CAYUCOS SANITARY DISTRICT

FINANCIAL STATEMENTSJ:une30,2012

CAYT.JCOS SANITARY DISTRICTTABLE OF CONTENTSJane30,2012

Independent Auditors' Report

Management's Discussion and Analysis 3

BASIC FINANCIAI STATEMENTS

Statement of Revenuas, Expenses, and Changesin Net Assets - Enterprise Fund 1l

MOSS, LEVY & HARTZHEIM LLPCERTIFIED PUBLIC ACCOUNTANTS

PARTNERSRONALD A LEVY, CPACRAIG A HARÍZHEIM, CPAHADLEY Y HUI, CPA

802 EAST MAINSANTA MARIA, CA 93454

TEL: 805.925.2579FAX: 805.925.2147www.mlhcpâs.com

INDEPENDENT AUDITORS' REPORT

Board of DirectorsCayucos S anitary DistrictCayucos, Califomia

We have audited the accompanying basic fina¡rcial statements of the Cayucos Sanitary District, as of and for the fiscal year ended June30,2012, as listed in the table of contents. These basic financial statements are the responsibility of the District's management. Ourresponsibility is to express an opinion on these basic financial statements based on our audit. The prior fiscal year comparativeinformation has been derived from the District's 20 I I financial statements and, in our report dated September 15,201I , we expressedan unqualified opinion on the basic financial statements.

'We conducted our audit in accordance with auditing sta¡dards generally accepted in the United States of America and the standardsapplicable to financial audits containedin Government Auditing Standards, issued by the Comptroller General of the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for ouropmlons.

We were unable to obtain audited financial statements supporting the activities of the wastewater treatment plant. Those financialactivities include the cost of the plant representing I2.2%o of the District's assets and related depreciation, and operating costsrepresenting 33.3yo of the District's operating expenses.

As discussed in note I to basic financial statements effective July, 1, 201 I, the Cayucos Sanit¿¡y District adopted the GovernmentalAccounting Standards (GASB) Statement No. 64, Derivative Instruments: Application ofHedge Accounting Termination Provisions.

In our opinion, except for the effect of such adjustrnents, if any, as mighthave been determined to be necessary had we been able toaudit the financial statements of the wastewater treatrnent plant, the basic financial statements referred to above present fairly, in allmaterial respects, the financial position of the Cayucos Saniøry District as of June 30,2012, and the results of its operations and itscash flows for the fiscal year then ended, in conformity with accounting principles generally accepted in the United States of America.

In accordancewith Government Auditing Standards,we have also issued ourreportdatedNovember2T ,2012, on our consideration ofthe Cayucos Sanitary District's intemal conkol over frnancial reporting and on our tests of its compliance with certain provisions oflaws, regulations, contracts, and grant agreements and other matters. The purpose ofthat report is to describe the scope of our testingof internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internalcontrol over fina¡rcial repofing or on compliance. That report is an integral part of an audit performed in accordance withGovernment Auditing Standards and should be considered in assessing the results of our audit.

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis onpages 3 through 8, be presented to supplement the basic financial statements. Such information, although not a part of the basicfinancial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essentiai part of furancialreporting for placing the basic financial statements ia an appropriate operational, economic, or historical context. We have applied

IOFFICES: BEVERLY HILLS . CULVER C|TY. SANTA MARTA

MEMBER AMERICAN INSTITUTE OF C.P.A,'S CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS CALIFORNIA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS

certain limited procedures to the requirad supplementary information in accordance with auditing standards generally accepted in the

United States of America, which consisted of inquiries ofmanagement about the methods ofpreparing the information and comparing

the information for consistency with management's responses to our inquiries, the basic financial statements, and otherlnowledge we

obtained during our audit of the basic fmancial statements. We do not express an opinion or provide any assurance on the information

because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

flnu,f',yif@ezzeSanta Maria, CaliforniaNovember 27,2012

2

Cayucos Sanitary DistrictManagement's Discussion and Analysis

This section of the financial statements is a highlight of the financial condition and activities forthe 2011-2012 fiscal year (FY). The discussion and analysis of the Cayucos Sanitary District'sfinancial performance provides an overall review of the District's financial activities for thefiscal year ended June 30, 2012. The intent of this discussion and analysis is to look at theDistrict's fìnancial performance as a whole. Readers should review the discussion and analysisin conjunction with the basic financial statements as well as the notes to the basic financialstatements to enhance their understanding of the District's financial performance.

The District accounting system is an Enterprise Fund. This is similar to the private sectoraccounting system. The revenue is primarily generated by service charges with the exception ofproperty tax revenue, investment revenue and other income. Expenses are stated as operatingexpenses, and capital expenses are capitalized and depreciated over the lives ofthe fixed assets.

FINANCIAL HIGHLI

Key financial highlights for fiscal year (FY) 2011-2012 are as follows

The District adopted a Revenue Rate Program in conjunction with upgrade of the MorroBay-Cayucos Sanitary District'Wastewater Treatment Plant calling for scheduled rateincreases commencing October 1,2007 and then increasing July I of every fiscal yearthereafter, through the end of FY 20lI-2012. For FY 20Il-2012, effective July I ,2017,the sewer service fee was increased from $47.00 monthly to $52.00 monthly. TheDistrict's goal was to ensure that the necessary steps were taken to devise and implementa revenue rate plan sufficient to generate the revenues necessary to pay anticipated debtservice for funding of the District's portion of the Morro Bay-Cayucos WastewaterTreatment Plant Upgrade and its own collection and conveyance capital improvementprojects.

o

o

o There was a change (increase) in net assets of $729,053, in part due to a $253,680increase in sewer fee revenue and a reduction in operating expenses of $ I 1 7 ,140. Theremaining balance of 5358,233 represents the excess revenues versus total expenses.

Gross wages, payroll taxes and fringe benefits decreased by $51,448 or 9.5o/o in FY 201 1-2012because of the following:

A transition from a full time employee District Manager to a part-time contractpro fessional servi ces Interim General Manager

Replacement of senior vacant positions with entry level positions resulting in salarysaungs.

Assumption by employees of an additional 2o/o of Employer Mandated PensionContribution (EPMC).

a

aJ

SOURCES OF REVENUESThe District's total revenue for the fiscal year was 52,449,599 inclusive of the following:

Sewer Service (User) ChareeThe major source of revenue for the District is the sewer service charge assessed to all customerswho are users of the District's sewerage facilities. Sewer service charges generated S1,648,940in annual revenue to the District, equal to 67%o of total revenues.

