CITY OF MORGAN HILL
Prepared by
FINANCE DEPARTMENT
CITY OF MORGAN HILL, CALIFORNIA
COMPREHENSIVE ANNUAL
FINANCIAL REPORT
YEAR ENDED JUNE 30, 2006
CITY OF MORGAN HILL
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TABLE OF CONTENTS
INTRODUCTORY SECTION
Letter of Transmittal................................................................................................................. i
Elected Officials and City Staff................................................................................................ vii
Location Map ........................................................................................................................... viii
Organizational Chart ................................................................................................................ ix
Certificates of Award for Excellence in Financial Reporting .................................................. xi
FINANCIAL SECTION
Independent Auditor’s Report .................................................................................................. 1
Management’s Discussion and Analysis .................................................................................. 3
Basic Financial Statements
Government- wide financial Statements
Statement of Net Assets .................................................................................................. 19
Statement of Activities.................................................................................................... 20
Fund Financial Statements
Balance Sheet – Governmental Funds ............................................................................ 21
Statement of Revenues, Expenditures, and Changes in Fund Balances –
Governmental Funds .................................................................................................... 22
Reconciliation of the Statement of Revenues, Expenditures,
and Changes in Fund Balances of Governmental Funds to the
Statement of Activities................................................................................................. 23
Statement of Revenues, Expenditures, and Changes in Fund Balances –
Budget and Actual – General Fund.............................................................................. 24
Statement of Net Assets – Proprietary Funds ................................................................. 25
Statement of Revenues, Expenses, and Changes in
Fund Net Assets – Proprietary Funds .......................................................................... 27
Statement of Cash Flows – Proprietary Funds................................................................ 29
Statement of Fiduciary Net Assets – Fiduciary Funds.................................................... 31
Notes to the Financial Statements ......................................................................................... 33
Required Supplementary Information:
Schedule of Funding Progress – Public Safety Employees
Retirement System ............................................................................................................. 63
CITY OF MORGAN HILL
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TABLE OF CONTENTS, ( Continued)
Combining and Individual Fund Statements and Schedules:
Combining Balance Sheet – Nonmajor Governmental Funds............................................... 73
Combining Statement of Revenues, Expenditures and Changes in
Fund Balance – Nonmajor Governmental Funds................................................................ 81
Schedule of Revenues, Expenditures, and Changes in Fund Balance-
Budget and Actual:
Redevelopment Agency Capital Project Fund.................................................................... 88
Nonmajor Governmental Funds.......................................................................................... 89
Combining Statement of Net Assets – Internal Services Funds............................................... 123
Combining Statement of Revenues, Expenses, and Changes in Fund
Net Assets – Internal Service Funds .................................................................................. 125
Combining Statement of Cash Flows – Internal Service Funds............................................... 127
Statement of Changes in Fiduciary Net Assets – Fiduciary Funds........................................... 131
Capital Assets Used in the Operation of Governmental Funds:
Comparative Schedules by Source, Function and Activity ................................................ 135
Schedule of Changes by Function and Activity.................................................................. 137
STATISTICAL SECTION
Net Assets by Component ....................................................................................................... 141
Changes in Net Assets ........................................................................................................... 142
Fund Balances of Governmental Funds.................................................................................... 144
Changes in Fund Balances of Governmental Funds ................................................................ 145
Assessed and Actual Value of Taxable Property .................................................................... 147
District and Overlapping Property Tax Rates ......................................................................... 148
Principal Property Taxpayers .................................................................................................. 149
Property Tax Levies and Collections ...................................................................................... 150
Ratios of Outstanding Debt by Type ....................................................................................... 151
Ratios of Net General Bonded Debt Outstanding ................................................................... 152
Direct and Overlapping Governmental Activities Debt .......................................................... 153
Legal Debt Margin Information ............................................................................................... 154
Pledged- revenue Coverage....................................................................................................... 155
Demographic and Economic Statistics ..................................................................................... 156
Principal Employers ................................................................................................................. 157
CITY OF MORGAN HILL
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
TABLE OF CONTENTS, ( Continued)
Full- time Equivalent City Government Employees by Function ............................................ 158
Operating Indicators by Function ............................................................................................ 159
Per Capita Comparison- Santa Clara County Cities.................................................................. 160
Property Values, Construction and Bank Deposits .................................................................. 161
Miscellaneous Statistics ........................................................................................................... 162
Introductory Section
FINANCE DEPARTMENT
17555 PEAK AVENUE
MORGAN HILL, CA
95037- 4128
UTILITY BILLING: 408- 779- 7221
GENERAL: 408- 779- 7237
FAX: 408- 778- 1564
WWW. MORGAN- HILL. CA. GOV
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December 20, 2006
Honorable Mayor, Members of the City Council, City Manager, and Citizens of Morgan Hill:
The Comprehensive Annual Financial Report ( CAFR) of the City of Morgan Hill, California for the fiscal
year ended June 30, 2006, is submitted for your information and review. The responsibility for the
accuracy of the information, and the completeness and fairness of the presentation, including all
disclosures, rests with the City's management. To the best of our knowledge, the enclosed information is
accurate in all material respects and is reported in a manner designed to present fairly the financial
position and the results of operations of the City. All disclosures necessary to enable the reader to gain an
understanding of the City’s financial activities have been included. The financial statements within this
report have been audited by the City’s independent auditor, Moss, Levy, & Hartzheim, which has issued
an unqualified opinion. The auditor’s opinion letter is included in this report.
The City was required to undergo a single audit for 2005/ 06 federal assistance to the City under the
provisions of The Single Audit Act, as amended in 1996, and the U. S. Office of Management and Budget
Circular A- 133, Audits of States, Local Governments, and Non Profit Organizations.
This fiscal year’s report has been formatted to comply with the financial reporting model developed under
the Governmental Accounting Standards Board ( GASB) Statement No. 34. It is intended to improve
financial reporting by providing additional information not previously available in local government
financial statements.
• The Statement of Net Assets and the Statement of Activities represent a combination of all the
City’s funds, comprising the City’s General Fund, Special Revenue, Capital Projects, Debt
Service, and Enterprise Funds, including activities which are restricted. Information about
individual funds can be found in the combining statements contained within the CAFR.
• The amount reported as “ unrestricted” in the net assets section of the Statement of Net Assets
includes amounts designated by the City Council for general reserve purposes, includes amounts
that have accumulated in various internal service funds to be used for the purposes intended for
those funds, and includes business- type net assets that have been collected from water and sewer
rate payers that are needed to fund ongoing water and sewer operating and capital needs.
• The amount reported as infrastructure, as part of capital assets, includes the value of infrastructure
from 1980 through fiscal year ending June 30, 2006. For the prior three years, the City had
included the annual additions to infrastructure each year, and the City has now included an
estimated value of historical infrastructure under the requirements of GASB Statement No. 34.
To assist with the reader’s review of the City’s financial statements, a narrative section called
Management’s Discussion and Analysis ( MD& A) is included. The MD& A reports on the financial
highlights of the City and provides additional analysis on the variances and trends reported as part of the
financial statements. In addition, the MD& A is designed to disclose any significant events or decisions
that affect the financial condition of the City.
The CAFR is presented in three sections: Introductory, Financial, and Statistical. The Introductory
Section, which is unaudited, includes this letter of transmittal, a list of the City’s elected officials and
administrative personnel, an organization chart, an area map, and certificates of award for financial
reporting. The Financial Section includes the independent auditor’s report on the financial statements and
schedules, the MD& A, basic financial statements, required supplementary information, and combining
and individual fund statements and schedules. The Statistical Section, which is unaudited, includes
selected financial and demographic information, generally presented on a multi- year basis.
The financial reporting entity includes all of the funds of the primary government, the City of Morgan
Hill, as well as all of its component units. Component units are legally separate entities for which the
primary government is fully accountable. The Morgan Hill Wastewater Facilities Financing Corporation
and the Redevelopment Agency of the City of Morgan Hill are governed by boards which are
substantially the same as the City's governing body. These two component units have been blended into
the City's basic financial statements because the City is able to impose its will on these component units
and because the component units provide services primarily to the City. The Morgan Hill Corporation
Yard Commission is a joint powers authority between the City and the Morgan Hill Unified School
District and it functions for the benefit of the City and the School District. Since the services of the
Corporation Yard Commission are not provided primarily to the City, the financial information for the
Commission is discretely presented in the basic financial statements so that this information may be
separately accounted for.
This report includes all funds of the City. The City provides a broad range of services including police
protection, business assistance and housing, water and sanitation services, streets, and parks construction
and maintenance, planning and engineering, code enforcement, recreation, and general city administration
and support services. The City receives fire protection services from the Santa Clara County Fire
Department under contract. The City relies on franchised solid waste collection services.
ECONOMIC CONDITIONS AND OUTLOOK
The City benefits from a diverse local economy which includes a variety of business activities and
employers. The largest employers are: Morgan Hill Unified School District, Hospira, Anritsu, Comcast
Cable Communications, EDO Reconnaissance & Surveillance Systems, Safeway, Fox Racing, Paramit
Corporation, City of Morgan Hill and Specialized Bicycle Components.
Business attraction, economic development, affordable housing, and capital improvements provide the
foundation of the City’s strategy for enhancing economic growth. Prudence in fiscal matters guides the
City’s management of its finances.
Goal setting and establishment of priorities based on community input ensure that issues important to the
citizens of Morgan Hill are appropriately addressed. These issues include access to housing, enhanced
recreation facilities, public safety, and emergency services. The City has been responsive to these issues,
as shown by the progress toward these goals and the establishment of a solid foundation for the future. In
particular, a substantial Capital Improvement Program included the addition of an Aquatics Center, a new
Centennial Recreation Center which opened its doors shortly after the end of the fiscal year, a new
Library currently under construction, and a new Police Facility. Much of this activity stems from the
City’s commitment to the redevelopment process through the actions of the Redevelopment Agency.
Morgan Hill is still rebounding from the effects of the slowdown in the regional and State economy,
which began in late 2000/ 01. Total employment for Santa Clara County declined from 1,009,500 in
calendar 2001 to 853,000 in 2004, but then increased to 858,600 in 2005. The County unemployment rate
increased from 2.0 % in calendar 2000 to 8.4% in 2002, and then dropped to 5.5% in 2005. The City’s
unemployment rate increased from 1.5 % in calendar 2000 to 8.8% in 2004, and then dropped to 7.3% in
2005. Property tax collections have continued to increase, reflecting higher residential property values
and new construction.
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Sales taxes increased by 19% during fiscal year 2005/ 06, with the largest growth occurring in the
“ transportation” sales tax category. Approximately half of the increase in property taxes resulted from
new property taxes allocated to the City by the State of California to replace vehicle in- lieu fees that had
been reduced by the State. Franchise, hotel, and other taxes increased by a combined 5%, and licenses
and permits decreased by 17%. The City’s tax receipts were affected by the State Government’s fiscal
crisis. The State took $ 340,000 in property taxes that would normally have gone to the City in each of the
fiscal years 2004/ 05 and 2005/ 06. In response to such actions, State voters approved a ballot measure in
November 2004 that will make it more difficult for the State to take additional monies away from local
governments in the future.
The operating costs associated with recently opened recreational facilities, along with increased employer
retirement system costs, increased workers’ compensation costs, and higher contract fire service costs will
place significant fiscal pressures upon the General Fund over the next several years. In response, the City
Council adopted a sustainable budget strategy in January 2004 in which the City aims to balance revenues
and expenditures by fiscal year 2007/ 08 through expenditure reductions, revenue increases, and draws on
existing reserve funds, while maintaining a General Fund reserve level equal to at least 25% of annual
revenues.
In order to provide the appropriate levels of service to the community, the City conducted a year- long
community conversation so that the City could determine the levels of service desired by the community
and determine the community’s willingness to pay more for these services. The City hired a consultant to
assist in this process which involved a series of approximately 30 community meetings, followed by a
capstone community discussion, during fiscal year 2005/ 06. Following these meetings, the City Council
determined that there was not sufficient community support to propose new revenue sources at that time.
However, the City Council did conclude that the community conversations were a valuable way in which
to engage the community and stated a willingness to conduct more community conversations to gauge the
community’s expectations concerning service levels.
While the General Fund maintained strong reserves of approximately $ 10 million ( or 46% of budgeted
fiscal year 2006/ 07 revenues) at June 2006, the City expects to incur a $ 300,000 General Fund operating
deficit in 2006/ 07. However, the City projects operating surpluses in the years following 2006/ 07,
because the Morgan Hill Redevelopment Agency approved a reduction in the Agency’s boundaries, and
this will produce an additional $ 700,000 per year in property tax revenues that previously went to the
Agency instead of the City’s General Fund. These projections assume that the City does not hire new
staff, other than two additional police officers in conjunction with the opening of a new retail center that
is under construction, to handle additional workloads.
