961,498 $ 179,430 $ ( 782,068) $ ( 782,068)
Public safety 11,841,571 664,199 $ 2,763,241 ( 8,414,131) ( 8,414,131)
Community services 2,016,079 1,521,821 ( 494,258) ( 494,258)
Streets 1,741,566 71,714 661,514 $ 151,000 ( 857,338) ( 857,338)
Interest on long- term debt 14,636 ( 14,636) ( 14,636)
Total governmental activities 16,575,350 2,437,164 3,424,755 151,000 ( 10,562,431) ( 10,562,431)
Business- type Activities:
Water 7,132,750 6,471,820 $ ( 660,930) ( 660,930)
Sewer 5,320,057 5,224,185 88,206 ( 7,666) ( 7,666)
Total business- type activities 12,452,807 11,696,005 88,206 ( 668,596) ( 668,596)
Total $ 29,028,157 $ 14,133,169 $ 3,424,755 $ 239,206 ( 10,562,431) ( 668,596) ( 11,231,027)
General Revenues:
Property tax 8,279,497 8,279,497
Property transfer tax 276,368 276,368
Franchise tax 672,946 672,946
Sales Tax 54,694 54,694
Motor vehicle license tax 963,367 963,367
Business license tax 635,457 635,457
All others 825,774 825,774
Unrestricted investment earnings 416,927 798,270 1,215,197
Total general revenues 12,125,030 798,270 12,923,300
Change in net assets 1,562,599 129,674 1,692,273
Net assets - beginning 21,028,460 31,598,062 52,626,522
Net assets - ending $ 22,591,059 $ 31,727,736 $ 54,318,795
The notes to the financial statements are an integral part of this statement.
Net ( Expense) Revenues and
Changes in Net Assets
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TOWN OF HILLSBOROUGH
STATEMENT OF ACTIVITIES
22
FUND FINANCIAL STATEMENTS
Police and Fire Other Total
General Special Tax Governmental Governmental
Fund Fund Funds Funds
Cash and investments:
Town Treasury $ 12,257,806 $ $ 8 01,540 $ 13,059,346
Receivables, net of estimated uncollectibles:
Accounts 175,577 2 9,325 204,902
Interest 186,756 186,756
Property tax receivable from County 294,343 294,343
Due from other governments 5 7,563 57,563
Due from other funds 17,153 17,153
Prepaids 10,896 10,896
Total Assets $ 12,942,531 $ $ 8 88,428 $ 13,830,959
Liabilities:
Accounts payable and other current liabilities $ 414,744 $ $ 7 2,868 $ 487,612
Accrued payroll 210,366 210,366
Due to other funds 1 7,153 17,153
Deposits payable 1,843,839 1,843,839
Uninsured claims 12,783 12,783
Deferred revenue ( unearned) 657,912 657,912
Total Liabilities 3,139,644 9 0,021 3,229,665
Fund Balances:
Reserved for prepaids and other purposes 10,896 10,896
Unreserved - designated and reported in:
Special revenue funds - streets projects 8 7,141 87,141
Special revenue funds - police projects 1 34,546 134,546
Capital projects fund - facilities projects 5 76,720 576,720
Unreserved - undesignated 9,791,991 9,791,991
Total fund balances 9,802,887 7 98,407 10,601,294
Total Liabilities and Fund Balances $ 12,942,531 $ $ 8 88,428
Amounts reported for governmental activities in the statement of net assets are different
because:
Capital assets used in governmental activities are not financial resources and,
therefore, are not reported in the funds. 9,120,331
The internal service fund is used by the Town to charge the costs of fleet
and other equipment management and the management information systems
to individual funds. The assets and liabilities of the internal service fund are
included in the governmental activities in the statement of net assets. 4,020,070
Long- term liabilities, including capitalized leases, are not due and payable in the
current period and therefore are not reported in the funds. ( 1,150,636)
Net assets of governmental activities $ 22,591,059
The notes to the financial statements are an integral part of this statement.
LIABILITIES AND FUND BALANCES
TOWN OF HILLSBOROUGH
BALANCE SHEET - GOVERNMENTAL FUNDS
JUNE 30, 2006
ASSETS
23
Police and Fire Other Total
General Special Tax Governmental Governmental
Fund Fund Funds Funds
REVENUES:
Taxes:
Property $ 8,279,497 $ 8,279,497
Public safety special tax $ 2,233,132 2,233,132
Franchise taxes 672,946 672,946
Business license tax 635,457 635,457
All others 773,730 773,730
Permits 973,812 973,812
Intergovernmental 1,150,207 $ 9 80,380 2,130,587
Service charges 1,149,151 145,428 1,294,579
Fines and forfeitures 106,319 106,319
Investment earnings 289,641 3 2,273 321,914
Miscellaneous 224,659 2 37,845 462,504
Total Revenues 14,255,419 2,378,560 1 ,250,498 17,884,477
EXPENDITURES:
Current:
General government 799,102 4 2,809 841,911
Public safety 11,740,930 3 5,296 11,776,226
Community services 2,037,695 2,037,695
Streets 1,516,241 5 ,894 1,522,135
Capital outlay - 1,426,647 1,426,647
Total Expenditures 16,093,968 1 ,510,646 17,604,614
EXCESS ( DEFICIENCY) OF REVENUES OVER
( UNDER) EXPENDITURES ( 1,838,549) 2,378,560 ( 260,148) 279,863
OTHER FINANCING SOURCES ( USES):
Transfers in 2,628,560 6 66,995 3,295,555
Transfers out ( 101,255) ( 2,378,560) ( 664,740) ( 3,144,555)
Total Other Financing Sources ( Uses) 2,527,305 ( 2,378,560) 2 ,255 151,000
NET CHANGE IN FUND BALANCES 688,756 ( 257,893) 430,863
BEGINNING FUND BALANCES 9,114,131 1 ,056,300 10,170,431
ENDING FUND BALANCES $ 9,802,887 $ $ 7 98,407 $ 10,601,294
The notes to the financial statements are an integral part of this statement.
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TOWN OF HILLSBOROUGH
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
GOVERNMENTAL FUNDS
24
Amounts reported for governmental activities in the statement of activities ( page 22 ) are different because:
Net change in fund balances - total governmental funds ( page 24) $ 430,863
Governmental funds report capital outlays as expenditures. However, in the statement of
activities, the cost of those assets is allocated over the estimated useful lives and
reported as depreciation expense. This is the amount by which capital outlays exceeded
depreciation in the current period. 851,618
The issuance of long- term debt ( e. g. leases) provides current financial resources to
governmental funds, while the repayment of long- term debt consumes the current
financial resources of governmental funds. Neither transaction, however, has any effect
on net assets. This amount is the effect of these items in the treatment of long- term debt. 13,494
Some expenses reported in the statement of activities do not require the use of current
financial resources and, therefore, are not reported as expenditures in governmental funds. ( 95,809)
The internal service fund is used by the Town to charge the costs of fleet and other
equipment management and management information systems to individual funds. 87,836
The net revenue of certain activities of the internal service fund is reported with governmental
activities. 274,597
Change in net assets of governmental activities ( page 22) $ 1,562,599
The notes to the financial statements are an integral part of this statement.
TOWN OF HILLSBOROUGH
RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
THE STATEMENT OF ACTIVITIES
25
Governmental
Activities -
Total Internal Service
Current Year Prior Year Current Year Prior Year Current Year Fund
ASSETS
Current Assets:
Cash and investments:
Town Treasury $ 9,779,958 $ 8,822,365 $ 6,291,364 $ 2,725,062 $ 16,071,322 $ 3,308,588
Trustee ( Restricted) 6,065,557 2,744,564 7,881,136 6,052,141 13,946,693
Receivables, net of estimated
uncollectibles:
Accounts 1,663,058 1,346,247 122,377 10,730 1,785,435
Interest 70,271 83,359 72,108 61,205 142,379
Due from other governments 99,268 1,771,198 99,268
Prepaids 16,800 31,114
Supplies 60,909 55,887 60,909
Total current assets 17,639,753 13,069,222 14,466,253 10,651,450 32,106,006 3,308,588
Noncurrent assets:
Cost of bond issuance ( net of
accumulated amortization) 297,054 199,941 450,581 395,223 747,635
Capital assets:
Buildings and improvements 292,176 292,176 49,161 49,161 341,337
Machinery and equipment 585,548 552,767 500,005 473,642 1,085,553 2,526,630
Water and sewer lines 50,613,503 47,583,524 42,293,752 39,036,239 92,907,255
Less accumulated depreciation ( 32,193,316) ( 30,893,541) ( 20,851,091) ( 19,686,531) ( 53,044,407) ( 1,309,290)
Total capital assets net of
accumulated depreciation 19,297,911 17,534,926 21,991,827 19,872,511 41,289,738 1,217,340
Total noncurrent assets 19,594,965 17,734,867 22,442,408 20,267,734 42,037,373 1,217,340
Total Assets 37,234,718 30,804,089 36,908,661 30,919,184 74,143,379 4,525,928
LIABILITIES
Current liabilities:
Accounts payable 641,185 289,980 763,026 553,540 1,404,211 6,300
Deposits 741,195 484,445 57,641 102,454 798,836
Uninsured claims 30,853 5,000 7,201 63,228 38,054
Accrued interest payable 60,027 38,304 93,834 71,265 153,861 362
Certificates of participation - current 178,702 178,702 321,298 321,298 500,000
Capital leases payable - current 196,146
Total current liabilities 1,651,962 996,431 1,243,000 1,111,785 2,894,962 202,808
Noncurrent liabilities:
Certificates of participation 16,355,155 10,389,857 23,344,845 17,810,143 39,700,000
Compensated absences 70,391 53,699 53,340 51,827 123,731
Total noncurrent liabilities 16,425,546 10,443,556 23,398,185 17,861,970 39,823,731
Total Liabilities 18,077,508 11,439,987 24,641,185 18,973,755 42,718,693 202,808
NET ASSETS
Invested in capital assets, net of
related debt 8,829,611 9,710,931 6,206,820 7,793,211 15,036,431 1,020,832
Restricted for:
Debt Service 375,000 250,000 375,000 250,000 750,000
Unrestricted 9,952,599 9,403,171 5,685,656 3,902,218 15,638,255 3,302,288
Total Net Assets $ 19,157,210 $ 19,364,102 $ 12,267,476 $ 11,945,429 31,424,686 $ 4,323,120
Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 303,050
Net assets of business- type activities $ 31,727,736
The notes to the financial statements are an integral part of this statement.