Sewer Standblø (Service Availabilit]¡) FeeThe District charges its customers who are owlers of vacant lots $7.50 monthly per each vacant,buildable parcel (lot) for the expense of maintaining a sewer system available to vacantproperties. Sewer standby (service availability) fees generated $21 ,564 in annual revenue to theDistrict, less than lYo of totat revenues.

Prooertv TaxThe District receives apro rata share of property tax (ad valoran) revenues collected by theCounty of San Luis Obispo fcr properties located within the District's service boundaries. Thisportion of revenue includes secured, unsecured, unitary and supplemental property taxes. Thesecured property tax increases 2Yo per year. The District's property tax revenue this year was$6 1 5, 1 82 representing 25Yo of total revenues.

Sewer Connection and Permit FeesThe District currently charges a sewer connection fee of $7,960 for the privilege of connecting tothe District's sewerage facilities for each single residential dwelling unit or equivalent dwelliñgunit (EDU), in the case of non-residential use. Of the $7,960, $100 represents the charge for th1sewer connection inspection fee. In FY 201 7-2012, the District generated 523,251in combinedsewer connection fee and sewer permit fees representing less than 7o/o of total revenues. Otherpermit fees include charges for processing and issuance of Sewer Will-Serve Letters for newconstruction and remodel projects and inspections of sewer tie-ins occurring within the District'sboundaries.

Interest IncomeThe District invests surplus monies not required for immediate necessity of the District inaccordance with the provisions of Califomia Government Code Sections 5921 and 53601 et. seq.For this pulpose, the District rnaintains an investment account with Shanley Associates, Inc.,working through Girard Secuities, Inc. The District's investments are primarily in U.S.Treasury Securities. Certificates of Deposit, and Mortgage-Backed Securities such as GNMAsand FNMAs' In addition, the District maintains an account with the Local Agency InvestmentFund (LAIF).

The District manages its exposure to interest rate risk by purchasing a combination of shorterterm and longer term investments and by timing cash flows from maturities so that aportion ofthe portfolio is maturing or coming closl to maturity evenly over time as necessary to providethe cash flow and liquidity needed for operations. Interest from investment holdings generated$43,075 in interest or 2Yo of total revenues.

4

Rental IncomeThe District derives rental income from long term leases it jointly holds with the City of MorroBay on parcels of real property adjacent to the Morro Bay-Cayucos Wastewater Treatment Plantthat are not needed for current operations nor immediate and future plant expansion purposes.The rental income generated was $48,739 in annual revenue to the District or 2Yo of totalrevenues.

Solid Waste Franchise FeeThe District derives a l0o/o franchise fee based on gïoss solid waste and recycling receipts of thefranchisee, Mission Country Disposal (a subsidiary of Waste Connections, Inc.) which broughtin revenues of $41,491 . In addition, the District received $5,000 representing annual revenuefrom Mission Country Disposal for a recycling development program. The combined revenuegenerated 546,491or approximately 2%o of total revenues.

SOURCES OF EXPENSESThe total expenses of the District in FY 2011-2012 were $1 ,702,339. There was an overalldecrease of S121,356 equal to 7o/o decrease from prior FY 201 0-2011as shown below.

Vehicle Expense

Pro fessional Development

Rent (Storage and meeting rooms)

Telephone

Utilities

Taxes & Assessments

Insurance

Professional Services

Permits and Licenses

Business Expense

Dues and Subscriptions

Office Expense

Directors'Fees

Payroll taxes and Benefits

Gross Wages

s6,903

s4,031

ss 10

$9,1 07

$40,054

$7,285

s79,027

s54,823

s4,272

s 1,094

$3,939

s23,594

$9,850

$ 107,641

$385,944

Fv 2012

s 1 0,676

$7,859

$ 1,410

s7,g0g

$42,993

$8,181

$109,277

s28,326

s5,156

$7s3

$3,959

s27,lg4

$ 10,750

s127,661

$417,372

F"Y 2011

($3,873)

($3,828)

($e00)

$1,198

($2,939)

($8e6)

($30,250)

s26,497

($884)

s341

$81

($3,590)

($eoo)

(s20,020)

($31,428)

$

CHANGE

-36.28%

-48.71%

-63.83%

t5.ts%

-6.84%

-r0.95%

-27.68%

9354%

-17.15%

45.29%

2.10%

-13.21%

-8.37%

-15.68%

-753%

o/t

CHANGE

5

36.97%

-14.53%

-1.29%

-658%

-9.83%

-9.83%

-6.6s%

s27,486

($67,675)

(s5,s60)

($117,140)

($4,216)

($4,216)

($121,356)

$74,350

s465,779

$431,3 l0

$1,780,804

s42,gg1

$42,891

$1,823,695

$101,83ó

s398,1 04

s425,750

$1,663,664

$36,675

$38,675

s1,702,339

Maintenance and Operations

Wastewater Treatment Plant

Depreciation

Total Operating Expenses

Bond Interest Expense

Total Non-Operating Expenses

Total Expenses

CAPTTAI, ASSF,TS AND DEBT ADMINISTR ATIONAttheendoffiscal year20ll-20l2,theDistricthelds6,g4T,224incapitalsassetsprimarilyforsewer related infrastructure. This amount represents a net decrease (including additions,deletions and accumulated depreciation) of $38,077

CHANGE

0.00

($669,356)

s219,715

(s449,641)

s892,592

0.00

s22,176

$ 1,760,943 (3,427)

0

0

0

0

FY 2011

9157,t32

s761,957

s584,333

sL,503,422

s350,427

$4,177,550

s I ,934,605

s5,542,407

$ 104,896

s76,277

s405,005

FY 2012

s157,732

$92,601

$804,048

$1,053,781

s7,243,019

s4,177,550

$ 1,956,781

$ 1,757,516

s5,542,407

$ 104,896

s76,277

$405,005

Land

Construction in Progress

Construction in Progress-W-WTP

Total Non Depreciable

Facility - Office

Conveyance System

Subsurface Lines

Sewage Collection Facilities

Sewage Treatment Facilities

Trucks

Offrce Equipment

Collection Equipment

6

NET CAPITAL ASSETS

Less : Accumulated Depreciation

TOTAL CAPITAL ASSETS

Total Depreciable

s6,947,224

($9,370,009)

816,317,232

$15,263,451

s6,,909,147

($8,946,395)

$15,855,532

s14,352,110

$38,077

(423,623)

$461,700

$9I1,341

This fiscal year major capital projects, equipment purchases and asset acquisitions included areexplained below:

S

CIP Additions Representing $245.4 I 2 :

CIP Additions of $245 ,472 in construction costs in connection with the Operations andMaintenance Garage/Shop (Phase 1). The entire project was transferred tó fixed assets buildingscategory in FY lll12

City of Morro Bay charges of $1 89,959 for the WWTP upgrade representing Cayucos SanitaryDishict 28 percent portion of design, facility master plan and envirõnmentalìmpact report.