ACCOUNTING SYSTEMS AND BUDGETARY CONTROLS
When developing and evaluating the City's accounting system, consideration is given to the effectiveness
of the internal accounting controls. Internal accounting controls are designed to provide reasonable
assurance regarding: safeguarding of assets against loss, accuracy and reliability of accounting data, and
adherence to prescribed managerial policy. Reasonable assurance recognizes that the cost of a control
should not exceed benefits to be derived. The evaluation of costs and benefits requires estimates and
judgments by management. We believe the internal accounting controls of the City adequately safeguard
assets and provide reasonable assurance of proper recording of the financial transactions.
State statutes and City policy require an approved budget before expenditures are made. Budgets are
adopted for all governmental funds and proprietary funds.
Budget proposals are prepared by the City's Department Directors. The budget proposals, with
justifications, are submitted to the Finance Department for compilation. The budget is compiled and the
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City's preliminary budget is recommended by the City Manager. The City Council reviews the
preliminary budget at study sessions open to the public. Changes made at these sessions are incorporated
into the final budget. The final budget is then submitted to the City Council for adoption at a public
hearing.
The City Council may amend the budget during the year. The City Manager may transfer appropriations
within an activity to facilitate the functions of that activity in accordance with the directions, goals, and
policies of the City Council. A transfer of appropriations between activities requires City Council
approval and any additional appropriations also require approval by the City Council. The budgeted
amounts presented in the report are as originally adopted and/ or amended by the City Council.
CASH MANAGEMENT
Temporarily idle cash, not restricted for other uses, was primarily invested in the California Local Agency
Investment Fund ( LAIF) and in U. S. Government Securities. Investments in LAIF are highly liquid, and
generally may be converted to cash within twenty- four hours without loss of investment income. Of
LAIF's total investments as of June 30, 2006, approximately 5% was invested in Government Bills and
Notes, 29% in Federal Agency Coupons and Discount Notes, 22% in CD’s, 20% in Commercial Paper
and Corporate Bonds, 12% in time deposits, and 12% in other investments. In general, the return on
investments for all funds increased from the prior fiscal year due to average higher interest rates on City
investments.
RISK MANAGEMENT
The City is a member of the Association of Bay Area Governments ( ABAG). The City participates in the
ABAG- PLAN, a self- insured risk pool formed by certain cities in the greater San Francisco Bay
Area to pool their insurance risk and help lower the overall cost of providing insurance coverage for
general liability claims. The coverage amount for 2005/ 06 was $ 10 million per occurrence, subject to a
$ 100,000 deductible, and the coverage was increased to $ 20 million per occurrence for 2006/ 07. The City
Manager, the Finance Director as Risk Manager, and the City Attorney work with the ABAG- PLAN to
coordinate the City's insurance policies, maintain insurance records and represent the City in handling
claims.
In addition, the City is fully self- insured for unemployment claims. The City is also self insured for
workers' compensation up to a maximum of $ 250,000 for each claim. Purchased insurance covers the
excess up to $ 5,000,000 per year for workers’ compensation claims.
AWARDS
The Government Finance Officers Association ( GFOA) awarded a Certificate of Achievement for
Excellence in Financial Reporting to the City of Morgan Hill for its Comprehensive Annual Financial
Report for the fiscal year ended June 30, 2005. The Certificate of Achievement is the highest form of
recognition for excellence in state and local government financial reporting.
In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable
and efficiently organized comprehensive annual financial report, the contents of which conform to
program standards. Such a report must satisfy both generally accepted accounting principles and
applicable legal requirements.
The GFOA certificate is valid for a period of one year only. The City has received this certificate for the
last twelve consecutive years. We believe our current report continues to conform to the Certificate of
Achievement program requirements, and we are submitting it to the GFOA again this year.
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CITY OF MORGAN HILL, CALIFORNIA
ELECTED OFFICIALS AND CITY STAFF AS OF JUNE 30, 2006
ELECTED OFFICIALS
Dennis Kennedy Mayor
Mark Grzan Mayor Pro Tem
Larry Carr Council Member
Greg Sellers Council Member
Steve Tate Council Member
Michael J. Roorda City Treasurer
Irma Torrez City Clerk
CITY STAFF
J. Edward Tewes City Manager
Janet Kern City Attorney
Jack Dilles Director of Finance
Kathy Moloy Previsich Director of Community Development
Garrett Toy Director of Business Assistance & Housing Services
Bruce Cumming Chief of Police
Jim Ashcraft Director of Public Works
Mary Kaye Fisher Director of Human Resources
Melissa Dile Assistant to the City Manager
Irma Torrez Council Services and Records Manager
Steve Rymer Recreation Manager
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CITIZENS OF MORGAN HILL
City Clerk City Council City Treasurer
City Manager City Attorney
Business Assistance &
Housing Services
Community Development
Council Services
Finance
Fire
Human Resources
Police
Public Works
Recreation & Community
Services
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Financial Section
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
Management’s Discussion and Analysis ( MD& A)
June 30, 2006
As management of the City of Morgan Hill ( City), we offer readers of the City’s financial statements this
narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30,
2006. Please read this overview in conjunction with the accompanying letter of transmittal and the
accompanying basic financial statements. In compliance with Governmental Accounting Standards
Board ( GASB) Statement No. 34, comparative data for the prior fiscal year is provided.
FINANCIAL HIGHLIGHTS
• During Fiscal Year 2005/ 06, the City’s net assets, representing the difference between total assets
and total liabilities, increased by $ 24.5 million to $ 345.6 million. Of the total net assets, $ 65.2
million in unrestricted assets may be used to meet the City’s ongoing obligations to citizens. The
$ 24.5 million increase primarily resulted from the collection of Redevelopment Agency property
tax increment and City development impact fees that have been or will be used for capital
projects.
• Of the total $ 345.6 million in net assets, $ 209.6 million represents investments in capital assets,
$ 70.8 million represents net assets restricted by outside agencies and state regulations for specific
purposes, and $ 65.2 million represents unrestricted net assets that may be used to meet the City’s
ongoing obligations to its citizens and creditors.
• Total revenues from all sources were $ 84.3 million and total expenses for all City programs were
$ 59.8 million.
• At June 30, 2006, the City had $ 43.1 million in long- term debt, comprised of $ 11.8 million in
debt secured by water revenues, $ 20.0 million in wastewater capacity rights payable secured by
sewer revenues, $ 6.9 million in police facility lease revenue bonds subject to a City
appropriations covenant, $ 2.1 million in loans for acquisition and predevelopment expenses
associated with multi- family housing rehabilitation and/ or new construction secured by liens on
real estate owned by recipients of Redevelopment Agency loans, $ 1.0 million in special
assessment bonds secured by property owner assessments, and $ 1.3 million in compensated
absences payable.
• At June 30, 2006, the City’s governmental funds reported ending fund balances of $ 63.4 million,
an increase of $ 0.3 million in comparison with the prior fiscal year.
• The unreserved portion of fund balance in the City’s General Fund increased by $ 0.1 million to
$ 10.0 million. The City Council designated $ 5.0 million of this total to provide for a “ general
reserve.”
• During Fiscal Year 2005/ 06, General Fund revenues exceeded expenditures by $ 0.1 million,
while combined revenues and transfers in exceeded combined expenditures and transfers out by
$ 0.3 million.
• Actual revenues in the General Fund were $ 1.6 million greater than the final budget. Of this
total, $ 1.4 million resulted from higher sales taxes and property taxes than had been anticipated.
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City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
• Actual expenditures in the General Fund were $ 0.4 million less than the final budget.
OVERVIEW OF THE FINANCIAL STATEMENTS
This discussion and analysis is intended to serve as an introduction to the City’s basic financial
statements, which are comprised of three components:
• Government- wide financial statements – These include the Statement of Net Assets and
Statement of Activities. These statements provide information about the activities of the City
as a whole and about the overall financial condition of the City in a manner similar to a
private- sector business. These statements are described in more detail in a subsequent section
in this MDA and can be found on pages 19 and 20 of this report.
• Fund financial statements – These statements provide additional information about the City’s
major funds, including how services were financed in the short term and fund balances
available for financing future projects. These statements are described in more detail in a
subsequent section of this MDA and can be found on pages 21 through 31 of this report.
• Notes to the basic financial statements – The notes provide additional detail that is essential
to a full understanding of the information provided in the government- wide and fund
financial statements. The notes can be found on pages 33 through 62 of this report.
A. Government- Wide Financial Statements
These statements include all assets and liabilities of the City using the accrual basis of accounting,
which is similar to the accounting used by most private sector companies. All current year revenues
and expenses are accounted for regardless of when the cash is paid or received.
These statements report the City’s net assets and related changes. Net assets, the difference between
assets and liabilities, are one way to measure the City’s financial position. Over time, increases or
decreases in net assets are indicators of whether the financial condition of the City is improving or
deteriorating. However, it is also important to consider other non- financial factors, such as changes
in the City’s property tax and sales tax bases or in the condition of the City’s infrastructure ( for
example, parks and streets), to accurately assess the overall health of the City.
These statements present information about the City’s activities, all of which are considered
governmental in nature. These include services provided for general government, public safety
( police and fire), community development, public works development ( streets and parks), recreation
& culture, sewer, and water. These services are funded from monies received from property, sales,
and other taxes, direct charges for services provided, grants, contributions from other agencies, and
development impact fees collected from new development.
B. Fund Financial Statements
These statements provide more detailed information about the City’s major funds. A fund is a
grouping of related accounts that is used to maintain control over resources that have been segregated
for specific activities or objectives. The City, 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 City can be divided into three categories, which are governmental funds, proprietary
funds, and fiduciary 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
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City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
the government- wide financial statements, governmental fund financial statements focus on the 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 financial
statements, it is useful to compare the information presented for governmental funds with similar
information presented by 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 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 City maintains 30 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 for the Redevelopment Agency capital
projects fund, as they qualify to be classified as major funds. Data for the other 28 governmental
funds is combined into a single, aggregated presentation. Individual fund data for each of these non-major
governmental funds is provided in the form of combining statements included elsewhere in this
report.
The City adopts an annual appropriated budget for each of the City’s governmental funds. A
budgetary comparison statement has been provided for each governmental fund to demonstrate
compliance with this budget.
Proprietary funds: The City maintains two different types of proprietary funds, which are
enterprise funds and internal service funds. Enterprise funds are used to report the same functions
presented as business- type activities in the government- wide financial statements. The City uses
enterprise funds to account for sewer and water operations, as well as for sewer and water mitigation
activities.
Internal service funds are accounting devices used to accumulate and allocate costs internally among
the City’s various functions and to build up reserves for the replacement of capital assets. The City
uses internal service funds to account for building maintenance, information systems, unemployment
insurance, workers’ compensation, general liability claims, equipment replacement, and capital
improvement program administration. Because these services predominantly benefit governmental
rather than business- type functions, they have been included within governmental activities in the
government- wide financial statements.
Proprietary fund financial statements provide the same type of information as the government- wide
financial statements, only in more detail. All seven internal service funds are combined into a single,
aggregated presentation in the proprietary fund financial statements. Individual fund data for the
internal service funds is provided in the form of combining statements elsewhere in this report. The
proprietary fund financial statements provide separate information for sewer operations, sewer
mitigation, water operations, and water mitigation, all of which are presented as major funds of the
City because of significant public interest.
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City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
Fiduciary Funds: The City acts as a trustee, or fiduciary, in collecting assessments and remitting
bond payments for the Morgan Hill Business Ranch, Tennant Business Park, and Madrone Business
Park assessment districts. The City has no legal, contingent, or moral obligation for the repayment of
the debt associated with these particular assessment districts and merely ensures that assets received
are used for their intended purposes. In addition, the City maintains a Special Deposits Fund in which
the City accounts for deposits held in trust for the benefit of third parties. Therefore, these fiduciary
activities are excluded from the City’s fund financial statements because these assets cannot be used
to finance operations. The activity for this fund, however, is provided for in a separate combining
statement of changes in assets and liabilities contained elsewhere in this report.
C. Notes to the Basic Financial Statements
The notes provide additional detail that is essential to a full understanding of the information provided
in the government- wide and fund financial statements. The notes can be found on pages 33 through
62 of this report.
D. Other Information
In addition to the basic financial statements and accompanying notes, this report also presents certain
required supplementary information concerning the City’s progress in funding its obligation to
provide certain pension benefits to its employees. Required information can be found on page 63 of
this report.
GOVERNMENT- WIDE FINANCIAL ANALYSIS
The City’s combined net assets for the Fiscal Year ended June 30, 2006, were $ 345.6 million. A
significant portion of the City’s net assets ($ 209.6 million or 61%) reflects the City’s investment in
capital assets ( for example, land, infrastructure, buildings, and equipment). The City uses these
capital assets to provide services to citizens; consequently, these assets are not available for future
spending.
