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2015 - 2016 Audit ReportMEASURE A – STRONG SCHOOLS BOND OF PALO ALTO UNIFIED SCHOOL DISTRICT AUDIT REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2016 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Table of Contents For the Fiscal Year Ended June 30, 2016 Page Introduction and Citizens’ Oversight Committee Member Listing ........................................................... 1 Independent Auditors’ Report ........................................................................................................................ 3 FINANCIAL SECTION Balance Sheet ..................................................................................................................................................... 5 Statement of Revenues, Expenditures and Changes in Fund Balance ...................................................... 6 Notes to Financial Statements ......................................................................................................................... 7 OTHER INDEPENDENT AUDITORS’ REPORTS Independent Auditors’ Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ................................................................................................................ 19 Independent Auditors’ Report on Performance .......................................................................................... 21 FINDINGS AND RESPONSES SECTION Schedule of Findings and Responses ............................................................................................................ 27 Summary Schedule of Prior Audit Findings ................................................................................................ 28 1 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Introduction and Citizens’ Oversight Committee Member Listing June 30, 2016 The Palo Alto Unified School District (the “District”) was founded on March 20, 1893 under the laws of the State of California. This District operates under a locally elected five‐member Board form of government and provides educational services to grades K – 12 as mandated by the state and federal agencies. The District operates twelve elementary, three middle, two high schools, an adult education program, a Young Fives program and two children’s centers. In June 2008, the voters of the Palo Alto Unified School District approved by more than the required 55% favorable vote the Measure A – Strong Schools Bond (“Measure A”), authorizing the issuance and sale of general obligation bonds, not to exceed $378,000,000. The Measure A – Strong Schools Bond is a Proposition 39 bond. The passage of Proposition 39 in November 2000 amended the California Constitution to include accountability provisions. Specifically, the District must conduct an annual independent performance audit to ensure that funds have been expended only on the specific projects listed in the full text of the Measure A – Strong Schools Bond ballot measure as well as an annual, independent financial audit of the proceeds from the sale of the bonds until all of the proceeds have been expended for bond‐designated facilities projects. Measure A bonds were issued by the District, through the County of Santa Clara. On August 27, 2008, Series 2008 of the Measure A bond authorization was issued, which consisted of current interest and capital appreciation bonds with an initial par amount of $119,999,249 with stated interest rates of 2.50% to 5.50% and maturing through August 1, 2033. On July 13, 2010, Series 2010 of the Measure A bond authorization was issued and was designated as qualified school construction bonds under Section 54F of the Internal Revenue Code of 1986. These bonds provide a federal subsidy to the District which significantly decreases overall interest cost. The bonds were issued with initial par amount of $25,000,000, with stated interest rates of 4.662% to 5.862% and maturing through July 1, 2027. The net interest rate of the issuance is 0.40% after accounting for the federal subsidy. On March 5, 2013, Series 2013 of the Measure A bond authorization was issued, which consisted of current interest bonds with an initial par amount of $70,000,000 with stated interest rates of 2.00% to 3.50% and maturing through July 1, 2036. Series 2014 of the Measure A bond authorization were issued on May 14, 2014, which included current interest bonds with an initial par amount of $40,000,000, with stated interest rates of 2.00% to 3.25% and maturing through August 1, 2033. Series 2016 of the Measure A bond authorization were issued on May 10, 2016, which included current interest bonds with an initial par amount of $45,000,000, with stated interest rates of 2.125% to 4.00% and maturing through August 1, 2035. For Measure A, the District has elected to conform to the requirements of low bid construction delivery. 