Cayucos Sanitary District also expended829,756 in legal review services in connection with theMorro B ay-Cayucos Wastewater Treatment plant.

Lons Term DebtFunding for the above capital improvement projects (CIP) and equipment acquisition were fromexisting reserves.

CURRENT FINANCIAL ISSUES A CONCERNS

The District is financially stable to meet increasing operating costs, capital replacement projects,and the building of the Waste Water Treatment Plant project on the current siie.

-CaBack in 2005, the Morro Bay City Council and Cayucos Sanitary District Board (MBCSD)adopted an 8.0 year full secondary compliance schedule for upgrading the treatment process attheir jointly-owned wastewater treatment plant to comply with full secondary treatmentstandards by no later than March 31,20I4. Carollo

7

Plan for the WWTP Upgrade in final draft formEngineers completed The Facility Master

On May 28, 2008 a contract was let for environmental review to Environmental ScienceAssociates (ESA) for a not to exceed amount of $288,770. Their work was progressing at fiscalyear-end. A flood analysis was performed by V/allace Group Engineers as a component of theenvironmental review. As a result of the flood analysis it was determined that the floodmitigation costs to complete the upgrade of the current WWTP were prohibitive and the Upgradewould need to take place adjacent to the existing plant. December 4,2008, the City and Districtwere granted a final 5 year 301(h) modified NPDES Permit from the State'Water ResourcesControl Board for continued discharge from the WWTP to the ocean outfall. This permit shouldcover the majority if not all of the WWTP Project when full secondary treatment standards can

be achieved.

On January ll,2011 the Morro Bay City Council conditionally approved a coastal developmentpennit for MBCSD's reques: to upgrade the existing WWTP and certitìed the envirorunentalimpact report (EIR) for the proposed project. The City's approval of the coastal developmentpermit was appealed to the California Coastal Commission (CCC). As a result of the appeal, theCCC asserted jurisdiction over the project's coastal development permit, which is now subject tode novo hearing requirements. Per CCC Staff direction, MBCSD conducted a robust WWTPAltematives Analysis to evaluate whether there is a more appropriate site to locate the W-WTP.At this time CCC staffhas not issued a staff recommendation and the De Novo Hearing has notbeen scheduled.

Cayucos S anitary District Facilit)¡ Expansion :

The District vacated its maintenance shop located at 1671 Cabrillo Road due to the County ofSan Luis Obispo terminating the leased area for intended use by its Water Department Division.As a result, the District undertook preliminary review, planning and design efforts to determinethe feasibility of building an Operations and Maintenance Garage/Shop on vacant land owned bythe District adjacent to the District's existing Administration Office. The GaragelShop wascompleted in fiscal year 2071-72.

D i stri ct' s Investm ent P ortfolio and Financi al IVI anagement S trate g)¡ :

The District Board was advised by its Financial Advisor, Karen Shanley, for conservative capitalpreservation to transfer most of its money market holdings to an all US Treasury Money Marketfor safety and liquidity in an effort to protect the District's cash holdings from the economicdownturn plagued by bank and financial institution-related problems, the credit crunch, housingslump, steep sell offs in capital markets, and deep slides with both S&P 500 Index and DowJones.

This report is a general overview of the District's finances and to demonstrate the District'saccountability for the money it receives. If you have any questions about this report or needadditional financial information please contact Lewis Brookins, Administrative Services Offìcer,at (805) 995-3290 or address: P.O. Box 333,200 Ash Avenue, Cayucos, CA, 93430.

8

CAYUCOS SANITARY DISTRICTSTATEMENT OF NET ASSETS - ENTERPRISE FLINDJune 30, 2012V/ith Comparative Totals for June 30,2017

ASSETS

Current Assets:

Cash and investments - cæh equivalents

Restricted cash and investments - cash equivalents

Total cash and cash equivalents

Cash a¡rd investments - non cash equivalents

Accounts receivableInterest receivable

Taxes receivable

Other receivablesPrepaid o(penses

Total curent assets

Capital Assets:

Non depreciableLa¡dConstruction in progress

Construction in progress - W-WTP

DçreciableSubsurface lines

S ewage collection facilitiesConveyance system

S ewage treatment facilitiesTrucksOffice equipmentCollection equipmentOfficebuilding

Accumulated depreciation

Net capital assets

Noncurrent Assets:

Prepaid pension obli gation

'Iotal noncur€nt assets

Total assets

2012

$ 3,5 81,175

22,091

2,832,60427,860

2,60724,222

7,8616,021

6,504,431

r57,13292,599

804,048

1,956,780

r,757,5174,177,5505,542,407

104,896

76,277405,005

1 19

207t

$ 3,752,981

141,185

2,177,05815,920

5,88732,30517,579

800

145 715

151,13276t,951584,333

1,934,605

1,760,9434,177,5505,542,407

104,896

76,277405,005

350,427

3,603,256 3,894,166

16,317,230 15,855,53 2

(e,370,006) (8,946,385)

6,947,224 6,909,147

107,485

107,485

The notes to basic financial statements are an integral part of this statement.

9

s 13,559,140 $ 13,054,862

CAYI]COS SAMTARY DISTRICTSTATEMENT OF NET ASSETS - ENTERPRISE FLINDJune 30, 2012

With Comparative Totals for June 30,2011

LIABILITIES

Current Liabilities:Accounts payable

Payable to the City of Morro Bay - New WWTPPayableto the City of Mono Bay

Accrued payrollAccrued interestCustomer deposits

Security depositC.ompensated absences

Loan payable, current portion

Total current liabilities

Long-Term Liabilities :

Loan payable, less current portion

Total liabilities

I\ET ASSETS

Invested in capital assets, net of rel¿ted debt

Restricted for constructionUnresricted

Total net assets

The notes to bæic furancial statem¿rits are an integral prt of this statemmt.

l0

$ $

2072

121,669

43,441

108,t3816,758

6,r243,000

25,000

19,l13r02.624

446,473

119.041

t,t65,520

6,125,55322,091

6.24s.986

20tl

127,890

1\4,437131,988

11,753

6,957

4,30025,00942,13698.254

568,624

82t,67r

1.390,295

5,989,222l4l,l85

5.534,160

s 12,393.620 $ 11,664,s61

CAYI]COS SANITARY DISTRICTSTATEMENT OF REVENUES, EXPENSES, AND C}IANGES IN NET ASSETS -

ENTERPRISE FUNDFor the Fiscal Year Ended June 30, 2012

With Comparative Totals for the Fiscal Year Ended June 30, 201I

Operating Revenues:Sewer services fees

Permit fees

Total operating revenues

Operating Expenses:Gross wages

Payroll taxes and benefits

Directors'feesOfñce expense

Dues and subscriptionsBusiness expense

Permits and licenses

Professional services

Insu¡anceTaxes and assessments

utiütiesTelephoneRentProfessional developmentVehicle expense

Maintenance and opaationsTreatment plantDepreciation

Total operating expenses

Net operating loss

Non-Operating Revenues (Expenses) :

