CITY OF MORGAN HILL
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
TABLE OF CONTENTS
INTRODUCTORY SECTION
Letter of Transmittal.................................................................................................................... ........... i
Elected Officials and City Staff............................................................................................................ vii
Morgan Hill Location Map.................................................................................................................. viii
Organizational Chart ............................................................................................................................. ix
Certificates of Award for Excellence in Financial Reporting ............................................................... xi
FINANCIAL SECTION
Independent Auditors’ 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............................ 65
Combining and Individual Fund Statements and Schedules:
Combining Balance Sheet – Nonmajor Governmental Funds................................................. 75
Combining Statement of Revenues, Expenditures and
Changes in Fund Balance – Nonmajor Governmental Funds ................................................. 83
Schedule of Revenues, Expenditures, and Changes in Fund Balance
Budget and Actual- Redevelopment Agency Capital Project Fund ......................................... 90
Schedules of Revenues, Expenditures, and Changes in Fund Balance
Budget and Actual – Nonmajor Governmental Funds ............................................................ 91
Combining Statement of Net Assets – Internal Services Funds .................................................. 125
Combining Statement of Revenues, Expenses, and Changes in Fund
Net Assets – Internal Service Funds...................................................................................... 127
Combining Statement of Cash Flows – Internal Service Funds .................................................. 129
Statement of Changes in Fiduciary Assets and Liabilities – Fiduciary Funds............................. 133
Capital Assets Used in the Operation of Governmental Funds:
Comparative Schedules by Source ........................................................................................ 137
Schedule by Function and Activity…………. ...................................................................... 138
Schedule of Changes by Function and Activity .................................................................... 139
CITY OF MORGAN HILL
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
TABLE OF CONTENTS ( Continued)
STATISTICAL SECTION
Government- wide information:
Government- wide Expenditures/ Expenses by Function..................................................................... 143
General Governmental Revenues by Source ..................................................................................... 144
General Governmental Tax Revenue by Source ................................................................................ 145
General Governmental Expenditures by Function ............................................................................. 146
Assessed and Estimated Actual Value of Taxable Property .............................................................. 147
General fund Property Tax Levies and Collections ........................................................................... 148
Property Tax Rates- Direct and Overlapping Governments ............................................................... 149
Principal Employers .......................................................................................................................... 150
Demographic Statistics Employees ................................................................................................... 151
Schedule of Direct and Overlapping Debt ......................................................................................... 152
Net General Obligation Debt.............................................................................................................. 153
General Bonded Debt Service ............................................................................................................ 154
Special Assessment Billings and Collections .................................................................................... 155
Sewer Revenue Bond Coverage ........................................................................................................ 156
Computation of Legal Debt Margin .................................................................................................. 157
Sales Taxes ............................................................................................................................... ........ 158
Per Capita Comparison- Santa Clara County Cities............................................................................ 159
Property Values, Construction and Bank Deposits ............................................................................ 160
Miscellaneous Statistics ..................................................................................................................... 161
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 14, 2005
Honorable Mayor, Members of the City Council, City Manager, and Citizens of Morgan Hill:
The Comprehensive Annual Financial Report ( CAFR) for the City of Morgan Hill, California for the
fiscal year ended June 30, 2005, 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 not required to undergo a single audit for 2004/ 05 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, for the third fiscal year, to comply with the financial
reporting model developed under the Governmental Accounting Standards Board ( GASB) Statement No.
34. The new financial reporting model resulted in significant changes to the format of the City’s financial
statements. 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 of 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, only represents the fiscal years
2004/ 05, 2003/ 04 and 2002/ 03 additions to the City’s infrastructure base, which includes road
and park improvements. Staff is planning to perform an inventory of the City’s infrastructure
which, once complete, will replace the amount reported for infrastructure in these financial
statements.
To assist with the reader’s review of the City’s financial statements, a narrative section called
Management’s Discussion and Analysis ( MDA) is included. The MDA 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 MDA is designed to disclose any significant events or decisions that affect
the financial condition of the City.
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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 auditors’ report on the financial statements and
schedules, the MDA, 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 association 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 Council has consistently faced the challenge of balancing policies that stimulate and support
economic growth with maintenance and improvement of the quality of life in Morgan Hill. 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, Fox Racing, EDO Reconnaissance & Surveillance Systems, Safeway, Paramit
Corporation, City of Morgan Hill, Global Motorsport Group, Alien Technology, The Thomas Kincade
Company, 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 assure 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 has included an Aquatics Center that opened in
May 2004, a new Indoor Recreation Center currently under construction, a new Library about to be
constructed, and the August 2004 completion of 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.
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Currently, Morgan Hill is 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
1,035,000 in 2000 to 790,000 in September 2005, while the County unemployment rate increased from
2.0 % in calendar 2000 to 8.4% in 2002, and then dropped to 5.2% in September 2005. Employment for
the City’s top 40 employers increased by 2.3% to a level of about 6,600 between July 2004 and July
2005, according to employment numbers reported to the City for business license purposes. Property tax
collections have continued to increase, reflecting higher residential property values and new construction.
Sales taxes increased by 28% during fiscal year 2004/ 05, with the largest growth occurring in the
“ transportation” and “ construction” sales tax categories. This increase in sales tax reversed a three year
trend of declining sales tax receipts and brought annual sales tax receipts almost back up to the fiscal year
2000/ 01 receipts. Franchise, hotel, and other taxes increased by a combined 9%, and licenses and permits
increased by 3%. The City’s tax receipts have been affected by the State Government’s fiscal crisis. The
State has taken or will take $ 340,000 from property taxes that would normally go to the City in each of
the fiscal years 2004/ 05 and 2005/ 06. In addition, in July 2005, the State repaid the City $ 600,000 in
motor vehicle in- lieu fees taken from the City in fiscal year 2003/ 04. In response to these 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 has recently embarked
upon a year- long community conversation so that the City may determine the levels of service desired by
the community and determine the community’s willingness to pay more for these services. The City has
hired a consultant to assist in this process which will involve a series of approximately 50 community
meetings during fiscal year 2005/ 06. Following these meetings, the City will determine the next steps so
that the City may balance its revenues and expenditures and meet the expectations of the community.
While the General Fund had strong reserves of approximately $ 9.8 million ( or 49% of budgeted fiscal
year 2005/ 06 revenues) at June 2005, without expanded revenue sources, these reserves are projected to
drop to approximately 19% of annual revenues by June 2009, if no actions, up to and including a tax
measure, are taken.
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.
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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
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, 2005, approximately 9% was invested in Government Bills and
Notes, 23% in Federal Agency Coupons and Discount Notes, 24% in CD’s, 20% in Commercial Paper
and Corporate Bonds, 12% in time deposits, and 12% in other investments. The amount of investment
income earned for all funds decreased from the prior fiscal year due to average lower interest rates on
City investments and due to lower cash balances.
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 California to pool their insurance risk
and help lower the overall cost of providing insurance coverage for general liability claims. The coverage
amount is $ 10 million per occurrence, subject to a $ 100,000 deductible. 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, 2004. 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.
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The GFOA certificate is valid for a period of one year only. The City has received this certificate for the
last eleven 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.
In addition, the City received the Certificate of Award for Outstanding Financial Reporting from the
California Society of Municipal Finance Officers ( CSMFO), for the tenth consecutive fiscal year, for its
Comprehensive Annual Financial Report for the fiscal year ended June 30, 2004. The criteria for this
award are very similar to that of GFOA.
ACKNOWLEDGMENTS
The Comprehensive Annual Financial Report represents many months of work by the City's entire
Finance Department staff. Special thanks go to Assistant Finance Director Tina Reza, Budget Manager
Chu Thai, and Accountants Isabel Jones and Lourdes Reroma for their accomplishments in the
preparation of this report. I also wish to express my appreciation to the City Council and City Manager
for their leadership and support.