2 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Introduction and Citizens’ Oversight Committee Member Listing, continued June 30, 2016 Upon passage of Proposition 39, an accompanying piece of legislation, AB 1908 (Chapter 44, Statutes of 2000), was also enacted, which amended the Education Code to establish additional procedures which must be followed if a District seeks approval of a bond measure pursuant to the 55% majority authorized in Measure A including formation, composition and purpose of the Citizens’ Oversight Committee, and authorization for injunctive relief against the improper expenditure of bond revenues. The Citizens’ Oversight Committee was comprised of the following members as of June 30, 2016: Name Title Representation James Cowie Bruce Whitson Walt Hays Todd Collins Catharine Garber Daniel Sin‐Yew Teo Arianne Teherani Chair Vice Chair Member Member Member Member Member Business Organization Member, Parent, PTA Business Organization Member Senior Citizens Organization Taxpayer Organization Member Business Organization Member Parent, PTA, Site Council Member Parent, PTA Corporate Oce: 348 Olive Street San Diego, CA 92103 toll-free: 877.220.7229 tel: 619.270.8222 fax: 619.260.9085 www.christywhite.com Christy White, CPA Michael Ash, CPA Heather Rubio SAN DIEGO LOS ANGELES SAN FRANCISCO/BAY AREA 3 INDEPENDENT AUDITORS’ REPORT Governing Board Members and Measure A Citizens’ Oversight Committee Palo Alto Unified School District Palo Alto, California Report on the Financial Statements We have audited the accompanying financial statements of the Measure A – Strong Schools Bond of Palo Alto Unified School District (the “District”) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Measure A ‐ Strong Schools Bond’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in 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 are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditorʹs judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entityʹs preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entityʹs internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 4 Auditor’s Responsibility (continued) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As discussed in Note 1A, the financial statements present only the individual Proposition 39 Bond Building Fund, consisting of the net construction proceeds of the Measure A – Strong Schools Bond general obligation bonds as issued by the District, through the County of Santa Clara, and are not intended to present fairly the financial position of the District in conformity with generally accepted accounting principles. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Measure A – Strong Schools Bond of Palo Alto Unified School District as of June 30, 2016 and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 25, 2016 on our consideration of the Measure A – Strong Schools Bond’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Measure A ‐ Strong Schools Bond’s internal control over financial reporting and compliance. Report on Other Legal and Regulatory Requirements In accordance with the requirements of Proposition 39, as incorporated in California Constitution Article 13A, we have also issued our performance audit report dated October 25, 2016 on our consideration of the Measure A – Strong Schools Bond’s compliance with the requirements of Proposition 39. That report is an integral part of our audit of the Measure A – Strong Schools Bond for the fiscal year ended June 30, 2016 should be considered in assessing the results of our financial audit. San Diego, California October 25, 2016 FINANCIAL SECTION The accompanying notes to financial statements are an integral part of this statement. 5 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Balance Sheet June 30, 2016 ASSETS Cash in county treasury 58,684,871$ Accounts receivable 79,660 Due from other funds 41,928 Total Assets 58,806,459$ LIABILITIES AND FUND BALANCE Liabilities Accounts payable 624,566$ Due to other funds 43,352 Total Liabilities 667,918 Fund Balance Restricted for capital projects 58,138,541 Total Liabilities and Fund Balance 58,806,459$ The accompanying notes to financial statements are an integral part of this statement. 6 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Statement of Revenues, Expenditures and Changes in Fund Balance For the Fiscal Year Ended June 30, 2016 REVENUES Other state revenue 711$ Interest income 217,588 Total Revenues 218,299 EXPENDITURES Facilities acquisition and construction 33,915,050 Total Expenditures 33,915,050 Excess (Deficiency) of Revenues Over (Under) Expenditures (33,696,751) OTHER FINANCING SOURCES Interfund transfer‐in 3,000,000 Proceeds from long‐term debt 45,000,000 Total Other Financing Sources 48,000,000 Net Change in Fund Balance 14,303,249 Fund Balance, July 1, 2015 43,835,292 Fund Balance, June 30, 2016 58,138,541$ 7 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements June 30, 2016 NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The Palo Alto Unified School District (the “District”) was founded on March 20, 1893 under the laws of the state of California. This District operates under a locally elected