Rent incomeTaxes and assessments

Investment incomeFranchise fees

Interest expense

Other revenue

Stand by fees

Loss on disposal of capital assets

Total non-operating revenues (expenses)

Capital contributions - connection fees

Change in net assets

Net assets:

Net assets, beginning of fiscal year

Prior period adjustmentsNet assets, beginning of fiscal year-restated

Net assets, end of fiscal year

The notes to bæic furancial statements are an integral part of this statement.

ll

2012

s 1,645,339

3,601

1,648,940

385,944t07,641

9,850

23,5943,9391,0944,272

54,823

19,027

1,28540,054

9,101

510

4,031

6,803

101,836

398,104425,150

1,663,664

(t4,724)

20tt

s 1,390,075

5,1 85

1,39s,260

417,372

127,661

10,750

27,184

3,858

7535,156

28,326109,217

8,18l42,993

1,9091,410

7,95910,676

74,350465,779

43r,3r0

1,780,804

(385,544)

48,139615,182

43,07546,491

(38,675)

6,058

21,564(r00)

33,225

616,29946,19242,876

(42,89t)7,732

20,800

742.334 724,823

19,650 15,720

747,260 354,999

I1,664,56'7( 18,207)

1r,309,568

I1,646,360 I 1,309,568

s 12,393,620 $ t1,664,567

CAYUCOS SAMTARY DISTRICTSTATEMENT OF CASH FLOWS - ENTERPRISE FLINDFor the Fiscal Year Ended June 30, 2C12

With Comparative Totals for the Fiscel Year Ended June 30, 201 I

CASH FLOWS FROM OPERATII\-G ACTTVITIESReceipts from customers

Payments to vendors

Payments to employees

Net cash provided by operating activities

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIESProperty taxes

Franchise fees

Stand by fees

Other revenue

Nd cæh provided by noncapital firancing acúvities

CASII FLOWS FROM CAPITAL AND RELATED FINANCING ACTTVITIESPurchase of capital assets

Proceeds from sale ofcapital assets

Principal paid on long-tam debt

Interest paid on long-term debt

Connection fees

Net cæh used by capital and relateC financing activities

CASH FLOWS FROM II\T\IESTING ACTIVITIESInterest receivedRent

S al dpurch as e of investmenls

Net cash provided (used) by investing activitres

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalants, July I

Cash and cash equivalents, June 30

Reconciliation to Statement of Net Assets:

Cash and investments - cash equivalents

Resricted cash and investments - cæh equivalents

The notes to bæic furancial statem:nts are an integral part of this statement.

2012

$ 1,645,409(767,171)(634.33 8)

243.300

623,26546,491

21,5646,058

697.378

(5s0,124)

1,200

(98,254)(39,408)

r6,0s0

1671.136)

46,356

48,139

t65s.s46)

(290,909)

3,894,166

s 3,603,257

$ 3,581,175

22,08t

s 1,412,712(149,801)(s40. r 3 9)

201 I

122.172

613,047

42,87620,800l 732

684.455

(868,308)

(94,069)(43,592)15,720

(560,4s 1) 633,63 8

450,616

(990.249\

46,193

33,225

ss3.620

3,443,550

$ 3,894,166

$ 3,752,981

14l,lg5

L2

$ 3,603,2s6 $ 3,894,166

CAYTICOS SAMTARY DISTRICTSTATEMENT OF CASH FLOWS - ENTERPRISE FUNDFor the Fiscal Year Ended June 30, 2012

V/ith Comparative Totals for the Fiscal Yeæ Ended June 30, 2011

Reconciliation of operating loss to net cash providedby operatin g activities :

Operating loss

Adjustmenls to reconcile operating loss to net

cash provided by operating activities:Depreciation

Change in net assets and liabilities:Accounts receivablePrepaids

Other receivables

DepositsPayable to the City of Morro Bay

Accounts payables

Accrued expenses

Compensated abselces

Customer deposits

Security depositDeferred revenue

Net cash provided by operating activities

The notes to basic fnancial statem€nts are an integral part of this statement.

2012 20tt

s (14,124) $ (385,544)

425,750 431,310

(l 1,940)(3,221)

9,718(107,485)

(23,850)(6,22t)

(ee5)(22,423)

(1,300)(e)

s 243,300

79,586(2,100)

(l 1,625)

(26,098)

95,083

1,593

3,3 0l(3,100)

(59,034)

s 122,772

l3

A.

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30, 2012

NOTE 1 - REPORTING ENTITY

The reporting entity is the Cayucos Sar-itary District, which began operations tn l942,under the authorization of Section 6400 et. seq.

of the Health and Safety Code of the State of California. The District operates under the direction of a board of directors who are

elected by the residents of Cayucos. The District provides wastewater disposal services.

The District is a Sanitary District as defined under State Code Section: 61000. A Sanitary District is a public ager'cy (State CodeSection: 12463.1) which is a State instrumentaliry (State Code Section:23706). State instrumentalities are exempt from federal andstate income taxes.

There are no componentunits included in this report which meet the criteria of Governmental Accounting Standards Board (GASB)Statement No. 14, The Financial Repcrting Entity, as amended by GASB Statement No. 39.

NOTE 2 - SIIMMARY OF SIGNIFICANT ACCOIJNTING POLICIES

Accounting Policies - The acpounting policies of the District conform to accounting principles generally accepted in the

United States of America as prescribed by the Governmental Accounting Standards Board and the American Tnstitl¡te ofCertifi ed Public Accountan ts-

Private-sector standards of ac:ounting and financial reporting issued prior to December 1, 1989, generally followed in theproprietary fund financial sta:ements to the extent that those standards do not conflict with or contradict guidance of the

Governmental Accounting Standards Board. Governments also have tJlLe option of following subsequent private-sectorguidance for their business-ty?e activities and enterprise funds, subject to this same limitation. The District has elected not tofollow subsequent private-sector guidance.

AccountinsMethod - The District is organized as an Enterprise Fund and follows the accrual method of accounting, wherebyrevenues are recorded as earned, and expenses are recorded when incurred.

C. Fund Financial Statements - The fund financial statements provide information about the District's proprietary fund.

Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with theprincipal activity of the frmd. Exchange transactions are those in which each party receives and gives up essentiallyequal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactionsor ancillary activities.