An additional portion of the City’s net assets ($ 70.8 million or 20%) represents resources that are
subject to external restrictions on how they may be used. The remaining balance of unrestricted net
assets ($ 65.2 million or 19%) may be used to meet the City’s ongoing obligations to citizens and
creditors. The total $ 65.2 million in unrestricted net assets is comprised of $ 51.1 million in
governmental unrestricted net assets and $ 14.1 million in business- type unrestricted net assets. The
governmental unrestricted net assets include assets that are not currently available for spending. The -
unrestricted business- type net assets are funds that have been collected from water and sewer rate
payers and are needed to fund ongoing water and sewer operating and capital needs.
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City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
The table below summarizes the City’s net assets:
2005/ 06 2004/ 05 2005/ 06 2004/ 05 2005/ 06 2004/ 05
Current and other assets 119,029,002 114,164,110 27,741,917 31,580,134 146,770,919 1 45,744,244
Capital assets 166,544,037 101,587,834 82,767,143 78,673,017 249,311,180 1 80,260,851
Total assets 285,573,039 215,751,944 110,509,060 110,253,151 396,082,099 3 26,005,095
Long- term liabilities 11,057,872 11,135,265 32,087,144 33,070,969 43,145,016 4 4,206,234
Other liabilities 5,613,244 5,636,164 1,739,565 2,061,764 7,352,809 7 ,697,928
Total liabilities 16,671,116 16,771,429 33,826,709 35,132,733 50,497,825 5 1,904,162
Net assets:
Invested in capital assets, 158,692,057 101,587,834 50,896,938 47,019,085 209,588,995 1 48,606,919
net of related debt
Restricted 59,148,848 17,146,710 11,694,740 9,782,649 70,843,588 2 6,929,359
Unrestricted 51,061,018 80,245,971 14,090,673 18,318,684 65,151,691 9 8,564,655
Total net assets 268,901,923 198,980,515 76,682,351 75,120,418 345,584,274 2 74,100,933
Governmental Activities Business- Type Activities Totals
Governmental activities: The table and charts below summarize major expense program categories,
program revenues used to fund specific expenditure programs, and general City revenues available
for funding all City programs. The $ 9.2 million in fiscal year 2005/ 06 general government expenses
includes $ 4.7 million in Redevelopment Agency pass- through obligations to other governmental
entities as required by State law. The property tax increment revenues associated with these
obligations are shown as general property tax revenues.
Governmental activities increased the City’s net assets by $ 22.9 million, whereas business- type
activities increased the City’s net assets by $ 1.6 million. The $ 24.5 million total change in the City’s
net assets resulted primarily from the collection of Redevelopment Agency property tax increment
and City development impact fees that have been or will be used for capital projects.
7
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
CITY OF MORGAN HILL CHANGES IN NET ASSETS
Governmental Activities Business- Type Activities Totals
2005/ 06 2004/ 05 2005/ 06 2004/ 05 2005/ 06 2004/ 05
Revenues:
Program Revenues: -
Charges for services $ 10,528,846 $ 16,312,298 $ 16,606,611 $ 15,426,150 $ 27,135,457 $ 31,738,448
Operating grants & contributions 2,747,309 933,533 - - 2,747,309 933,533
Capital grants & contributions 7,404,748 3,357,549 2,939,102
-
- 10,343,850 3,357,549
General Revenues:
Property taxes 30,508,930 28,012,338 - - 30,508,930 28,012,338
Sales taxes 6,183,960 5,196,224 - - 6,183,960 5,196,224
Franchise taxes 2,802,148 2,663,021 - - 2,802,148 2,663,021
Other general revenue taxes 711,297 1,058,233 - - 711,297 1,058,233
Unrestricted investment earnings 3,016,306 3,175,061 872,644 583,148 3,888,950 3,758,209
Total Revenues 63,903,544 60,708,257 20,418,357 16,009,298 84,321,901 76,717,555
-
Expenses: -
General Government 9,209,144 9,278,891 9,209,144 9,278,891
Public Safety 13,302,406 12,236,802 13,302,406 12,236,802
Community Development 9,279,390 4,939,486 9,279,390 4,939,486
Public Works/ Development Services 5,005,130 4,519,109 5,005,130 4,519,109
Recreation and Culture 4,421,183 4,098,111 4,421,183 4,098,111
Interest on long- term debt 418,064 235,612 418,064 235,612
Sewer 8,464,676 7,418,775 8,464,676 7,418,775
Water - - 9,690,548 8,081,953 9,690,548 8,081,953
Total Expenses 41,635,317 35,308,011 18,155,224 15,500,728 59,790,541 50,808,739
Increase in net assets before transfers 22,268,227 25,400,246 2,263,133 508,570 24,531,360 25,908,816
Transfers 701,200 640,000 ( 701,200) ( 640,000) - -
Increase in net assets 22,969,427 26,040,246 1,561,933 ( 131,430) 24,531,360 25,908,816
Net assets - beginning of year 198,980,516 172,940,270 75,120,418 75,251,847 274,100,934 248,192,117
Prior period adjustment 46,951,980 - - - 46,951,980 -
Adjusted net assets – beginning of year 245,932,496 172,940,270 75,120,418 75.251,847 321,052,914 248,192,117
Net assets - year- end $ 268,901,923 $ 198,980,516 $ 76,682,351 $ 75,120,417 $ 345,584,274 $ 274,100,933
8
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
Revenues by Source - Governmental Activities $ 63.9 Million
Property taxes
48%
Charges for services
16%
Investment earnings
5%
Sales taxes
10%
Contributions/ grants
16%
Franchise fees/ other
taxes
5%
Expenses & Revenues – Governmental Activities
$ 0
$ 2,000,000
$ 4,000,000
$ 6,000,000
$ 8,000,000
$ 10,000,000
$ 12,000,000
$ 14,000,000
General Government
Public Safety
Community
Development
Public
Works/ Development
Svs
Recreation and
Culture
Interest on long- term
debt
Expenses
Program Revenues
9
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
Business- type activities: Business- type activities accounted for an increase of $ 1.6 million in the City’s
net assets. Key elements of changes are as follows:
• Net assets for Sewer Operations decreased by $ 0.9 million as expenses exceeded revenues and
used available resources. Operating income for Sewer Operations, which excludes transfers and
additions to capital assets included above, showed a loss of $ 0.8 million.
• Net assets for Water Operations remained constant. Operating income for Water Operations,
which excludes transfers and additions to capital assets, showed a loss of $ 0.4 million.
• Net assets for the Sewer Mitigation fund increased by $ 2.2 million and net assets for the Water
Mitigation fund increased by $ 0.2 million.
Revenues by Source – Business- Type Activities
Charges for services
82%
Capital Grants &
Contributions
14%
Investment earnings
4%
Expenses & Program Revenues – Business- Type Activities
$ 7,500,000
$ 8,000,000
$ 8,500,000
$ 9,000,000
$ 9,500,000
$ 10,000,000
Expenses Program Revenues
Sewer Water
10
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
FINANCIAL ANALYSIS OF THE CITY’S FUNDS
GOVERNMENTAL FUNDS
As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related
legal requirements. As of June 30, 2006, the City’s governmental funds reported combined ending
fund balances of $ 63.4 million, an increase of $ 0.3 million in comparison with the prior year.
General Fund
The General Fund is the chief operating fund of the City. At the end of Fiscal Year 2005/ 06, total fund
balance for the General Fund amounted to $ 10.0 million, of which $ 5.0 million has been designated by
the City Council as a “ general reserve.”
During Fiscal Year 2005/ 06, General Fund revenues exceeded expenditures by $ 0.1 million, while
combined revenues and transfers in exceeded combined expenditures and transfers out by $ 0.3 million.
Significant changes in Revenues and Expenditures that affected the change in fund balance for the
General Fund are as follows:
a. Revenue Highlights
Property tax revenues increased by 19% over the prior year primarily due higher property values, new
construction, and changes in State law that increased property taxes allocated to local governments to
replace most of the vehicle license in- lieu fees previously allocated to local governments by the State.
Approximately half of the increase in property taxes resulted from the property taxes allocated to the City
in place of vehicle license in- lieu fees.
Sales taxes increased by 19%, primarily from transportation related business activity. Franchise, hotel,
and other taxes increased by 5%, and licenses & permits decreased by 17%.
Funding from other governmental agencies decreased by 33% primarily because the State reduced the
amount of motor vehicle in- lieu fees distributed to local governments and began offsetting these losses
with higher allocations of property taxes to local governments, as mentioned above.
Charges for current services increased by 4% for 2005/ 06.
Investment and rental income decreased by 42% in 2005/ 06 primarily because, during the prior year, the
City accounted for the reversal of the June 2004 $ 857,000 valuation reduction so that cash and
investments would be stated at fair value. This valuation difference reflects the City’s investment “ buy
and hold philosophy.” Most of the $ 857,000 fair value adjustment for 2003/ 04 related to non- General
Fund investments held at June 30, 2004, which were consolidated in the General Fund for reporting
purposes. Without these valuation adjustments, investment and rental income would have increased by
16% in 2005/ 06, primarily as a result of higher returns on City investments.
b. Expenditure Highlights
Expenditures increased overall by 4%. General government expenditures decreased by 7% primarily
because of lower litigation related costs. Public safety costs increased by 7%, partly associated with
higher debt service for the new police facility. Parks and recreation costs increased by 4%.
11
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
c. Budgetary Highlights
Over the course of the year, the City Council revised the City budget with adjustments that fell into one of
the following three categories:
• Charges to adjust appropriations for capital project and encumbrance carryovers from the prior
fiscal year.
• Charges made during the fiscal year to adjust revenues and augment current year appropriations
• Other revenue and expenditure adjustments approved after the original budget was adopted.
Budget adjustments approved by the City Council during Fiscal Year 2005/ 06 related to projects and
encumbrances carried over from the prior year, unanticipated legal costs, special election costs, expanded
community conversation outreach services, and a transfer of funds to plan for the future opening of the
Outdoor Sports complex.
After taking into account these adjustments, actual expenditures were $ 0.4 million less than final budget
amounts. Of the total, approximately $ 0.1 million related to general government services, $ 0.2 million
related to recreation services, and $ 0.1 million related to capital outlay expenditures.
Redevelopment Agency Capital Projects Fund
The Redevelopment Agency Capital Projects Fund accounts for property tax increment revenues received
by the Redevelopment Agency. The funds received are used to pay for capital projects in accordance
with the Redevelopment Plan, for revitalization of blighted areas, and for affordable housing programs.
At the end of Fiscal year 2005/ 06, the total fund balance for the Redevelopment Agency was $ 17.2
million, of which $ 7.8 million was reserved for low and moderate income housing, $ 16.4 million was
reserved for encumbrances, and $ 0.2 million was reserved for investment in properties held for resale.
Since these reserves totaled $ 24.4 million, or $ 7.2 million more than the total Redevelopment Agency
fund balance, the balance sheet reflects a negative ($ 7.2 million) reservation for capital projects. These
encumbrances will be funded with a mix of resources available at year- end and tax increment revenues to
be received by the Agency during 2006/ 07.
During Fiscal Year 2005/ 06, Redevelopment Agency expenditures exceeded revenues by $ 2.4 million.
The excess was due to the timing of capital project expenditures. Existing fund balances and Fiscal Year
2005/ 06 revenues were used to pay for the following major capital projects and affordable housing
programs during Fiscal Year 2005/ 06:
• Construction of the Centennial Recreation Center
• Improvements to the Aquatics Center
• Start of construction for a new Library
• Depot Street Undergrounding
• Tennant Avenue Widening
• Watsonville Road Housing Project
• Royal Court Housing Loan
• Casa Diana Housing
12
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
PROPRIETARY FUNDS
The City’s proprietary funds provide the same type of information found in the government- wide
financial statements, but in more detail.
Unrestricted net assets at June 30, 2006, amounted to $ 6.9 million for Sewer Operations and $ 5.9 million
for Water Operations. In addition, Sewer Mitigation had $ 6.3 million in net assets restricted for capital
expansion and Water Mitigation had $ 2.9 million restricted for a similar purpose. The total change in net
assets from the prior year for all proprietary funds combined was an increase of $ 1.6 million, as
previously described above.
CAPITAL ASSET AND DEBT ADMINISTRATION
Capital Assets: The City’s investment in capital assets for its governmental activities as of June 30,
2006, amounted to $ 166.5 million ( net of accumulated depreciation). This investment in capital assets
included land, buildings, park and roadway improvements, vehicles & other equipment, infrastructure,
and construction in progress, as summarized in the schedule below. The overall increase of $ 65.0 million
for net assets invested in capital assets at June 30, 2006, compared with the amount on the prior year’s
statement of net assets, was comprised of a current year increase of $ 18.0 million and a prior period
adjustment of $ 47.0 for retroactively recognizing infrastructure constructed prior to 2002. The City’s
current year $ 18.0 million addition to investment in capital assets represented a 12% increase.