TOWN OF HILLSBOROUGH
STATEMENT OF NET ASSETS
JUNE 30, 2006
PROPRIETARY FUNDS
Water Sewer
Business- type Activities - Enterprise Funds
26
Governmental
Activities -
Total Internal Service
Current Year Prior Year Current Year Prior Year Current Year Fund
OPERATING REVENUES:
Sale of water $ 5,982,747 $ 5,539,081 $ 5,982,747
Water meter charges 333,894 332,697 333,894
Sewer service charges $ 5,126,141 $ 4,960,583 5,126,141
Connection fees 125,063 63,982 23,228 15,767 148,291
Other services $ 558,505
Miscellaneous 30,116 6,987 74,816 64,635 104,932 37,732
Total Operating Revenues 6,471,820 5,942,747 5,224,185 5,040,985 11,696,005 596,237
OPERATING EXPENSES:
Water purchases, utilities and pumping 2,143,672 2,267,030 2,143,672
Sewage treatment services and utilities 1,103,573 1,037,438 1,103,573
Personnel, overhead and facilities 2,334,916 1,946,003 1,522,875 1,277,617 3,857,791
Materials, supplies and other 747,709 642,264 707,216 561,514 1,454,925 34,274
Depreciation and amortization 1,312,035 1,160,341 1,184,348 992,907 2,496,383 272,847
Total Operating Expenses 6,538,332 6,015,638 4,518,012 3,869,476 11,056,344 307,121
Operating Income ( loss) ( 66,512) ( 72,891) 706,173 1,171,509 639,661 289,116
NONOPERATING REVENUES ( EXPENSES):
Investment earnings 449,114 280,113 349,156 111,521 798,270 102,472
Reimbursement from other government - 695,278
Interest expense ( 438,494) ( 392,133) ( 821,488) ( 807,694) ( 1,259,982) ( 14,636)
Total nonoperating revenue ( expenses) 10,620 ( 112,020) ( 472,332) ( 895) ( 461,712) 87,836
Income ( loss) before contributions
and transfers ( 55,892) ( 184,911) 233,841 1,170,614 177,949 376,952
Capital contributions - 88,206 480,325 88,206
Transfers out ( 151,000) ( 151,000)
Change in net assets ( 206,892) ( 184,911) 322,047 1,650,939 115,155 376,952
Total net assets - beginning 19,364,102 19,549,013 11,945,429 10,294,490 3,946,168
Total net assets - end $ 19,157,210 $ 19,364,102 $ 12,267,476 $ 11,945,429 $ 4,323,120
Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds. 14,519
Change in net assets of business- type activities ( page 22 ) $ 129,674
The notes to the financial statements are an integral part of this statement.
TOWN OF HILLSBOROUGH
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS
PROPRIETARY FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
Business- type Activities - Enterprise Funds
Water Sewer
27
Governmental
Activities -
Internal
Total Service
Current Year Prior Year Current Year Prior Year Current Year Fund
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers and users $ 6,411,759 $ 6,446,923 $ 5,390,342 $ 4 ,869,583 $ 1 1,802,101 $ 37,732
Receipts from interfund services provided 558,505
Payment to suppliers ( 3,537,194) ( 3,864,584) ( 2,610,565) ( 2,596,275) ( 6,147,759) ( 34,274)
Payment to employees ( 1,254,535) ( 1,008,295) ( 766,477) ( 581,607) ( 2,021,012)
Payment to interfund services used ( 29,040) ( 29,040) ( 48,340) ( 48,340) ( 77,380)
Net cash provided ( used) by operating activities 1,590,990 1,545,004 1,964,960 1 ,643,361 3,555,950 561,963
CASH FLOWS FROM NONCAPITAL FINANCING
ACTIVITIES
Reimbursement from other government 88,206 6 95,278 88,206
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES
Proceeds from capital debt 6,144,000 5,856,000 1 2,000,000
Receipts from capital contributions 1,671,930 8 8,207 1,671,930
Operating transfer to governmental funds ( 151,000) ( 151,000)
Cost of issuance ( 109,373) ( 75,145) ( 184,518)
Acquisition and construction of capital assets ( 3,004,006) ( 2,865,732) ( 3,299,766) ( 1,866,623) ( 6,303,772) ( 204,872)
Principal paid on capital debt ( 178,702) ( 178,702) ( 321,298) ( 321,298) ( 500,000)
Interest paid on capital debt ( 475,526) ( 441,097) ( 827,843) ( 822,304) ( 1,303,369) ( 14,984)
Capital lease payment ( 187,719)
Net cash provided ( used) by capital
and related financing activities 2,225,393 ( 3,485,531) 3,003,878 ( 2,922,018) 5,229,271 ( 407,575)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment earnings 462,203 242,402 338,253 8 6,736 800,456 121,238
Net cash provided by investing activities 462,203 242,402 338,253 8 6,736 800,456 121,238
Net increase ( decrease) in cash and cash equivalents 4,278,586 ( 1,698,125) 5,395,297 ( 496,643) 9,673,883 275,626
Cash and cash equivalents - beginning 11,566,929 13,265,054 8,777,203 9 ,273,846 2 0,344,132 3,032,962
Cash and cash equivalents - ending ( including $ 6,065,557
and $ 7,881,136 for the water and sewer funds,
respectively reported in restricted accounts $ 15,845,515 $ 11,566,929 $ 14,172,500 $ 8 ,777,203 $ 3 0,018,015 $ 3,308,588
Reconciliation of operating income to net cash
provided ( used) by operating activities:
Operating income ( loss) $ ( 66,512) $ ( 72,891) $ 706,173 $ 1 ,171,509 $ 639,661 $ 289,116
Adjustments to reconcile operating income to net
cash provided ( used) by operating activities:
Depreciation and amortization expense 1,312,035 1,160,341 1,184,348 9 92,907 2,496,383 272,847
( Increase) decrease in accounts receivable ( 316,811) 446,831 ( 111,647) 1 06,402 ( 428,458)
( Increase) decrease in due from other governments ( 277,804)
( Increase) decrease in inventories and prepaids 11,778 65,926 31,114 ( 10,437) 42,892
Increase ( decrease) in customer deposits 256,750 57,345 256,750
Increase ( decrease) in accounts payable 377,058 ( 105,884) 153,459 ( 360,306) 530,517
Increase ( decrease) in compensated
absences payable 16,692 ( 6,664) 1,513 2 1,090 18,205
1,657,502 1,617,895 1,258,787 4 71,852 2,916,289 272,847
Net cash provided ( used) by operating activities $ 1,590,990 $ 1,545,004 $ 1,964,960 $ 1 ,643,361 $ 3,555,950 $ 561,963
The notes to the financial statements are an integral part of this statement.
Business- type Activities - Enterprise Funds
Water Sewer
TOWN OF HILLSBOROUGH
STATEMENT OF CASH FLOWS
PROPRIETARY FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
28
NOTES TO THE FINANCIAL STATEMENTS
29
TOWN OF HILLSBOROUGH
Notes to the Financial Statements
June 30, 2006
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Town’s accounting policies:
A. Reporting Entity
The Town of Hillsborough is a municipal corporation governed by a five- member council. The
accompanying financial statements present the Town and its component units, entities for which
the government is considered to be financially accountable. Blended component units, although
legally separate entities, are, in substance, part of the government’s operations.
Blended component unit - The operations of the Hillsborough Public Improvement Corporation
( HPIC) which was established to assist in the financing of the acquisition of public improvements
on behalf of the Town are combined with that of the Town’s Water and Sewer funds in these
financial statements. The City Council sits as its Board of Directors and has full accountability for
its operations.
B. Government- wide and Fund Financial statements
The government- wide financial statements ( i. e., the statement of net assets and the statement of
activities) report information on all of the activities of the Town of Hillsborough and its component
unit. For the most part, the effect of interfund activity has been removed from these statements.