GASB Statement No. 34, defines major funds and requires that the District's major business-type fund be identified and

presented separately in the fund financial statements.

Major funds are defined as frnds that have either assets, liabilities, revenues or expenses equal to ten percent of theirfund-type total and five percent of the grand total. The District maintains one proprietary fund.

Proorietarv Fund Tvoe

Enterprise Fund

Enterprise fund is used to a'lcount for operations (a) that are financed and operated in a man¡er similar to privatebusiness enterprises - wher¿ the intent of the governing body is that the cosrs (expenses, including depreciation) ofproviding goods or services to the general public on a continuing basis be financed or recovered primarily through usercharges; or (b) where the governing body has decided that periodic determination ofrevenues earned, expenses incurred,and/or net income is appropriate for capital maintenance, public policy! management control, accountability, or otherpurposes.

The District reported its enterprise fund as a major fund in the accompanying basic hnancial statements

Sewer Utilily Fund is to account for the provision of sewer services to residents of Cayucos.

14

B

D

E.

F.

CAYUCOS SANITARY DISTR]CTNOTES TO BASIC FINANCIAL STATEMENTSIlune30,2012

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOLINTING POLICIES (Continued)

Cash and Cash Equivalents - For purposes of the statement of cash flows, cash and cash equivalents include restricted and

unrestricted cash and restricted and unrestricted certificates of deposit with original maturities of th¡ee months or less.

Property. Plant, and Equipment - Capital assets purchased by the District are recorded at cost. Contributed or donated

capital assets are recorded at fair value when acquired.

Depreciation - Capital assets owned by the District are depreciated over their estimated useful lives (ranging from 5-40years) under the straight-line method of depreciation.

Receivables - The District did not experience any signifìcant bad debt losses; accordingly, no provision has been made

for doubtful accounts, and accounts receivable is shown at full value.

Deferred Revenue - The District bills customers in advance, thus amounts received prior to services being rendered by the

District are recorded as deferred revenue.

Encumbrances - Encumbrances represent commitmørts related to unperformed contracts for goods or services.

Encumbrance accounting, under which purchase orders, contracts, and other commitrnents for the expenditure of resources

are recorded to reserye that portion of the applicable appropriation, is not utilized by the District.

J Compensated Absences - Accumulated unpaid employee vacation and sick leave benefits are recognized as liabilities of the

District. The amounts are included in current liabilities.

Property TaxesProperty taxes in the State ofCalifornia are administered for all local agencies at the counfy level, and consist ofsecured,unsecured, and utility tax rolls. The following is a summary of major policies and practices relating to property taxes:

Property Valuations - are established by the Assessor of the County of San Luis Obispo for the secured and unsecuredproperly tax rolls; the utilityproperty tax roll is valued by the State Board of Equalization. Under the provisions of ArticleXIII of the State Constitution (Proposition 13 adopted by the voters on June 6, 1978), properties are assessed at 100% of fullvalue. From the base assessment, subsequent a¡nual increases in valuation a¡e limited to a maximum of 2%o. However,increases to full value are allowed for property improvements or upon change in ownership. Personal property is excludedfrom these limitations, and is subject to an¡ual reappraisal.

TaxCollections-aretheresponsibilityofthecountytaxcollector. Taxesandassessmentsonsecuredandutilityrollswhichconstitute a lien against the property, may be paid in lwo installments: the first is due on November 1 of the fìscal year and is

delinquent if not paid by December l0; and the second is due on March I of the fiscal year and is delinquent if not paid byApril 10. Unsecured personal property taxes do not constitute a lien against real property unless the taxes becomedelinquent. Payment must be made in one installment, which is delinquent if not paid by August 3l of the fiscal year.

Significant penalties are imposed by the county for late payments.

Tax Levy Apportionments - Due to the nature of the District-wide maximum levy, it is not possible to identifu generalpurpose tax rates for specific entities. Under State legislation adopted subsequent to the passage of Proposition 13,

apportionments to local agencies a¡e made by the county auditor-controller based primarily on the ratio that each agencyrepresented of the total District-wide levy for the three years prior to fiscal year 1979 .

Property Tax Administration Fees - The State of California FY 90-91 Budget Act, authorized counties to collect an

administmtive fee for collection and distribution of properly taxes. Property taxes are recorded as net of administrative fees

withheld during the fiscal year.

Tax Levies - are limited to 1% of fulI value which results in a tax rate of $1.00 per $100 assessed valuation, under theprovisions of Proposition 13. Tax rates for voter-approved indebtedness are excluded from this limitation.

Tax LewDates - are attached annually on January I preceding the fiscal year for which the taxes are levied. The fiscal yearbegins July I and ends June 30 ofthe following year. Taxes are levied on both real and unsecured personal property as itexists at that time. Liens against real estate, as well as the tax on personal prcperty, are not relieved by subsequent renewalor change in ownership

G

H

I

K.

15

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30, 2012

NOTE 2 - SIJMMARY OF SIGNIFICANT ACCOUNTNG POLICIES (Continued)

L. Restricted Assets - RestricteC assets are financial resources segregated for a special purpose such as construction ofimprovements and financing of debt obligations. These assets are for the benefit of a distinct group and as such are legally orcontractually restri cted.

M. Use of Estimates

The preparation of financial statements in conformity with accounting principìes generally accepted in the United States

of America, as prescribed by the GASB and the AICPA, requires management to make estimates and assumptions that

affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

financial statements and the reported amounts of revenues and expenses during the reported period. Acrual results coulddiffer from those estimates.

N. Net Assets

GASB Statement No. 34, requires that the difference between assets and liabilities be reported as net assets. Net assets are

classified as either invested in capital assets, net ofrelated debt, restricted, or unrestricted.

Net assets that a¡e invested in capiøl assets, net of related debt, consist of capital assets, netof accumulated depreciation, and

reduced by the outstanding principal ofrelated debt. Restricted net assets are those net assets that have external constraintsplaced on them by creditors, grantors, contributors, laws, or regulations of other governments, or through constitutionalprovisions, or enabling legisla:ion, Uruestricted net assets consist of net assets that do not meet the definition of invested incapital assets, net ofrelated debt, or restricted net assets.

O. New Accounting Pronouncements

Govemmental Accounting Standa¡ds Board Statement No. 64

For the fiscal year ended June 30,2012, the District implemørted Governmental Accounting Standards Board (GASB)Statement No . 64,"Denvative Instruments: Application of Hedge Accounting Termination Provisions." This Statement iseffectiveforperiodsbeginningafterJune15,20ll. TheobjectiveofthisStatementistoclariffwhetheraneffectivehedgrrgrelationship continues after the replacement of a swap counterparly or a swap counterparty's credit support provider. ThisStatement sets forth criteria th¿t establish when the effective hedging relatìonship continues and hedge accounting shouldcontinue to be applied. Implementation of the GASB Statement No. 64, did not have an impact on the District's financialstatements for the fiscal year ended June 30,2012.