Sincerely,
Jack Dilles
Director of Finance
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CITY OF MORGAN HILL, CALIFORNIA
ELECTED OFFICIALS AND CITY STAFF AS OF JUNE 30, 2005
ELECTED OFFICIALS
Dennis Kennedy Mayor
Steve Tate Mayor Pro Tem
Greg Sellers Council Member
Larry Carr Council Member
Mark Grzan Council Member
Michael J. Roorda City Treasurer
Irma Torrez City Clerk
CITY STAFF
J. Edward Tewes City Manager
Dan Seigel Interim City Attorney
Jack Dilles Director of Finance
Kathleen Molloy 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
Rod Cooper Interim Recreation Manager
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CITIZENS OF MORGAN HILL
City Clerk City Council
City Manager City Attorney
Business
Assistance &
Housing Services
Community
Development
Council Services
Finance
Fire
Human
Resources
Police
Public Works
Recreation
City Treasurer
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Financial Section
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City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
3
Management’s Discussion and Analysis ( MDA)
June 30, 2005
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,
2005. 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 2004/ 05, the City’s net assets, representing the difference between total assets
and total liabilities, increased by $ 25.9 million to $ 274.1 million. Of the total net assets, $ 98.6
million in unrestricted assets may be used to meet the City’s ongoing obligations to citizens. The
$ 25.9 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 $ 274.1 million in net assets, $ 148.6 million represents investments in capital assets,
$ 26.9 million represents net assets restricted by outside agencies and state regulations for specific
purposes, and $ 98.6 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 $ 76.7 million and total expenses for all City programs were
$ 50.8 million.
• At June 30, 2005, the City had $ 44.2 million in long- term debt, comprised of $ 12.1 million in
debt secured by water revenues, $ 20.9 million in wastewater capacity rights payable secured by
sewer revenues, $ 7.0 million in police facility lease revenue bonds subject to a City
appropriations covenant, $ 2.0 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, $ 1.1 million in special
assessment bonds secured by property owner assessments, and $ 1.1 million in compensated
absences payable.
• At June 30, 2005, the City’s governmental funds reported ending fund balances of $ 63.1 million,
an increase of $ 13.2 million in comparison with the prior fiscal year. This increase was caused
by an $ 8.1 million addition to Redevelopment Agency fund balance primarily associated with the
collection of property tax increment revenues to be used for future capital projects and by a $ 7.4
million receipt of proceeds from long- term debt that was used for the acquisition and construction
of a new city police facility, offset by the use of existing resources.
• The unreserved portion of fund balance in the City’s General Fund decreased by $ 0.2 million to
$ 9.8 million. The City Council designated $ 4.5 million of this total to provide for a “ general
reserve.”
• During Fiscal Year 2004/ 05, General Fund expenditures exceeded revenues by $ 0.3 million,
while combined expenditures and transfers out exceeded combined revenues and transfers in by
$ 0.2 million. If fair value adjustments were excluded from revenues, expenditures would have
exceeded revenues by $ 1.1 million.
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
4
• Actual revenues in the General Fund were $ 2.0 million greater than the final budget. Of this
total, $ 1.3 million resulted from higher sales taxes and property taxes and the remaining $ 0.7
million resulted from fair value adjustments.
• Actual expenditures in the General Fund were $ 0.6 million less than the final budget primarily
because of expenditure reduction controls placed upon City departments by management under
the direction of the City Council.
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 32 through 63 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
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
5
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
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.
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
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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
63 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 64 of
this report.
GOVERNMENT- WIDE FINANCIAL ANALYSIS
The City’s combined net assets for the Fiscal Year ended June 30, 2005, were $ 274.1 million. A
significant portion of the City’s net assets ($ 148.6 million or 54%) 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 ($ 26.9 million or 10%) represents resources that are
subject to external restrictions on how they may be used. The remaining balance of unrestricted net
assets ($ 98.6 million or 36%) may be used to meet the City’s ongoing obligations to citizens and
creditors. The total $ 98.6 million in unrestricted net assets is comprised of $ 80.3 million in
governmental unrestricted net assets and $ 18.3 million in business- type unrestricted net assets. The
governmental unrestricted net assets include City Council designations totaling $ 4.5 million of
General Fund dollars for “ general reserve” purposes, include $ 5.4 million in dollars that have
accumulated in various internal service funds to be used for the purposes intended for those funds,
include $ 13.7 million in unreserved capital project funds, include $ 8.0 million in encumbrances
committed to purchases, include $ 39.1 million in deferred revenues not currently available, and
include $ 9.6 million of other funds that are available. The $ 18.3 million in 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.
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
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The table below summarizes the City’s net assets:
2004/ 05 2003/ 04 2004/ 05 2003/ 04 2004/ 05 2003/ 04
Current and other assets 114,164,110 97,624,264 31,580,134 26,465,976 145,744,244 1 24,090,240
Capital assets 101,587,834 87,083,599 78,673,017 77,246,184 180,260,851 1 64,329,783
Total assets 215,751,944 184,707,863 110,253,151 103,712,160 326,005,095 2 88,420,023
Long- term liabilities 11,135,265 3,987,641 33,070,969 26,706,656 44,206,234 3 0,694,297
Other liabilities 5,636,164 7,779,952 2,061,764 1,753,657 7,697,928 9 ,533,609
Total liabilities 16,771,429 11,767,593 35,132,733 28,460,313 51,904,162 4 0,227,906
Net assets:
Invested in capital assets, 101,587,834 87,083,599 47,019,085 51,921,214 148,606,919 1 39,004,813
net of related debt
Restricted 17,146,710 19,681,778 9,782,649 12,000,958 26,929,359 3 1,682,736
Unrestricted 80,245,971 66,174,893 18,318,684 11,329,675 98,564,655 7 7,504,568
Total net assets 198,980,515 172,940,270 75,120,418 75,251,847 274,100,933 2 48,192,117
Governmental Activities Business- Type Activities Totals
Governmental activities: The charts below summarize major expenditure program categories,
program revenues used to fund specific expenditure programs, and general City revenues available
for funding all City programs. The $ 9.3 million in fiscal year 2004/ 05 general government expenses
includes $ 4.4 million in Redevelopment Agency pass- through obligations to other governmental
entities as required by State law. The property tax increment revenues associated with these pass-throughs
are shown as general property tax revenues.
Governmental activities increased the City’s net assets by $ 26.0 million, whereas business- type
activities decreased the City’s net assets by $ 0.1 million. The $ 25.9 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 related to
increases in capital assets during the year.
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
8
Totals
2004/ 05 2003/ 04 2004/ 05 2003/ 04 2004/ 05 2003/ 04
Revenues:
Program Revenues: -
Charges for services $ 16,312,298 $ 21,790,999 $ 15,426,150 $ 15,714,410 $ 31,738,448 $ 37,505,409
Operating grants & contributions 933,533 2,695,875 - - 9 33,533 2,695,875
Capital grants & contributions 3,357,549 276,677 - - 3 ,357,549 276,677
General Revenues:
Property taxes 28,012,338 25,045,268 - - 2 8,012,338 25,045,268
Sales taxes 5,196,224 4,070,030 - - 5 ,196,224 4,070,030
Franchise taxes 2,663,021 2,628,604 - - 2 ,663,021 2,628,604
Other general revenue taxes 1,058,233 48,177 - - 1 ,058,233 48,177
Unrestricted investment earnings 3,175,061 5,356,675 583,148 600,073 3,758,209 5,956,748
Total Revenues 6 0,708,257 61,912,305 1 6,009,298 16,314,483 76,717,555 78,226,788
- -
Expenses: - -
General Government 9,278,890 8,560,110 9,278,890 8,560,110
Public Safety 12,236,802 10,221,986 12,236,802 10,221,986
Community Development 4,939,486 11,425,408 4,939,486 11,425,408
Public Works/ Development Services 4,519,110 3,754,817 4,519,110 3,754,817
Recreation and Culture 4,098,111 3,358,632 4,098,111 3,358,632
Interest on long- term debt 235,612 121,532 235,612 121,532
Sewer 7,418,775 6,767,764 7,418,775 6,767,764
Water - - 8,081,953 5,512,709 8,081,953 5,512,709
Total Expenses 3 5,308,011 37,442,485 1 5,500,728 12,280,473 50,808,739 49,722,958
- -
Increase in net assets before transfers 25,400,246 24,469,820 508,570 4 ,034,010 25,908,816 28,503,830
Transfers 6 40,000 557,843 ( 640,000) ( 665,000) - ( 107,157)
Increase in net assets 26,040,246 25,027,663 ( 131,430) 3 ,369,010 25,908,816 28,396,673
Net assets - beginning of year 172,940,270 147,912,607 75,251,847 71,882,837 2 48,192,117 219,795,444
Net assets - year- end $ 1 98,980,516 $ 172,940,270 $ 75,120,417 $ 75,251,847 $ 2 74,100,933 $ 248,192,117
CITY OF MORGAN HILL CHANGES IN NET ASSETS
Governmental Activitie s Business- Type Activities
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
9
Revenues by Source - Governmental Activities $ 60.7 Million
Property taxes
46%
Charges for services
27%
Investment earnings
5%
Sales taxes
9%
Contributions/ grants
7%
Franchise fees/ other
taxes
6%
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
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
10
Business- type activities: Business- type activities accounted for a reduction of $ 0.1 million in the City’s
net assets. Key elements of changes are as follows:
• Net assets for Sewer Operations decreased by $ 1.0 million as expenses exceeded revenues and
used available net assets. However, operating income for Sewer Operations, which excludes
transfers and additions to capital assets, showed a loss of $ 0.4 million.