five‐member Board form of government and provides educational services to grades K – 12 as mandated by the state and federal agencies. The District operates twelve elementary, three middle, two high schools, an adult education program, a Young Fives program and two children’s centers. On June 3, 2008 the District voters authorized $378 million in general obligation bonds (“Measure A”) to provide safe and modern schools; accommodate enrollment growth; upgrade aging classrooms, libraries, computer and science labs; repair or replace roofs, plumbing, heating, ventilation and electrical systems; improve fire alarms and school security; meet current earthquake standards; provide current technology; and replace old portables with permanent classrooms. An advisory committee to the District’s Governing Board and Superintendent, the Measure A Citizens’ Oversight Committee (“COC”) was established pursuant to the requirements of state law and the provisions of Measure A. The purpose of the COC is to inform the public concerning the use of bond proceeds. The COC is required by state law to actively review and report on the proper expenditure of taxpayersʹ money for school construction. The COC provides oversight and advises the public as to whether the District is spending the Measure A – Strong Schools Bond funds for school capital improvements within the scope of projects outlined in the Measure A – Strong Schools Bond Project List. In fulfilling its duties, the COC reviews, among other things, the Districtʹs annual performance and financial audits of Measure A activity. The statements presented are for the individual Measure A – Strong Schools Bond of the District, consisting of the net construction proceeds of Measure A Series 2008, Series 2010, Series 2013, Series 2014, and Series 2016 general obligation bonds as issued by the District, through the County of Santa Clara, and are not intended to be a complete presentation of the District’s financial position or results of operations. B. Accounting Policies The District accounts for its financial transactions in accordance with the policies and procedures of the California Department of Educationʹs California School Accounting Manual. The accounting policies of the District conform to generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (“GASB”) and the American Institute of Certified Public Accountants (“AICPA”). 8 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued) C. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of measurement made, regardless of the measurement focus applied. The financial statements are presented on the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recorded when susceptible to accrual; i.e., both measurable and available. “Available” means the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. Expenditures are generally recognized under the modified accrual basis of accounting when the related liability is incurred. D. Encumbrances Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated when the commitments are paid. E. Deposits and Investments In accordance with Education Code Sections 15357 and 41001, the Measure A bond building fund maintains its cash in the Santa Clara County Treasury. The county pools these funds with those of other districts in the county and invests the cash. These pooled funds are carried at cost, which approximates market value. Interest earned is deposited quarterly into participating funds. Any investment losses are proportionately shared by all funds in the pool. F. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 expenditures during the reporting period. Actual results could differ from those estimates. 9 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued) G. Budgets and Budgetary Accounting Annual budgets are adopted on a basis consistent with generally accepted accounting principles for all government funds. By state law, the Districtʹs Governing Board must adopt a budget no later than July 1. A public hearing must be conducted to receive comments prior to adoption. The Districtʹs Governing Board satisfied these requirements. These budgets are revised by the Districtʹs Governing Board during the year to give consideration to unanticipated income and expenditures. Formal budgetary integration was employed as a management control device during the year for all budgeted funds. The District employs budget control by minor object and by individual appropriation accounts. Expenditures cannot legally exceed appropriations by major object account. H. Fund Balance Under GASB Statement No. 54, fund balance is divided into five classifications based primarily on the extent to which the District is bound to observe constraints imposed upon the use of the resources in the governmental funds. The fund balance in Measure A – Strong Schools Bond fund is considered restricted. The restricted fund balance classification reflects amounts subject to externally imposed and legally enforceable constraints. Such constraints may be imposed by creditors, grantors, contributors, or laws or regulations of other governments, or may be imposed by law through constitutional provisions or enabling legislation. 