NOTE 3 - CASH AND INVESTMENTS

Investments are carried at fai¡ value i¡ accordance with GASB Statement No. 3l. On June 30, 2012 alad June 30, 201 l, the Districthad the following cash a¡d investments on hand:

2012 201 I

Total cash and investnents S 6.435.860 S 6.071.224

Cash and invesfnents listed above are presented on the accompanying basic financial statements, as follows:

)o1? )011

Cash on hand

Cash in banksInvestments

Cash and investments - cash equivalentsRestricted cash and investmer¡tsCash and investments - non cash equivalents

Total

s 175240,530

6 lg5 155

$ 3,581,17522,081

2.832.604

s 175t64,664

s s06 3Rs

$ 3,752,981l4l,185

2.177 058

16

$__é*435-8é0 $___ß,Dr_t-24

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30, 2012

NOTE 3 - CASH AND INVESTMENTS (Continued)

Investments Authorized bJ¡ the Califomia Government Code

The table below identifies the investment types that are authorized for the District by the California Govemment Code. The table also

identifies certain provisions of the California Government Code that address interest rate risk, credit risk, and concentration of creditrisk.

Maximum MaximumAuthorized Maximum Percentage Investment

Investment T.'r'pe Maturitv Of Portfolio in One Issuer

Local Agency BondsU.S. Treasury ObligationsFederal Agency SecuritiesBankers' AcceptancesCommercial PaperNegotiable Certificates of DepositRepurchase and Reverse Repurchase

AgreementsMedium-Term NotesMutual FundsMoney Market Mutual FundsMortgage Pass-Through SecuritiesCounty Pooled Invest¡nent FundLocal Agency Investrnent Fund (LAIF)State Registered Warrants, Notes, or

BondsNotes and Bonds of other Local

Califomia Agencies

5 years

5 yearsN/A

180 days270 days5 years

92 days5 years5 years

N/AN/AN/AN/A

5 years

5 years

$

l2 Months

Or Less

NoneNoneNone40%25%30%

207o ofbase value30%t5%None20%NoneNone

None

None

t3-24

Months

24'7,674

NoneNoneNone30%t0%None

NoneNone10%NoneNoneNoneNone

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, thelonger the mahÌrity of a¡r investment, the greater the sensitivify of its fair value to changes in market interest rates. One of the ways

that the District manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investmentsand by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as

necessary to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the District's investments to ma¡ket interest rate fluchrations is provided by the

following table that shows the distribution of the District's investments by maturity:

2012

Remaining Maturity (in Months)

Carrying

None

None

25-60

Months

More than

60 MonthsInvestment Type

Mort gage pass-through securities

Federal agency secr¡-ities

Negotiable certificates of deposit

State investment pool (LAIF)

Money market funds

S

Amount

3 5 5,798

r,007,950

t,267 ,427

7,'t82

3,556,r 98

s $ s 355,798

I ,007,950

$ 6,195,155 $ 4,583,733 $ 241 ,674 $ r,007,950 S

I ,01 9,753

7,782

3,556,t 98

t7

35s,798

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30,2012

NOTE 3 - CASH AND INVESTMEIITS (Continued)

Disclosures Relatine to Interest Rate F-isk (Continued)

Carrying

Investment Type Amormt

Remainíng Maturity (in Months)

$

20t I

l2 Months

Or Less

13-24

Months

s

25-60

Months

s

More than

60 Months

$ 402,836Mort gage pass-through secr¡rities

Federal agency securities

Negotiable certifi cates of deposit

State investment pool (LAIF)

Money market firnds

Cormty investment pool

Mort gage pass-through secr:rities

Federal agency secr¡rities

Negotiabìe certificates of d€posit

9ate investment pool (LAIF)

Money market funds

lnvestment Type

Mort gage pass-through secuit ies

Federal agency secrrities

Negotiable certificates of deposit

State investment pool (LAIF)

Money market fi:nds

Couty investment pool

402,836

5 07,000

1,267,222

1,743

3,652,984

6 8,6 00

$

N/A

N/A

N/A

N/A

N/A

Mìnimrrn

Legal

Ratins

$

3 5 5,798

l,007,950

507,000

$ 5,906,385 $ 4,996,549 $ $ 402,836

Disclosures Relatine to Credit Risk

Generally, credit risk is the risk that an issuer of a¡r investrnent will not fulfill its obligation to the holder of the investrnent. This ismeasured by the assignment of rating b;r a nationally rec ogîízcð statistical rating organization. Presented below is the minimum ratingrequired by (where applicable) the California Government Code and the District's investrnent policy, and the actual rating as of fiscalyear end for each investment type.

2012

Minimr¡¡

Legal

Rating

Rating as of Fiscal Year End

Investment TyÞe

t,267,222

7,743

3,6s2,984

68,600

$

Ca:rying

Arlomt

355,798

l,007,950

I,267 ,427

1,782

3,556,1 98

$ 6,195,155

Carying

Anomt

$ 402,836

507,000

1,267,222

7,743

3,652,984

6 8,600

$ 50?'000

-

Rating as of Fiscal Year End

A.+

$ $

Not Rated

355,798

1.007,950

I ,267,427

7,182

3,556, I 98

s 6,r 95,1 55

Not Rated

s

1,267,222

7,7 43

3,652,984

6 8,500

Baa

s $

s-s rJ63J4S S -

201 I

402,836

507,000

Baa

N/A

N/A

N/A

N/A

N/A

$

s909,836$-S-54,996,549s 5,906,385

l8

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30, 2012

NOTE 3 - CASII AND INVESTMENTS (Continued)

Concentration of Credit Risk

The investrnent policy of the District contains no limitations on the amount that can be invested in any one issuer beyond that

stipulatedbytheCaliforniaGovernmentCode. Investmentsinanyoneissuer(otherthanU.S.Treasurysecurities,mutualfunds,andextemal investment pools) that represent 5Yo or more of total District investments is as follows:

Issuer Investrnent Tvpe Reported Amount

2012 2011

FNMAFNMA

Federal agency securitiesMortgage pass-through securities

Investment Type

Federal ageîcy securitiesMoney ma¡ket fundsMortgage pass-through securities

$ 1,007,950 $ 507,000

$ 355,798 $ 303,788

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository f,rnancial 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 parfy. The

custodial credit risk for investments is the risk that, in the event of the failure of the counterp arty (e.9., broker-dealer) to a tansaction,

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 a¡d the District's investment policy do not contain legal or policy requirements that would limit the

exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California

Government Code requires that a financial institution secure deposits made by state or local governrnental units bypledging secwities

in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The fairvalue of the pledged securities in the collateral pool must equal at least I t0% of the total amount deposited by the public agencies.