Governmental activities, which normally are supported by taxes and intergovernmental revenues,
are reported separately from business- type activities, which rely to a significant extent on fees
and charges for support.
The statement of activities demonstrates the degree to which the direct expenses of a given
function or segment are offset by program revenues. Direct expenses are those that are clearly
identifiable with a specific function or segment. Program revenues include 1) charges to
customers or applicants who purchase, use, or directly benefit from goods, services, or privileges
provided by a given function or segment and 2) grants, functional taxes and contributions that are
restricted to meeting the operational or capital requirements of a particular function or segment.
Taxes and other items not properly included among program revenues are reported instead as
general revenues.
Separate financial statements are provided for governmental funds and proprietary funds. Major
individual governmental funds and major individual enterprise funds are reported as separate
columns in the fund financial statements.
The Town does not have any fiduciary funds or fiduciary- type component units.
C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation
The government- wide financial statements are reported using the economic resources
measurement focus and the accrual basis of accounting, as are the proprietary fund financial
statements. Revenues are recorded when earned and expenses are recorded when a liability is
incurred, regardless of the timing of related cash flows. Property taxes are recognized as
30
revenues in the year for which they are levied. Grants and similar items are recognized as
revenue as soon as all eligibility requirements imposed by the provider have been met.
Governmental fund financial statements are reported using the current financial resources
measurement focus and the modified accrual basis of accounting. Revenues are recognized as
soon as they are both measurable and available. Revenues are considered to be available when
they are collectible within the current period or soon enough thereafter to pay liabilities of the
current period. For this purpose, the Town considers revenues to be available if they are
collected within 60 days of the end of the current fiscal period. Expenditures generally are
recorded when a liability is incurred, as under accrual accounting. However, debt service
expenditures, as well as expenditures related to compensated absences and claims and
judgments, are recorded only when payment is due.
Property taxes, franchise taxes, licenses, and interest associated with the current fiscal period are
all considered to be susceptible to accrual and so have been recognized as revenues of the
current fiscal period. All other revenue items are considered to be measurable and available only
when cash is received by the Town.
The Town reports the following major governmental funds:
The General Fund is the Town’s primary operating fund. It accounts for all financial resources of
the general government, except those required to be accounted for in another fund.
The Police and Fire Special Tax Fund is used to account for revenues apportioned under a Town
of Hillsborough voter- approved special tax which proceeds are designated for public safety
operations and capital expenditures.
The Town reports the following major proprietary funds:
The Water Fund accounts for the activities associated with the distribution and transmission of
potable water to the Town’s residents.
The Sewer Fund accounts for activities associated with the treatment and transmission of
sewage.
Additionally, the Town reports an Internal Service Fund that accounts for fleet management and
the replacement of other equipments provided to other departments on a cost reimbursement
basis.
The Town does not have any fiduciary fund and fiduciary- type component unit; hence, no such
statements are included in this financial report.
Private- sector standards of accounting and financial reporting issued on or before November 30,
1989, generally are followed in both the government- wide and proprietary fund financial
statements to the extent that those standards do not conflict with or contradict guidance of the
Governmental Accounting Standards Board. The Town also has the option of following
subsequent private- sector guidance for its enterprise funds, subject to the same limitation. The
Town has elected not to follow subsequent private- sector guidance.
As a general rule the effect of interfund activity has been eliminated from the government- wide
financial statements. Exceptions to this general rule are charges between the government’s
water and sewer functions of the Town. Elimination of these charges would distort the direct
costs and program revenues reported for the various functions concerned.
Amounts reported as program revenues include 1) charges to customers or applicants for goods,
services, or privileges provided, 2) operating grants, functional taxes and contributions, and 3)
31
capital grants and contributions. Internally dedicated resources are reported as general revenues
rather than as program revenues.
Proprietary funds distinguish operating revenues and expenses from nonoperating items.
Operating revenues and expenses generally result from providing services and producing and
delivering goods in connection with the water and sewer funds’ principal ongoing operations. The
principal operating revenues of the water and sewer funds, and of the Town’s internal service
fund, are charges to customers for sales and services. The Town also recognizes as operating
revenues the portion of connection fees intended to recover the cost of connecting new
customers to the system. Operating expenses for the enterprise and the internal service funds
include the cost of sales and services, administrative expenses, and depreciation on capital
assets. All revenues and expenses not meeting this definition are reported as nonoperating
revenues and expenses.
When both restricted and unrestricted resources are available for use, it is the town’s policy to
use restricted resources first, then unrestricted resources as they are needed.
The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ from those estimates.
D. Assets, Liabilities, and Net Assets or Equity
1. Deposits and Investments
The Town’s cash and cash equivalents are considered to be cash on hand, demand deposits and
short- term investments with original maturities of three months or less from the date of
acquisition.
The Town’s investment policy and the California Government Code allow the Town to invest in
the US Government, certificates of deposits placed with commercial banks, banker’s
acceptances, commercial paper, money market funds, repurchase agreements, the County of
San Mateo Pooled Fund, and the California Local Agency Investment Fund ( LAIF) pool. LAIF is
regulated by the California Government Code Section 16429 under the oversight of the State
Treasurer. The Town reports its investment in LAIF at the fair value amount LAIF provided. The
Town’s position in the pool is approximately the same as the value of the pool shares. Included
in LAIF’s investment portfolio are collateralized mortgage obligations, mortgage- backed
securities, other asset- backed securities, loans to certain state funds, and floating rate securities
issued by federal agencies, government- sponsored enterprises and corporations. Cash and
investments with the Trustee are invested pursuant to governing bond covenants.
The Town’s investments are carried at fair value as required by generally accepted accounting
principles.
2. Receivables and Payables
Activity between funds that are representative of lending/ borrowing arrangements, outstanding at
the end of the fiscal year are referred to as either “ due to/ from other funds” ( i. e., the current
portion of interfund loans) or “ advances to/ from other funds” ( i. e. the non- current portion of
interfund loans). All other outstanding balances between funds are reported as “ due to/ from other
funds.” Any residual balances outstanding between the governmental activities and business-type
activities are reported in the government- wide financial statements as “ internal balances”
32
Advances between funds, as reported in the fund financial statements, are offset by a fund
balance reserve account in applicable governmental funds to indicate that they are not available
for appropriation and are not expendable available financial resources
3. Property Taxes
Property taxes become an enforceable lien on property as of January 1, levied on July 1, payable
in two installments on November 1 and February 1 and delinquent on December 10 and April 10.
The County bills and collects the property taxes and remits them to the City.
The County is permitted by State Law ( Proposition 13) to levy taxes at 1% of the full market value
of the property ( at time of purchase) and can increase the assessed property valuation by no
more than 2% per year. This tax levy is distributed to the different governmental agencies under
the State- mandated alternate method of apportioning taxes ( commonly referred to as the “ Teeter
Plan”) whereby all local agencies with historical tax delinquency rates less than 3%, receive from
the County 100% of their respective shares of the amount of ad valorem taxes levied, without
regard to the actual collection of taxes levied. The County handles all delinquencies, retaining
interest and penalties.
Receivables are shown net of an allowance for uncollectibles where applicable. Unbilled services
revenues in the Enterprise Funds are accrued at year- end.
4. Inventories and Prepaid Items
All inventories are valued at cost using the first- in/ first- out ( FIFO) method. Inventories of
governmental funds are recorded as expenditures when consumed rather than when purchased.
Certain payments to vendors reflect costs applicable to future accounting periods and are
recorded as prepaid items in the financial statements.
5. Restricted Assets
Certain proceeds of the Town’s enterprise fund bond issue are classified as restricted assets on
the balance sheet because they are maintained in separate bank accounts and their use is limited
by the applicable bond covenant.
6. Capital Assets
Capital assets, which include property, plant, equipment, infrastructure ( e. g., roads, sidewalks,
and similar items), and water and sewer lines, are reported in the applicable governmental or
business- type activities columns in the government- wide financial statements. Capital assets are
defined by the government as assets with an initial, individual cost of more than $ 5,000 and an
estimated useful life in excess of two years.
Major outlays for capital assets and improvements are capitalized as projects are constructed.
Interest incurred during the construction phase of capital assets of business- type activities is
included as part of the capitalized value of the assets constructed.
Initial capitalization of general infrastructure assets ( i. e., those reported by governmental
activities) is included regardless of their acquisition date or amount. Town estimated the
historical cost for the initial reporting of these assets through back trending ( i. e., estimating the
current replacement cost of the infrastructure to be capitalized and using a price- level index to
deflate the cost to the acquisition or estimated acquisition year). As Town constructs or acquires
additional capital assets each period, including infrastructure assets, they are capitalized and
reported at historical cost. The reported value excludes normal maintenance and repairs which
are essentially amounts spent in relation to capital assets that do not increase the capacity or
33
efficiency of the item or extend its useful life beyond the original estimate. Town values donations
of capital assets at the estimated fair value of the item at the date of its donation.