10 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 2 – CASH AND INVESTMENTS Summary of Cash and Investments Cash and investments as of June 30, 2016 consist of the following: Cash in county treasury 58,684,871$ Total cash and investments 58,684,871$ Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investments of debt proceeds held by trustees are governed by the provisions of debt agreements rather than the general provisions of the California Government Code. These provisions allow for the acquisition of investment agreements with maturities up to 30 years. Cash in County Treasury – The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District’s investment in the pool is reported in the accounting financial statements at amounts based upon the District’s pro‐rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. 11 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 2 – CASH AND INVESTMENTS (continued) General Authorizations Except for investments by trustees of debt proceeds, the authority to invest District funds deposited with the county treasury is delegated to the County Treasurer and Tax Collector. The table below identifies examples of the investment types permitted in the investment policy: Authorized Investment Type Maximum Remaining Maturity Maximum Percentage of Portfolio Maximum Investment in One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker’s Acceptance 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements 1 year None None Reverse Repurchase Agreements 92 days 20% of base None Medium‐Term Corporate Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass‐Through Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Powers Authority Pools N/A None None Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are described below: 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. The District manages its exposure to interest rate risk by investing in the County Treasury. The District maintains an investment with the Santa Clara County Investment Pool with a fair value of approximately $58,865,099 and an amortized book value of $58,684,871. The weighted average maturity for this pool as of June 30, 2016 is 439 days. 12 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 2 – CASH AND INVESTMENTS (continued) Credit Risk 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. Per County investment policy, the investments within the Santa Clara County Investment Pool are rated A or higher by Moody’s Investors Service. Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer beyond the amount stipulated by the California Government Code. District investments that are greater than 5 percent of total investments are in either an external investment pool or mutual funds and are therefore exempt. Fair Value The District categorizes the fair value measurements of its investments based on the hierarchy established by generally accepted accounting principles. The fair value hierarchy is based on the valuation inputs used to measure an assetʹs fair value. The following provides a summary of the hierarchy used to measure fair value: Level 1 ‐ Quoted prices (unadjusted) in active markets for identical assets. Level 2 ‐ Observable inputs other than Level 1 prices such as quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable, either directly or indirectly. Level 3 ‐ Unobservable inputs should be developed using the best information available under the circumstances, which might include the Districtʹs own data. The District should adjust that data if reasonable available information indicates that other market participants would use different data or certain circumstances specific to the District are not available to other market participants. Uncategorized ‐ Investments in the Santa Clara County Treasury Investment Pool and/or Local Agency Investment Funds/State Investment Pools are not measured using the input levels above because the Districtʹs transactions are based on a stable net asset value per share. All contributions and redemptions are transacted at $1.00 net asset value per share. 13 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 2 – CASH AND INVESTMENTS (continued) Fair Value, continued The Districtʹs fair value measurements at June 30, 2016 were as follows: Uncategorized Investment in county treasury 58,865,099$ Total fair market value of investments 58,865,099$ Fair Market Value of Investments NOTE 3 – ACCOUNTS RECEIVABLE Accounts receivable at June 30, 2016 consisted of the following: Interest earned on investments 76,200$ Other local sources 3,460 Total 79,660$ NOTE 4 – INTERFUND TRANSACTIONS Interfund Receivables/Payables (Due From/Due To) Individual interfund receivable and payable balances at June 30, 2016 were as follows:  Due from Fund 21.5 (Non‐Measure A) to Fund 21.6 (Measure A) for borrowing of cash totaling $41,928  Due from Fund 21.6 (Measure A) to Fund 21.5 (Non‐Measure A) to journal expenditures to Fund 21.6 totaling $43,352. Operating Transfers Interfund transfers for the year ended June 30, 2016 consisted of a transfer from the County School Facilities Fund to Fund 21.2 for state funding received for the Paly Theater totaling $3,000,000. 