Basic Financial Statements
and Independent Auditors' Reports
For the year ended June 30, 2002

Independent Auditors’ Report 

Management's Discussion and Analysis 

Basic Financial Statements:

1. FINANCIAL HIGHLIGHTS

• At June 30, 2002, the Authority had net assets of $2.3 million; however, total net assets decreased during the fiscal year by $834,000 due to issuance costs of new debt and debt service payments exceeding lease revenues received from the City. Future lease revenues from the City will replenish this deficit.
• During the fiscal year ended June 30, 2002, the Authority issued the 2001 Water and Wastewater Revenue Bonds in the amount of $32 million to refund the 1992 Utilities Revenue Bonds, Series A in the amount of $19 million and to provide funding for improvements to the wastewater facilities.
• The Authority’s other bonded indebtedness decreased by $1,065,000 during the current fiscal year as a result of current debt service repayments.

This discussion and analysis is intended to serve as an introduction to the Authority’s basic financial statements, which are comprised of three components: 1) Government-Wide Financial Statements, 2) Fund Financial Statements, and 3) Notes to the Basic Financial Statements.

The basic financial statements include only the Sunnyvale Financing Authority, which is a component unit of the City and is reported in the City’s financial statements using the blended method.

The Authority’s main activities are the issuance of debt for the benefit of the City.

The Government-Wide Financial Statements present the financial picture of the Authority and provide readers with a broad view of the Authority’s finances. These statements present governmental activities and include all assets of the Authority as well as all liabilities (including long-term debt). Additionally, certain interfund receivables, payables and other interfund activity have been eliminated as prescribed by GASB Statement No. 34.

The Statement of Net Assets and the Statement of Activities and Changes in Net Assets report information about the Authority as a whole and about its activities. These statements include all assets and liabilities of the Authority using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year’s revenues and expenses are taken into account, regardless of when cash is received or paid.

The Statement of Net Assets presents information on all of the Authority’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases in net assets may serve as a useful indicator of whether the financial position of the Authority is improving or deteriorating.

The Statement of Activities and Changes in Net Assets presents information showing how the Authority’s net assets changed during the year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of timing of related cash flows.

The Authority only has governmental activities, which are shown in the Statement of Net Assets and the Statement of Activities and Changes in Net Assets.

The Authority’s main function is the issuance of debt and as a result, the activities of the Authority are restricted to the payment of interest expense and other debt related costs such as bond issuance costs and fiscal agent fees.

The Fund Financial Statements provide detailed information about the Authority’s major funds—not the Agency as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using its resources.

The Fund Financial Statements include statements for the Governmental Funds which are prepared using the current financial resources measurement focus and modified accrual basis of accounting.

The 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 Funds Financial Statements focus on current financial resources, which emphasize near-term inflows and outflows of spendable resources as well as balances of spendable resources at the end of the fiscal year. This information is essential in evaluating the Agency’s near-term financial requirements.

In order to better understand the Authority’s long-term and short-term requirements, it is useful to compare the Authority’s Governmental Fund Statements with the governmental activities in the Government-Wide Financial Statements. A reconciliation is provided for both the governmental fund balance sheet and the statement of revenues, expenditures and changes in fund balances to facilitate this comparison.

All of the Authority’s funds were determined to be major funds. These funds include the 2001 Government Center Certificates of Participation Debt Service Fund, the 1992 Utilities Revenue Bonds, Series B Debt Service Fund, the 2001 Water and Wastewater Revenue Bonds Debt Service Fund and the 2001 Wastewater Capital Projects Fund, which are reported in detail in the Governmental Fund Financial Statements.

The notes provide additional information that is essential to a full understanding of the data provided in the Government-Wide and Fund Financial Statements.

Net assets are a good indicator of the Authority’s financial position. During this fiscal year, the Authority had net assets of $2.3 million.

The following is the condensed Statement of Net Assets for the fiscal year ended June 30, 2002.

At June 30, 2002, the Authority reported negative balances in unrestricted net assets. This deficit will be eliminated as lease payments from the City are received.

