2011 - 2012 Audit Report
MEASURE A – STRONG SCHOOLS BOND OF
PALO ALTO UNIFIED SCHOOL DISTRICT
AUDIT REPORT
For the Fiscal Year Ended
June 30, 2012
MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
AUDIT REPORT
Table of Contents
For the Fiscal Year Ended June 30, 2012
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 ................................................................................................................ 15
Independent Auditors’ Report on Performance .......................................................................................... 17
FINDINGS AND RESPONSES SECTION
Schedule of Findings and Responses ............................................................................................................ 22
Summary Schedule of Prior Audit Findings ................................................................................................ 23
1
MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Introduction and Citizens’ Oversight Committee Member Listing
June 30, 2012
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. For Measure A, the District has elected to
conform to the requirements of low bid construction delivery, as opposed to an alternate model such as
lease‐leaseback. In doing so, the District has likely increased the degree of the program’s cost
accountability.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Introduction and Citizens’ Oversight Committee Member Listing, continued
June 30, 2012
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, 2012:
Name Title Representation
Todd Collins
Mary Marth
Bruce Whitson
Ray Bacchetti
Scott Darling
Catherine Garber
Gary W. Hornbeek
Chair
Vice Chair
Member
Member
Member
Member
Member
Taxpayers’ Organization
Parent
Parent
Senior Citizensʹ Organization
At‐Large Member
Business Organization
Parent & PTA Organization
3
INDEPENDENT AUDITORS’ REPORT
Governing Board Members and
Measure A Citizens’ Oversight Committee
Palo Alto Unified School District
Palo Alto, California
We have audited the accompanying balance sheet of the Measure A – Strong Schools Bond
of Palo Alto Unified School District (the “District”) as of June 30, 2012, and the related
statement of revenues, expenditures and changes in fund balance for the fiscal year ended
June 30, 2012. These financial statements are the responsibility of the District’s management.
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 of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
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 our opinion.
As discussed in Note 1A, the financial statements present only the individual Measure A –
Strong Schools Bond (“Measure A”), consisting of the net construction proceeds of Measure
A Series 2008 and Series 2010 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.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Measure A – Strong Schools Bond of Palo Alto Unified
School District as of June 30, 2012, and the results of its operations for the fiscal year ended
June 30, 2012, in conformity with accounting principles generally accepted in the United
States of America.
4
In accordance with Government Auditing Standards, we have also issued our report dated August 30, 2012,
on our consideration of Palo Alto Unified School District’s internal control over financial reporting and
our tests of its compliance with certain provisions of laws, regulations, contracts, grants agreements and
other matters. The purpose of that report is to describe the scope of our testing of internal controls over
financial reporting and compliance and the results of that testing, and not to provide an opinion on the
internal control over financial reporting or on compliance. That report is an integral part of an audit
performed in accordance with Government Auditing Standards and should be considered in assessing the
results of our audit.
San Diego, California
August 30, 2012
FINANCIAL SECTION
The accompanying notes to financial statements are an integral part of this statement.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Balance Sheet
June 30, 2012
ASSETS
Cash in county treasury 60,257,661$
Accounts receivable 171,797
Total Assets 60,429,458$
LIABILITIES AND FUND BALANCE
Liabilities
Accounts payable 8,104,348$
Total Liabilities 8,104,348
Fund Balance
Restricted for capital projects 52,325,110
Total Liabilities and Fund Balance 60,429,458$
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, 2012
REVENUES
Interest income 624,659$
Total Revenues 624,659
EXPENDITURES
Facilities acquisition and construction 57,867,264
Total Expenditures 57,867,264
Excess (Deficiency) of Revenues
Over (Under) Expenditures (57,242,605)
Net Change in Fund Balance (57,242,605)
Fund Balance, July 1, 2011 109,567,715
Fund Balance, June 30, 2012 52,325,110$
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements
June 30, 2012
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 and Series 2010 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”).
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
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 District maintains a portion of
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.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
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.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
NOTE 2 – CASH AND INVESTMENTS
Summary of Cash and Investments
Cash and investments as of June 30, 2012 are classified in the accompanying financial statements as cash
in county treasury for $60,257,661.
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.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
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 $60,487,243 and an amortized book value of
$60,257,661. The weighted average maturity for this pool as of June 30, 2012 is 472 days.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
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.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable of $171,797 as of June 30, 2012 consisted of interest earned on the District’s
investment in the County Treasury.
NOTE 4 – CONSTRUCTION COMMITMENTS
The Measure A ‐ Strong Schools Bond had construction commitments of $52,894,876 as of June 30, 2012.
NOTE 5 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS
As of June 30, 2012, the principal balance outstanding on the District’s Measure A – Strong Schools Bond
(“Measure A”) general obligation bonds, including accreted interest to date, was $163,384,087.
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.