14 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 5 – ACCRUED LIABILITIES Accrued liabilities of $624,566 at June 30, 2016 consisted of construction related liabilities. NOTE 6 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS As of June 30, 2016, the principal balance outstanding on the District’s Measure A – Strong Schools Bond (“Measure A”) general obligation bonds, including accreted interest to date, was $284,187,220.  On August 27, 2008, Series 2008 bonds of the Measure A bond authorization were issued, which consisted of current interest and capital appreciation bonds with an initial par amount of $119,999,249 with stated interest rates of 2.50% to 5.50% and maturing through August 1, 2033.  On July 13, 2010, Series 2010 of the Measure A bond authorization was issued and was designated as qualified school construction bonds under Section 54F of the Internal Revenue Code of 1986. The bonds were issued with initial par amount of $25,000,000, with stated interest rates of 4.662% to 5.862% and maturing through July 1, 2027.  On March 5, 2013, Series 2013 of the Measure A bond authorization was issued, which consisted of current interest bonds with an initial par amount of $70,000,000 with stated interest rates of 2.00% to 3.50% and maturing through July 1, 2036.  On May 14, 2014, Series 2014 of the Measure A bond authorization was issued, which consisted of current interest bonds with an initial par amount of $40,000,000 with stated interest rates of 2.00% to 3.25% and maturing through August 1, 2033.  On May 10, 2016, Series 2016 of the Measure A bond authorization were issued, which included current interest bonds with an initial par amount of $45,000,000, with stated interest rates of 2.125% to 4.00% and maturing through August 1, 2035. 15 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 6 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS (continued) Series 2008 General Obligation Bond As of June 30, 2016, the principal balance outstanding on the Measure A Series 2008 general obligation bonds, including accreted interest to date, was $141,322,220. The annual requirements to amortize Measure A Series 2008 general obligation bonds payable outstanding as of June 30, 2016, are as follows: Fiscal Year Ended June 30, Principal (including accreted interest to date) Accreted Interest Total 2017 3,637,043$ 477,957$ 4,115,000$ 2018 4,101,143 773,858 4,875,001 2019 4,311,877 1,073,123 5,385,000 2020 4,858,643 1,516,358 6,375,001 2021 4,628,114 1,791,886 6,420,000 2022 ‐ 2026 48,628,440 31,106,559 79,734,999 2027 ‐ 2031 46,638,899 53,926,101 100,565,000 2032 ‐ 2034 24,518,061 42,306,940 66,825,001 Total 141,322,220$ 132,972,782$ 274,295,002$ Series 2010 Qualified School Construction Bonds As of June 30, 2016, the principal balance outstanding on the Measure A Series 2010 qualified school construction bond was $25,000,000. These bonds provide a federal subsidy to the District which significantly decreases overall interest cost. The annual requirements to amortize Measure A Series 2010 general obligation bonds payable outstanding as of June 30, 2016, are as follows: Fiscal Year Ended June 30,Principal Interest Federal Subsidy Interest Payment Total 2017 ‐$ 1,418,755$ (1,332,718)$ 86,037$ 172,074$ 2018 ‐ 1,418,755 (1,332,718) 86,037 172,074 2019 ‐ 1,418,755 (1,332,718) 86,037 172,074 2020 ‐ 1,418,755 (1,332,718) 86,037 172,074 2021 870,000 1,418,755 (1,332,718) 86,037 1,042,074 2022‐2026 11,280,000 6,165,265 (5,738,235) 427,031 12,134,061 2027‐2028 12,850,000 1,165,073 (1,071,263) 93,810 13,037,620 Total 25,000,000$ 14,424,113$ (13,473,088)$ 951,026$ 26,902,051$ 16 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 6 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS (continued) Series 2013 General Obligation Bond As of June 30, 2016, the principal balance outstanding on the Measure A Series 2013 general obligation bonds was $53,050,000. The annual requirements to amortize Measure A Series 2013 general obligation bonds payable outstanding as of June 30, 2016, are as follows: Fiscal Year Ended June 30,Principal Interest Total 2017 1,810,000$ 1,759,288$ 3,569,288$ 2018 1,700,000 1,697,588 3,397,588 2019 1,830,000 1,635,488 3,465,488 2020 1,885,000 1,561,188 3,446,188 2021 1,980,000 1,483,888 3,463,888 2022‐2026 2,000,000 6,861,438 8,861,438 2027‐2031 4,800,000 6,615,983 11,415,983 2032‐2036 26,165,000 4,744,119 30,909,119 2037 10,880,000 190,400 11,070,400 Total 53,050,000$ 26,549,380$ 79,599,380$ Series 2014 General Obligation Bond As of June 30, 2016, the principal balance outstanding on the Measure A Series 2014 general obligation bonds was $19,815,000. The annual requirements to amortize Measure A Series 2014 general obligation bonds payable outstanding as of