Governmental
Activiites
Item: June 30, 2006
Land $ 2 7,676,932
Buildings & Other Improvements 5 2,697,028
Machinery, Equipment, & Vehicles 8 94,798
Infrastructure 6 5,536,961
Construction In Progress 1 9,738,318
Total Governmental Capital Assets $ 1 66,544,037
Major capital asset events during the current fiscal year included the following:
Library Facility 2 ,133,836
Centennial Recreation Center 14,209,136
Tennant South 101 Signal & Interchange 2 64,086
Depot Street Undergrounding 1 ,325,634
Dedicated Infrastructure 2 ,654,832
Community Park Improvements 1 43,782
Llagas Flood Control 2 11,137
Monterey/ Central Pedestrian Crossing Improvements 2 79,133
Depot Street Reconstruction 460,283
More detailed information concerning capital assets may be found in Note 5 beginning on page 45.
13
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2006
LONG- TERM DEBT
At the end of Fiscal Year 2005/ 06, the City had long- term debt outstanding of $ 43.1 million. Of this
amount, $ 1.1 million comprises debt to be paid from general City revenues. A total of $ 6.9 million in
debt, associated with the acquisition and construction of the new police facility acquired in 2004, was
secured by certain bond accounts held by a trustee and by rental payments to be made by the City, under a
sublease between the City and Morgan Hill Financing Authority, subject to a City appropriations
covenant. An amount of $ 0.9 million represented special assessment debt for which the City would be
liable only in the event of default by the property owners subject to the assessments, and $ 2.1 million
related to loans for acquisition and predevelopment expenses associated with multi- family housing
rehabilitation and/ or new construction secured by liens on real estate owned by loan recipients. The $ 32.1
million remainder of the City’s debt primarily represented bonds secured solely by specified water and
sewer sources.
The City’s total debt decreased by approximately $ 1.1 million ( 2 %) during Fiscal Year 2005/ 06. This
decrease primarily resulted from scheduled principal debt service payments on water and wastewater
related bonds. More detailed information concerning long- term debt may found in Note 7 beginning on
page 52.
ECONOMIC FACTORS AND NEXT FISCAL YEAR’S BUDGET
Increased sales taxes and property taxes, along with some one- time revenues, allowed the City’s General
Fund to end 2005/ 06 with a small positive operating margin. However, given the structural General Fund
budgetary deficit, caution was exercised in developing the City’s budget for Fiscal year 2006/ 07. The
City’s entire adopted budget for Fiscal year 2006/ 07 was $ 119.7 million, including $ 61.3 million for
capital projects and $ 58.4 million for operations, or 11% more than the prior year budget. The General
Fund budget for 2006/ 07 was $ 23.0 million or 11% more than the final 2005/ 06 budget. This increase
results from the increased operational costs associated with opening the Centennial Recreation Center in
2006/ 07. In fiscal year 2006/ 07, the Council amended the Redevelopment Agency plan to, among other
things, reduce the size of the project area, which is expected to decrease Agency tax increment revenues
by approximately $ 7.7 million per year, but to increase the City’s General Fund property tax revenue by
approximately $ 0.7 million per year, beginning in fiscal year 2007/ 08. This General Fund revenue
increase will assist the City in balancing its budgets in future years.
REQUESTS FOR INFORMATION
This financial report is designed to provide a general overview of the City’s finances for all those with an
interest in the City’s finances. Questions concerning any of the information provided in this report or
requests for additional financial information should be addressed to the following address: City of
Morgan Hill, Finance Department, 17555 Peak Avenue, Morgan Hill, CA 95037.
14
Basic Financial Statements
Government- Wide Financial Statements
City of Morgan Hill
Statement of Net Assets
June 30, 2006
Component Unit
Governmental Business- Type MH Corporation
Activities Activities Total Yard Commission
Assets
Pooled cash and investments ( Note 4) $ 7 1,407,769 $ 1 3,681,389 $ 8 5,089,158 $ 54,424
Restricted pooled cash and investments 355,967 8 ,716,034 9 ,072,001
Cash and investments with fiscal agents 638,987 3 ,362,210 4 ,001,197
Receivables:
Taxes and special assessments 1,079,829 1 ,079,829
Accrued interest 472,815 1 54,502 6 27,317
Other accounts receivable 2,213,800 1 ,795,675 4 ,009,475 16,194
Deposit in Escrow/ Prepaid items 204,188 2 04,188
Investment in properties held for resale ( Note 2) 245,409 2 45,409
Loans receivable ( Note 6) 42,410,238 3 2,107 4 2,442,345
Capital assets, Net ( Note 5)
Non- Depreciable 4 7,415,250 3 ,920,197 5 1,335,447
Depreciable 1 19,128,787 6 1,280,756 1 80,409,543 218,527
Sewer capacity rights ( Note 8) 1 7,566,190 1 7,566,190
Total Assets 2 85,573,039 1 10,509,060 3 96,082,099 289,145
Liabilities
Accounts payable 3 ,577,363 1 ,129,413 4 ,706,776 34,967
Accrued liabilities 1 ,738,573 5 42,772 2 ,281,345 3
Customer and other deposits 2 0,236 6 7,380 8 7,616
Unearned revenue 2 77,072 2 77,072
Non- current liabilities ( Note 7 & 8)
Due within one year 9 36,950 1 ,324,240 2 ,261,190
Due in more than one year 1 0,120,922 3 0,762,904 4 0,883,826
Total Liabilities 1 6,671,116 3 3,826,709 5 0,497,825 34,970
Net Assets ( Note 10)
Invested in capital assets, net of related debt 1 58,692,057 5 0,896,938 2 09,588,995 218,527
Restricted for:
Low and moderate income housing 4 5,873,260 4 5,873,260
Capital expansion project 1 2,422,210 8 ,332,530 2 0,754,740
Debt service 8 53,378 3 ,362,210 4 ,215,588
Unrestricted 5 1,061,018 1 4,090,673 6 5,151,691 35,648
Total Net Assets $ 268,901,923 $ 76,682,351 $ 345,584,274 $ 254,175
See accompanying notes to basic financial statements
Primary Government
19
City of Morgan Hill
Statement of Activities
For the Year Ended June 30, 2006
Operating Capital Component Unit
Charges for Grants and Grants and Governmental Business- type Corporation
Functions/ Programs Expenses Services Contributions Contributions Activities Activities Total Yard
Primary government:
Governmental Activities:
General government $ 9 ,209,144 $ 1 ,723,067 $ 2 11,992 $ $ ( 7,274,085) $ $ ( 7,274,085) $
Public safety 13,302,406 4 20,461 1 41,999 2 84,340 ( 12,455,606) ( 12,455,606)
Community development 9,279,390 5 ,729,578 6 54,587 384,280 ( 2,510,945) ( 2,510,945)
PW/ development/ other public services 5 ,005,130 4 92,697 8 86,597 5,018,301 1,392,465 1,392,465
Recreation & culture 4 ,421,183 2 ,163,043 8 52,134 1 ,717,827 311,821 311,821
Interest on long- term debt 4 18,064 ( 418,064) ( 418,064)
Total government activities 4 1,635,317 1 0,528,846 2 ,747,309 7 ,404,748 ( 20,954,414) ( 20,954,414)
Business- type activities:
Sewer 8,464,676 8 ,506,415 1,303,668 1,345,407 1,345,407
Water 9,690,548 8 ,100,196 1,635,434 45,082 45,082
Total business- type activities 18,155,224 16,606,611 - 2 ,939,102 1,390,489 1,390,489
Total primary government $ 5 9,790,541 $ 27,135,457 $ 2,747,309 $ 10,343,850 ( 20,954,414) 1,390,489 ( 19,563,925) $
Component unit:
Corporation Yard $ 1 20,369 $ 1 28,768 $ 8 ,399
General revenues:
Property taxes 30,508,930 30,508,930
Sales taxes 6,183,960 6,183,960
Franchise taxes 2,802,148 2,802,148
Other general revenue taxes 711,297 711,297
Unrestricted investment earnings 3,016,306 872,644 3,888,950
Transfers 701,200 ( 701,200)
Total general revenues and transfers 43,923,841 171,444 44,095,285
Change in net assets 22,969,427 1,561,933 24,531,360 8,399
Net assets - beginning 198,980,516 75,120,418 274,100,934 245,776
Prior period adjustment 46,951,980 46,951,980
Adjusted net assets - beginning 245,932,496 75,120,418 321,052,914 245,776
Net assets - ending $ 268,901,923 $ 76,682,351 $ 345,584,274 $ 254,175
See accompanying notes to basic financial statements
Net ( Expense) Revenue and
Program Revenues Changes in Net Assets
Primary Government
20
City of Morgan Hill
Balance Sheet
Governmental Funds Other Total
June 30, 2006 Redevelopment Governmental Governmental
General Agency Funds Funds
Assets
Pooled cash and investments $ 9,390,006 $ 18,996,379 $ 35,486,600 $ 63,872,985
Restricted pooled cash and investments 315,967 315,967
Cash with fiscal agents 638,987 638,987
Receivables:
Taxes and special assessments 134,829 945,000 1,079,829
Accrued interest 81,818 122,746 241,025 445,589
Other accounts receivable 1,804,532 30,042 378,555 2,213,129
Deposit in Escrow/ Prepaid items 58,619 145,569 204,188
Investment in properties held for resale ( Note 2) 245,409 245,409
Notes receivable
Loans receivable 413,406 41,061,779 935,053 42,410,238
Due from other Funds 45,481 45,481
Total Assets $ 11,793,862 $ 60,591,184 $ 39,086,756 $ 111,471,802
Liabilities and Fund Balance
Liabilities:
Accounts payable $ 309,958 $ 2,189,578 $ 887,947 $ 3,387,483
Accrued liabilities 605,855 106,136 214,586 926,577
Due to other funds 45,481 45,481
Unearned revenue ( Note 6) 704,215 41,061,779 1,880,053 43,646,047
Customer and other deposits 20,236 20,236
Total Liabilities 1,640,264 43,357,493 3,028,067 48,025,824
Fund Balances:
Reserved for:
Encumbrances 180,168 16,361,349 3,655,034 20,196,551
Low and moderate income housing 7,830,133 7,830,133
Investment in properties held for resale 245,409 245,409
Debt service 853,378 853,378
Capital expansion projects 16,173,012 16,173,012
Unreserved, reported in:
General fund 9,973,430 9,973,430
Special revenue funds 6,942,175 6,942,175
Capital projects funds ( 7,203,200) 8,435,090 1,231,890
Total fund balances 10,153,598 17,233,691 36,058,689 63,445,978
Total Liabilities and Fund Balances $ 11,793,862 $ 60,591,184 $ 39,086,756
Amounts reported for governmental activities in the statement of net assets are different because:
Internal service funds are used by management to charge the costs of building maintenance
management information systems, fleet management, general liability, workers' compensation
and CIP administration to the individual funds. The assets and liabilities of the internal
service funds are included in governmental activities in the statement of net assets. 7,250,850
Capital assets used in governmental activities are not financial resources and,
therefore, are not reported in the funds. 165,816,251
Long- term liabilities, including bonds payable, are not due and payable in the
current period and therefore are not reported in the funds. ( 10,980,130)
Revenues earned but not available ( deferred) are not recorded in the funds. 43,368,975
Net assets of governmental activities $ 268,901,923
See accompanying notes to basic financial statements
21
City of Morgan Hill
Statement of Revenues, Expenditures, and Changes in Fund Balances
Governmental Funds
For the Year Ended June 30, 2006 Other Total
Redevelopment Governmental Governmental
General Agency Funds Funds
Revenues
Property taxes and special assessments $ 5 ,234,590 $ 2 5,274,340 $ 695,657 $ 31,204,587
Sales taxes 6 ,183,960 6,183,960
Franchise, hotel and other taxes 2 ,802,148 2,802,148
Licenses and permits 1 65,114 165,114