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
NOTE 5 – MEASURE A – STRONG SCHOOLS BOND GENERAL OBLIGATION BONDS (continued)
Series 2008 General Obligation Bond
As of June 30, 2012, the principal balance outstanding on the Measure A Series 2008 general obligation
bonds, including accreted interest to date, was $138,384,087. The annual requirements to amortize
Measure A Series 2008 general obligation bonds payable outstanding as of June 30, 2012, are as follows:
Fiscal Year
Ended June 30,
Principal (including
accreted interest to
date)
Future Accreted
Interest
Current Interest to
Maturity Total
2013 2,825,000$ ‐$ 219,400$ 3,044,400$
2014 2,350,000 ‐ 148,775 2,498,775
2015 2,805,000 ‐ 84,150 2,889,150
2016 3,003,298 566,702 ‐ 3,570,000
2017 3,294,963 820,037 ‐ 4,115,000
2018‐2022 20,914,802 9,735,199 ‐ 30,650,001
2023‐2027 48,144,518 42,885,483 ‐ 91,030,001
2028‐2032 40,686,928 62,988,073 ‐ 103,675,001
2033‐2034 14,359,578 30,465,422 ‐ 44,825,000
Total 138,384,087$ 147,460,916$ 452,325$ 286,297,328$
Series 2010 Qualified School Construction Bonds
As of June 30, 2012, the principal balance outstanding on the Measure A Series 2010 qualified school
construction bond was $25,000,000. These bonds provide a federal subsidy to the District which
significantly decreases overall interest cost. The annual requirements to amortize Measure A Series 2010
general obligation bonds payable outstanding as of June 30, 2012, are as follows:
Fiscal Year
Ended June 30, Principal Interest Federal Subsidy Interest Payment Total
2013 ‐$ 1,418,755$ (1,332,718)$ 86,037$ 86,037$
2014 ‐ 1,418,755 (1,332,718) 86,037 86,037
2015 ‐ 1,418,755 (1,332,718) 86,037 86,037
2016 ‐ 1,418,755 (1,332,718) 86,037 86,037
2017 ‐ 1,418,755 (1,332,718) 86,037 86,037
2018‐2022 1,915,000 7,053,216 (6,623,031) 430,185 2,345,185
2023‐2027 16,060,000 5,540,337 (5,138,691) 401,646 16,461,646
2028 7,025,000 411,806 (378,648) 33,158 7,058,158
Total 25,000,000$ 20,099,134$ (18,803,961)$ 1,295,173$ 26,295,173$
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Notes to Financial Statements, continued
June 30, 2012
NOTE 6 – MEASURE A – STRONG SCHOOLS BOND EXPENDITURES BY PROJECT
The following table presents the expenditure amounts by project for the fiscal year ended June 30, 2012:
Project Amount
Duveneck Elementary School 566,683$
Fairmeadow Elementary School 2,019,504
Ohlone Elementary School 4,094,477
Other elementary schools 3,325
J.L.S. Middle School 988,352
Jordan Middle School 5,378,079
Terman Middle School 4,159,996
Gunn High School 14,075,842
Palo Alto High School 13,709,547
525 San Antonio Road 8,500,000
Technology 2,987,333
Program administration ‐ District 1,384,126
Total 57,867,264$
OTHER INDEPENDENT
AUDITORS’ REPORTS
15
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 the financial statements of the Measure A – Strong Schools Bond of Palo
Alto Unified School District as of and for the fiscal year ended June 30, 2012, and have
issued our report thereon dated August 30, 2012. 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.
Internal Control Over Financial Reporting
Management of Palo Alto Unified School District is responsible for establishing and
maintaining effective internal control over financial reporting. In planning and performing
our audit, we considered Palo Alto Unified School District’s internal control over financial
reporting as a basis for designing our auditing procedures for the purpose of expressing
our opinion on the financial statements, but not for the purpose of expressing an opinion on
the effectiveness of the Palo Alto Unified School District’s internal control over financial
reporting. Accordingly, we do not express an opinion on the effectiveness of the Palo Alto
Unified School District’s internal control over financial reporting.
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 entity’s financial statements will
not be prevented, or detected and corrected on a timely basis.
Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section and would not necessarily identify all
deficiencies in internal control that might be deficiencies, significant deficiencies or material
weaknesses. We did not identify any deficiencies in internal control over financial
reporting that we consider to be material weaknesses, as defined above.
16
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Measure A – Strong Schools Bond of Palo
Alto Unified School District’s 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.
This report is intended solely for the information and use of the District’s Governing Board, the Measure
A – Strong Schools Bond Citizens’ Oversight Committee, management, others within the entity, and the
taxpayers of Palo Alto Unified School District and is not intended to be and should not be used by anyone
other than these specified parties.
San Diego, California
August 30, 2012
17
INDEPENDENT AUDITORS’ REPORT ON PERFORMANCE
Governing Board Members and
Measure A Citizens’ Oversight Committee
Palo Alto Unified School District
Palo Alto, California
We have audited the financial statements of the Measure A – Strong Schools Bond of the
Palo Alto Unified School District (the “District”) as of and for the fiscal year ended June 30,
2012 and have issued our report thereon dated August 30, 2012. Our audit was made in
accordance with generally accepted auditing standards in the United States of America and,
accordingly, included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.