Property, plant and equipment are depreciated using the straight line method over the following
estimated useful lives:
Assets Years
Buildings 40 years
Building improvements 30 years
Machinery and equipment 3- 15 years
System infrastructure 30- 50 years
Transmission and distribution systems 40 years
7. Compensated Absences
It is the Town’s policy to permit employees to accumulate earned but unused vacation up to a
certain amount. Sick leave vests in varying amounts depending on bargaining units and groups.
Both are accrued when incurred in the government- wide and proprietary fund financial
statements. A liability for these amounts is reported in governmental funds only if they have
matured, for example, as a result of employee resignations and retirements.
8. Long- Term Obligations
In the government- wide financial statements, and proprietary fund types in the fund financial
statements, long- term debt and other long- term obligations are reported as liabilities in the
applicable governmental activities, business- type activities, or proprietary fund type statement of
net assets. Bond premiums and discounts, as well as issuance costs, are deferred and
amortized over the life of the bonds using the effective interest method. Bonds payable are
reported net of the applicable bond premium or discount. Bond issuance costs are reported as
deferred charges and amortized over the term of the related debt.
9. Fund Equity
In the fund financial statements, governmental funds report reservations of fund balance for
amounts that are not available for appropriation or are legally restricted by outside parties for use
for a specific purpose. Designations of fund balance represent tentative management plans that
are subject to change.
10. Comparative Data/ Reclassifications
Comparative total data for the prior year have been presented only for individual enterprise funds
in the fund financial statements in order to provide an understanding of the changes in the
financial position and operations of these funds. Also, certain amounts presented in the prior
year data have been reclassified in order to be consistent with the current year’s presentation.
NOTE 2 – RECONCILIATION OF GOVERNMENT- WIDE AND FUND FINANCIAL STATEMENTS.
A. Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the
Government- Wide Statement of Net Assets
The governmental fund balance sheet includes a reconciliation between fund balance – total
governmental funds and net assets – governmental activities as reported in the government- wide
statement of net assets. One element of that reconciliation explains that “ long- term liabilities
34
including capitalized leases, are not due and payable in the current period and therefore are not
reported in the funds.” The details of this $ 1,150,636 difference are as follows:
Accrued interest payable $ 57
Capital leases payable 7,000
Compensated absences 1,143,579
Net adjustment to reduce fund balance – total governmental funds to arrive
at net assets – governmental activities $ 1,150,636
B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues,
Expenditures and Changes in Fund Balances and the Government- Wide Statement of
Activities
The governmental fund statement of revenues, expenditures and changes in fund balances
includes a reconciliation between net changes in fund balances – total governmental funds and
changes in net assets of governmental activities as reported in the government- wide statement of
activities. One element of that reconciliation explains that “ Governmental funds report capital
outlays as expenditures. However, in the statement of activities, the cost of those assets is
allocated over the estimated useful lives and reported as depreciation expense.” The details of
this $ 851,618 difference are as follows:
Capital outlay $ 1,426,647
Depreciation expense ( 575,029)
Net adjustment to increase net changes in fund balances – total governmental
funds to arrive at changes in net assets of governmental activities $ 851,618
Another element of that reconciliation states that “ the issuance of long- term debt ( e. g. leases)
provides current financial resources to governmental funds, while the repayment of long- term
debt consumes the current financial resources of governmental funds. Neither transaction,
however, has any effect on net assets.” The $ 13,494 difference refers to the down payment on
capital lease.
Another element of that reconciliation states that “ some expenses reported in the statement of
activities do not require the use of current financial resources and, therefore, are not reported as
expenditures in the governmental funds.” The details of this $ 95,809 are as follows:
Compensated absences ( $ 95,922)
Accrued interest 113
Net adjustment to decrease net changes in fund balances – total governmental
funds to arrive at changes in net assets of governmental activities ( $ 95,809)
NOTE 3 – STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY.
Excess of Expenditures over Appropriations
For the year ended June 30, 2006, expenditures exceeded appropriations for $ 20,004, $ 8,200
and $ 25,847 in the Police and Fire Special Tax, Measure “ A” and Police Grants funds
respectively. These over expenditures were funded by available fund balance in the respective
funds.
The Streets Department in the General Fund also exceeded appropriations in the amount of
$ 87,121 resulting from unexpected increased activities, higher utilities, park maintenance costs
and need for professional services. However, the legal level of budgetary control is the fund level
and the excess appropriations in this department were covered by the expenditure savings from
the rest of the General Fund departments.
35
NOTE 4 – CASH AND INVESTMENTS
The Town’s deposits and investments are invested pursuant to its investment policy guidelines.
The objectives of the policy are, in order of priority, preservation of capital, liquidity and yield. The
policy addresses the soundness of financial institutions in which the Town will deposit funds,
types of investment instruments as permitted by the California Government Code, and the
percentage of the portfolio which may be invested in certain instruments with longer terms to
maturity.
Total Town cash and investments at fair value on June 30, 2006, are as follows:
Deposits and investments $ 32,439,256
Restricted cash and investments – held by fiscal agent 13,946,693
Total $ 46,385,949
Cash and investments as of June 30, 2006, consist of the following:
Cash on hand $ 8,500
Deposits with financial institutions ( 153,442)
Investments 46,530,891
Total cash and investments $ 46,385,949
Investments Authorized by the California Government Code and the Town’s Investment Policy
The table below identifies the investment types that are allowed by the California Government
Code and are authorized by the Town’s more restrictive investment policy. The second part of
the table relates to investments of debt proceeds held by bond trustees and governed by the
provisions of the Town’s debt agreements. The table addresses interest rate risk, credit risk, and
concentration of credit risk.
Authorized Investment Type
Maximum
Maturity
Maximum
Percentage
Of Portfolio
Maximum
Investment in
One Issuer
AUTHORIZED FOR THE CITY:
U. S. Treasury Obligations 5 years None None
Banker’s Acceptances 180 days 20% Lower of $ 1M or 10%
Time Certificate of Deposit 2 years None $ 500,000
Commercial Paper 180 days 10% $ 1M up to 3 months
$ 500,000 up to 6 months
Local Agency Investment Fund ( LAIF) N/ A None N/ A
Repurchase Agreements 30 days 20% 20%
County Pooled Investment Funds N/ A 10% N/ A
Money Market Mutual Funds ( Custodial Accounts Only) N/ A None None
TOWN OVERALL POOL
2 years
5 years
80%
20%
AUTHORIZED BY DEBT AGREEMENTS:
U. S. Treasury Obligations None None None
U. S. Agency Securities None None None
Certificates of Deposits/ Bankers Acceptances 360 days None None
Commercial Paper 270 days None None
Money Market Funds N/ A None None
Local Agency Bonds None None None
Investment Contracts None None None
Repurchase Agreements N/ A None None
Local Agency Investment Fund ( LAIF) N/ A None N/ A
36
Interest Rate Risk
Changes in market interest rates will affect the fair value of an investment. Generally,
investments with longer maturities are more sensitive to changes in market interest rates. The
Town manages its exposure to interest rate risk by purchasing a combination of shorter and
longer term investments and by timing cash flows from maturities so that investments mature
evenly over time as necessary to provide the cash flow and liquidity needed for operations. The
following table shows the distribution of the Town’s investments by maturity:
Remaining Maturity ( in Months)
Investment Type
12 Months
Or Less
13- 24
Months
25- 60
Months
Total
U. S. Treasury bills $ 10,847,323 $ 10,847,323
U. S. Treasury notes 5,935,268 $ 2,933,750 $ 947,110 9,816,128
Commercial paper 974,139 974,139
San Mateo County Pool 2,071,756 2,071,756
Local Agency Investment Fund ( LAIF) 8,868,648 8,868,648
Money Market Funds ( Custodial Bank) 6,204 6,204
HELD BY BOND TRUSTEE:
Money Market Funds 11,833,190 11,833,190
Local Agency Investment Fund ( LAIF) 2,113,503 2,113,503
Total $ 42,650,031 $ 2,933,750 $ 947,110 $ 46,530,891
Credit Risk
Credit risk – when an issuer of an investment does not fulfill its obligation to the holder investment
– is measured by the assignment of a rating by a nationally recognized statistical rating
organization. Presented below is the minimum rating required by the Town’s investment policy,
or debt agreements, and the actual rating as of year end for each investment type:
Rating as of Year End
Investment Type
Amount
Minimum
Legal
Requirement
Exempt
From
Disclosure
AAA/ A1- P1
Not
Rated
U. S. Treasury bills $ 10,847,323 N/ A $ 10,847,323
U. S. Treasury notes 9,816,128 N/ A 9,816,128
Commercial paper 974,139 A1- P1 $ 974,139
Local Agency Investment Fund ( LAIF) 8,868,648 N/ A $ 8,868,648
San Mateo County Pool 2,071,756 N/ A 2,071,756
Money market funds ( Custodial bank) 6,204 N/ A 6,204
HELD BY BOND TRUSTEE:
Money market funds 11,833,190 N/ A 11,833,190
Local Agency Investment Fund ( LAIF) 2,113,503 N/ A 2,113,503
Totals $ 46,530,891 $ 20,663,451 $ 12,813,533 $ 13,053,907
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. Custodial credit risk for
investments is the risk, that, in the event of the failure of the counterparty ( e. g. broker- dealer used
by the Town to buy the securities), the 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 the Town’s investment policy do not contain legal or policy requirements
that would limit the exposure to custodial credit risk for deposits or investments, other than the
following provision: A financial institution is required to secure deposits in excess of the $ 100,000
( government insured amount) made by state and local governmental units by pledging securities
in an undivided collateral pool held by a depository regulated under state law secured by US
government securities at a constant margin ratio of 110% for government securities.