Califomia law also allows financial institutions to secure the District's deposits by pledging first trust deed mortgage notes having a

value of 150% ofthe secured public deposits.

As of June 30,2012, none of the District's deposits with financial institutions in excess of federal depository ìnsurance limits were

heldinuncollateralizedaccounts. AsofJune30,2012,theDistrict'sinvestmentsinthefollowingtypeswereheldbythesamebroker-dealer (counterparry) that was used by the District to buy securities:

Amount

2012

$ 3s5,798s 3,556,198$ 1,007,950

2011

$ 507,000s 3,652,984$ 402,836

Investment in State Pool (LAIF)

The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by the Califomia GovernmentCodeundertheoversightoftheTreasurerofthestateofCalifornia. Thefai¡valueoftheDistrict'sinvestmentinthispool isreported

in the accomparying financial statements at amounts based upon the District's pro-rata sha¡e of the fair value provided by LAIF forthe entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the

accounting records maintained by LAIF, which are recorded on an amortized cost basis.

t9

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAI STATEMENTSJlune30,2012

NOTE 4 - SCHEDIJLE OF CAPITAL ASSETS

A schedule ofchanges in capital assets and depreciation for the fiscal year ended June 30.2012, is shown below:

Land $

BuildingS:bsrface linesSewage collection facilitiesConveyance system

Se\¡âge treatment facilitiesCollection eçipmentOffice equipment

TrucksConstn¡ction in pro gress

Construction in progress-'üWTP

Less accrrn ulated depreciat íon

Net capítal assets

[¿nd

Buildíng

Subsurface lines

Sewage collecticnr facilities

Conveyance system

Sewage treaûnent facilities

Collecticm equipment

Ofïice equipment

Tmcls

Constructior in progress

Constructicn in progress-WWTP

l¿ss accu¡m¡lated depreciaticr

Net capitalassets

Balance

July l,201I157,1323s0,427

1,934,605I,760,9434,177,5505,542,407

40s,00576,277

I 14,896751 ,9575 34,333

r 5,855,532

8,946,3 85

Balance

Julv | . 2010

Additions Deletions

Deletions

s

36,599

36,s99

Transfers

892,59222,176

(914.768)

Balance

June 30, 201 I

Balance

June 30. 201 2

$ 157,132I,243,019r ,956,78 l1 ,'7 57 ,5164,177,5505.542,407

405,00576,277

l 04,89692,601

804,04816.3t7.232

9,3 70,008

s 6,947,224

$ $

245,412219,715465,127

425,150

Additims

48,91 0

62,040

s6't 233

247.583

$

3,427

3,427

2,127

r,300 $$ 6,9D9, r 47 $ 39,377 $

A schedule of changes in capital assets and depreciation for the fiscal year ended June 30.2011, is shown below:

s 157,132

3s0427

r,885,695

1,760,943

4,17't,550

5,s42A0'7

405,00s

76,277

't9Ass

't94,724

336.750

s s 157,t32

350,427

1,934,605

1,760,943

4,1'11,550

5,542,407

405,005

76,277

104,896

761 ,951

584J33

t4,96636s 925.766

8.55 r .674 431.310

$ 6.414.691 S 494.456

36,599

$-

I 5.855,532

8.946-385

s 6.909.147

20

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30, 2012

NOTE5_LOAJ\PAYABLE

OnApril 2l,2004,theDistrictreceivedaloanfromMunicipalFinanceCorporationintheamountof$1,500,000. Thepurposeoftheloan was to refinance the 1982 Sewer Bonds in the amount of $174,000, and to finance the reconstruction of pump station #2. TheDistrict will make semi-annual payments under the loan agreement of $68,831 through April 29,2019. The inte¡est rate forthe loan is

4.4Yo. Fuíne debt service payments are as follows:

Fiscal YearEnding20132014201520162017

2018-2019

Principal Interests

Total$ 102,624

I07,r90r l r,958r 16,938122,140260,821

J).UJ /30,47225,70420,72415,52114,498

l]7,661137,662137,662137,662137,661275,319

$

$ 82t,ó71 üi t4r,956 J; 963,6¿7

NOTE6-LONG-TERMDEBT

The changes in long-term debt at June 30, 2012, ís as follows:

Balance 30.2012.Trrlv I 201 I Additions Reti¡ements Total Current Long-Term

Loanpayable $-----919J25 $- $----98254 S----821-éZL

The changes in long-term debt at June 30, 201 I , is as follows:

s__ta-a{ s__J_19-041

Julv l,2009 Additions Retirements Total Current Lonq-Term

Loanpayable $---1-0-l3Jgl $---------.- $----94-069 $-il9J25 $---18"254 $---82L6ZL

NOTE 7 - COMPENSATED ABSENCES

As of June 30,2012, it is estimated that the District's employees have $19,713 of accumulated vested vacation time and sick leave.

AccumulatedunpaidemployeevacationandsickleavebenefitsarerecognizedasliabilitiesoftheDistrict. Theaccumulatedbenefitswill be liquidated in future years as employees elect to use them.

NOTE 8 - DISTRICT EMPLOYEES' RETIREMENT PLAN (DEFINED BENEFIT PENSION PLANI)

Plan Description

The Cayucos Sanitary District's (ttre District) defined benefit pension plan, Public Employees' Retirement System (PERS),

provides retirement and disability benefîts, annual cost-ofliving adjustments, and death benef,tts to plan members and

beneficiaries. The PERS is part of the Public Agency portion of the California Public Employees' Retirement System, (CaIPERS),

an agent multiple-employer plan administered by CaIPERS, which acts as a coÍrmon investment and administrative agent forparticipating public employers within the State of California. A menu of benefit provisions as well as other requirements are

established by State statutes with the Public Employees' Retirement Law. The District selects optional benefrt provisions from the

beneht menu by contract with CaIPERS and adopts those benefits through local ordinance (other local methods). CaIPERS issues

a separate comprehensive annual f,inancial report. Copies of the CaIPERS' annual financial report may be obtained from the

CaIPERS Executive Office - 400 P Street, Sacramento, CA 95814.