Net assets for Water Operations decreased by $ 0.2 million. However, operating income for
Water Operations, which excludes transfers and additions to capital assets, showed a gain of $ 0.1
million.
• Net assets for the Sewer Impact fund increased by $ 1.6 million and net assets for Water Impact
fund decreased by $ 0.5 million.
Revenues by Source – Business- Type Activities
Charges for services
96%
Investment earnings
4%
Expenses & Program Revenues – Business- Type Activities
$ 7,000,000
$ 7,200,000
$ 7,400,000
$ 7,600,000
$ 7,800,000
$ 8,000,000
$ 8,200,000
Expenses Program Revenues
Sewer Water
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
11
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, 2005, the City’s governmental funds reported combined ending
fund balances of $ 63.1 million, an increase of $ 13.2 million in comparison with the prior year.
Of this increase in fund balances, approximately $ 8.1 million related to Redevelopment Agency property
tax increment to be used for future capital projects and $ 7.4 million related to proceeds from long- term
debt used for the acquisition and construction of a new city police facility, which were offset by the use of
existing resources.
General Fund
The General Fund is the chief operating fund of the City. At the end of Fiscal Year 2004/ 05, total fund
balance for the General Fund amounted to $ 9.8 million, of which $ 4.5 million has been designated by the
City Council as a “ general reserve.”
During Fiscal Year 2004/ 05, General Fund expenditures exceeded revenues by $ 0.3 million, while
combined expenditures and transfers out exceeded combined revenues and transfers by $ 0.2 million. If
fair value adjustments were excluded, expenditures would have exceeded revenues by $ 1.1 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 taxes increased by 74% over the prior year primarily due to 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. However, if these changes were not considered, property
taxes would have increased by 13% as the result of a general overall increase in assessed property values
in the City associated with a strong housing market and the addition of new residential units.
Sales taxes increased by 28%, which reversed a three year slide, resulting primarily from new businesses
locating in town and existing businesses expanding. Franchise, hotel, and other taxes increased by 1%,
and licenses & permits decreased by 2%.
Funding from other governmental agencies decreased by 45% because the State stopped backfilling a
previous loss in motor vehicle in- lieu fees to local governments and began offsetting these losses with
higher allocations of property taxes to local governments. This decrease would have amounted to 76% if
the State had not paid the City pending one- time motor vehicle in- lieu fees.
Charges for current services increased by 28% primarily because of a significant increase in recreation
program revenues associated with the first full year of Aquatics Center operations.
• Investment and rental income increased by 104% primarily because, during 2004/ 05, the City
accounted for the reversal of the June 2004 $ 857,000 valuation reduction and accounted for the
$ 107,000 valuation reduction for investments at June 2005, resulting in a net $ 750,000 addition to
fund balance 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 the prior year 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 9%.
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
12
b. Expenditure Highlights
Expenditures increased overall by 19%. General government expenditures increased by 11% primarily
because of higher litigation related costs. Public safety costs increased by 18% because of a renegotiated
fire services contract, higher pension costs, higher facilities costs associated with the opening of a new
police facility, and new debt service related to the new police facility. Parks and recreation costs
increased by 31% and were related to the first full year of Aquatics Center operations.
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 2004/ 05 were primarily related to
projects and encumbrances carried over from the prior year, unanticipated legal costs, and implementation
of recreation programs.
After taking into account these adjustments, actual expenditures were $ 0.6 million less than final budget
amounts. Of the total, approximately $ 0.1 million related to police services, $ 0.3 million related to
recreation, $ 0.1 million related to park maintenance, and the balance related to other City services. Most
of the savings were associated with departmental labor and other costs associated with a City- wide cost
reduction program initiated to confront the General Fund’s structural deficit.
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 Redevelopment Plan, for economic development, and for affordable housing programs. At the end
of Fiscal year 2004/ 05, the total fund balance for the Redevelopment Agency was $ 18.8 million, of which
$ 6.5 million was reserved for low and moderate income housing, $ 5.9 million was reserved for
encumbrances, and $ 6.2 million was available to be spent on certain capital projects described in the
Redevelopment Plan.
During Fiscal Year 2004/ 05, Redevelopment Agency revenues exceeded expenditures by $ 7.6 million.
The excess was due to the timing of capital project expenditures. Existing fund balances and Fiscal Year
2004/ 05 revenues were used to pay for the following major capital projects during Fiscal Year 2004/ 05:
• Start of construction for an Indoor Recreation Center
• Improvements to Aquatics Center
• Design for a new Library
• Street Resurfacing
• Tennant Avenue
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
13
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, 2005, amounted to $ 8.2 million for Sewer Operations and $ 6.3 million
for Water Operations. In addition, Sewer Mitigation had $ 6.4 million in net assets restricted for capital
expansion and Water Mitigation had $ 3.8 million restricted for a similar purpose. The total change from
the prior year for all proprietary funds combined was negative ($ 0.1) 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,
2005, amounted to $ 101.1 million ( net of accumulated depreciation). This investment in capital assets
includes land, buildings, park and roadway improvements, vehicles & other equipment, infrastructure,
and construction in progress, as summarized in the schedule below. During the current fiscal year, the
City’s investment in capital assets increased by approximately $ 14.4 million, or 17%.
Governmental
Activiites
Item: June 30, 2005
Land $ 28,162,960
Buildings & Other Improvements 52,470,600
Machinery, Equipment, & Vehicles 9 57,285
Infrastructure 15,893,846
Construction In Progress 4 ,103,143
Total Governmental Capital Assets $ 101,587,834
Major capital asset events during the current fiscal year included the following:
Fiscal Year
2004/ 05
Capital Project: Expenditures
Aquatics Center $ 9 91,089
Tennant Avenue 4 39,515
Street Resurfacing 7 87,340
Library Design 1 87,299
Indoor Recreation Center Construction 1 ,667,366
Tennant South 101 Signal 4 58,630
Underground Utilities 270,314
Dedicated Infrastructure 3 ,101,373
Police Facility 6,973,100
More detailed information concerning capital assets may be found in Note 5 beginning on page 44.
LONG- TERM DEBT
At the end of Fiscal Year 2004/ 05, the City had long- term debt outstanding of $ 44.2 million, which
included $ 8.0 million in debt to be paid from general City revenues. Of the $ 8.0 million, $ 7.1 million in
debt, associated with the acquisition and construction of a new police facility, is 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 $ 1.1
City of Morgan Hill, California Comprehensive Annual Financial Report
Management’s Discussion and Analysis ( MDA)
June 30, 2005
14
million represents special assessment debt for which the City is liable only in the event of default by the
property owners subject to the assessments, and $ 2.0 million relates 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 $ 33.1 million remainder of the City’s debt
primarily represents bonds secured solely by specified water and sewer sources.
The City’s total debt increased by approximately $ 13.5 million ( 44 %) during Fiscal Year 2004/ 05. This
increase resulted from two new bond issues. Lease revenue bonds in the amount of $ 7.4 million were
issued to finance the acquisition and construction of a new police facility. In addition, water revenue
bonds in the amount of $ 7.7 million were issued to finance capital improvements to the City’s water
system. More detailed information concerning long- term debt may found in Note 7 beginning on page
52.