Funding from other governmental agencies 7 11,297 1,230,168 1,941,465
Charges for current services 3 ,579,886 8,328,449 11,908,335
Investment income and rentals 9 35,719 9 91,542 924,847 2,852,108
Fines, forfeitures and other revenues 2 84,438 1 ,983,479 795,398 3,063,315
Total Revenues 19,897,152 28,249,361 11,974,519 60,121,032
Expenditures
Current
General government 3,099,560 6,453,860 39,200 9,592,620
Public safety 12,927,272 8,127 12,935,399
Community development 1,997,926 3,776,478 5,774,404
Housing services 4,912,721 4,912,721
Streets and highways 1,998,346 1,998,346
Parks and recreation 3,757,118 21,468 3,778,586
Other public services 562,875 562,875
Capital outlay
Capital assets 15,231 2,385 31,417 49,033
Construction projects 17,292,588 3,547,819 20,840,407
Debt Service
Principal 300,000 300,000
Interest and fiscal charges 407,098 407,098
Total Expenditures 19,799,181 30,659,480 10,692,828 61,151,489
Excess ( deficiency) of revenues
over ( under) expenditures 9 7,971 ( 2,410,119) 1,281,691 ( 1,030,457)
Other financing sources ( uses)
Transfers in 5 14,745 1 74,482 1,389,995 2,079,222
Transfers out ( 306,094) ( 1,071,928) ( 1,378,022)
Proceeds from sale of capital assets 6 50,000 650,000
Total other financing sources and uses 2 08,651 8 24,482 318,066 1,351,200
Net change in fund balances 3 06,622 ( 1,585,637) 1,599,757 320,743
Fund Balances - Beginning 9 ,846,976 1 8,819,328 34,458,931 63,125,235
Fund Balances - Ending $ 10,153,598 $ 17,233,691 $ 36,058,688 $ 63,445,978
See accompanying notes to basic financial statemensts
22
City of Morgan Hill
Reconciliation of the Statement of Revenues,
Expenditures, and Changes in Fund Balances of Governmental Funds
To the Statement of Activities
For the Year Ended June 30, 2006
Amounts reported for governmental activities in the statement of activities
are different because:
Net change in fund balances- total governmental funds $ 320,743
Governmental funds report capital outlay as expenditures. This is the
amount of capital outlay that has been recorded as an asset on the
statement of net assets. 20,889,821
Sale/ disposal of governmental fixed assets resulting in reduction in fixed assets ( 648,663)
Governmental funds report loans as an expenditure. Loans issued in
the current year are reported as an asset on the statement of
net assets. 2,418,566
Governmental funds report the payment of debt service as an
expenditure. Payments for debt service reduce liabilities on the
statement of net assets. 289,034
The value of donated infrastructure assets are recognized as a
revenue on the statement of activities. 2,654,832
Revenues in the statement of activities that do not provide current
financial resources are reported as a revenue, instead of a liability,
on the statement of activities. 1,025,656
Liabilities for expenditures, even though not requiring the use of current
financial resources, are reported on the statement of activities. ( 211,641)
Depreciation expense is reported in connection with all of a governments
depreciable assets. ( 4,891,266)
Any net profit from Internal Service Funds need to be added to the
government wide statement of activities, net of transfers 1,122,345
Change in net assets of governmental activities $ 22,969,427
See accompanying notes to basic financial statements
23
City of Morgan Hill
General Fund
Statement of Revenues, Expenditures, and
Changes in Fund Balances - Budget and Actual
For the Year Ended June 30, 2006 Variance with
Final Budget
Positive
Original Final Actual Amounts ( Negative)
Revenues
Property taxes and special assessments $ 4,533,070 $ 4,533,070 $ 5 ,234,590 $ 701,520
Sales taxes 5,460,000 5,460,000 6 ,183,960 723,960
Franchise, hotel and other taxes 2,648,385 2,648,385 2 ,802,148 153,763
Licenses and permits 161,680 161,680 1 65,114 3,434
Funding from other govt agencies 435,176 435,176 7 11,297 276,121
Charges for current services 3,892,025 3,892,025 3 ,579,886 ( 312,139)
Investment income and rentals 923,000 923,000 9 35,719 12,719
Fines, forfeitures and other revenues 227,100 227,100 2 84,438 57,338
Total revenues 18,280,436 18,280,436 1 9,897,152 1,616,715
Expenditures:
General government
Council 207,067 207,750 2 03,227 4,523
City Attorney 566,690 844,690 8 47,548 ( 2,858)
City Manager 330,948 330,948 3 31,417 ( 469)
Human Resources 488,604 488,604 4 66,130 22,474
City Clerk 347,401 435,661 3 75,150 60,511
Finance 982,085 982,085 9 42,630 39,455
Medical services
Total General Government 2,922,795 3,289,738 3 ,166,102 123,636
Public Safety
Police 8,514,638 8,561,294 8 ,608,262 ( 46,968)
Fire 4,377,495 4,377,495 4 ,363,334 14,161
Total Public Safety 12,892,133 12,938,789 1 2,971,596 ( 32,807)
Culture and recreation
Recreation 3,058,089 3,126,864 2 ,953,923 172,941
Cable TV/ Comm.& Marketing 184,403 219,403 2 08,893 10,510
Park Maintenance 698,893 711,484 6 63,604 47,880
Total Culture and recreation 3,941,385 4,057,751 3 ,826,420 231,331
Capital Outlay 46,950 101,699 1 5,231 86,468
Total Expenditures 19,803,263 20,387,977 1 9,979,349 408,628
Excess ( deficiency) of revenues
over ( under) expenditures ( 1,522,827) ( 2,107,541) ( 82,198) 2,025,343
Other Financing sources ( uses):
Transfers in 451,865 596,472 5 14,745 ( 81,727)
Transfers ( out) ( 228,978) ( 328,978) ( 306,094) 22,884
Total other financing sources ( uses) 222,887 267,494 2 08,651 ( 58,843)
Net change in fund balances ( 1,299,940) ( 1,840,047) 1 26,453 1,966,500
Adjustments to budgetary basis 1 80,168 180,168
Fund Balances- Beginning 7,894,613 7,894,613 9 ,846,976 1,952,363
Fund Balances- Ending $ 6,594,673 $ 6,054,566 $ 1 0,153,598 $ 4,099,031
See accompanying notes to basic financial statements
Budgeted Amounts
24
City of Morgan Hill
Proprietary Funds
Statement of Net Assets
Sewer Sewer Wastewater Water
Operations Mitigation Financing Corp Operations
Assets
Current assets:
Pooled cash and investment( Note 4) $ 7,687,992 $ 5,993,397
Restricted pooled cash and investments $ 6,534,395
Cash with fiscal agents 1,895,609 606,971
Receivables:
Accrued interest 49,456 43,599 41,348
Other accounts receivable 587,572 8,111 1,199,992
Investment in lease - current 1 90,000
Notes receivable - current 6,920
Total current assets 10,220,629 6,593,025 1 90,000 7,841,708
Noncurrent assets:
Notes receivable - long term 25,187
Capital assets, net ( Note 5)
Non- Depreciable 1,841,047 2,079,150
Depreciable 19,193,834 5,433,246 30,465,751
Sewer capacity rights ( Note 8) 17,566,190
Investment in lease - long term 3 ,298,545
Total noncurrent assets 36,760,024 7,299,480 3 ,298,545 32,544,901
Total Assets 46,980,653 13,892,505 3 ,488,545 40,386,609
Liabilities
Current liabilities
Accounts payable 70,718 212,662 697,236
Accrued liabilities 268,599 105,477 148,212
Customer deposits and deferred revenue 67,380
Current obligations for:
Bonds payable 284,424
Capacity rights payable 1,015,000
Lease obligation 1 90,000
Compensated absences 7,570 17,246
Total current liabilities 1,361,887 318,139 1 90,000 1,214,498
Noncurrent liabilities
Long term obligations for:
Bonds payable ( Note 7) 6,382,127
Lease obligation 3 ,298,545
Compensated absences ( Note 7) 70,370 121,753
Capacity rights payable ( Note 8) 19,003,733
Total noncurrent liabilities 19,074,103 3 ,298,545 6,503,880
Total Liabilities 20,435,990 318,139 3 ,488,545 7,718,378
Net Assets: ( Note 10)
Invested in capital assets, net of related debt 17,756,291 7,274,293 26,162,773
Restricted net assets 1,895,609 6,300,073 606,971
Unrestricted 6,892,763 5,898,487
Total Net Assets $ 26,544,663 $ 13,574,366 $ $ 32,668,231
See accompanying notes to basic financial statements continued…
Enterprise Funds
June 30, 2006 Business- type Activities
25
City of Morgan Hill
Proprietary Funds
Statement of Net Assets
Governmental
Activities
Water Internal Service
Mitigation Eliminations Totals Funds
Assets
Current assets:
Pooled cash and investment( Note 4) $ 13,681,389 $ 7 ,534,785
Restricted pooled cash and investments $ 2 ,181,639 8,716,034 4 0,000
Cash with fiscal agents 8 59,630 3,362,210
Receivables:
Accrued interest 2 0,099 154,502 2 7,226
Other accounts receivable 1,795,675 6 71
Investment in lease - current ( 190,000)
Notes receivable - current 6,920
Total current assets 3 ,061,368 ( 190,000) 27,716,730 7 ,602,682
Noncurrent assets:
Notes receivable - long term 25,187
Capital assets, net ( Note 5)
Non- Depreciable 3,920,197
Depreciable 6 ,187,925 61,280,756 7 27,786
Sewer capacity rights ( Note 8) 17,566,190
Investment in lease - long term ( 3,298,545)
Total noncurrent assets 6 ,187,925 ( 3,298,545) 82,792,330 7 27,786
Total Assets 9 ,249,293 ( 3,488,545) 110,509,060 8 ,330,468
Liabilities
Current liabilities
Accounts payable 1 48,797 1,129,413 1 89,880
Accrued liabilities 2 0,484 542,772 8 11,996
Customer and other deposits 67,380
Current obligations for:
Bonds payable 284,424
Capacity rights payable 1,015,000
Lease obligation ( 190,000)
Compensated absences 24,816 1 6,140
Total current liabilities 1 69,281 ( 190,000) 3,063,805 1 ,018,016
Noncurrent liabilities
Long term obligations for:
Bonds payable ( Note 7) 5 ,184,921 11,567,048
Lease obligation ( 3,298,545)
Compensated absences ( Note 7) 192,123 6 1,602
Capacity rights payable ( Note 8) 19,003,733
Total noncurrent liabilities 5 ,184,921 ( 3,298,545) 30,762,904 6 1,602
Total Liabilities 5 ,354,202 ( 3,488,545) 33,826,709 1 ,079,618
Net Assets: ( Note 10)
Invested in capital assets, net of related debt 1 ,003,004 52,196,361 7 27,786
Restricted net assets 2 ,892,087 11,694,740 4 0,000
Unrestricted 12,791,250 6 ,483,064
Total Net Assets $ 3,895,091 $ $ 76,682,351 $ 7 ,250,850
See accompanying notes to basic financial statements
Enterprise Funds ( continued)
June 30, 2006 Business- type Activities
26
City of Morgan Hill
Proprietary Funds
Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended June 30, 2006
Sewer Sewer Wastewater Water
Operations Mitigation Financing Corp Operations
Operating Revenues:
Charges for current services $ 5,939,216 $ 2 ,567,199 $ $ 7,591,915
Interest and rentals 2 00,233
Total Operating Revenues 5,939,216 2 ,567,199 2 00,233 7,591,915
Operating expenses:
Salaries and benefits 1,174,158 1,931,007
Utilities and taxes 1,702,661
Operations and maintenance 3,104,580 2,141,175
Depreciation 1,173,181 187,749 1,724,593
Amortization of sewer capacity rights 944,917
Administrative charges 388,884 3,791 507,960
Total Operating expenses 6,785,720 1 91,540 8,007,396
Operating Income ( 846,504) 2 ,375,659 2 00,233 ( 415,481)
Nonoperating revenues ( expense):
Investment earnings 292,548 1 69,625 208,068
Interest ( expense) ( 648,828) ( 297,537) ( 200,233) ( 430,813)
Total nonoperating revenue ( expense) ( 356,280) ( 127,912) ( 200,233) ( 222,745)
Income ( loss) before operating transfers
and contributions ( 1,202,784) 2 ,247,747 ( 638,226)
Capital Contributions 762,617 848,053
Transfers In 930,488
Transfers Out ( 481,688) ( 10,000) ( 1,130,000)
Change in net assets ( 921,855) 2,237,747 10,315
Total Net Assets- Beginning 27,466,518 11,336,618 32,657,917
Total Net Assets- Ending $ 26,544,663 $ 13,574,365 $ $ 32,668,232
See accompanying notes to basic financial statements continued….