$3.2 million of the Authority’s net assets are subject to restrictions for debt service reserve requirements as determined by bond covenants and their use is determined by those restrictions and agreements.

Comparative Statements of Net Assets were not available since this is the first year of implementation of GASB Statement No. 34.

The following is the condensed Statement of Activities and Changes in Net Assets for the fiscal year ended June 30, 2002.

The Authority’s only expense was interest on long-term debt, fiscal agent fees and bond issuance costs. Revenues consisted of lease revenues received from the City and investment earnings, which were insufficient to meet current year’s expenses. As a result, net assets decreased by $834,000. Lease revenues were insufficient to meet current expenses as they were based on current financial resources and did not take into account certain accrued amounts and new bond issuance costs. These amounts will be recovered in future years.

Comparative Statements of Activities and Changes in Net Assets were not available since this is the first year of implementation of GASB Statement No. 34.

The Authority uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

The focus of the Authority’s governmental funds is to provide information on short-term inflows, outflows and balances of spendable resources. Such information is useful in assessing the Authority’s financing requirements.

As of the end of fiscal year 2002, the Authority’s governmental funds reported a combined ending fund balance of $16.6 million. The fund balance was reserved for capital projects in the amount of $12.8 million and for debt service requirements in the amount of $3.8 million.

5. BUDGETARY HIGHLIGHTS

The funds of the Authority are not budgeted. Spending control is achieved through requirements of bond covenants.

6. LONG-TERM OBLIGATIONS

As of June 30, 2002, the Authority had outstanding debt issues as listed below (amounts in thousands).

During the fiscal year 2002, revenue bonds in the amount of $32.1 million were issued by the Authority to provide funds to defease and refund the outstanding 1992 Utilities Revenue Bonds, Series A and to finance certain additions and improvements to the municipal wastewater system of the City. The bonds are payable from the net revenues of the City’s municipal water and wastewater systems based on each system’s prorata share of the 1992 revenue bonds and new improvements to be financed. An amount equal to the debt service requirement is paid to the Authority by the City in the form of lease revenues. The bonds bear interest rates ranging from 2.5% to 5.17% and are payable semiannually on April 1 and October 1 of each year commencing April 1, 2002. Principal payments ranging from $1,150,000 to $3,395,000 are due October 1 of each year and mature in 2026.

This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the Authority’s finances and to demonstrate the Authority’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City of Sunnyvale Finance Department, 650 W. Olive Avenue, Sunnyvale, California 94086.

Statement of Net Assets
June 30, 2002
		Governmental
		Activities
Assets:
Current Assets:
Restricted Cash and Investments Held by Fiscal Agent		$ 16,510,087
Interest Receivable		85,176
Lease Receivable Due Within One Year		2,265,000
Total Current Assets		18,860,263
Noncurrent Assets:
Lease Receivable Due in More Than One Year		53,585,000
Total Noncurrent Assets		53,585,000
Total Assets		72,445,263
Liabilities:
Current Liabilities:
Interest Payable		669,549
Long Term Debt - Due Within One Year		2,265,000
Total Current Liabilities		2,934,549
Noncurrent Liabilities:
Long-term Debt - Due in More than One Year		67,175,000
Total Noncurrent Liabilities		67,175,000
Total Liabilities		70,109,549
Net Assets:
Restricted for:
Debt Service		3,167,929
Unrestricted		(832,215)
Total Net Assets		$ 2,335,714
See Accompanying Notes to Basic Financial Statements

Statement of Activities and Changes in Net Assets
Year Ended June 30, 2002
		Governmental
		Activities
Program Expenses:
Interest Expense and Bond Issuance Cost		$ 3,471,314
Total Program Expenses		3,471,314
Program Revenues:
Lease Revenue from City		2,329,984
Restricted Investment Earnings		307,084
Total Program Revenues		2,637,068
Net Program Expense		834,246
Change in Net Assets		(834,246)
Net Assets - Beginning of Year, Restated		3,169,960
Net Assets - End of Year		$ 2,335,714
See Accompanying Notes to Basic Financial Statements

Governmental Fund Financial Statements

The 2001 Government Center Certificates of Participation Debt Service Fund is used to accumulate funds for the debt service payments of the Certificates of Participation issued in 2001 to finance the acquisition of land and buildings for possible construction of a new government center. Debt service is financed with lease payments from the City.