ECONOMIC FACTORS AND NEXT FISCAL YEAR’S BUDGET
Given the state of the local economy and the structural General Fund budgetary deficit, caution was
exercised in developing the City’s budget for Fiscal year 2005/ 06. The City’s adopted budget for Fiscal
year 2005/ 06 was $ 108.0 million, including $ 56.8 million for capital projects and $ 51.2 million for
operations. The amount budgeted for operations in Fiscal year 2005/ 06 represents an increase of 3%
compared to Fiscal Year 2004/ 05. The General Fund budget for 2005/ 06 was $ 20.0 million, or 0.9%
more than the final 2004/ 05 budget.
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.
15
Basic Financial Statements
16
17
Government- Wide Financial
Statements
18
19
City of Morgan Hill
Statement of Net Assets
June 30, 2005
Component Unit
Governmental Business- Type MH Corporation
Activities Activities Total Yard Commission
Assets
Pooled cash and investments ( Note 4) $ 6 9,764,922 $ 1 5,445,579 $ 8 5,210,501 $ 37
Restricted pooled cash and investments 3 38,442 7 ,262,082 7 ,600,524
Cash and investments with fiscal agents 6 38,987 7 ,031,651 7 ,670,638
Receivables:
Taxes and special assessments 2 ,005,720 2 ,005,720
Accrued interest 3 09,913 1 21,265 4 31,178 29
Other accounts receivable 1 ,789,515 1 ,710,144 3 ,499,659 32,769
Deposit in Escrow/ Prepaid items 1 90,241 1 90,241
Investment in properties held for resale ( Note 2) 2 81,049 2 81,049
Loans receivable ( Note 6) 3 8,845,323 9 ,413 3 8,854,736
Capital assets, Net ( Note 5)
Non- Depreciable 3 2,266,103 2 ,102,288 3 4,368,391
Depreciable 6 9,321,731 5 8,059,621 1 27,381,352 2 18,527
Sewer capacity rights ( Note 8) 1 8,511,108 1 8,511,108
Total Assets 2 15,751,946 1 10,253,151 3 26,005,097 2 51,362
Liabilities
Accounts payable 3 ,929,556 1 ,558,232 5 ,487,788 5,586
Accrued liabilities 1 ,419,780 4 81,957 1 ,901,737
Customer and other deposits 1 5,535 2 1,575 3 7,110
Unearned revenue 2 71,294 2 71,294
Non- current liabilities ( Note 7 & 8)
Due within one year 1 ,283,640 1 ,283,640
Due in more than one year 1 1,135,265 3 1,787,329 4 2,922,594
Total Liabilities 1 6,771,430 3 5,132,733 5 1,904,163 5,586
Net Assets ( Note 10)
Invested in capital assets, net of related debt 1 01,587,834 4 7,019,085 1 48,606,919 2 18,527
Restricted for:
Low and moderate income housing 6 ,467,643 6 ,467,643
Capital expansion project 9 ,817,905 6 ,423,740 1 6,241,645
Debt service 8 61,162 3 ,358,909 4 ,220,071
Unrestricted 8 0,245,972 1 8,318,684 9 8,564,656 27,249
Total Net Assets $ 1 98,980,516 $ 7 5,120,418 $ 2 74,100,934 $ 2 45,776
See accompanying notes to basic financial statements
Primary Government
20
City of Morgan Hill
Statement of Activities
For the Year Ended June 30, 2005
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 $ 9,278,891 $ 1,367,877 $ $ $ ( 7,911,014) $ $ ( 7,911,014) $
Public safety 12,236,802 585,428 10,000 3,202,573 ( 8,438,801) ( 8,438,801)
Community development 4,939,486 7,599,544 186,810 2 ,846,868 2,846,868
PW/ development 4,519,109 4,568,552 736,723 7 86,166 786,166
Recreation & culture 4,098,111 2,190,898 154,976 ( 1,752,239) ( 1,752,239)
Interest on long- term debt 235,612 ( 235,612) ( 235,612)
Total government activities 35,308,011 16,312,299 933,533 3,357,549 ( 14,704,632) - ( 14,704,632) -
Business- type activities:
Sewer 7,418,775 7,902,418 483,643 483,643
Water 8,081,951 7,523,731 ( 558,220) ( 558,220)
Total business- type activities 15,500,726 15,426,149 - - - ( 74,577) ( 74,577) -
Total primary government $ 50,808,737 $ 31,738,448 $ 933,533 $ 3,357,549 ( 14,704,632) ( 74,577) ( 14,779,209) $ -
Component unit:
Corporation Yard $ 135,663 $ 98,319 $ ( 37,344)
General revenues:
Property taxes 28,012,338 28,012,338
Sales taxes 5,196,224 5,196,224
Franchise taxes 2,663,021 2,663,021
Other general revenue taxes 1,058,233 1,058,233
Unrestricted investment earnings 3,175,062 583,148 3,758,210
Transfers 640,000 ( 640,000)
Total general revenues and transfers 40,744,878 ( 56,852) 40,688,026 -
Change in net assets 26,040,246 ( 131,429) 25,908,817 ( 37,344)
Net assets - beginning 172,940,270 75,251,847 248,192,117 283,120
Net assets - ending $ 1 98,980,516 $ 75,120,418 $ 274,100,934 $ 245,776
See accompanying notes to basic financial statements
Net ( Expense) Revenue and
Program Revenues Changes in Net Assets
Primary Government
21
City of Morgan Hill
Balance Sheet
Governmental Funds Other Total
June 30, 2005 Redevelopment Governmental Governmental
General Agency Funds Funds
Assets
Pooled cash and investments $ 10,347,419 $ 19,407,371 $ 33,482,324 $ 63,237,114
Restricted pooled cash and investments 298,442 298,442
Cash with fiscal agents 638,987 638,987
Receivables:
Taxes and special assessments 629,445 301,275 1,075,000 2,005,720
Accrued interest 53,795 77,930 159,571 291,296
Other accounts receivable 1,257,853 65,969 465,693 1,789,515
Deposit in Escrow/ Prepaid items 46,065 144,176 190,241
Investment in properties held for resale ( Note 2) 281,049 281,049
Notes receivable
Loans receivable 423,645 37,651,169 770,509 38,845,323
Total Assets $ 12,758,222 $ 57,784,763 $ 37,034,702 $ 107,577,687
Liabilities and Fund Balance
Liabilities:
Accounts payable $ 1,769,339 $ 1,259,628 $ 648,963 $ 3,677,930
Accrued liabilities 431,432 50,952 80,558 562,942
Unearned revenue ( Note 6) 694,940 37,654,855 1,846,252 40,196,047
Customer and other deposits 15,535 15,535
Total Liabilities 2,911,246 38,965,435 2,575,773 44,452,454
Fund Balances:
Reserved for:
Encumbrances 18,423 5,918,432 2,044,980 7,981,835
Low and moderate income housing 6,467,643 6,467,643
Investment in properties held for resale 281,049 281,049
Debt service 861,162 861,162
Capital expansion projects 9,817,905 9,817,905
Unreserved, reported in:
General fund 9,828,553 9,828,553
Special revenue funds 8,037,603 8,037,603
Capital projects funds 6,152,204 13,697,279 19,849,483
Total fund balances 9,846,976 18,819,328 34,458,929 63,125,233
Total Liabilities and Fund Balances $ 12,758,222 $ 57,784,763 $ 37,034,702
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. 6,128,504
Capital assets used in governmental activities are not financial resources and,
therefore, are not reported in the funds. 100,859,926
Long- term liabilities, including bonds payable, are not due and payable in the
current period and therefore are not reported in the funds. ( 11,057,900)
Revenues earned but not available ( deferred) are not recorded in the funds. 39,924,753
Net assets of governmental activities $ 198,980,516
See accompanying notes to basic financial statements
22
City of Morgan Hill
Statement of Revenues, Expenditures, and Changes in Fund Balances
Governmental Funds
For the Year Ended June 30, 2005 Other Total
Redevelopment Governmental Governmental
General Agency Funds Funds
Revenues
Property taxes and special assessments $ 4,387,053 $ 23,625,285 $ 719,467 $ 28,731,805
Sales taxes 5,196,224 5,196,224
Franchise, hotel and other taxes 2,663,021 2,663,021
Licenses and permits 199,522 199,522
Funding from other governmental agencies 1,058,233 1,189,709 2,247,942