Business- type Activities
Enterprise Funds
27
City of Morgan Hill
Proprietary Funds
Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended June 30, 2006
Governmental
Activities
Water Internal Service
Mitigation Eliminations Totals Funds
Operating Revenues:
Charges for current services $ 508,281 $ $ 16,606,611 $ 4,921,550
Interest and rentals ( 200,233)
Total Operating Revenues 508,281 ( 200,233) 16,606,611 4,921,550
Operating expenses:
Salaries and benefits 3,105,165 1,317,456
Utilities and taxes 1,702,661 730,121
Operations and maintenance 158 5,245,913 1,291,169
Depreciation 210,460 3,295,983 345,745
Amortization of sewer capacity rights 944,917
Administrative charges 227 900,862 215,398
Total Operating expenses 210,845 15,195,501 3,899,889
Operating Income 297,436 ( 200,233) 1,411,110 1,021,661
Nonoperating revenues ( expense):
Investment earnings 202,402 872,643 100,684
Interest ( expense) ( 254,112) 200,233 ( 1,631,290)
Total nonoperating revenue ( expense) ( 51,710) 200,233 ( 758,647) 100,685
Income ( loss) before operating transfers
and contributions 245,726 652,463 1,122,345
Capital Contributions 1,610,670
Transfers In 930,488 9,807
Transfers Out ( 10,000) ( 1,631,688) ( 9,807)
Change in net assets 235,726 1,561,933 1,122,345
Total Net Assets- Beginning 3,659,365 75,120,418 6,128,505
Total Net Assets- Ending $ 3,895,091 $ $ 76,682,351 $ 7,250,850
See accompanying notes to basic financial statements
Enterprise Funds ( continued)
Business- type Activities
28
City of Morgan Hill
Statement of Cash Flows
Proprietary Funds
For the Year Ended June 30, 2006
Sewer
Sewer Mitigation Water
Cash Flows from Operating activities
Receipts from customers and users $ 5,987,836 $ 2,544,768 $ 7 ,457,501
Payments for supplies and services ( 3,086,999) ( 386,074) ( 3,903,069)
Payments to employees ( 1,145,238) ( 1,889,489)
Payments for interfund services ( 388,884) ( 3,791) ( 507,960)
Net cash provided by operating activities 1,366,715 2,154,903 1 ,156,983
Cash Flows From Noncapital Financing Activities
Transfers ( to) from other funds ( 481,688) ( 10,000) ( 199,512)
Net cash provided ( used) by noncapital and
financing activities ( 481,688) ( 10,000) ( 199,512)
Cash Flows From Capital and Related Financing Activities
Capital contributions 762,617 8 48,053
Purchase of capital assets
Acquisition and construction of capital assets ( 1,664,217) ( 2,549,164) ( 2,754,199)
Principal paid on debt ( 855,380) ( 207,208)
Interest paid on debt ( 648,828) ( 297,537) ( 430,813)
Net cash provided ( used) by capital and related
financing activities ( 2,405,808) ( 2,846,701) ( 2,544,167)
Cash Flows From Investing Activities
Interest earnings 285,026 159,048 2 01,932
Net cash provided by investing activities 285,026 159,048 2 01,932
Net increase in cash and cash equivalents ( 1,235,755) ( 542,750) ( 1,384,764)
Cash and cash equivalents, July 1, 2005 10,819,356 7,077,145 7 ,985,132
Cash and Cash equivalents, June 30, 2006 $ 9,583,601 $ 6,534,395 $ 6 ,600,368
Reconciliation of operating income to net cash
provided ( used) by operating activities
Operating income $ ( 846,504) $ 2,375,659 $ ( 415,481)
Adjustments to reconcile:
Depreciation expense 1,173,181 187,749 1 ,724,593
Amortization of sewer capacity rights 944,917
( Increase) decrease in accounts receivable 48,620 262 ( 134,415)
(( Increase)) decrease in notes receivables ( 22,693)
Increase ( decrease) in accounts payable 17,581 ( 386,074) ( 59,232)
I( ncrease () decrease) in compensated absences 28,920 4 1,518
Total adjustments 2,213,219 ( 220,756) 1 ,572,464
Net cash provided by operating activities $ 1,366,715 $ 2,154,903 $ 1 ,156,983
See accompanying notes to basic financial statements continued….
Business- Type Activities
Enterprise Funds
29
City of Morgan Hill
Statement of Cash Flows
Proprietary Funds Governmental
For the Year Ended June 30, 2006 Activities
Water Internal Service
Mitigation Total Funds
Cash Flows from Operating activities
Receipts from customers and users $ 508,281 $ 16,498,386 $ 4 ,920,879
Payments for supplies and services 105,367 ( 7,270,775) ( 2,127,879)
Payments to employees ( 3,034,727) ( 1,317,079)
Payments for interfund services ( 227) ( 900,862) ( 215,398)
Net cash provided by operating activities 613,421 5,292,022 1 ,260,523
Cash Flows From Noncapital Financing Activities
Transfers ( to) from other funds ( 10,000) ( 701,200)
Net cash provided ( used) by noncapital and
financing activities ( 10,000) ( 701,200)
Cash Flows From Capital and Related Financing Activities
Capital contributions 1,610,670
Purchase of capital assets ( 345,624)
Acquisition and construction of capital assets ( 1,367,445) ( 8,335,025)
Principal paid on debt 8,325 ( 1,054,263)
Interest paid on debt ( 254,112) ( 1,631,290)
Net cash provided by capital and related
financing activities ( 1,613,232) ( 9,409,907) ( 345,624)
Cash Flows From Investing Activities
Interest earnings 193,401 839,407 92,076
Net cash provided by investing activities 193,401 839,407 9 2,076
Net increase in cash and cash equivalents ( 816,410) ( 3,979,679) 1 ,006,975
Cash and cash equivalents, July 1, 2005 3,857,679 29,739,312 6,567,809
Cash and Cash equivalents, June 30, 2006 $ 3,041,269 $ 25,759,633 $ 7 ,574,784
Reconciliation of operating income to net cash
provided ( used) by operating activities
Operating income $ 297,436 $ 1,411,110 $ 1 ,021,661
Adjustments to reconcile:
Depreciation expense 210,460 3,295,983 345,745
Amortization of sewer capacity rights 944,917 ( 671)
( Increase) decrease in accounts receivable ( 85,533)
(( Increase)) decrease in notes receivables ( 22,693)
Increase ( decrease) in accounts payable 105,525 ( 322,200) ( 106,588)
I( ncrease () decrease) in compensated absences 70,438 377
Total adjustments 315,985 3,880,912 2 38,863
Net cash provided by operating activities $ 613,421 $ 5,292,022 $ 1 ,260,524
See accompanying notes to basic financial statements
Business- Type Activities
Enterprise Funds ( continued)
30
City of Morgan Hill
Statement of Fiduciary Net Assets
Fiduciary Funds
Agency Funds
Assets:
Restricted pooled cash and investments $ 3,194,768
Cash and investments with fiscal agents 2,581,965
Accounts receivable 51,468
Total Assets 5,828,201
Liabilities
Accounts payable 68,285
Customer and other deposits 5,759,916
Total liabilities 5,828,201
Net Assets
Total Net Assets $
See accompanying notes to basic financial statements
June 30, 2006
31
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
33
1. DEFINITION OF THE REPORTING ENTITY
The City of Morgan Hill, California, ( the City) was incorporated in November 1906 as a general law city
and operates under a Council- Manager form of government.
As required by Statement No. 14 of the Governmental Accounting Standards Board ( GASB), as amended
by GASB No. 39, these financial statements present the government 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 and so data from these
units are combined with data of the primary government. Each discretely presented component unit, on
the other hand, is reported in a separate column in the combined financial statements to emphasize it is
legally separate from the government. Each blended and discretely presented component unit has a June
30 year end.
Blended Component Units. The Morgan Hill Wastewater Facilities Financing Corporation, the Morgan
Hill Financing Authority and the Redevelopment Agency of the City of Morgan Hill ( the Agency) are
governed by boards which are substantially the same as the City's governing body and serve the City
exclusively. The Morgan Hill Wastewater Facilities Financing Corporation was established in 1988 to
facilitate the issuance of debt for capital improvements. The Morgan Hill Financing Authority was
established, by agreement, under government code section 6500, et seq., in November 2003 to act as a
conduit in issuing debt. The parties to this agreement are the City and The Agency. The Redevelopment
Agency operates under California Redevelopment Law and provides business and housing activities.
These component units have been blended into the City's basic financial statements. The financial
activity of the Financing Corporation is reported in an Enterprise Fund and the Redevelopment Agency’s
financial activity is reported in a Capital Projects Fund on the City’s basic financial statements. The
activity of the Financing Authority is reported in various enterprise, governmental, and fiduciary funds
because this entity issued bonds related to all three types of funds.
Discretely Presented Component Units. The Morgan Hill Corporation Yard Commission functions for
the benefit of the City and the Morgan Hill Unified School District. The Commission is equally
comprised of members from each governing body and one member at large. The Commission was
formed in 1975 to facilitate the operation of a joint tenancy between the school district and the City. The
activities of the Commission are included in the City’s basic financial statements as a discretely presented
component unit because the Commission board is not substantially the same as the primary governments,
nor does it operate exclusively, nor almost exclusively, for the benefit of the City. However, the City is
responsible for the day to day operations and financial reporting of the Commission and therefore
includes it as a discretely presented component unit.
The Financing Corporation and the Financing Authority do not issue separate financial statements.
Complete financial statements for the Agency and the Commission may be obtained from the City at the
following address:
City of Morgan Hill
Attention: Finance Department
17555 Peak Avenue
Morgan Hill, CA 95037
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
34
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The government- wide financial statements ( the statement of net assets and the statement of activities)
report information on all of the non- fiduciary activities of the primary government and its component
units. 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
services. Likewise, the primary government is reported separately from certain legally separate
component units for which the primary government is financially accountable.
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 function or segment
and 2) grants 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, proprietary funds, and fiduciary funds,
even though the latter are excluded from the government- wide financial statements. Major individual
governmental funds and major individual enterprise funds are reported as separate columns in the fund
financial statements.
( a) 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 and fiduciary
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 revenues in the year for which they are levied. Grants and similar items are recognized as
revenue as soon as all eligibility requirements 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 City 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, sales taxes, franchise fees, licenses, and interest earnings 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 City.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
35
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
The City reports the following major governmental funds:
General Fund
The General Fund is the primary operating fund of the City. It is used to account for all
financial resources of the general government, except those required to be accounted for
in another fund.
Redevelopment Agency Fund
The Redevelopment Agency fund accounts for the capital improvements and
administration of the Ojo de Agua project area. Tax increment revenues, housing set-aside
requirements, capital improvements and housing services are accounted for in this
fund.
The City reports major funds on the government- wide financial statements separately from other
funds. Major funds are defined as any fund the City believes to be of particular importance to
financial statement users. At a minimum, the General Fund and any fund that meets both of the
following criteria must be reported as a major fund:
Ten percent criterion. An individual governmental fund reports at least 10 percent of any of the
following: a) total governmental fund assets, b) total governmental fund liabilities, c) total
governmental fund revenues, or d) total governmental fund expenditures.
Five percent criterion. An individual governmental fund reports at least 5 percent of the total for
both governmental and enterprise fund of any one of the items for which it met the 10 percent
criterion.
The City reports the following major proprietary funds:
Sewer Enterprise Funds
The Sewer Enterprise funds account for the collection of sewer revenues, including user
fees, operating costs of sewer collection and treatment and capital improvements.
Water Enterprise Funds
The Water Enterprise funds account for the revenues, including user fees, the pumping
and distribution of water to commercial and residential users, the maintenance of the
water system and capital improvements.
Proprietary funds distinguish operating revenues and expenses from non- operating items.
Operating revenues and expenses generally result from providing services in connection with a
proprietary fund’s principal ongoing operations. The principal operating revenues of the City’s
proprietary funds are charges to customers for services. Operating expenses include the cost of
services, administrative expenses, and depreciation on capital assets. All revenues and expenses
not meeting this definition are reported as non- operating revenues and expenses.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
36
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
Additionally, the City reports the following fund types:
Internal Service Funds account for services provided to other departments of the City
such as information services, building maintenance, vehicle replacement, workers’
compensation, unemployment and general liability insurance, and construction
administration. Services are provided by these funds on a cost reimbursement basis.
Fiduciary funds are used to account for the assets held by the City in a trust capacity or as
an agent for individuals, private organizations or other governmental units. Assets equal
liabilities and the measurement of operations is not a focus. Fiduciary Funds use the full
accrual basis of accounting for reporting receivables and payables. Fiduciary funds are
reported in the fund financial statements but are not included for government wide
reporting purposes. The City acts as a fiduciary for numerous assessment districts,
recording the receipt of property tax levies to pay the debt service and administrative fees
of the district.
Non- major governmental funds include special revenue funds where the revenues
recorded in the funds are restricted for special purposes. Debt service funds are used to
account for the collection of resources and payment of debt service obligations on
outstanding bonds. Capital projects funds are used to account for the revenues, including
grants and development fees, and expenditures for capital improvements. These funds do
not meet the criteria for being reported as a major fund and are reported in the aggregate
under one column, other governmental funds, on the financial statements.
( c) Budgetary Information
State statutes require a budget be approved before any expenditures are made. Budgets are
adopted for all Governmental Fund Types. Budgetary comparisons are reflected in the City's
financial report for all governmental funds.
From the effective date of the budget, the amounts stated therein as proposed expenditures
become appropriations of the various governmental funds. The City Council may amend the
budget during the fiscal year. The City Manager is authorized to transfer appropriations within an
activity budget to facilitate the functions of that activity in accordance with the directions, goals
and policies of the City Council. Activities are defined as departments, such as Finance, Parks or
Police. Council approval is required for additional appropriations or transfers between
departments ( activities). Unencumbered appropriations lapse at the end of each fiscal year.
Budget proposals are prepared by each of the City's department directors. The budget proposals
and justifications are submitted to the Finance Department, which compiles the information and
prepares the City's preliminary budget. The City Council reviews the City Manager’s
recommended budget at a meeting open to the public. Changes approved at this meeting are
incorporated into the final budget. The final budget is then submitted to the City Council for
adoption at a public hearing.