In connection with our performance audit, we performed an audit for compliance as
required in the performance requirements for the Measure A – Strong Schools Bond
(“Measure A”) for the fiscal year ended June 30, 2012. The objective of the audit of
compliance applicable to the District is to determine with reasonable assurance that:
The proceeds from the sale of the Measure A – Strong Schools Bonds were only used
for the purposes set forth in the ballot measure 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.
18
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, waste, or abuse regarding Measure A resources
Ensure adequate separation of duties exists in the accounting for Measure A funds
Prevent material misstatements in the Measure A financial statements
Ensure expenditures are allocated to the proper District fund
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 2011‐12 financial statement balances for the Measure A – Strong Schools Bond are not materially
misstated.
Results of Procedures Performed:
The results of our audits 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 unqualified opinion was expressed on the Measure A – Strong Schools Bond
financial statements.
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, 2012 were for valid facilities acquisition and construction purposes. We toured eight
District construction sites where 2011‐12 construction work occurred: Gunn High School; Palo Alto High
School; Jordan Middle School; J.L.S. Middle School; Terman Middle School; Duveneck Elementary School;
Fairmeadow Elementary School and Ohlone Elementary School. We also visited the site at 525 San
Antonio Road that was purchased by Measure A in 2011‐12.
Results of Procedures Performed:
Results of the site walks indicate that the major 2011‐12 Measure A construction projects were
successfully completed and advanced into 2012‐13 expenditure/construction phases where applicable.
19
Tests of Expenditures
Procedures Performed:
The following performance tests of expenditures 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 71 payments, of which 61 were vendor payments and 10 were payroll
payments, totaling $18.6 million, or approximately 32% of total Measure A expenditures for 2011‐
12.
2. We also tested payments made to 6 professional service firms. We obtained the contracts for
these firms and ensured that position rates per contract were accurately billed to the District. In
addition, for program management, we analyzed the billing rates and hours charged as
compared to other school districts’ program management agreements.
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.
Test of Contracts and Bid Procedures
Procedures Performed:
For the fiscal year ended June 30, 2012, we performed testing of nine contracts to determine compliance
with District policy and Public Contract Code provisions related to contracting and bidding:
Formal Bids
Project: Palo Alto High School New Classroom and Media Arts Center
Original Contract Award Amount: $25,150,000
Project: Gunn High School New Classroom Buildings A and B
Original Contract Award Amount: $17,632,000
Project: Jordan Middle School Modernization and New Construction
Original Contract Award Amount: $13,987,000
Project: Terman Middle School Modernization and New Construction
Original Contract Award Amount: $9,299,000
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Test of Contracts and Bid Procedures (continued)
Procedures Performed: (continued)
Formal Bids (continued)
Project: Gunn High School New Gymnasium
Original Contract Award Amount: $8,347,000
Project: Ohlone Elementary School Modernization and New Construction
Original Contract Award Amount: $7,484,000
Project: Palo Alto High School Haymarket Boiler Replacement
Original Contract Award Amount: $392,000
Project: Jordan Middle School Modulars 2011
Original Contract Award Amount: $153,284
Informal Bids
Project: Palo Alto High School Football Stadium Modular Relocation
Original Contract Award Amount: $77,620
Results of Procedures Performed:
We found that the contracts tested above followed proper bidding procedures and were awarded in all
cases to the lowest responsible bidder. In addition, we tested 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: J.L.S Middle School Modernization and New Construction, Jordan Middle School
Modernization and New Construction, Terman Middle School Modernization and New Construction,
Gunn High School New Gymnasium, Gunn High School New Classroom Buildings A and B, Ohlone
Elementary School Modernization and New Construction and Air Conditioning of Existing Classrooms.
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 2011‐12 and that
no Measure A projects have a cumulative change order rate in excess of 10% of contract value.
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Our audit of compliance made for the purposes set forth in the second and third paragraphs of this report
above would not necessarily disclose all instances of noncompliance.
In our opinion, the District complied, in all material respects, with the compliance requirements for the
Measure A – Strong Schools Bond, for the fiscal year ended June 30, 2012, as listed and tested above.
This report is intended solely for the information and use of the District’s Governing Board, the Measure
A – Strong Schools Bond Citizens’ Oversight Committee, management, others within the entity, and the
taxpayers of Palo Alto Unified School District and is not intended to be and should not be used by anyone
other than these specified parties.
San Diego, California
August 30, 2012
FINDINGS AND RESPONSES SECTION
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MEASURE A – STRONG SCHOOLS BOND
PALO ALTO UNIFIED SCHOOL DISTRICT
Schedule of Findings and Responses
For the Fiscal Year Ended June 30, 2012
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.
We found Palo Alto Unified School District’s accounting systems to be functioning efficiently and
effectively to account for the Measure A – Strong Schools Bond. In addition, 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, 2012.
23 MEASURE A – STRONG SCHOOLS BOND PALO ALTO UNIFIED SCHOOL DISTRICT Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2012 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, 2011.