Charges for current services 3,439,432 9,576,512 13,015,944
Investment income and rentals 1,604,680 510,193 643,272 2,758,145
Fines, forfeitures and other revenues 148,087 1,198,234 779,758 2,126,079
Total Revenues 18,696,252 25,333,712 12,908,718 56,938,682
Expenditures
Current
General government 3,346,239 5,925,315 41,866 9,313,420
Public safety 12,026,435 55,032 12,081,467
Community development 1,044,603 2,305,545 3,350,148
Housing services 5,538,980 5,538,980
Streets and highways 1,637,479 1,637,479
Parks and recreation 3,619,751 13,444 3,633,195
Other public services 1,305,144 1,305,144
Capital outlay
Capital assets 45,845 45,845
Construction projects 5,265,799 8,860,559 14,126,358
Debt Service
Principal 120,000 120,000
Interest and fiscal charges 564,598 564,598
Total Expenditures 19,038,270 17,774,697 14,903,667 51,716,634
Excess ( deficiency) of revenues
over ( under) expenditures ( 342,019) 7,559,015 ( 1,994,949) 5,222,048
Other financing sources ( uses)
Transfers in 392,119 533,860 943,426 1,869,405
Transfers out ( 244,300) ( 1,030) ( 1,033,100) ( 1,278,430)
Issuance of long- term debt ( Note 7) 7,395,000 7,395,000
Total other financing sources and uses 147,819 532,830 7,305,326 7,985,975
Net change in fund balances ( 194,199) 8,091,845 5,310,377 13,208,023
Fund Balances - Beginning 10,041,175 10,727,483 29,148,552 49,917,210
Fund Balances - Ending $ 9,846,976 $ 18,819,328 $ 34,458,929 $ 63,125,233
See accompanying notes to basic financial statemensts
23
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, 2005
Amounts reported for governmental activities in the statement of activities
are different because:
Net change in fund balances- total governmental funds $ 1 3,208,023
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. 1 3,213,077
Sale of governmental fixed assets resulting in reduction in fixed assets ( 141,500)
Governmental funds report loans as an expenditure. Loans issued in
the current year are reported as an asset on the statement of
net assets. 4 ,267,017
Governmental funds report the payment of debt service as an
expenditure. Payments for debt service reduce liabilities on the
statement of net assets. 1 20,000
The value of donated infrastructure assets are recognized as a
revenue on the statement of activities. 3 ,101,373
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 ,060,188
Liabilities for expenditures, even though not requiring the use of current
financial resources, are reported on the statement of activities. ( 124,245)
Depreciation expense is reported in connection with all of a governments
depreciable assets. ( 2,396,623)
Transfers within funds incorporated as part of the governmental activities, such
as internal service funds, need to be removed from the government- wide 4 9,025
statement of activities.
Net proceeds from bond issue is removed from revenue and recorded as long term
debt in the government wide financial statements. ( 7,066,013)
Any net profit from Internal Service Funds need to be removed from the
government wide statement of activities, net of transfers 7 49,924
Change in net assets of governmental activities $ 2 6,040,246
See accompanying notes to basic financial statements
24
City of Morgan Hill
General Fund
Statement of Revenues, Expenditures, and
Changes in Fund Balances - Budget and Actual
For the Year Ended June 30, 2005 Variance with
Final Budget
Positive
Original Final Actual Amounts ( Negative)
Revenues
Property taxes and special assessments $ 2,960,896 $ 2,960,896 $ 4,387,053 $ 1,426,157
Sales taxes 4,600,000 4,600,000 5,196,224 596,224
Franchise, hotel and other taxes 2,529,500 2,529,500 2,663,021 133,521
Licenses and permits 201,720 201,720 199,522 ( 2,198)
Funding from other govt agencies 1,728,200 1,728,200 1,058,233 ( 669,967)
Charges for current services 3,536,276 3,791,510 3,439,432 ( 352,078)
Investment income and rentals 819,261 819,261 1,604,680 785,419
Fines, forfeitures and other revenues 61,000 63,500 148,087 84,587
Total revenues 16,436,853 16,694,587 18,696,252 2,001,664
Expenditures:
General government
Council 174,319 229,648 228,542 1,105
City Attorney 566,191 1,092,022 1,061,611 30,412
City Manager 318,659 318,659 315,997 2,662
Human Resources 485,417 493,417 488,770 4,647
City Clerk 381,330 381,330 356,508 24,822
Finance 927,325 927,325 895,496 31,829
Medical services 5,000
Total General Government 2,853,241 3,447,401 3,346,923 100,478
Public Safety
Police 7,975,850 7,973,986 7,837,099 136,886
Fire 4,194,617 4,194,617 4,194,484 133
Total Public Safety 12,170,467 12,168,603 12,031,584 137,019
Culture and recreation
Recreation 2,779,597 3,106,443 2,824,349 282,094
Cable TV/ Comm.& Marketing 116,006 116,006 109,695 6,311
Park Maintenance 705,572 709,457 698,297 11,160
Total Culture and recreation 3,601,175 3,931,906 3,632,342 299,565
Capital Outlay 41,400 81,659 45,845 35,814
Total Expenditures 18,666,283 19,629,569 19,056,694 572,875
Excess ( deficiency) of revenues
over ( under) expenditures ( 2,229,430) ( 2,934,982) ( 360,442) 2,574,540
Other Financing sources ( uses):
Transfers in 403,100 403,100 392,119 ( 10,981)
Transfers ( out) ( 99,025) ( 187,001) ( 244,300) ( 57,299)
Total other financing sources ( uses) 304,075 216,099 147,819 ( 68,280)
Net change in fund balances ( 1,925,355) ( 2,718,883) ( 212,622) 2,506,260
Adjustments to budgetary basis 18,423 18,423
Fund Balances- Beginning 11,092,168 10,613,496 10,041,175 ( 572,321)
Fund Balances- Ending $ 9,166,813 $ 7,894,613 $ 9,846,976 $ 1,952,362
See accompanying notes to basic financial statements
Budgeted Amounts
25
City of Morgan Hill
Proprietary Funds
Statement of Net Assets
Sewer Sewer Water
Operations Mitigation Operations
Assets
Current assets:
Pooled cash and investment( Note 4) $ 8,924,855 $ 6,520,724
Restricted pooled cash and investments $ 7,077,145
Cash with fiscal agents 1,894,501 1,464,408
Receivables:
Accrued interest 41,934 33,022 35,212
Other accounts receivable 636,192 8,373 1,065,579
Notes receivable - current 2,213
Total current assets 11,497,482 7,120,753 9,085,923
Noncurrent assets:
Notes receivable - long term 7,200
Capital assets, net ( Note 5)
Non- Depreciable 238,981 1,863,307
Depreciable 18,702,797 4,673,897 29,651,987
Sewer capacity rights ( Note 8) 18,511,108
Total noncurrent assets 37,213,905 4,920,078 31,515,294
Total Assets 48,711,387 12,040,831 40,601,217
Liabilities
Current liabilities
Accounts payable 52,771 596,140 866,048
Accrued liabilities 268,965 108,073 84,437
Customer and other deposits 21,575
Current obligations for:
Bonds payable 275,536
Capacity rights payable 995,000
Compensated absences 3,328 9,776
Total current liabilities 1,320,064 704,213 1,257,372
Noncurrent liabilities
Long term obligations for:
Bonds payable ( Note 7) 6,598,223
Compensated absences ( Note 7) 45,692 87,705
Capacity rights payable ( Note 8) 19,879,113
Total noncurrent liabilities 19,924,805 - 6,685,928
Total Liabilities 21,244,869 704,213 7,943,300
Net Assets: ( Note 10)
Invested in capital assets, net of related debt 17,334,792 4,912,878 24,917,071