June 30, 2016, are as follows: Fiscal Year Ended June 30,Principal Interest Total 2017 1,840,000$ 513,950$ 2,353,950$ 2018 1,525,000 463,475 1,988,475 2019 1,620,000 424,400 2,044,400 2020 1,640,000 391,800 2,031,800 2021 1,675,000 354,463 2,029,463 2022‐2026 1,670,000 1,517,325 3,187,325 2027‐2031 4,305,000 1,315,450 5,620,450 2032‐2034 5,540,000 266,038 5,806,038 Total 19,815,000$ 5,246,900$ 25,061,900$ 17 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 6 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS (continued) Series 2016 General Obligation Bond As of June 30, 2016, the principal balance outstanding on the Measure A Series 2016 general obligation bonds was $45,000,000. The annual requirements to amortize Measure A Series 2016 general obligation bonds payable outstanding as of June 30, 2016, are as follows: Fiscal Year Ended June 30,Principal Interest Total 2017 11,000,000$ 748,856$ 11,748,856$ 2018 7,250,000 911,125 8,161,125 2019 6,250,000 713,625 6,963,625 2020 1,000,000 568,625 1,568,625 2021 1,000,000 528,625 1,528,625 2022‐2026 1,000,000 2,363,125 3,363,125 2027‐2031 2,500,000 2,316,563 4,816,563 2032‐2036 15,000,000 1,229,250 16,229,250 Total 45,000,000$ 9,379,794$ 54,379,794$ NOTE 7 – MEASURE A – STRONG SCHOOLS BOND EXPENDITURES BY SITE The following table presents the expenditure amounts by project for the fiscal year ended June 30, 2016: Project Amount Palo Alto High School 28,239,307$ Gunn High School 1,157,660 J.L.S. Middle School 94,527 Duveneck Elementary 62,177 Technology 51,874 Terman Middle School 49,342 Ohlone Elementary 46,865 Fairmeadow Elementary 11,316 Program Management 1,301,251 Planned Maintenance Cost 2,458,018 Other ‐ Bond Issuance Costs 442,713 33,915,050$ 18 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Notes to Financial Statements, continued June 30, 2016 NOTE 8 – COMMITMENTS AND CONTINGENCIES A. Litigation The District is involved in various litigation arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30, 2016. B. Construction Commitments The Measure A ‐ Strong Schools Bond had construction commitments of $118,375 as of June 30, 2016 and related to the Gunn Campus Lighting Project and Palo Alto High School Theater Project. OTHER INDEPENDENT AUDITORS’ REPORTS Corporate Oce: 348 Olive Street San Diego, CA 92103 toll-free: 877.220.7229 tel: 619.270.8222 fax: 619.260.9085 www.christywhite.com Christy White, CPA Michael Ash, CPA Heather Rubio SAN DIEGO LOS ANGELES SAN FRANCISCO/BAY AREA 19 INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Governing Board Members and Measure A Citizens’ Oversight Committee Palo Alto Unified School District Palo Alto, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Measure A ‐ Strong Schools Bond, as of and for the year ended June 30, 2016 and the related notes to the financial statements, which collectively comprise the Measure A ‐ Strong Schools Bond’s basic financial statements, and have issued our report thereon dated October 25, 2016. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Measure A ‐ Strong Schools Bond’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Measure A ‐ Strong Schools Bond’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Measure A ‐ Strong Schools Bond’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entityʹs financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 20 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Measure A ‐ Strong Schools Bondʹs financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entityʹs internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entityʹs internal control and compliance. Accordingly, this communication is not suitable for any other purpose. San Diego, California October 25, 2016 Corporate Oce: 348 Olive Street San Diego, CA 92103 toll-free: 877.220.7229 tel: 619.270.8222 fax: 619.260.9085 www.christywhite.com Christy White, CPA Michael Ash, CPA Heather Rubio SAN DIEGO LOS ANGELES SAN FRANCISCO/BAY AREA 21 INDEPENDENT AUDITORS’ REPORT ON PERFORMANCE Governing Board Members and Measure A Citizens’ Oversight Committee Palo Alto Unified School District Palo Alto, California Report on the Financial Statements We have audited the accompanying financial statements of the Measure A ‐ Strong Schools Bond, as of and for the year ended June 30, 2016 and the related notes to the financial statements, which collectively comprise the Measure A ‐ Strong Schools Bond’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in 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 are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditorʹs judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entityʹs preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entityʹs internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 22 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Objectives In connection with our audit, we also performed an audit of compliance as required in the performance requirements for the Measure A General Obligation Bonds for the fiscal year ended June 30, 2016. The objective of the examination of compliance applicable to the District is to determine with reasonable assurance that:  The proceeds of the sale of the Measure A Bonds were only used for the purposes set forth in the Measure A ballot language and not for any other purpose, such as teacher and administrative salaries.  