Any revisions that increase the total budgeted expenditures of any activity ( department) must be
approved by the City Council. Expenditures and encumbrances may not legally exceed budgeted
appropriations at the department level. Budgeted amounts presented, for the General Fund and
those funds which have legally adopted budgets, include the original adopted budget, the final
amended budget and comparison to actual expenditures.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
37
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
( d) Encumbrances
Encumbrance accounting, under which purchase orders, contracts, and other commitments for the
expenditure of monies are recorded in order to reserve that portion of the applicable
appropriation, is employed in all Governmental Fund Types. Encumbrances outstanding at year-end
are re- appropriated in the next year and reported as reservations of fund balances since they
do not constitute expenditures or liabilities.
( e) Cash and Investments
Cash and investments of individual funds are combined for investment purposes in a commingled
pool except for the investments held by fiscal agents, which are maintained and invested
separately.
The City’s cash and cash equivalents are considered to be cash on hand or demand deposits.
Cash equivalents are stated at fair value. The fair value of investments is determined annually
and is based on current market prices. Investment income earned on the commingled pool is
allocated quarterly among the funds based upon the average daily balance of cash maintained by
each fund.
Gains or losses on securities included in the investment portfolio are recognized at the earlier of
the end of the fiscal year or when the related security is sold. Investments in securities purchased
with the intent to trade for a profit are prohibited by City policy.
Resolutions authorizing certain bonds require that certain amounts be held by a fiscal agent to
secure principal and interest payments. Such amounts are classified as restricted cash and
investments held by fiscal agents. Each fund type's portion of this pool is displayed on the
combined balance sheet as " pooled cash and investments" and " restricted pooled cash and
investments” held by the City.
( f) Capital Assets
Capital assets, which include property, plant and equipment and infrastructure assets ( streets,
curbs and gutters, water and sewer systems, etc.) are reported in the applicable governmental or
business– type activities columns in the government- wide financial statements. Capital assets are
defined by the City as assets with an initial individual cost of $ 3,000 or more and estimated useful
life of at least three years. Capital assets are recorded at historical cost or estimated historical
cost if purchased or constructed. Donated capital assets are valued at estimated fair market value,
or engineering estimates in the case of infrastructure, at the date of donation.
Governmental Accounting Standards Board Statement No. 34 requires the retroactive reporting of
infrastructure assets back to 1980 for those assets that exceed 10% of the value of general fixed
assets at June 15, 1999. The City has been reporting current year additions to infrastructure since
fiscal year 2002/ 2003. For the year ending June 30, 2006, the value of those assets meeting the
capitalization criteria as specified in GASB No. 34 ( retroactive reporting) has been added to the
statement of activities for governmental funds.
Major outlays for capital assets and improvements are capitalized as projects are constructed.
Interest expense incurred during the construction phase of capital assets of business- type
activities is included as part of the capitalized value.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
38
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
Property, plant and equipment of the primary government and its component units are depreciated
using the straight- line method over the following estimated useful lives:
Buildings and land improvements 30- 50 years
Infrastructure 20- 30 years
Machinery, equipment and vehicles 5- 20 years
The costs of normal maintenance and repairs that do not add to the value of the asset or materially
extend asset lives are not capitalized
( g) Sewer Capacity Rights
Capacity rights are capitalized in the Sewer Enterprise Fund. Such rights are being amortized
over 30 years, the estimated life of the sewer treatment facility. Sewer capacity rights will be
fully amortized in 2023.
( h) Special Assessment Districts for which the City is Obligated in Some Manner
Recognition of revenue related to noncurrent receivables of the special assessment districts is
deferred until such receivables become current. There is no reserve for delinquent receivables
since liens exist against the related properties and hence the City's management believes full
value will ultimately be received by the City. Surplus fund balances remaining at the completion
of a special assessment district project are disposed of in accordance with City Council
resolutions and with the applicable assessment bond laws of the State of California.
( i) Compensated absences and Post- Employment Benefits
It is the City’s policy to permit employees to accumulate earned but unused vacation, sick and
compensatory time off. There is no liability for unused sick leave as the City has no obligation to
pay for any accumulated balance when employees separate from employment. The City does
recognize a current liability in proprietary funds for 25% ( 50% for members of AFSCME who
meet minimum balances) of the current year unused sick leave accrual due to bargaining group
agreements to pay this amount if unused during the year. All vacation and compensatory time are
accrued in the government- wide and proprietary fund financial statements.
Upon retirement or leave from the City, any unused sick leave may be used in the determination
of length of service in relation to pension benefits received from the California Public Employees'
Retirement System ( CalPERS) ( see Note 9).
The City participates in the CalPERS Health Program. This program provides medical insurance
coverage for both current employees and retirees. Participating employers must contribute
toward the cost of the health premiums for both employee groups. The City has chosen to
contribute for retired and active employees under the unequal contribution option. The unequal
contribution option requires an initial City contribution for each retiree of $ 1 per month, with
annual increases of at least 5 percent of the City’s monthly contribution of $ 64.40 toward the
premium for each active employee, until such time as the contribution for employees and retirees
are equal. The City contribution for retiree medical premiums as of June 30, 2006 was $ 11.46 per
retiree. At June 30, 2006 the City was contributing towards the health premium for 18 retirees.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
39
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
( j) Restricted Assets
Assets which are restricted for specified uses by bond debt requirements, grant provisions, or
other requirements are classified as restricted assets held by the City as fiscal agent.
( k) Interfund Transactions
Interfund transactions are recorded as transfers on the fund financial statements which result in
interfund receivables and payables. Balances reported in the fund financial statements are
eliminated for the government- wide financial statements. There were no interfund receivables or
payables at June 30, 2006.
Interfund transfers reported on the fund financial statements are summarized as follows:
General Nonmajor
From: Fund Governmental Water Sewer RDA ISF Total
General Fund $ 2 96,094 $ 2 96,094
Nonmajor governmental
funds $ 4 53,545 4 53,901 $ 174,482 1 ,081,928
Water 2 0,000 4 20,000 $ 700,000 1 ,140,000
Sewer 4 1,200 2 20,000 230,488 4 91,688
ISF 9,807 9 ,807
Total Transfers In $ 5 14,745 $ 1 ,389,995 $ 930,488 $ - $ 174,482 $ 9 ,807 $ 3 ,019,517
General Nonmajor
To: Fund Governmental Water Sewer RDA ISF Total
General Fund $ 4 53,545 $ 20,000 $ 41,200 $ 5 14,745
Nonmajor governmental
funds $ 3 06,094 6 18,383 420,000 220,000 1 ,564,477
Water 700,000 230,488 9 30,488
ISF 9,807 9 ,807
Total Transfers Out $ 3 06,094 $ 1 ,071,928 $ 1,140,000 $ 491,688 $ - $ 9 ,807 $ 3 ,019,517
Transfers In
Transfers Out
The principal purpose of the City’s interfund transfers was for operational support to other funds.
( l) Property Tax and Special Assessment Levy, Collection, and Maximum Rates
The State of California's ( the State) Constitution Article XIII A ( commonly referred to as
Proposition 13) provides that the combined maximum property tax rate on any given property
may not exceed 1% of its assessed value unless an additional amount for general obligation debt
has been approved by the voters. Assessed value is calculated at 100% of market value as
defined by Article XIII A and may be increased by no more than 2% per year unless the property
is further improved, sold or transferred. The State legislature has determined the method of
distribution of receipts from the 1% tax levy among the counties, cities, school districts, and other
districts.
Santa Clara County assesses properties and bills, collects, and distributes property taxes and
special assessments as follows:
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
Date Category Secured Unsecured
Valuation Dates January 1 January 1
Lien/ Levy Dates July1 March 1
Due Dates 50% on November 1
50% on February 1
Upon receipt of billing
Delinquent as of December 10 ( For November)
April 10 ( for February)
August 31
The term " unsecured" refers to taxes on personal property other than real estate, land, and
buildings. Taxes on real estate, land, and buildings are secured by liens on the property being
taxed.
( m) Unbilled Service Receivables
The City bills for water and sewer services on a monthly basis. All amounts not billed at year end
are accrued and reflected as accounts receivable in the appropriate funds.
( n) Income Taxes
The City and its related entities fall under the purview of Internal Revenue Code Section 115 and
corresponding California Revenue and Taxation Code provisions. As such, they are not subject
to federal or state income taxes.
( o) Investment in Properties Held for Resale
The Agency purchases housing units and other properties for redevelopment within the Agency's
project area. The costs of agency properties held for resale are capitalized in the Redevelopment
Agency Capital Project Fund as “ investment in properties held for resale” at the lower of
acquisition cost or net realizable value.
( p) Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
( q) New Accounting Pronouncements
For the fiscal year ended June 30, 2006, the City implemented Governmental Accounting
Standards Board ( GASB) Statement No. 46, “ Net Assets Restricted by Enabling Legislation- an
amendment of GASB Statement No. 34.” This Statement is effective for fiscal periods beginning
after June 15, 2005. This Statement requires that limitations on the use of net assets imposed by
enabling legislation be reported as restricted net assets. A legally enforceable enabling legislation
restriction is one that a party external to the City – such as citizens, public interest groups, the
judiciary - can compel a government to honor. Implementation of GASB Statement No. 46 did
not have an impact on the City’s basic financial statements for the fiscal year ended June 30,
2006.
For the fiscal year ended June 30, 2006, the City implemented GASB Statement No. 44,
“ Economic Condition Reporting: The Statistical Section.” This Statement is effective for fiscal
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
41
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
periods beginning after June 15, 2005. This Statement enhances and updates the statistical
section that accompanies a local government’s basic financial statements to reflect the significant
changes that have taken place in the government. The statistical section is comprised of
schedules that present trend information about revenues and expenses, significant revenue
sources, outstanding debt, economic and demographic information and operating information.
Implementation of GASB Statement No. 44 did not have an impact on the City’s basic financial
statements for the fiscal year ended June 30, 2006.
3. BUDGETARY INFORMATION
Budgetary Results Reconciled to Generally Accepted Accounting Principles in the United States of
America
The budgetary process is based upon accounting for certain transactions on a basis other than generally
accepted accounting principles ( US GAAP basis). The results of operations for the General Fund are
presented in the accompanying budget and actual comparison statement in accordance with the budgetary
process ( budgetary basis) to provide a meaningful comparison with the budget.
The major difference between the budgetary basis actual and US GAAP basis is that year- end
encumbrances are recognized as the equivalent of expenditures on the budgetary basis, while encumbered
amounts are not recognized as expenditures on the US GAAP basis until recorded as actual expenditures.
A summary of the adjustments necessary to reconcile the results of operations on a budgetary basis to the
results of operations on a US GAAP basis are listed below for governmental funds:
General Fund
Redevelopment
Agency
Other
Governmental
Funds
Expenditures, US GAAP basis $ 19,799,181 $ 30,659,482 $ 10,692,829
Encumbrances 180,168 16,361,349 3,655,034
Expenditures, budgetary basis $ 19,979,349 $ 47,020,831 $ 14,347,863
Excess of Expenditures Over Appropriations
For the year ended June 30, 2006, expenditures exceeded appropriations at the legal level of control in the
Asset Seizure Fund by $ 301; the Lighting & Landscape Fund by $ 10,429; the Environmental
Remediation Fund by $ 73,236; the Open Space Fund by $ 2,970; the Undergrounding Fund by $ 58,939;
the Library Impact Fund by $ 1; the Police Facility Debt Service Fund by $ 23; and the Cochrane Business
Park Assessment District Fund by $ 1,896. These excess expenditures were funded by available fund
balance except for the Lighting and Landscape, Open Space, Library Impact and Police Facility Debt
Service Funds which were funded by greater than anticipated revenues.
4. CASH AND INVESTMENTS
Cash and investments as of June 30, 2006 were classified in the accompanying financial statements as
follows:
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
42
4. CASH AND INVESTMENTS ( continued)
Statement of net assets:
Cash and investments $ 94,215,583
Cash and investments held by bond trustee 4,001,197
Fiduciary funds:
Cash and investments 3,194,768
Cash and investments with fiscal agent 2,581,965
Total cash and investments $ 103,993,513
Cash and investments as of June 30, 2006 consisted of the following:
Cash on hand $ 6,112
Deposits with financial institutions 1,537,920
Investments 102,449,481
Total cash and investments $ 103,993,513
Investments Authorized by the California Government Code and the City’s Investment Policy
The table below identifies the investment types that are authorized for the City by the City of Morgan Hill
investment policy. The table also identifies certain provisions of the City’s investment policy that address
interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of
debt proceeds, held by bond trustees, that are instead governed by the provisions of trust agreements with
the City.