Restricted net assets 1,894,501 6,423,740 1,464,408
Unrestricted 8,237,225 6,276,438
Total Net Assets $ 27,466,518 $ 11,336,618 $ 32,657,917
See accompanying notes to basic financial statements continued…
Enterprise Funds
June 30, 2005 Business- type Activities
26
City of Morgan Hill
Proprietary Funds
Statement of Net Assets
Governmental
Activities
Water Internal Service
Mitigation Totals Funds
Assets
Current assets:
Pooled cash and investment( Note 4) $ 15,445,579 $ 6,527,808
Restricted pooled cash and investments $ 184,937 7,262,082 40,000
Cash with fiscal agents 3,672,742 7,031,651
Receivables:
Accrued interest 11,097 121,265 18,617
Other accounts receivable 1,710,144
Notes receivable - current 2,213
Total current assets 3,868,776 31,572,934 6,586,425
Noncurrent assets:
Notes receivable - long term 7,200
Capital assets, net ( Note 5)
Non- Depreciable 2,102,288
Depreciable 5,030,940 58,059,621 727,908
Sewer capacity rights ( Note 8) 18,511,108
Total noncurrent assets 5,030,940 78,680,217 727,908
Total Assets 8,899,716 110,253,151 7,314,333
Liabilities
Current liabilities
Accounts payable 43,273 1,558,232 251,626
Accrued liabilities 20,482 481,957 856,838
Customer and other deposits 21,575
Current obligations for:
Bonds payable 275,536
Capacity rights payable 995,000
Compensated absences 13,104 13,706
Total current liabilities 63,755 3,345,404 1,122,170
Noncurrent liabilities
Long term obligations for:
Bonds payable ( Note 7) 5,176,596 11,774,819
Compensated absences ( Note 7) 133,397 63,659
Capacity rights payable ( Note 8) 19,879,113
Total noncurrent liabilities 5,176,596 31,787,329 63,659
Total Liabilities 5,240,351 35,132,733 1,185,829
Net Assets: ( Note 10)
Invested in capital assets, net of related debt ( 145,656) 47,019,085 724,897
Restricted net assets 3,805,021 13,587,670
Unrestricted 14,513,663 5,403,607
Total Net Assets $ 3,659,365 $ 75,120,418 $ 6,128,504
See accompanying notes to basic financial statements
Enterprise Funds ( continued)
June 30, 2005 Business- type Activities
27
City of Morgan Hill
Proprietary Funds
Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended June 30, 2005
Sewer Sewer Water
Operations Mitigation Operations
Operating Revenues:
Charges for current services $ 5,941,830 $ 1 ,960,588 $ 7,043,980
Total Operating Revenues 5,941,830 1 ,960,588 7,043,980
Operating expenses:
Salaries and benefits 1,049,000 1,780,779
Utilities and taxes 1,504,943
Operations and maintenance 3,049,854 2,687 2,236,744
Depreciation 610,893 158,697 869,214
Amortization of sewer capacity rights 944,917
Administrative charges 340,223 3,745 393,704
Total Operating expenses 5,994,887 1 65,129 6,785,384
Operating Income ( 53,057) 1 ,795,459 258,596
Nonoperating revenues ( expense):
Investment earnings 210,849 1 27,693 208,961
Interest ( expense) ( 662,449) ( 303,783) ( 407,334)
Total nonoperating revenue ( expense) ( 451,600) ( 176,090) ( 198,373)
Income ( loss) before operating transfers
and contributions ( 504,657) 1 ,619,369 60,223
Capital Contributions ( 292,527) ( 497,844)
Transfers In 615,591
Transfers Out ( 220,000) ( 420,000)
Change in net assets ( 1,017,184) 1,619,369 ( 242,030)
Total Net Assets- Beginning 28,483,702 9,717,249 32,899,947
Total Net Assets- Ending $ 27,466,518 $ 11,336,618 $ 32,657,917
See accompanying notes to basic financial statements continued….
Business- type Activities
Enterprise Funds
28
City of Morgan Hill
Proprietary Funds
Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended June 30, 2005
Governmental
Activities
Water Internal Service
Mitigation Totals Funds
Operating Revenues:
Charges for current services $ 479,752 $ 15,426,150 $ 4,725,216
Total Operating Revenues 479,752 15,426,150 4,725,216
Operating expenses:
Salaries and benefits 2,829,779 1,344,044
Utilities and taxes 1,504,943 1,126,905
Operations and maintenance 10,422 5,299,707 1,268,895
Depreciation 176,162 1,814,966 313,779
Amortization of sewer capacity rights 944,917
Administrative charges 226 737,898 159,217
Total Operating expenses 186,810 13,132,210 4,212,840
Operating Income 292,942 2,293,940 512,376
Nonoperating revenues ( expense):
Investment earnings 35,645 583,148 76,374
Interest ( expense) ( 204,580) ( 1,578,146)
Total nonoperating revenue ( expense) ( 168,935) ( 994,998) 76,375
Income ( loss) before operating transfers
and contributions 124,007 1,298,942 588,750
Capital Contributions ( 790,371)
Transfers In 615,591 49,025
Transfers Out ( 615,591) ( 1,255,590)
Change in net assets ( 491,584) ( 131,428) 637,775
Total Net Assets- Beginning 4,150,949 75,251,847 5,490,729
Total Net Assets- Ending $ 3,659,365 $ 75,120,418 $ 6,128,504
See accompanying notes to basic financial statements
Enterprise Funds ( continued)
Business- type Activities
29
City of Morgan Hill
Statement of Cash Flows
Proprietary Funds
For the Year Ended June 30, 2005
Sewer
Sewer Mitigation Water
Cash Flows from Operating activities
Receipts from customers and users $ 5,936,925 $ 1,962,103 $ 7,196,631
Receipts from interfund services
Payments for supplies and services ( 3,072,816) 8,686 ( 3,340,330)
Payments to employees ( 1,053,306) ( 1,774,851)
Payments for interfund services ( 340,223) ( 3,745) ( 440,007)
Net cash provided by operating activities 1,470,580 1,967,044 1,641,443
Cash Flows From Noncapital Financing Activities
Transfers ( to) from other funds ( 220,000) 195,591
Net cash provided ( used) by noncapital and
financing activities ( 220,000) - 195,591
Cash Flows From Capital and Related Financing Activities
Capital contributions ( 292,527) ( 497,844)
Issuance of bonds 2,218,541
Purchase of capital assets
Acquisition and construction of capital assets ( 594,650) ( 1,034,998) ( 1,866,605)
Principal paid on debt ( 835,381) ( 197,065)
Interest paid on debt ( 662,449) ( 303,783) ( 407,334)
Net cash provided ( used) by capital and related
financing activities ( 2,385,006) ( 1,338,781) ( 750,307)
Cash Flows From Investing Activities
Interest earnings 246,351 116,341 198,173
Net cash provided by investing activities 246,351 116,341 198,173
Net increase in cash and cash equivalents ( 888,076) 744,603 1,284,900
Cash and cash equivalents, July 1, 2004 11,707,432 6,332,542 6,700,232
Cash and Cash equivalents, June 30, 2005 $ 10,819,356 $ 7,077,145 $ 7,985,132
Reconciliation of operating income to net cash
provided ( used) by operating activities
Operating income $ ( 53,057) $ 1,795,459 $ 258,596
Adjustments to reconcile:
Depreciation expense 610,893 158,697 869,214
Amortization of sewer capacity rights 944,917
( Increase) decrease in accounts receivable ( 4,905) ( 800) ( 121,113)
( Increase) decrease in notes receivables 2,315
( Increase) decrease in due from other funds 273,763
Increase ( decrease) in accounts payable ( 22,962) 11,373 355,055
Increase ( decrease) in compensated absences ( 4,306) 5,928
( Increase) decrease in due to other funds
Total adjustments 1,523,637 171,585 1,382,847
Net cash provided by operating activities $ 1,470,580 $ 1,967,044 $ 1,641,443
See accompanying notes to basic financial statements continued….