The 1992 Utilities Revenue Bonds, Series B Debt Service Fund is used to accumulate funds for the debt service payments of the Revenue Bonds issued in 1992 to finance the construction of the Solid Waste Materials Recovery and Transfer Station (SMaRT Station). Debt service is financed with lease payments from the City made through the SMaRT Station Enterprise Fund, which is funded by the SMaRT Station partners, the cities of Sunnyvale, Palo Alto and Mountain View.

The 2001 Water And Wastewater Revenue Bonds Debt Service Fund is used to accumulate funds for the debt service payments of the Revenue Bonds issued in 2001 to defease the Authority's outstanding 1992 Utilities Revenue Bonds, Series A and to finance certain improvements to the Wastewater System. Debt service is financed with lease payments from the City through the Water and Wastewater Enterprise Funds based on the prorata share of each fund's 1992 revenue bonds and new improvements to be financed.

The 2001 Wastewater Capital Projects Fund accounts for the use of proceeds from the issuance of 2001 Water and Wastewater Revenue Bonds for the Wastewater Projects.

Balance Sheet Governmental Funds
June 30, 2002

Major Funds

The financial statements of the Sunnyvale Financing Authority (Authority), a component unit of the City of Sunnyvale (City), California, have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental agencies. The Governmental Accounting Standards Boards (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The more significant of the Authority’s accounting policies are described below.

1. Reporting Entity

The Authority was established on September 29, 1992 by the Joint Exercise of Powers Agreement between the City and the Redevelopment Agency of the City of Sunnyvale (Agency).

The Authority is administered by a Board of Directors consisting of seven persons, each serving in his or her individual capacity as a Director of the Authority. The sitting members of the City Council constitute the Directors of the Authority until such time as they cease to be members of the City Council.

Additionally, the Authority shall have four officers as follows:

Chairperson – Mayor of the City
Vice-Chairperson – Vice-Mayor of the City
Executive Director – City Manager
Treasurer – Director of Finance

The City Attorney shall serve as General Counsel to the Authority and the City Clerk shall serve as Secretary. In addition to having the same governing board, the City is financially accountable for the Authority and conducts management activities of the Authority. Though legally a separate entity, the Authority is, in substance, a component unit of the City.

The Board of the Authority is required to hold at least one regular meeting each year.

Because City Council members serve as the governing members of the Authority, management activities of the Authority are conducted by City staff, and the Authority is dependent upon the City for fiscal operations including preparation of the annual financial report, the Authority is considered a component unit of the City and blended into the City’s Comprehensive Annual Financial Report.

2. Basis of Accounting and Measurement Focus

The accounts of the Authority are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for in a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures. Authority resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent and the means by which spending activities are controlled.

The Authority’s Government-Wide Financial Statements include a Statement of Net Assets and a Statement of Activities and Changes in Net Assets. These statements present summaries of Governmental Activities for the Authority. The Authority has no Business Type Activities.

The basic financial statements are presented on an "economic resources" measurement focus and the accrual basis of accounting. Accordingly, all of the Authority’s assets and liabilities, including capital assets, as well as infrastructure assets, and long-term liabilities, are included in the accompanying Statement of Net Assets. Currently, the Authority has no capital assets. The Statement of Activities presents changes in net assets. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. The types of transactions reported as revenues for the Authority are lease revenues received from the City and interest revenues. Certain eliminations have been made as prescribed by GASB Statement No. 34 in regards to interfund activities, payables and receivables. All internal balances in the Statement of Net Assets have been eliminated. In the Statement of Activities, interfund transfers have been eliminated.