37
As of June 30, 2006, all Town’s deposits with financial institutions were within the $ 100,000
government insured amount. As of June 30, 2006, commercial papers for $ 974,139 were held by
a third- party custodial bank.
Investment in the State and the County Investment Pool
The Town is a voluntary participant in the Local Agency Investment Fund ( LAIF) that is regulated
by the California Government Code under the oversight of the Treasurer of the State of California.
Likewise, it is also a voluntary participant in the San Mateo County Pool regulated by the
California Government Code under the oversight of the San Mateo County Treasurer. The
balance available for withdrawal is based on the accounting records maintained by LAIF and the
San Mateo County, which are recorded on an amortized cost basis.
Interest and investment income consists of the following at June 30, 2006:
Interest earned $ 1,330,226
Net change in fair market value ( 107,570)
Total $ 1,222,656
NOTE 5 – CAPITAL ASSETS
Capital asset activity for the year ended June 30, 2006 was as follows:
Beginning
Balance
Increases
Decreases
Ending
Balance
Governmental Activities:
Land – not being depreciated $ 1,456,560 $ $ $ 1,456,560
Capital assets, being depreciated
Land improvements 1,938,715 470,801 2,409,516
Buildings 2,587,158 23,406 2,610,564
Machinery and equipment 4,353,311 312,332 ( 192,801) 4,472,842
Infrastructure 10,199,018 856,389 11,055,407
Total capital assets being depreciated 19,078,202 1,662,928 ( 192,801) 20,548,329
Less accumulated depreciation for:
Land improvements ( 636,312) ( 99,373) ( 735,685)
Buildings ( 1,882,729) ( 58,041) ( 1,940,770)
Machinery and equipment ( 2,676,948) ( 443,044) ( 192,801) ( 2,927,191)
Infrastructure ( 5,816,154) ( 247,418) ( 6,063,572)
Total accumulated depreciation ( 11,012,143) ( 847,876) ( 192,801) ( 11,667,218)
Total capital assets, being depreciated, net 8,066,059 815,052 8,881,111
Governmental activities capital assets, net $ 9,522,619 $ 815,052 $ $ 10,337,671
Beginning
Balance
Increases
Decreases
Ending
Balance
Business- type Activities:
Land – not being depreciated $ $ $ $
Capital assets, being depreciated
Buildings 341,337 341,337
Machinery and equipment 1,026,407 59,146 1,085,553
Systems & transmissions 86,619,764 6,287,491 92,907,255
Total capital assets being depreciated 87,987,508 6,346,637 94,334,145
Less accumulated depreciation for:
Buildings ( 225,928) ( 11,681) ( 237,609)
Machinery and equipment ( 537,319) ( 109,202) ( 646,521)
Systems & transmissions ( 49,816,824) ( 2,343,453) ( 52,160,277)
Total accumulated depreciation ( 50,580,071) ( 2,464,336) ( 53,044,407)
Total capital assets, being depreciated, net 37,407,437 3,882,301 41,289,738
Business- type activities capital assets, net $ 37,407,437 $ 3,882,301 $ $ 41,289,738
38
Depreciation expense was charged to functions/ programs as follows:
Governmental Activities:
General government $ 135,360
Public safety 182,575
Community services 765
Public works 256,329
Capital assets held by the Town’s internal service funds are charged
to the various functions based on their usage of the assets
272,847
Total depreciation expense – governmental activities $ 847,876
Business- type Activities:
Water $ 1,299,775
Sewer 1,164,561
Total depreciation expense – business- type activities $ 2,464,336
NOTE 6 – INTERFUND TRANSACTIONS
The following is a summary of the interfund transactions for the year ended June 30, 2006:
Transfer In
Nonmajor
General Governmental
Transfer Out Fund Funds Total
General Fund $ $ 101,255 $ 101,255
Police and Fire special tax fund 2,378,560 2,378,560
Nonmajor governmental funds 250,000 414,740 664,740
Water Fund 151,000 151,000
Total $ 2,628,560 $ 666,995 $ 3,295,555
The transfers in to the General Fund included $ 2,378,560 transfer from the Police and Fire
Special Tax Fund – a pass though fund – and $ 250,000 from the Measure “ A” fund to cover street
related costs incurred in the General Fund. Revenues from the voter- approved Police and Fire
Special Tax are designated for public safety operations and capital expenditures accounted for in
the General Fund. Transfers out of the General Fund included $ 101,255 to the Capital Projects
Fund for certain capital improvements. Transfers out of the Police Grants Fund covered $ 14,740
of capital improvements. The $ 400,000 transfers in to the Capital Projects Fund covered
transfers from the Gas Tax and the Measure “ A” funds for streets related projects. The $ 151,000
transfer from the Water Fund to the Capital Projects Fund represented the Water Fund’s
contribution for certain streets related projects.
NOTE 7 – LEASES
Capital Leases - The Town has entered into lease agreements as lessee for photocopiers and
reproduction equipment and fire engines. The lessors were granted security interests in any and
all rights, titles and interests of the Town in the equipments. These lease agreements are
classified as capital leases for accounting purposes, and therefore have been recorded at the
present value of the future minimum lease payments as of the inception date.
39
The assets acquired through capital leases are as follows:
Governmental
Activities
Asset: Amount
Machinery and equipment $ 950,834
Less: Accumulated depreciation 272,261
Total $ 678,573
The future minimum lease payments for these leases are as follows:
Governmental
Activities
Year Ending 6/ 30 Amount
2007 $ 209,875
Less: Amount representing interest ( 6,729)
Present value of minimum lease payments $ 203,146
NOTE 8 – INTEREST RATE SWAPS
Objective of interest rate swap. As a means to manage variable interest rate exposure and potentially
lower its long- term borrowing costs, the Town entered into various interest rate swaps relating to its
variable- rate bonds.
Terms. On May 31, 2000, the Town signed a swap agreement to convert the 2000 Series A COPs to a
fixed rate of 5.262 percent based on a notional amount of $ 4,900,000 which matched the par amounts of
the bonds. The swap was structured to comply with regulations governing the variable rate refunding of
the 1997 fixed rate tax- exempt COPs to its first call date of June 1, 2007. The Town pays the
counterparty the fixed rate and receives variable payments based on the actual remarketing rates reset
on a weekly basis.
On August 21, 2003, the Town entered into a swap agreement to convert the 2000 Series B variable- rate
COPs to a fixed rate of 3.75 percent, subject to an early termination under certain conditions, until they
mature on June 1, 2030. Concurrent with the bond issuance of the 2003 Series A COPs ( See Note 9),
the Town also entered into a swap agreement to convert the 2003 Series A variable- rate COPs to a fixed
rate of 3.77 percent, subject to an early termination under certain conditions, until they mature on June 1,
2033. Under both swaps, the Town pays the counterparty the fixed rates and receives variable payments
based on The Bond Market Association Municipal Swap Index ( BMA). Both swaps are intended to
remain in place for the life of the bonds, barring an early termination. The counterparty will have the right,
but not the obligation, to terminate these transactions in whole, but not in part, on each day that the daily
weighted average of the BMA index for any immediate preceding rolling consecutive 180- days period is
more than 7 percent. The notional amounts of the swaps match the principal amounts of the associated
debts. There was no cash paid or received when the swaps were initiated.
On December 27, 2005, the Town entered into a “ forward starting 68% of LIBOR interest rate swap”
agreement to convert the $ 12,000,000 variable- rate COPS, Series 2006, as fully discussed in Note 9 of
this report, to a fixed rate of 3.507% until they mature on June 1, 2035. The swap is intended to remain in
place for the life of the bonds. The notional amounts of the swap match the principal amounts of the
associated debt and there was no cash paid or received when the swap was initiated.
Fair value. The following fair values of the swaps as of June 30, 2006, provided by the counterparty are
derived from proprietary models based upon well recognized financial principles:
40
Bond Issue
Notional
Amount
Fair
Values
2000A $ 4,900,000 ($ 71,552)
2000B 9,300,000 139,437
2003A 14,500,000 199,233
2006A 12,000,000 491,220
Total $ 758,338
Credit risk. As of June 30, 2006, the Town was exposed to credit risk to the extent of the swaps’ positive
fair value in the amount of $ 758,338. The swap counterparty is rated Aa2 by Moody’s Investors Services,
AA- by Standard & Poor’s and A+ by Fitch Ratings as of October 1, 2005.
Termination risk. The Town or the counterparty may terminate the swap if the other party fails to perform
under the terms of the contract. The swaps may be terminated by the counterparty if the Town’s credit
quality rating falls below Baa2 by Moody’s Investors Service and BBB by Fitch Ratings and by Standard &
Poor’s. If the swap is terminated, the variable- rate bond would no longer carry a synthetic interest rate.