Business- Type Activities
Enterprise Funds
30
City of Morgan Hill
Statement of Cash Flows
Proprietary Funds Governmental
For the Year Ended June 30, 2005 Activities
Water Internal Service
Mitigation Total Funds
Cash Flows from Operating activities
Receipts from customers and users $ 479,752 $ 15,575,410 $ 4,768,330
Receipts from interfund services ( 273,763) ( 273,763)
Payments for supplies and services ( 45,781) ( 6,450,241) ( 2,634,430)
Payments to employees ( 2,828,157) ( 1,339,532)
Payments for interfund services ( 226) ( 784,201) ( 159,217)
Net cash provided by operating activities 159,982 5,239,048 635,151
Cash Flows From Noncapital Financing Activities
Transfers ( to) from other funds ( 615,591) ( 640,000) 49,025
Net cash provided ( used) by noncapital and
financing activities ( 615,591) ( 640,000) 49,025
Cash Flows From Capital and Related Financing Activities
Capital contributions ( 790,371)
Issuance of bonds 5,176,597 7,395,138
Purchase of capital assets ( 464,789)
Acquisition and construction of capital assets ( 690,462) ( 4,186,715)
Principal paid on debt ( 1,032,446)
Interest paid on debt ( 204,582) ( 1,578,147)
Net cash provided by capital and related
financing activities 4,281,553 ( 192,541) ( 464,789)
Cash Flows From Investing Activities
Interest earnings 24,548 585,413 72,046
Net cash provided by investing activities 24,548 585,413 72,046
Net increase in cash and cash equivalents 3,850,493 4,991,920 291,433
Cash and cash equivalents, July 1, 2004 7,186 24,747,392 6,276,375
Cash and Cash equivalents, June 30, 2004 $ 3,857,679 $ 29,739,312 $ 6,567,808
Reconciliation of operating income to net cash
provided ( used) by operating activities
Operating income $ 292,942 $ 2,293,939 $ 512,376
Adjustments to reconcile:
Depreciation expense 176,162 1,814,966 313,779
Amortization of sewer capacity rights 944,917 43,114
( Increase) decrease in accounts receivable ( 126,818)
( Increase) decrease in notes receivables 2,315
( Increase) decrease in due from other funds 273,763
Increase ( decrease) in accounts payable ( 35,359) 308,107 ( 238,630)
Increase ( decrease) in compensated absences 1,622 4,512
( Increase) decrease in due to other funds ( 273,763) ( 273,763)
Total adjustments ( 132,960) 2,945,109 122,775
Net cash provided by operating activities $ 159,982 $ 5,239,048 $ 635,151
See accompanying notes to basic financial statements
Business- Type Activities
Enterprise Funds ( continued)
31
City of Morgan Hill
Statement of Fiduciary Net Assets
Fiduciary Funds
Agency Funds
Assets:
Restricted pooled cash and investments $ 3,343,441
Cash and investments with fiscal agents 1,946,212
Accounts receivable 10,391
Total Assets 5,300,044
Liabilities
Accounts payable 55,196
Customer and other deposits 5,244,848
Total liabilities 5,300,044
Net Assets
Unrestricted
Total Net Assets $ -
See accompanying notes to basic financial statements
June 30, 2005
32
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
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 Statement 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 under government code section 6500, et seq., in November 2003 to act as a conduit in issuing
assessment district refinancing bonds. 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. Both component units have been blended into the City's basic financial statements.
The activities of the Financing Corporation are reported as an Enterprise Fund and the Redevelopment
Agency’s activities are reported as a Capital Project Fund on the City’s basic financial statements.
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 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
For the Year Ended June 30, 2005
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 nonfiduciary 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 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
For the Year Ended June 30, 2005
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
For the Year Ended June 30, 2005
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, worker’s
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 trustee 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 are
reported in the fund financial statements but are not included for government- wide
reporting purposes.
Nonmajor 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
For the Year Ended June 30, 2005
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 reappropriated 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
value, or engineering estimates in the case of infrastructure, at the date of donation.
The City has included the current year additions to infrastructure assets but has chosen the option
of postponing reporting prior year’s infrastructure in order to inventory, evaluate and value to the
best of our abilities those assets.
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.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
38
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
Major outlays for capital assets and improvements are capitalized as projects are constructed.
Interest incurred during the construction phase of capital assets of business- type activities is
included as part of the capitalized value.
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
( 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 $ 48.40 toward the
premium for each active employee, until such time as the contribution for employees and retirees
are equal.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
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, 2005.
Interfund transfers reported on the fund financial statements are summarized as follows:
General Nonmajor Internal
Fund Governmental Water Sewer RDA Service
General Fund $ - $ 9 43,426 $ - $ - $ 28,976 $ 49,025
Nonmajor governmental
funds 352,119 504,884
Water 20,000 6 15,591
Sewer 20,000
Total Transfers In $ 392,119 $ 9 43,426 $ 6 15,591 $ - $ 533,860 $ 49,025
General Nonmajor Internal
Fund Governmental Water Sewer RDA Service
General Fund $ - $ 3 52,119 $ 2 0,000 $ 20,000 $ - $ -
Nonmajor governmental 166,299 1 76,240 4 00,000 200,000 1,030
funds
RDA 28,976 5 04,741
Water 6 15,591
ISF 49,025
Total Transfers Out $ 244,300 $ 1 ,033,100 $ 1 ,035,591 $ 220,000 $ 1,030 $ -
Transfer In
Transfer Out
The principal purpose of the City’s interfund transfers was for operation 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 fair 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.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( continued)
Santa Clara County assesses properties and bills, collects, and distributes property taxes and
special assessments as follows:
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 Funds
The Police Facility Bond Debt Service fund ( 441) was created during the fiscal year ending June
30, 2005. The purpose of the fund is to account for activity related to debt service payments of
the bond issue used to build a new Police Facility.
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
41
3. BUDGETARY INFORMATION
Budgetary Results Reconciled to Accounting Principles Generally Accepted 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 $ 19,038,271 $ 17,774,697 $ 14,903,667
Encumbrances 18,423 5,918,432 2,008,310
Expenditures, budgetary basis $ 19,056,694 $ 23,693,129 $ 16,911,977
Excess of Expenditures Over Appropriations
For the year ended June 30, 2005, expenditures exceeded appropriations at the legal level of control in the
Asset Seizure Fund by $ 47,196; the Lighting & Landscape Fund by $ 738; the Environmental
Remediation Fund by $ 6,000; the Open Space Fund by $ 2,879; and the Morgan Hill Ranch CIP Fund by
$ 82,143. These over expenditures were funded by available fund balance except for the Lighting and
Landscape, Environment Remediation, and Open Space Funds which were funded by greater than
anticipated revenues. In addition, due to the timing of receipts and expenditures the Lighting and
Landscape Fund has a negative fund balance at June 30, 2005.
4. CASH AND INVESTMENTS
Cash and investments as of June 30, 2005 are classified in the accompanying financial statements as
follows:
Statement of net assets:
Cash and investments $ 92,811,025
Cash and investments with fiscal agent 7,670,638
Fiduciary funds:
Cash and investments 3,365,167
Cash and investments with fiscal agent 1,946,212
Total cash and investments $ 105,793,042
Cash and investments as of June 30, 2005 consist of the following:
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
42
4. CASH AND INVESTMENTS, ( continued)
Cash on hand $ 6,112
Deposits with financial institutions 3,264,080
Investments 102,522,850
Total cash and investments $ 105,793,042
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 governed by the provisions of debt agreements of the City,
rather than the general provision of the California Government Code and the City’s investment policy.
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 Debt Agreements
Investment of debt proceed held by bond trustees are governed by provisions of the debt 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 debt 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 agreement NA None None
Federal agency securities None None None
Investment contracts None None None
Cash management funds NA None None
Disclosures Relating to Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an
investment. Generally, the longer 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
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
43
4. CASH AND INVESTMENTS, ( continued)
occur; thus, eliminating the need to sell securities prior to maturity and by prohibiting 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, as approved by the City Council, the City does not directly invest in securities
maturing more than five years from the date of purchase.
Bond reserve funds and bond escrow funds, pursuant to the 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 securities $ 55,526,241 3.790
Local agency investment fund 35,379,759 0.450
Certificate of deposits 2,000,000 0.016
Held by bond trustees:
Repurchase agreement 3,998,718 2.000
Federal agency securities 1,530,706 .304
Investment contracts 1,849,400 17.080
Cash management funds 2,238,026 .003
Total $ 102,522,850
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
debt agreements and the actual rating as of year end for each investment type.