Maximum Maximum
Authorized Maximum Percentage Investment
Investment Type Maturity of Portfolio in One Issuer
U. S. treasury bills and notes 5 years No limit No limit
Dreyfus treasury cash and management fund NA No limit No limit
U. S. government agencies 5 years No limit No limit
Local agency investment fund ( LAIF) NA No limit Gov’t Code
Time deposits 5 years 5%* $ 2M/ institution
* 5% of portfolio ( excluding government agency and LAIF)
Investments Authorized by Trust Agreements
Investment of debt proceeds held by bond trustees are governed by provisions of the trust agreements,
rather than the general provisions of the California Government Code or the City’s investment policy.
The table below identifies the investment types that are currently authorized for investment and held by
bond trustees. The table also identifies certain provisions of these trust agreements that address interest
rate risk, credit risk, and concentration of credit risk.
Maximum Maximum
Authorized Maximum Percentage Investment
Investment Type Maturity Allowed In One Issuer
Repurchase agreements NA None None
Federal agency securities None None None
Investment contracts None None None
Cash management funds NA None None
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
43
4. CASH AND INVESTMENTS ( continued)
Disclosures Relating to Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an
investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value
to changes in market interest rates. One of the ways that the City mitigates its exposure to interest rate
risk is by structuring the portfolio so that securities mature at the same time that major cash outflows
occur; thus, eliminating the need to sell securities prior to maturity. In addition, the City prohibits the
taking of short positions; that is, selling securities that the City does not own.
The City tries to match its investments with anticipated cash flow requirements. Unless matched to a
specific cash flow, and allowed for under bond covenants as approved by the City Council, the City
cannot directly invest in securities maturing more than five years from the date of purchase.
Bond reserve funds and bond escrow funds, pursuant to bond documents, may be invested in securities
exceeding five years if the maturities of such investments are made to coincide as nearly as possible with
the expected use of the funds. The City monitors the interest rate risk inherent in its portfolio by
measuring the weighted average maturity of its portfolio.
Weighted
Average
Maturity
Investment Type Amount ( in years)
Federal agency/ US treasury notes $ 64,567,810 1.898
Local agency investment fund 29,142,914 0.014
Certificate of deposits 2,000,000 1.016
Held by bond trustee:
Repurchase agreement 276,529 .003
Federal agency securities 1,531,938 .191
Investment contracts 1,849,400 16.080
Cash management funds 3,080,890 .003
Total $ 102,449,481
Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations
The City does not have investments ( including investments held by bond trustees) that are highly
sensitive to interest rate fluctuations ( to a greater degree than already indicated in the information
provided above):
Disclosures Relating to Credit Risk
Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder
of the investment. This is measured by the assignment of a rating by a nationally recognized statistical
rating organization. Presented below is the minimum rating required by the City’s investment policy, or
trust agreements and the actual rating as of year end for each investment type.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
44
4. CASH AND INVESTMENTS ( continued)
Minimum Rating as of Year End
Legal
Investment Type Rating AAA AAAf Not Rated
Federal agency securities $ 64,567,810 NA $ 64,567,810
Local agency investment fund 29,142,914 NA $ 29,142,914
Certificate of deposits 2,000,000 A- 1 2,000,000
Held by bond trustee:
Repurchase agreement 276,529 A3/ A 276,529
Federal agency securities 1,531,938 NA 1,531,938
Investment contracts 1,849,400 AA 1,849,400
Cash management funds 3,080,890 NA 904,786 $ 2,112,812 63,292
Total $ 102,449,481 $ 68,853,934 $ 2,112,812 $ 31,482,735
Concentration of Credit Risk
The investment policy of the City contains no limitations on the amount that can be invested in any one
issuer beyond that stipulated by the California Government Code. Investments in any one issuer ( other
than U. S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of
total City investments are as follows:
Reported
Issuer Investment Type Amount
FHLMC Federal agency securities $ 9,715,360
Federal Farm Credit Bank Federal agency securities 7,676,880
FHLB Federal agency securities 45,195,970
Custodial Credit Risk
Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial
institution, a government will not be able to recover its deposits or will not be able to recover collateral
securities that are in the possession of an outside party. The custodial credit risk for investments is the
risk that, in the event of the failure of the counterparty ( e. g., broker- dealer) to a transaction, a government
will not be able to recover the value of its investment or collateral securities that are in the possession of
another party. The California Government Code does not contain legal requirements that would limit the
exposure to custodial credit risk for deposits or investments, other than the following provision for
deposits: the California Government code requires that a financial institution secure deposits made by
state or local governmental units by pledging securities in an undivided collateral pool held by a
depository regulated under state law ( unless so waived by the governmental unit). The market value of
the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the
public agencies. California law also allows financial institutions to secure City deposits by pledging first
trust deed mortgage notes having a value of 150% of the secured public deposits.
The City’s investment policy requires that as protection against potential losses by the collapse of
individual securities dealers, all securities owned by the City shall be held in safekeeping by a third party
bank trust department acting as agent for the City under the terms of a custody agreement executed by the
bank and the City. All securities will be received and delivered using standard delivery- versus- payment
( DVD) procedures. The third party bank trustee agreement must comply with Section 53608 of the
California Government Code. No outside broker/ dealer or advisor may have access to City funds,
accounts or investments, and any transfer of funds to or through an outside broker/ dealer must be
approved by the City Treasurer.
As of June 30, 2006, $ 1,337,920 of the City’s deposits with financial institutions in excess of federal
depository insurance limits were held in collateralized accounts. As of June 30, 2006, City investments in
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
45
4. CASH AND INVESTMENTS ( continued)
the following investment types were held by the same broker- dealer ( counterparty) that was used by the
City to buy the securities:
Amount
Investment Type Reported
Federal agency securities $ 66,099,748
Investment contracts 1,849,400
External Investment Pool
The City invests in LAIF, a State of California external investment pool. LAIF determines fair value on
its investment portfolio based on market quotations for those securities where market quotations are
readily available and based on amortized cost or best estimate for those securities where market value is
not readily available.
The City valued its investments in LAIF as of June 30, 2006, by multiplying its account balance with
LAIF times a fair value factor determined by LAIF. This fair value factor was determined by dividing all
LAIF participants total aggregate amortized cost by total aggregate fair value.
Accordingly, as of June 30, 2006, the City’s investments in LAIF at fair value amounted to $ 29,142,914
using a LAIF fair value factor of 0.998185821.
5. CAPITAL ASSETS
The following is a summary of governmental activities capital assets at June 30, 2006:
Capital Asset Category Carrying Value
Land $ 27,676,932
Building and Improvements 52,697,028
Machinery, Equipment & Vehicles 894,798
Infrastructure 65,536,961
Construction in progress 19,738,318
Total General Capital Assets $ 166,544,037
Changes in governmental activities capital assets were as follows:
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
46
5. CAPITAL ASSETS ( continued)
Balance Prior Balance
Beginning of Period End of
Year Increases Decreases Adjustment Year
Capital Assets, Not Being Depreciated:
Land $ 28,162,960 $ ( 486,028) $ 2 7,676,932
Construction in progress 4,103,143 $ 16,615,941 ( 980,766) 1 9,738,318
Total Capital Assets, Not Being Depreciated 32,266,103 16,615,941 ( 1,466,794) 4 7,415,250
Capital Assets, Being Depreciated:
Infrastructure 16,629,828 5,532,842 77,364,651 9 9,527,321
Buildings and other improvements 58,077,872 2,327,225 ( 566,295) 5 9,838,802
Machinery/ Equipment/ Vehicles 3 ,122,917 49,033 ( 1,226,015) 1 ,945,935
Total Capital Assets, Being Depreciated 77,830,617 7,909,100 ( 1,792,310) 77,364,651 1 61,312,058
Less Accumulated Depreciation For:
Infrastructure ( 735,982) ( 2,841,707) ( 30,412,671) ( 33,990,360)
Buildings and other improvements ( 5,607,272) ( 1,940,651) 4 06,149 ( 7,141,774)
Machinery/ Equipment/ Vehicles ( 2,165,632) ( 108,908) 1 ,223,403 ( 1,051,137)
Total Accumulated Depreciation ( 8,508,886) ( 4,891,266) 1 ,629,552 ( 30,412,671) ( 42,183,271)
Total Capital Assets Being Depreciated, Net 69,321,731 3,017,834 ( 162,758) 46,951,980 1 19,128,787
Governmental Activities Capital Assets, Net $ 101,587,834 $ 19,633,775 $ ( 1,629,552) $ 46,951,980 $ 166,544,037
Depreciation expense was charged to governmental functions as follows:
Governmental Function Expense
Administration $ 50,902
Community Development 13,654
Redevelopment Agency 940,175
Public Works 2,876,928
Public Safety 367,009
Parks & Recreation 642,598
Total General Capital Assets $ 4,891,266
As of June 30, 2006, Capital assets of business type activities on the government- wide financial
statements consisted of:
Capital Asset Category
Business- Type
Funds
Land $ 1,825,332
Building and other improvements 38,394,105
Machinery, Equipment & Vehicles 5,029,265
Infrastructure 76,651,474
Sewer Capacity rights 28,347,522
Construction in Progress 2,094,865
Total $ 152,342,563
Less Accumulated depreciation ( 69,575,420)
Capital Assets, Net $ 82,767,143
A reconciliation of capital assets for business type activities are listed below:
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
47
5. CAPITAL ASSETS ( continued)
Balance Balance
Beginning of End of
Year Increases Decreases Reclassification Year
Capital Assets, Not Being Depreciated:
Land $ 1,825,332 $ $ $ $ 1 ,825,332
Construction in progress 276,956 2 ,056,890 ( 238,981) 2 ,094,865
Total Capital Assets, Not Being Depreciated 2,102,288 2 ,056,890 ( 238,981) - 3 ,920,197
Capital Assets, Being Depreciated:
Infrastructure 70,582,749 2 ,557,767 3,510,958 7 6,651,474
Buildings and other improvements 40,190,678 3 ,617,302 ( 5,413,875) 3 8,394,105
Machinery/ Equipment/ Vehicles 8,816,530 3 42,048 ( 4,129,313) 5 ,029,265
Sewer Capacity rights 28,347,522 2 8,347,522
Total Capital Assets, Being Depreciated 147,937,479 6 ,517,117 - ( 6,032,230) 1 48,422,366
Less Accumulated Depreciation For:
Infrastructure ( 46,080,393) ( 1,615,866) 1,863,174 ( 45,833,085)
Buildings and other improvements ( 8,505,850) ( 1,207,037) 53,676 ( 9,659,211)
Machinery/ Equipment/ Vehicles ( 6,944,093) ( 473,079) 4,115,380 ( 3,301,792)
Sewer Capacity rights ( 9,836,414) ( 944,918) ( 10,781,332)
Total Accumulated Depreciation ( 71,366,750) ( 4,240,900) - 6,032,230 ( 69,575,420)
Total Capital Assets Being Depreciated, Net 76,570,729 2 ,276,217 - - 7 8,846,946
Enterprise Funds, Net Assets 06/ 30/ 06 $ 78,673,017 $ 4 ,333,107 $ ( 238,981) $ - $ 8 2,767,143
Depreciation and amortization expense was charged to business- type funds as follows:
Fund Amount
Sewer $ 2,305,847
Water 1,935,053
Total Business- Type Activities $ 4,240,900
6. LOANS RECEIVABLE
The loans receivable on the statement of net assets as of June 30, 2006 total $ 42,442,345 consisting of the
following types:
Description Amount
CDBG Loans $ 565,992
Housing Rehabilitation Loans 1,227,651
Jasmine Way ( Sweat Equity) 208,540
Sunrise Meadows 4,227,751
San Pedro Gardens 1,527,554
Morgan Hill Ranch Family Housing 3,315,682
Village Avante Apartments 1,800,995
Village Avante Apartments 2 774,461
Villa Ciolino 2,976,727
Church Street 3,839,188
Murphy Ranch 6,235,302
Royal Court Apartments 5,856,715
Casa Diana 3,235,579
Millennium Housing 1,257,699
Other Loans 5,392,509
Total $ 42,442,345
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
June 30, 2006
48
6. LOANS RECEIVABLE ( continued)
( a) CDBG Loans/ Housing Rehabilitation Loans
The City administers two home improvement revolving loan funds using Federal Community
Development Block Grant funds ( CDBG) and Redevelopment Agency Housing monies. The
program provides below market rate loans, secured by deeds of trust, to eligible participants for
housing rehabilitation. Although payments for most loans are amortized over an established
payment schedule, some loans allow for deferred payment of accrued interest and principal until
the homeowner's property is sold or transferred, primarily for seniors and very low income
families. Repayments received from the outstanding loans are used to make additional housing
rehabilitation loans. As of June 30, 2006, the City had $ 565,992 of outstanding CDBG loans and
the Agency had $ 1,227,651 in outstanding home improvement loans.
( b) Jasmine Way
The Agency also issued “ sweat equity” loans in 1989, secured by deeds of trust, to 15 low and
moderate income families to purchase homes. Interest accrues at the rate of 7% annually for 10
years after the execution of the loan. The notes with accrued interest are due and payable upon
the sale or transfer of the homeowner’s property, unless