21

CAYUCOS SANITARY DISTRICTNOTES TO BASIC FINANCIAL STATEMENTSJune 30,2012

NOTE I - DISTRICT EMPLOYEES'RBTIREMENT PLAN (DEFINED BENEFIT PENSION PLAN) (Continued)

Funding Policy

Active plan members in PERS are required to contribute 8% of their annual covered salary and the District is required tocontribute the actuarially determined rate. The actuarial methods and assumptions used are those adopted by CaIPERS Board ofAdministration. The required employer contribution rate for the fiscal year 2}ll/2012, was 15.941 % from July I to January 3l ,

and 13.353% for the remainder of the fiscal year. The contribution requirements of the plan members are established by Statestatute and employer contribution rate was established and may be amended by CaIPERS. The Cayucos Sanitary District'scontributions to CalPERs for the fiscal years ending June 30, 2Ol2,20ll, and 2010, were $50,897,550,621, and $49,588,respectively, and equal lN% of the required contributions for each fiscal year.

In January 2012, ihe District paid to C¿IPERS S107,485 towards its unfunded liability. This prepayment will be amortized cvereleven years, beginning fiscal year 20l2ll3 through fiscal year 2022123.

NOTE 9 - CONTINGENCTES

According to the District's attorney, no contingent liabilities are outstanding and no lawsuits are pending of any real financialconsequence.

NOTE 10 _ PRIOR PERIOD ADJUSTMENT

A prior period adjustment of $ 14,607 r¡'as made to reflect the difference in amount accrued versus the amount billed as of June 30,

20 I I , for the fourth quarter waste water treatment plant invoiced from the City of Morro Bay.

A prior period adjustmørt of $3,600 wes made to refund connections fees received in a previous fiscal year.

22

MOSS, LEVY & HARIZHEIM LLPCERTIFIED PUBLIC ACCOUNTANTS

PARTNERSRONALD A LEVY, CPACRAIG A HARTZHEIM, CPAHADLEY Y HUI, CPA

802 EAST MAIN STSANTA MARIA. CA 93454

TEL: 805.925.2579FAX: 805.925 2147www.mlhcpas.com

November 27,2012

Board of DirectorsCayucos Sanitary DistrictPO Box 333Cayucos, Cl^93430

We have audited the basic financial statements of Cayucos Sanitary District for the fiscal year ended June

30,2012. Professional standards require that we provide you with information about our responsibilitiesunder generally accepted auditing standards, as well as certain information related to the planned scope

and timing of our audit. V/e have communicated such information in our letter to you dated November27, 2012. Professional standards also require that we communicate to you the following informationrelated to our audit.

Si snifi cant Audit Findines

Qualitative Aspects of Accounting Practices

Management is responsible for the selection and use of appropriate accounting policies. The significantaccounting policies used by Cayrcos Sanitary District are described in Note I to the financial statements.

No new accounting policies were adopted and the application of existing policies was not changed duringthe fiscal year ended June 30, 2072. We noted no transactions entered into by the govemmental unitduring the fiscal year for which there is a lack of authoritative guidance or consensus. AII significanttransactions have been recognized in the financial statements in the proper period.

Accounting estimates are an integral part of the financial statements prepared by management and are

based on management's knowledge and experience about past and current events and assumptions aboutfuture events. Certain accounting estimates are particularly sensitive because of their significance to thefinancial statements and because of the possibility that future events affecting them may differsignificantly from those expected. The most sensitive estimates affecting the District's financialstatements were:

Management's estimate of the fourth quarter WWTP payable to the City of Morro Bay, depreciation,and the fair value of investments are based on the W-WTP invoice issued after fiscal year end, theestimated useful lives of capital assets, and investment statements, respectively. We evaluated the keyfactors and assumptions used to develop these estimates in determining that the estimates arereasonable in relation to the financial statements taken as a whole.

Dfficulties Encountered in Performing the Audit

We encountered no signifrcant difficulties in dealing with management in performing and completing ouraudit.

OFFICES: BEVERLY HILLS 'CULVER ClïY' SANTA MARIA

MEMBER AMERICAN INSTITUTE OF CPAS CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS CALIFORNIA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS

Corrected and Uncorrected Miss tatements

Professional standards require us to accumulate all known and likely misstatements identified during theaudit, other than those that are trivial, and commrrricate them to the appropriate level of management.Management has corrected all such misstatements. Some of the misstatements detected as a result of auditprocedures and corrected by management were material, either individually or in the aggregafe, to thefinancial statements taken as a whole.

D i s agreements with Management

For purposes of this letter, professional standards define a disagreement with management as a financialaccounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be

signif,rcant to the hnancial statements or the auditor's report. We are pleased to report that no suchdisagreements arose during the course of our audit.

Manø gement Repres entations

We have requested certain representations from management that are included in the managementrepresentation letter dated November 27, 201 2.

Management Consultations with Other Independent A ccountants

In some cases, management may decide to consult with other accountants about auditing and accountingmatters, similar to obtaining a "second opinion" on certain situations. If a consultation involvesapplication of an accounting principle to the govemmental unit's financial statemerìts or a determinationof the type of auditor's opinion that may be expressed on those statements, our professional standardsrequire the consulting accountant to check with us to determine that the consultant has all the relevantfacts. To our knowledge, there were no such consultations with other accountants.

Other Audit Fíndings or Issues

We generally discuss a variety of matters, including the application of accounting principles and auditingstandards, with management each fiscal year prior to retention as the governmental unit's auditors.However, these discussions occurred in the normal course of our professional relationship and ourresponses were not a condition to our retention.

Comments to Management

As always, your staff was extremely personable, helpfirl, and efficient in dealing with audit intemrptions,with answering our many questions, and with advance preparation for the audit. No findings were notedin our audit testing results.

We assisted your staff with expected accounting adjustments including recording annual depreciationexpense, adjusting payroll accruals, adjusting accounts receivable and revenue, investments includinggains/losses, prepaid expenses, and accrued interest. The adjustments and audited trial balance wereprovided to staff on August 14, 2012, and again upon receipt of the fourth quarter WWTP accrualadjustment. As always, it was a pleasure to work with the staff of Cayucos Sanitary District, and we lookforward to working with you in the future.

Other Matters

With respect to the supplemantary information accompanying the financial statements, we made certaininquiries of management and evaluated the form, content, and methods of preparing the information todetermine that the information complies with accounting principles generally accepted in the UnitedStates of America, the method of preparing it has not changed from the prior period, and the informationis appropriate and complete in relation to tour audit of the financial statements. We compared and

reconciled the supplementary information to the underlying accounting records used to prepare thefinancial statements or to the financial statements themselves.

This information is intended solely for the use of the Board of Directors and management of CayucosSanitary District and is not intended to be and should not be used by anyone other than these specifiedparties.

Sincerely,

Y/aa, î'-,¡ i&'*;*tzn