Minimum Rating as of Year End
Legal
Investment Type Rating AAA AAAf Not Rated
Federal agency securities $ 55,526,241 NA $ 55,526,241
Local agency investment fund 35,379,759 NA $ 35,379,759
Certificate of deposits 2,000,000 A- 1 2,000,000
Held by bond trustees:
Repurchase agreement 3,998,718 A3/ A 3,998,718
Federal agency securities 1,530,706 NA 1,530,706
Investment contracts 1,849,400 AA 1,849,400
Cash management funds 2,238,026 NA 913,695 $ 1,137,591 186,740
Total $ 102,522,850 $ 59,820,042 $ 1,137,591 $ 41,565,217
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
44
4. CASH AND INVESTMENTS, ( continued)
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 $ 9,905,940
Federal Farm Credit Bank Federal agency securities 5,853,140
FHLB Federal agency securities 38,474,816
Morgan Stanley Repurchase agreement 3,998,718
Custodial Credit Risk
Custodian 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 fair 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, 2005, $ 3,164,080 of the City’s deposits with financial institutions in excess of federal
depository insurance limits were held in collateralized accounts. As of June 30, 2005, City investments in
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 $ 57,056,947
Repurchase agreements 3,998,718
Investment contracts 1,849,400
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
45
4. CASH AND INVESTMENTS, ( continued)
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, 2005, 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, 2005, the City’s investments in LAIF at fair value amounted to $ 35,379,759
using a LAIF fair value factor of 0.997747553.
5. CAPITAL ASSETS
The following is a summary of governmental activities capital assets at June 30, 2005:
Capital Asset Category Carrying Value
Land $ 28,162,960
Building and Improvements 52,470,600
Machinery, Equipment & Vehicles 957,285
Infrastructure 15,893,846
Construction in progress 4,103,143
Total General Capital Assets $ 101,587,834
Changes in governmental activities capital assets were as follows:
Balance Balance
Beginning of End of
Year Increases Decreases Year
Capital Assets, Not Being Depreciated:
Land $ 2 8,304,460 $ - $ ( 141,500) $ 2 8,162,960
Construction in progress 6 ,698,509 2 ,078,654 ( 4,674,020) 4 ,103,143
Total Capital Assets, Not Being Depreciated 3 5,002,969 2 ,078,654 ( 4,815,520) 3 2,266,103
Capital Assets, Being Depreciated:
Infrastructure 1 0,542,808 6 ,087,020 1 6,629,828
Buildings and other improvements 4 5,315,373 1 2,762,499 5 8,077,872
Machinery/ Equipment/ Vehicles 2 ,334,713 7 88,204 3 ,122,917
Total Capital Assets, Being Depreciated 5 8,192,894 1 9,637,723 - 7 7,830,617
Less Accumulated Depreciation For:
Infrastructure ( 260,830) ( 475,152) ( 735,982)
Buildings and other improvements ( 3,853,882) ( 1,753,390) ( 5,607,272)
Machinery/ Equipment/ Vehicles ( 1,997,552) ( 168,080) ( 2,165,632)
Total Accumulated Depreciation ( 6,112,264) ( 2,396,622) - ( 8,508,886)
Total Capital Assets Being Depreciated, Net 5 2,080,630 1 7,241,101 - 6 9,321,731
Governmental Activities Capital Assets, Net $ 87,083,599 $ 1 9,319,755 $ ( 4,815,520) $ 1 01,587,834
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
46
5. CAPITAL ASSETS, ( continued)
Depreciation expense was charged to governmental functions as follows:
Governmental Function Expense
Administration $ 66,010
Community Development 22,261
Redevelopment Agency 867,841
Public Works 514,128
Public Safety 289,267
Parks & Recreation 637,115
Total General Capital Assets $ 2,396,622
As of June 30, 2005, 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 Improvements 40,190,678
Machinery, Equipment & Vehicles 8,816,530
Infrastructure 70,582,749
Sewer Capacity rights 28,347,522
Construction in Progress 276,956
Total $ 150,039,767
Less Accumulated depreciation ( 71,366,750)
Capital Assets, Net $ 78,673,017
A reconciliation of capital assets for business- type activities are listed below:
Capital Assets, Not Being Depreciated:
Land $ 1 ,825,332 $ $ $ 1 ,825,332
Construction in progress 2 ,113,922 276,956 ( 2,113,922) 2 76,956
Total Capital Assets, Not Being Depreciated 3 ,939,254 276,956 ( 2,113,922) 2 ,102,288
Capital Assets, Being Depreciated:
Infrastructure 7 0,079,913 502,836 7 0,582,749
Buildings and other improvements 3 3,730,124 6,460,554 4 0,190,678
Machinery/ Equipment/ Vehicles 8 ,463,031 353,499 8 ,816,530
Sewer Capacity rights 2 8,347,522 2 8,347,522
Total Capital Assets, Being Depreciated 1 40,620,590 7,316,889 - 1 47,937,479
Less Accumulated Depreciation For:
Infrastructure ( 44,687,496) ( 1,392,897) ( 46,080,393)
Buildings and other improvements ( 7,259,581) ( 1,246,269) ( 8,505,850)
Machinery/ Equipment/ Vehicles ( 6,475,086) ( 469,007) ( 6,944,093)
Sewer Capacity rights ( 8,891,497) ( 944,917) ( 9,836,414)
Total Accumulated Depreciation ( 67,313,660) ( 4,053,090) - ( 71,366,750)
Total Capital Assets Being Depreciated, Net 7 3,306,930 3,263,799 - 7 6,570,729
Enterprise Funds, Net Assets 06/ 30/ 05 $ 7 7,246,184 $ 3,540,755 $ ( 2,113,922) $ 7 8,673,017
Water
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
47
5. CAPITAL ASSETS, ( continued)
Depreciation and amortization expense was charged to business- type funds as follows:
Fund Amount
Sewer $ 1,714,507
Water 1,045,376
Total Business- type Activities $ 2,759,883
6. LOANS RECEIVABLE
The City’s and Agency’s loans receivable as of June 30, 2005 total $ 38,854,736, consisting of the
following types:
Description Amount
CDBG Loans $ 563,626
Housing Rehabilitation Loans 1,095,984
Jasmine Way 343,083
Sunrise Meadows 3,853,985
San Pedro Gardens 1,425,690
Hospira 904,632
Morgan Hill Ranch Family Housing 3,289,018
Village Avante Apartments 1,741,270
Village Avante Apartments 2 748,889
Villa Ciolino 2,881,727
Church Street 3,617,186
Murphy Ranch 6,032,990
Royal Court Apartments 3,919,785
Casa Diana 2,094,962
Millennium Housing 1,221,699
Other Loans 5,120,210
Total $ 38,854,736
( 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, 2005, the City had $ 563,626 of outstanding CDBG loans and
the Agency had $ 1,095,684 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 the new purchaser or occupant agrees to
a new note equal to the amount of principal and accrued interest due at the time of sale. After the
City of Morgan Hill Comprehensive Annual Financial Report
Notes to the Financial Statements
For the Year Ended June 30, 2005
48
6. LOANS RECEIVABLE, ( continued)
borrower has occupied the residence for 10 years, an amount equal to 10% of the principal and
interest due shall be forgiven each year until no amount remains due and the loan is forgiven. As
of June 30, 2005, the City had $ 343,083 of these loans outstanding in its Redevelopment Agency
Capital Projects Fund.
( c) Sunrise Meadows
The Sunrise Meadows project consisted of 24 self- help homes reserved for low income
households, and 36 contractor- built units reserved for those at median income. The Agency
purchased the project ( including land and all entitlements) for $ 1,670,000. The entire project was
then sold to South County Housing for this same amount. The Agency attached a third trust deed
on each of the 24 self- help units for loan amounts varying from $ 50,000 to $ 100,000 each. The
notes with accrued interest are due and payable upon the sale or transfer of the homeowner’s
property, unless the new purchaser or occupant agrees to a new note equal to the amount of
principal and accrued interest due at the time of