Also, if at the time of termination, the swaps have negative fair values, Town would be liable to the
counterparty for a payment equal to the swaps’ fair values.
As noted above, counterparty will also have the right, but not the obligation, to terminate the 2000B and
2003A swaps in whole, but not in part, on each day that the daily weighted average of the BMA index for
any immediate preceding rolling consecutive 180 days period is more than 7 percent. Under such early
termination event, the counterparties shall be liable to pay only the accrued interest for the period from
the last payment date to the termination date.
Rollover risk. The Town is exposed to rollover risk on swaps that mature or may be terminated prior to
the maturity of the associated debt. The swap termination date on the Series 2000A COPs is June 1,
2007, after which the debt will be in a variable- rate mode. The related debt matures on June 1, 2030.
The outstanding principal of the Series 2000A COPs as of June 1, 2007, will be $ 4,900,000.
Refer to Note 9 for swap payments and associated debt service requirements. `
NOTE 9 – LONG- TERM DEBT
Long- term liability activity for the year ended June 30, 2006, was as follows:
Beginning
Balance
Additions
Reductions
Ending
Balance
Due Within
One Year
Governmental activities:
Capital leases $ 404,359 $ ($ 201,213) $ 203,146 $ 203,146
Compensated absences 1,047,658 106,490 ( 10,569) 1,143,579
Governmental activity long- term liabilities $ 1,452,017 $ 106,490 ($ 211,782) $ 1,346,725 $ 203,146
Business- type activities:
Compensated absences $ 105,526 $ 18,205 $ $ 123,731 $
Certificates of participation 28,700,000 12,000,000 ( 500,000) 40,200,000 500,000
Business- type activity long- term liabilities $ 28,805,526 $ 12,018,205 ($ 500,000) $ 40,323,731 $ 500,000
Compensated absences— Compensated absences due within one year represent unpaid
balances of reimbursable unused leave of employees who are retired as of the balance sheet
date. All compensated absences for governmental activities are paid out of the General Fund.
41
Certificates of participation( COPs)— The certificates are recorded in the Enterprise Fund and
were issued by the Public Improvement Corporation . Two issues on June 1, 2000, comprised of
$ 4,900,000 Series A, proceeds of which were used to advance refund the 1997 COPs that will
mature on the June 1, 2007 call date and $ 10,100,000 Series B that were used to refund and
retire the 1995 COPs and to finance the acquisition, construction and installation of certain
improvements to the Town’s water and sewer systems. The debt bears variable rates with
principal payments payable annually at June 1 from 2001 through 2030.
The 2003 Series A $ 15,000,000 of variable rate certificates of participation ( water and sewer
system projects) issued in August 2003 financed various water and wastewater projects,
consistent with the enterprise’s ten year capital improvement plan. The debt bears variable rates
with principal payments payable annually at June 1 from 2004 through 2033.
On April 2006, the Town issued $ 12,000,000 of variable rate certificates of participation ( water
and sewer system projects) 2006 Series A to finance various water and wastewater projects
consistent with the enterprise’s ten year capital improvement plan. ( Please refer to Note 8
discussing the forward swap agreement entered into by the Town in connection with this bond
issue.) The debt bears variable rates with principal payments payable annually at June 1 of each
year starting in 2009 through 2035.
The Town received ratings of AA+ from Fitch and AA from Standard & Poor’s for the above bond
issue.
A standby purchase agreement ( SPA) provides for the payment of the purchase price of the
tendered variable- rate COPs during the daily, weekly, and extended- rate modes in the event
remarketing proceeds following such a tender are insufficient. The initial term of the SPA expires
on July 1, 2011.
Interest accruing on the COPs is determined at the weekly rate and is payable on the first
business day of each calendar month. The debt is secured by a pledge of the net revenues of
the Enterprise Funds.
There are limitations and covenants contained in the various debt agreements. The Town
complies with all restrictive limitations and covenants at June 30, 2006.
In 2006, the Town’s total interest cost was approximately 4.26%. Using the average variable rate
in fiscal year 2005- 2006, debt service requirements of the variable- rate debt and net swap
payments, assuming current interest rates remain the same, for their term were as follows. As
rates vary, variable- rate bond interest payments and net swap payments will vary. ( Refer to Note
8.)
Year Ending Variable- Rate Bonds
June 30 Principal Interest
Interest Rate
Swaps, Net
Total
Interest
2007 $ 500,000 $ 1,422,433 $ 252,550 $ 1,674,983
2008 600,000 1,293,410 361,338 1,654,748
2009 860,000 1,273,835 355,026 1,628,861
2010 870,000 1,245,823 347,292 1,593,115
2011 980,000 1,217,487 339,502 1,556,989
2012- 2017 6,060,000 5,536,241 1,535,769 7,072,010
2018- 2021 7,200,000 4,487,886 1,224,625 5,712,511
2022- 2026 8,795,000 3,224,396 860,591 4,084,987
2027- 2031 9,985,000 1,645,770 396,214 2,041,984
2032- 2035 4,350,000 303,408 57,982 361,390
$ 40,200,000 $ 21,650,689 $ 5,730,889 $ 27,381,578
1997 Certificates of Participations Advance Refunding- As discussed above, the 1997 Certificates
of Participations were advanced refunded to reduce total debt service. The refunded bonds are
42
considered to be defeased and the liability has been removed from the proprietary funds
statement of net assets. The proceeds of the refunding bonds were placed in an irrevocable trust
for the purpose of generating resources to pay the remaining debt service and the remaining
principal balance as of the initial redemption date - June 2, 2007. Outstanding principal balance
on the refunded bonds as of June 30, 2006 was $ 4,205,000.
The internal service fund predominantly serves the governmental funds. Accordingly, the capital
lease for the fund is included as part of the capital lease for governmental activities discussed in
Note 7.
NOTE 10 – RISK MANAGEMENT
The town is exposed to various risks of loss related to torts; theft of, damage to, and destruction
of assets; errors and omissions; and natural disasters for which the Town carries commercial
insurance. The Town has established a limited risk management program of these types of risks.
The Town joined a public- entity risk pool ( The Cities Group – a Joint Power Authority) that
operates a Workers’ Compensation self- insured program. The pool indemnifies the membership
for their Workers’ Compensation losses and recovers those costs from the members through a
retrospective, loss experience based contribution- rating plan. The pool is self- insured for claims
up to $ 250,000 per occurrence. Claims in excess of this amount are insured up to $ 6.1 million.
The Town has no deductible for these claims. The Town’s premiums for the fiscal year ended
June 30, 2006, were $ 607,543. Financial statements for the pool may be obtained from The
Cities Group, P O Box 111, Burlingame, CA 94011.
Effective October 1, 2002, the Town participates in the Association of Bay Area Governments
Pooled Liability Assurance Network ( ABAG PLAN) organized within the Joint Powers Authority
Association of Bay Area Governments. The PLAN provides $ 10,000,000 coverage for general
and automobile liability in excess of the Town’s $ 50,000 deductible. Effective July 1, 2003, Town
also joined the ABAG PLAN pool for the commercial property including boiler and machinery
coverage, with $ 5,000 per incident deductible and certain specified limits.
Liabilities are reported when it is probable that a loss has occurred and the amount of the loss
can be reasonably estimated. The result of the process to estimate the claims liability is not an
exact amount as it depends on many complex factors, such as inflation, changes in legal
doctrines, and damage awards. Accordingly, claims are reevaluated periodically to consider
these factors, estimated recoveries from salvage or subrogation, and other economic and social
factors. The estimate of the claims liability also includes amounts for incremental claim
adjustment expenses related to specific claims and other claim adjustment expenses regardless
of whether allocated to specific claims. The amount recorded as liability for known claims are
based on the recommendation of the third- party administrator. No accrued liability for incurred
but not reported claims ( IBNRs) has been recorded as amounts for such claims cannot be
reasonably estimated. The Town’s remaining exposure for claims filed under this program is
minimal.
The Town is self- insured for all other insurable risk, except for excess insurance coverage
provided by commercial insurance companies that are limited to the following:
• Earthquake in excess of 15% per unit subject to $ 25,000 minimum deductible, but limited
to a maximum of $ 10,000,000
• Employment Practices Liability in excess of $ 100,000, but limited to a maximum of
$ 5,000,000.
There is no significant change in insurance coverage from that of the prior year and there were no
settlements that exceeded coverage for each of the past three years.
43
Below is a reconciliation of changes in the aggregate liabilities for claims for the fiscal years
ending June 30, 2006 and 2005.
2006 2005
Beginning Balance $ 68,718 $ 287,129
Claims incurred and changes in estimates for prior year claims 90,536 ( 52,689)
Claims paid ( 108,416) ( 165,722)
Ending Balance $ 50,838 $ 68,718
NOTE 11 – JOINT POWERS AGREEMENT
The Town participates in the City/ County Association of Governments of San Mateo County
( C/ CAG), which is governed by a board consisting of a representative from each member. The
board controls the operations of C/ CAG, including selection of management and approval of
operating budget. The association was established under a 1990 Joint Exercise of Powers
Agreement between the Town, San Mateo County and a majority of cities within the County for
the purpose of developing State- mandated plans such as an integrated waste management plan.