The Governing Board of the District, in establishing the approved projects set forth in the ballot measure, evaluated the remodeling, new construction and renovations of items which will improve learning and to accommodate growth in the District, with no funds expended on administrator salaries. In performing our audit of compliance, we performed procedures including but not limited to those listed as follows: Internal Control Evaluation Procedures Performed: Inquiries were made of management regarding internal controls to:  Prevent fraud or waste regarding Measure A projects, including budgetary controls  Ensure adequate separation of duties exists in the fiscal services department for Measure A funds  Prevent material misstatements in the financial statements  Ensure expenditures are allocated to the proper fund(s)  To follow applicable regulations, including regulations related to bidding and contract management We then performed substantive tests of financial statement balances to determine whether the controls designed by management were operating effectively, and to provide reasonable assurance that the fiscal year 2015‐16 financial statement balances for the Measure A ‐ Strong Schools Bond are not materially misstated. Results of Procedures Performed: The result of our audit tests show that internal control procedures appear to be working to meet the financial and compliance objectives required by generally accepted accounting standards and applicable laws and regulations. An unmodified opinion was expressed on the financial statements. 23 Facilities Site Walk Procedures Performed: We performed a site walk to verify that Measure A – Strong Schools Bond funds expended for the fiscal year ended June 30, 2016 were for valid facilities acquisition and construction purposes. We toured two District construction sites where 2015‐16 construction work occurred. The sites toured were Gunn High School and Palo Alto High School. Gunn High School The auditor toured Gunn High School to view the painting project. Nearly the entire school had been painted a light brown with a variety of colored trim and door. The color of the trim and doors were selected by the students. Each building had a different colored trim and door which will enable visitors to easily identify particular buildings. This painting project consisted of exterior painting only. It was noted on the site tour that buildings that were not painted included newly constructed buildings as well as the buildings slated for demolition. During the painting project, there was also repair of dry rot. Additional items noted on the site walk at Gunn High School included the motion sensor exterior LED lights and the concrete entry with school emblem at the entrance of the gym. Palo Alto High School The auditor toured both the completed Theater and the in progress Gym projects at Palo Alto High School. During to tour of the Theater, the auditor viewed the performance hall including the seating area, on stage and backstage. The basement of the theater was toured including the elevator and bottom of the orchestra pit. The backstage area was toured including the green screen. It was noted the TV and audio monitoring of the performances that can be viewed from the backstage, front of house, and teacher’s office in the theater. Lastly, the auditor viewed the technical booth for lighting, sound, and stage technicians. The Palo Alto High School Gym was also toured. The auditor viewed the in‐progress construction that consisted of the smaller gym as well as the bigger gym. At present the foundation of the building’s had been poured and a majority of the framing was complete. During the tour, the electrical, plumbing, and insulation were in progress. The auditor toured various rooms including locker rooms, weight rooms, trainer’s room, coaches’ rooms as well as the floor of each gym. This project is expected to be completed in April 2017. Results of Procedures Performed: Results of the site walks indicate that the major 2015‐16 Measure A – Strong Schools Bond construction projects at Gunn High School and Palo Alto High School were successfully completed and closed out, or advanced into 2016‐17 construction phases where applicable. 24 Test of Expenditures Procedures Performed: The following performance tests of expenditures and transfers were performed: 1. We tested expenditures to determine whether Measure A – Strong Schools Bond funds were spent solely on voter and Board approved school facilities projects (as set forth in the District’s Facilities Master Plan and the Measure A ballot measure language). The expenditure test included a sample of 22 payments, of which 20 were vendor payments and salaries for two employees paid throughout the fiscal year, totaling $8.2 million, or approximately 25% of total Measure A expenditures for 2015‐16. 