The Authority applies all applicable GASB pronouncements (including all NCGA Statements and Interpretations currently in effect) to the governmental activities.

Governmental Fund Financial Statements include a Balance Sheet and a Statement of Revenues, Expenditures and Changes in Fund Balances for all major governmental funds and non-major funds aggregated. An accompanying schedule is presented to reconcile and explain the differences in net assets as presented in these statements to the net assets presented in the Government-Wide financial statements. The Authority has presented all governmental funds as major funds because the Authority believes the financial position and activities of those funds are significant to the Authority as a whole.

All governmental funds are accounted for on a spending or "current financial resources" measurement focus and the modified accrual basis of accounting. Accordingly, only current assets and current liabilities are included on the Balance Sheets. The Statement of Revenues, Expenditures and Changes in Fund Balances presents increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current period. Accordingly, revenues are recorded when received in cash, except that revenues subject to accrual (generally 60 days after year-end) are recognized when due. The primary revenue sources, which have been treated as susceptible to accrual by the Authority, are lease revenues and earnings on investments. Expenditures are recorded in the accounting period in which the related fund liability is incurred.

Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach.

3. Use of Restricted/Unrestricted Net Assets

When an expense is incurred for purposes for which both restricted and unrestricted net assets are available, the Authority’s policy is to apply restricted net assets first.

4. Cash, Deposits and Investments

The Authority’s cash and investments consist of restricted funds held by fiscal agents to meet debt obligations. The Authority does not have any unrestricted cash and investments.

5. Long-term Debt

Long-term debt and other financed obligations are reported as liabilities in the governmental activities.

The fund financial statements do not present long-term debt but are shown in the Reconciliation of the Governmental Funds Balance Sheet to the Government-Wide Statement of Net Assets.

6. Net Assets and Fund Equity

Restricted Net Assets – This amount is restricted by external creditors, grantors, contributors, or laws or regulations of other governments.

Unrestricted Net Assets – This amount is all net assets that do not meet the definition "restricted net assets."

Fund Equity – Reservations and designations of fund balances of governmental funds are created to either satisfy legal covenants, including State laws, that require a portion of the fund equity be segregated or identify the portion of the fund equity not available for future expenditures.

7. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. In addition, estimates affect the reported amount of expenditures and expenses. Actual results could differ from these estimates and assumptions.

8. Implementation of New GASB Pronouncements

In 2002, the Authority adopted new accounting standards in order to conform to the following Governmental Accounting Standards Board (GASB) Statements:

• Statement No. 34, Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments.
• Statement No. 37, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments: Omnibus
• Statement No. 38, Certain Financial Statement Note Disclosures

GASB Statement No. 34 is a new financial reporting requirement for local governments in the United States. The Authority has implemented this pronouncement and has restructured much of the information that it has presented in the past. The main goal is to make the reports more comprehensive and easier to understand and use.

GASB Statement No. 37 addresses selected issues and amends GASB Statements No. 21, Accounting for Escheat Property, and No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. These Statements make selective changes including accounting for Escheat Property, Management’s Discussion and Analysis, Capitalization of Construction – Period Interest, Modified Approach for Reporting Infrastructure, Program Revenues and Major Fund Criteria.

GASB Statement No. 38 establishes and modifies disclosure requirements related to the Summary of Significant Accounting Policies, actions taken to address violations of significant finance – related legal and contractual provisions, debt and lease obligations, short-term debt, disaggregation of receivable and payable balances, and interfund balances and transfers.

The Authority’s cash and investments consist of cash and investments held by fiscal agents. At June 30, 2002, the Authority had the following cash and investment balances:

Refer to the City’s Comprehensive Annual Financial Report for detailed disclosure on cash and investments.

3. LEASE RECEIVABLE AND DEFERRED REVENUE

The Authority has recorded a lease receivable in the amount of $55,850,000 pursuant to the lease agreement between the Authority and the City in relation to the bonded indebtedness. The lease receivable along with investments held by fiscal agents secures the repayment of the different debt issues. The lease revenue is equal to the Authority’s debt service requirements and is used for that purpose.