The Town makes annual nonrefundable contributions to C/ CAG, which are used along with other
member contributions to finance C/ CAG operations. The Town’s contribution during the year
totaled $ 21,899. Financial information related to the association may be obtained from the City of
San Carlos, 666 Elm Street, San Carlos, CA 94070. The Town’s share of year- end assets,
liabilities or fund equity has not been calculated by C/ CAG.
NOTE 12 – COMMITMENTS AND CONTINGENT LIABILITIES
The Town is obligated through cost sharing agreements with other municipalities to pay its pro-rata
share of operating expenses, capital expenses and debt service for the operation of
wastewater treatment plants. The Town is billed its portion of expenses pursuant to agreements
it entered into with the municipalities. The costs incurred by the Town under these agreements
amounted to $ 1,093,202 and $ 1,027,620 as of June 30, 2006 and 2005, respectively.
The Town is also obligated to pay a portion of the cost of operations of the local libraries, which
are operated, by the Cities of Burlingame and San Mateo. The portion of these costs paid by the
Town amounted to $ 600,311 and $ 579,411 as of June 30, 2006 and 2005, respectively.
At June 30, 2006, the Town has outstanding construction contracts and commitments for the
water operations in the amount of $ 2,068,999.
The Town is subject to litigation arising in the normal course of business. In the opinion of the
Town’s management, there is no pending litigation, which is likely to have a material adverse
effect on the financial position of the Town.
NOTE 13 – OTHER POST- EMPLOYMENT BENEFITS
The Town provides postretirement health benefits, administered through the California Public
Employees Retirement System ( CalPERS), pursuant to various Town Employee Associations’
Memoranda of Understanding. To be eligible for these benefits, the employees must retire from
the Town on or after attaining age 50 with benefits depending upon years of services varying from
a minimum of 3 to 6 years. The town is required to pay a specified premium for each employee.
As of year- end, there were 81 employees who were receiving this benefit. The Town finances the
plan on a pay- as- you- go basis. For the year ended June 30, 2006, the Town paid $ 613,297 for
these benefits. ( See Note 15 regarding GASB Statement No. 45.)
44
NOTE 14 – EMPLOYEE RETIREMENT SYSTEMS
A. PERS Pension Plan
Plan Description. The Town provides retirement and disability benefits, annual cost- of- living
adjustments and death benefits to its employees through a defined benefit pension plan offered
by the Public Agency portion of the California Public Employees Retirement System ( CalPERS),
an agent multiple- employer plan, which acts as a common investment and administrative agent
for participating public employers within the State of California. A menu of benefit provisions, as
well as other requirements, are established by State statutes within the Public Employee’s
Retirement Law. The Town selects optional benefit provisions from the benefit menu by contract
with CalPERS and adopts those benefits through local resolutions. The Town participates in
separate Safety ( police and fire) and Miscellaneous ( all other) Employee Plans. CalPERS issues
a separate comprehensive annual financial report. Copies of its annual financial report may be
obtained from CalPERS Executive Office at 400 P Street, Sacramento, CA 95814.
Funding Policy. Active plan members are required to contribute 8% ( miscellaneous) or 9%
( public safety) of their annual covered salary. For fiscal year 2006, plan members contributed
$ 710,323. The Town is required to contribute the actuarially determined remaining amounts
necessary to fund the benefits for its members. The actuarial methods and assumptions used re
those adopted by the CalPERS Board of Administration. The contribution requirements of the
plan members are established by State statute and the employer contribution rate is established
and may be amended by CalPERS.
Annual Pension Cost. For fiscal year 2006, the Town’s annual pension cost was $ 2,125,474 The
required contribution for the current year was determined as part of the June 30, 2003 actuarial
valuation using the entry age normal actuarial cost method with the contributions determined as a
percent of pay. The actuarial assumptions included ( a) 8.25% investment rate of return ( net of
administrative expenses); ( b) projected salary increases that vary by duration of service ranging
from 3.75% to 14.20% for miscellaneous members ( from 4.272% to 11.59% for safety members),
and ( c) 3.75% cost- of- living adjustment. Both ( a) and ( b) include an inflation component of 3.5%.
The Plans’ provisions and benefits in effect at June 30, 2006, and the required contribution rates
for fiscal year 2005- 06 are summarized below:
Police Fire Miscellaneous
Benefit vesting schedule 5 years service 5 years service 5 years service
Benefit payments Monthly for life Monthly for life Monthly for life
Retirement age 50 50 55
Monthly benefits, as a % of annual salary 3% 2% - 2.7% 2% - 2.7%
Required employee contribution rates 9% 9% 8%
Required employer contribution rates 24.945% 22.739% 21.287%
Initial unfunded liabilities are amortized over a closed period that depends on the plan’s date of
entry into CalPERS. Subsequent plan amendments are amortized as a level percentage of pay
over a closed 20- year period. Gains and losses that occur in the operation of the plan are
amortized over an open 13- year period, which results in an amortization of 10% of unamortized
gains and losses each year. If the plan’s accrued liability exceeds the actuarial value of plan
assets, then the amortization payment on the total unfounded liability may not be lower than the
payment calculated over a 30- year amortization period.
45
The three- year trend information for the Town is as follows:
Annual Percentage Net
Fiscal Year Pension Of APC Pension
Ending Cost Contributed Obligation
Miscellaneous 6/ 30/ 04 $ 392,107 100% $ - 0 -
6/ 30/ 05 $ 676,201 100% $ - 0 -
6/ 30/ 06 $ 791,648 100% $ - 0 -
Public Safety 6/ 30/ 04 $ 254,267 $ - 0 -
6/ 30/ 05 $ 1,022,663 100% $ - 0 -
6/ 30/ 06 $ 1,333,826 100% $ - 0 -
B. Social Security
The Town’s Local 856 union members, management and part- time seasonal and temporary
employees are covered under Social Security that requires these employees and the Town to
each contribute 7.65% of the employees’ pay. Total contributions to Social Security during the
year ended June 30, 2006, amounted to $ 410,171.
NOTE 15 – NEW ACCOUNTING PRONOUNCEMENTS
In July 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers
for Post- employment Benefits Other than Pensions. This will require local governmental employers who
provide other post- employment benefits ( OPEB) as part of the total compensation offered to employees
to recognize the expense and related liabilities ( assets) in the government- wide financial statements of
net assets and activities. It establishes standards for the measurement, recognition, and display of OPEB
expense/ expenditures and related liabilities ( assets), note disclosures, and, if applicable, required
supplementary information ( RSI) in the financial reports of the local governmental employer.
Town’s current financial reporting practices for OPEB are based on pay- as- you- go basis ( See
Note 13.) It does not measure or recognize the cost of OPEB during the periods when employees render
the services or to provide relevant information about OPEB obligations and the extent to which progress
is being made in funding those obligations.
The Statement provides for prospective implementation, i. e. employers set the beginning net
OPEB obligation at zero as of the beginning of the initial year. The Town will be required to implement
the provisions of this Statement for the fiscal year ended June 30, 2009. The Town is in the process of
determining the impact the implementation of this Statement will have on the government- wide statement
of net assets and activities.
In December 2004, GASB issued Statement No. 46, Net Assets Restricted by Enabling
Legislation. This Statement sets the criteria and specifies the accounting and financial reporting
requirements for such assets. The requirements of this Statement are effective for periods beginning
after June 15, 2005. Town does not have any assets restricted by enabling legislation.
In June 2005, GASB issued Statement No. 47, Accounting for Termination Benefits. This
Statement sets accounting standards for termination benefits and takes effect for periods beginning after
June 15, 2005. Town does not have any termination plan other than the existing defined benefit OPEB
plan discussed in Note 13 to be implemented with the requirements of Statement No. 45 discussed
above.
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REQUIRED SUPPLEMENTARY
INFORMATION
Actuarial Annual UAAL as a
Valuation Accrued Value of Unfunded Funded Covered % of
Date Liability Assets Liability Status Payroll Payroll
( a) ( b) ( a) - ( b) ( b) / ( a) ( c) [( a)-( b)]/( c)
PUBLIC SAFETY:
POLICE: ( 2)
Retirement Program
6/ 30/ 2003 ( 1) 1,218,082,935 1,083,690,137 134,392,798 89.0% 1 84,098,257 73.0%
6/ 30/ 2004 5,383,921,942 4,424,586,846 959,335,096 82.2% 5 75,296,434 166.8%
6/ 30/ 2005 6,367,049,264 5,295,150,375 1,071,898,889 83.2% 6 64,147,796 161.4%
FIRE:
Retirement Program
6/ 30/ 2003 ( 1) 1,218,082,935 1,083,690,137 134,392,798 89.0% 1 84,098,257 73.0%
6/ 30/ 2004 996,203,370 885,549,650 110,653,720 88.9% 1 49,407,703 74.1%
6/ 30/ 2005 742,247,338 646,358,708 95,888,630 87.1% 1 15,062,820 83.3%
MISCELLANEOUS: ( 3)
Retirement Program
6/ 30/ 2003 ( 1) 515,421,442 456,062,164 59,359,278 88.5% 1 20,692,360 49.2%
6/ 30/ 2004 426,958,282 334,956,019 92,002,263 78.5% 9 0,667,029 101.5%
6/ 30/ 2005 499,323,280 405,480,805 93,842,475 81.2% 1 08,618,321 86.4%
( 1) Effective with the 6/ 30/ 2003 valuation, CalPERS established risk pools for plans containing less than 100 active members.