2. We also tested six payments made to various professional service firms contracted by the Measure A – Strong Schools bond program. We obtained the contracts for these firms and ensured that position rates per contract were accurately billed to the District. Results of Procedures Performed: We found all expenditures tested to be in compliance with the terms of the Measure A – Strong Schools Bond ballot measure and applicable state laws and regulations, without exception. Also, our analysis indicated that the District is receiving program management services that are reasonable as compared to other school districts, with regard to billing rates, hours charged, and the ratio of consultants to District employees. Furthermore, it appeared that the District’s site projects were competitive in price with similar projects size and scope to other school construction bond programs included in our benchmarking. 25 Test of Contracts and Bid Procedures Procedures Performed: For the fiscal year ended June 30, 2016, we performed testing of three contracts to determine compliance with District policy and Public Contract Code provisions related to contracting and bidding: Formal Bids  Project: Gunn Exterior Painting Original Contract Award Amount: $275,880 Informal Bids  Project: Pool Light Poles & Sheds at JLS Original Contract Award Amount: $68,915  Project: Exterior Paint Project at Fairmeadow/JLS Original Contract Award Amount: $118,800 Results of Procedures Performed: We found that the contracts tested above for bidding procedures followed proper bidding procedures and were awarded in all cases to the lowest responsible bidder. In addition, we tested two change orders and determined the change orders were executed in accordance with District internal controls and were in compliance with applicable provisions of the Public Contract Code. Contracts tested with change orders included the following projects:  Palo Alto High School – Performing Arts Center  Gunn High School – Miranda Parking & Drop Off Moreover, we noted that the District has been providing the Governing Board with a listing of change orders to contracts that relate to Measure A – Strong Schools Bond projects in fiscal year 2015‐16 and that no Measure A projects have a cumulative change order rate in excess of 10% of contract value. 26 Citizens’ Oversight Committee Procedures Performed: In accordance with AB 1908 (Assembly Bill) and Ed Code Section 15278, the District is required to establish a bond oversight committee for Prop 39 bonds including one active member from each of the following sectors: a business organization, senior citizens organization, bona fide taxpayers association, and one parent/guardian of a child enrolled in the District and one parent/guardian of a child enrolled in the District who is also a member of a parent teacher association. The COC is to meet pursuant to Education Code Section 15280. Results of Procedures Performed: In our review of the minutes of the Citizens’ Oversight Committee for Measure A, we found that there was adequate documentation of meetings held during fiscal year 2015‐16. In addition, the District has submitted annual audit reports during the life of the Measure A – Strong Schools Bond. In our review of the composition of the committee, we noted that the District has the proper members in the COC that fulfill each of the required representations noted above. Our audit of compliance was made for the purposes set forth in the Objectives section of this report and would not necessarily disclose all instances of noncompliance. Opinion In our opinion, based on the fieldwork described above as well as the other tests that we conducted, the District complied with the compliance requirements for the Measure A – Strong Schools Bond as listed and tested above. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on accountability requirements pursuant to the passage of Proposition 39 and the enactment of AB 1908 (Chapter 44, Statutes of 2000). Accordingly, this report is not suitable for any other purpose. San Diego, California October 25, 2016 FINDINGS AND RESPONSES SECTION 27 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Schedule of Findings and Responses For the Fiscal Year Ended June 30, 2016 This section identifies the deficiencies, significant deficiencies, material weaknesses, and instances of noncompliance related to the financial statements that are required to be reported in accordance with Government Auditing Standards. Our tests resulted in no findings and recommendations related to the financial and performance audit of the Measure A – Strong Schools Bond for the fiscal year ended June 30, 2016. 28 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2016 Our tests resulted in no findings and recommendations related to the financial and performance audit of the Measure A – Strong Schools Bond for the fiscal year ended June 30, 2015.