In the Fund Financial Statements a corresponding amount is recorded as deferred revenue since the assets are not current financial resources. In the Government-wide Financial Statements the assets are offset by long-term debt with any remaining amounts being reflected in Net Assets.

Following is a summary of long term debt transactions during the fiscal year ended June 30, 2002:

Due in annual installments of $360,000-$995,000 through April 1, 2031, variable interest rate determined weekly by the remarketing agent. Repayments are made from lease payments from the City based on a predetermined prorata share of each activity’s use of the premises.

Annual debt service requirements for the Government Center Certificates of Participation are based on a variable interest rate, which is determined by the remarketing agent as the rate, which would be necessary to enable the remarketing of the COPs at 100% of the principal amount. At June 30, 2002, the average interest rate is 1.54%, which was the rate used to project the interest portion of the debt service payments for future years. This rate will change with market fluctuations.

The debt service requirements for the Certificates of Participation at June 30, 2002 were as follows:

Due in annual installments of $415,000-$1,770,000 through October 1, 2017, interest at 3.10% - 6.00%, repayments made from lease payments from the City.

The debt service requirements for the bonds at June 30, 2002 were as follows:

Due in annual installments of $1,150,000 - $3,395,000 through October 1, 2026, interest at 2.5% - 5.17%, repayments made from lease payments from the City.

The debt service requirements for the bonds at June 30, 2002 were as follows:

5. SELF-INSURANCE AND CONTINGENT LIABILITIES

The Authority is covered under the City’s self-insurance plan and various insurance policies. The City is self-insured for claims related to general liability up to $500,000 per incident; for claims related to workers’ compensation liability up to $275,000 per incident; and for unemployment insurance through direct reimbursement to the State for actual unemployment benefits paid. Employers’ Reinsurance, Inc. provides workers’ compensation coverage to the City for claims up to $1,000,000 for employer’s liability damages and $10,000,000 for statutory benefits in excess of $275,000. The City participates in the liability program of California Joint Powers Risk Management Authority (CJPRMA), a risk sharing pool, which provides public liability coverage to its members. CJPRMA provides public liability coverage for claims in excess of $500,000 up to $14,500,000.

An operating transfer is a legally authorized transfer between funds in which one fund is responsible for the initial receipt of funds and another fund is responsible for the actual disbursement.

For the year ended June 30, 2002, the 2001 Wastewater Capital Projects Fund transferred funds in the amount of $18,865,538 to the 1992 Utility Bond Debt Service Fund for the payment of the principal amount of refunded bonds and escrow fees in conjunction with the issuance costs of the new bonds.

In addition, the 1992 Utility Bond Debt Service Fund and the 2001 Wastewater Capital Projects Fund transferred funds in the amounts of $1,893,340 and $655,721 respectively, to the 2001 Water and Wastewater Debt Service Fund for establishment of reserve funds for the new debt issue.

In the Government-Wide Financial Statements, net assets are classified in the following categories:

Restricted Net Assets – This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. The restrictions imposed on net assets by the Authority are for debt service requirements.

Unrestricted Net Assets – This category represents the net assets of the Authority, which are not restricted for any project or other purpose.

In the Fund Financial Statements, reserves and designations segregate portions of fund balance that are either not available or have been earmarked by the Authority Board and Management and can be increased, reduced or eliminated by similar actions.

In Governmental Funds, fund reservations are presented as a component of fund balance as follows:

Fund reservations are described as follows:

Reserved for capital projects represent amounts earmarked for wastewater improvement projects as prescribed in the bond covenants.

Reserved for Debt Service represents the portion of fund balance that is legally restricted as per the bond covenants for repayment of debt.

The Government-Wide Financial Statements had deficit unrestricted net assets of $832,215. The Authority plans to eliminate this deficit by future contributions to debt service funds to comply with debt service reserve requirements.

The Authority has implemented new GASB pronouncements and made some changes to the reporting of funds of the Authority. The following adjustments were made to beginning fund equity:

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