Town's 3 plans are included in these risk pools.
( 2) Police Plan's 6/ 30/ 2003 valuation reflects data for Safety 2% at 50 Risk Pool and Safety 3% at 60 Risk Pool for the 6/ 30/ 2004
valuation.
( 3) Miscellaneous Plan's 6/ 30/ 03 valuation reflects data for Miscellaneous 2.7% at 55 Risk Pool and Miscellaneous 3% at 60 Risk
Pool for the 6/ 30/ 2004 valuation.
TOWN OF HILLSBOROUGH
SCHEDULE OF FUNDING PROGRESS
EMPLOYEES RETIREMENT SYSTEM
47
Total
Nonmajor
Gas Police CAPITAL Governmental
Tax Measure A Grants PROJECTS Funds
ASSETS
Cash and investments:
Town Treasury $ $ 46,731 $ 134,567 $ 620,242 $ 801,540
Accounts receivable 2 9,325 29,325
Due from other governments 21,450 36,113 57,563
Total Assets $ 21,450 $ 82,844 $ 134,567 $ 649,567 $ 888,428
LIABILITIES
Accounts payable $ $ $ 21 $ 72,847 $ 72,868
Due to other funds 17,153 17,153
Total Liabilities 17,153 21 7 2,847 90,021
FUND BALANCES
Unreserved -
Designated for streets 4,297 82,844 87,141
Designated for public safety 134,546 134,546
Designated for capital improvement plan 5 76,720 576,720
Total Fund Balances 4,297 82,844 134,546 576,720 798,407
Total Liabilities & Fund Balances $ 21,450 $ 82,844 $ 134,567 $ 649,567 $ 888,428
SPECIAL REVENUE FUNDS
TOWN OF HILLSBOROUGH
COMBINING BALANCE SHEET
NONMAJOR GOVERNMENTAL FUNDS
JUNE 30, 2006
51
Total
Nonmajor
Gas Police CAPITAL Governmental
Tax Measure A Grants PROJECTS Funds
REVENUES:
Intergovernmental $ 213,255 $ 413,044 $ 100,000 $ 254,081 $ 980,380
Investment earnings 1,294 6,164 24,815 32,273
Miscellaneous 237,845 237,845
Total Revenues 213,255 414,338 106,164 516,741 1,250,498
EXPENDITURES:
Current:
General government 5,428 13,400 23,981 42,809
Public safety 35,296 35,296
Public works 5,894 5,894
Capital outlay 76,051 1,350,596 1,426,647
Total Expenditures 5,428 13,400 111,347 1,380,471 1,510,646
EXCESS OF REVENUES OVER
EXPENDITURES 207,827 400,938 ( 5,183) ( 863,730) ( 260,148)
OTHER FINANCING SOURCES ( USES):
Transfers In 666,995 666,995
Transfers Out ( 225,000) ( 425,000) ( 14,740) ( 664,740)
Total Other Financing Sources ( Uses) ( 225,000) ( 425,000) ( 14,740) 666,995 2,255
NET CHANGE IN FUND BALANCES ( 17,173) ( 24,062) ( 19,923) ( 196,735) ( 257,893)
BEGINNING FUND BALANCES 21,470 106,906 154,469 773,455 1,056,300
ENDING FUND BALANCES $ 4,297 $ 82,844 $ 134,546 $ 576,720 $ 798,407
SPECIAL REVENUE FUNDS
TOWN OF HILLSBOROUGH
COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
NONMAJOR GOVERNMENTAL FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
52
50
Town of Hillsborough
Note to Required Supplementary Information
June 30, 2006
Budgetary Information
The Town adopts annual budgets on a basis consistent with generally accepted
accounting principles for all governmental funds except the capital projects funds, which
adopt project- length budgets. All appropriations lapse at fiscal year- end. Encumbrances
which are commitments related to unperformed contracts for goods or services at year-end
lapse and are automatically reappropriated and reencumbered in the subsequent
fiscal year. Such encumbrances in the governmental funds at June 30, 2006 were
$ 14,215. Budgets are also adopted and controlled for the proprietary funds. Budget
comparisons for these funds are not legally mandated and thus are not presented.
Prior to June 30, the Town Manager submits to the Town Council a proposed operating
budget for review. The Council holds public hearings and a final budget is adopted on or
before June 30.
The appropriated budget is prepared by fund, function, and department. The Town’s
department heads may make transfers of appropriations within a department. The Town
Manager may transfer budgeted amounts within any fund. Any revisions that alter the
total expenditures of any fund must be approved by the Town Council. The legal level of
budgetary control ( i. e., the level at which expenditures may not legally exceed
appropriations) is the fund level. Budget amounts shown in these financial statements
include all supplemental appropriations made during the year for the General and the
Special Revenue funds.
A schedule of revenues, expenditures and changes in fund balances – budget and actual
– of the Town’s general fund and the Police and Fire special tax fund – another major
governmental fund- are presented as required supplementary information.
COMBINING STATEMENTS AND INDIVIDUAL
FUND SCHEDULES
Nonmajor Governmental Funds
Special Revenue Funds
Special revenue funds are used to account for specific revenues that are legally restricted to
expenditure for particular purposes.
Gas Tax Fund – This fund is used to account for receipts and disbursements of funds
apportioned under Streets and Highways Code Sections 2105, 2106, 2107 and 2107.5 of the
State of California for the purpose of financing major street construction projects.
Measure “ A” Fund – This fund is used to account for receipts and disbursements of a San Mateo
County half- cent sales tax approved by the voters in June 1988 ( Measure A) for the purpose of
improving local transportation including streets and roads.
Police Grants Fund – This fund is used to account for activities funded by proceeds from various
police grants and programs.
Capital Projects Fund
Capital projects funds are used to account for the acquisition and construction of major capital
facilities other than those financed by proprietary funds and trust funds.
Total
Nonmajor
Gas Police CAPITAL Governmental
Tax Measure A Grants PROJECTS Funds
ASSETS
Cash and investments:
Town Treasury $ $ 46,731 $ 134,567 $ 620,242 $ 801,540
Accounts receivable 2 9,325 29,325
Due from other governments 21,450 36,113 57,563
Total Assets $ 21,450 $ 82,844 $ 134,567 $ 649,567 $ 888,428
LIABILITIES
Accounts payable $ $ $ 21 $ 72,847 $ 72,868
Due to other funds 17,153 17,153
Total Liabilities 17,153 21 7 2,847 90,021
FUND BALANCES
Unreserved -
Designated for streets 4,297 82,844 87,141
Designated for public safety 134,546 134,546
Designated for capital improvement plan 5 76,720 576,720
Total Fund Balances 4,297 82,844 134,546 576,720 798,407
Total Liabilities & Fund Balances $ 21,450 $ 82,844 $ 134,567 $ 649,567 $ 888,428
SPECIAL REVENUE FUNDS
TOWN OF HILLSBOROUGH
COMBINING BALANCE SHEET
NONMAJOR GOVERNMENTAL FUNDS
JUNE 30, 2006
51
Total
Nonmajor
Gas Police CAPITAL Governmental
Tax Measure A Grants PROJECTS Funds
REVENUES:
Intergovernmental $ 213,255 $ 413,044 $ 100,000 $ 254,081 $ 980,380
Investment earnings 1,294 6,164 24,815 32,273
Miscellaneous 237,845 237,845
Total Revenues 213,255 414,338 106,164 516,741 1,250,498
EXPENDITURES:
Current:
General government 5,428 13,400 23,981 42,809
Public safety 35,296 35,296
Public works 5,894 5,894
Capital outlay 76,051 1,350,596 1,426,647
Total Expenditures 5,428 13,400 111,347 1,380,471 1,510,646
EXCESS OF REVENUES OVER
EXPENDITURES 207,827 400,938 ( 5,183) ( 863,730) ( 260,148)
OTHER FINANCING SOURCES ( USES):
Transfers In 666,995 666,995
Transfers Out ( 225,000) ( 425,000) ( 14,740) ( 664,740)
Total Other Financing Sources ( Uses) ( 225,000) ( 425,000) ( 14,740) 666,995 2,255
NET CHANGE IN FUND BALANCES ( 17,173) ( 24,062) ( 19,923) ( 196,735) ( 257,893)
BEGINNING FUND BALANCES 21,470 106,906 154,469 773,455 1,056,300
ENDING FUND BALANCES $ 4,297 $ 82,844 $ 134,546 $ 576,720 $ 798,407
SPECIAL REVENUE FUNDS
TOWN OF HILLSBOROUGH
COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
NONMAJOR GOVERNMENTAL FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
52
Variance with
Final Budget -
Original and Positive
Final Budget Actual ( Negative)
REVENUE