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HomeMy WebLinkAbout2000-03-20 City Council (23)TO: City of Palo Alto C ty Manager’s Report HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:MARCH 20, 2000 CMR:156:00 SUBJECT:APPROVAL OF PUBLIC IMPROVEMENT FINANCIAL STATEMENTS CORPORATION REPORT IN BRIEF On July 13, 1998 Council adopted a resolution establishing itself as the Board of Directors of the Palo Alto Public Improvement Corporation (PIC). The PIC is a nonprofit corporation that allows the City to issue Certificates of Participation (COPs) to fund capital improvements. Currently, the City has two COP bond issues: one for Golf Course improvements and refinancing and one for Civic Center capital work and refinancing. The Board of Directors of the Corporation is required to meet at least annually and approve the financial statements for the Corporation. CMR: 156:00 Page 1 of 3 RECOMMENDATION Staff recommends that the Board of Directors of the Public Improvement Corporation approve the 1998-1999 Financial Statements for the Public Improvement Corporation. BACKGROUND In 1983 and 1998 the City of Palo Alto issued COPs to fund improvements to the Civic Center and the Golf Course, respectively. COPs are a unique form of financing public improvements. Technically, investors who purchase COP’s buy a share of a stream of future lease payments. Investors purchase the certificates, thereby providing the City with funds in exchange for future lease or principal and interest payments. COPs are not considered a debt of the City, and are therefore exempt from the California Constitution’s voter requirements, although they are regulated securities. To utilize COPs, cities must establish a nonprofit corporation, such as the Public Improvement Corporation. Once the corporation is formed, the City enters into a formal arrangement whereby the City agrees to lease back a facility from the corporation and make annual payments through a Trustee to investors. In order to fund the recent Golf Course improvements, the City issued COPs. At the same time the Council approved issuing COPs, it approved a resolution that amended the bylaws of the existing Public Improvement Corporation to establish itself as the Board of Directors (CMR:296:98). The previous Board of Directors consisted of former City Council members. This change was implemented to reduce administrative work, expedite the financing process, and provide flexibility in future, similar financings. Other local governments throughout - California have a similar structure whereby the Council acts as the Board of Directors. DISCUSSION The City Council is required to meet annually as the Board of the PIC. This meeting is optimally be held in conjunction with a regularly scheduled Council meeting. Once the Council adjourns, it opens a new meeting as the Board of the PIC to transact business such as the approval of minutes and reviewing financial statements. If it so chooses, the Council could adjourn the Board meeting and reconvene for Council business. The Board has no substantive oversight responsibilities, as it assigns all rights to receive lease payments over to the Trustee (U.S. Bank Trust) for the benefit of the investors. The attached financial statements show the financial condition of the Palo Alto Public Improvement Corporation. All debt service payments have been made on time and all financial requirements, such as the maintenance of reserves, have been met. At year-end, June 30, 1999, total outstanding debt (principal and interest) on the COPs equaled $18.08 million. Debt service payments on the Civic Center will be retired in 2011-2012 and on the Golf Course in 2017-2018. CMR: 156:00 Page 2 of 3 RESOURCE IMPACT Approval of the Public Improvement Corporation’s resource impact. financial statements will have no POLICY IMPLICATIONS Approval of the Public Improvement Corporation’s financial statements is consistent with prior Council policy direction and resolutions. ENVIRONMENTALREVIEW This is not a project under the California Environmental Quality Act (CEQA). ATTACHMENTS Attachment A:City of Palo Alto Public Improvement Corporation Financial. Statements for the Years Ended June 30, 1999 and 1998 PREPARED BY:Joe Saccio, Manager of Investments and Debt APPROVED BY: CITY MANAGER APPROVAL: CMR:156:00 Page 3 of 3 ATTACHMENT A CITY OF PALO ALTO PUBLIC IMPROVEMENT CORPORATION FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 CITY OF PALO ALTO PUBLIC IMPROVEMENT CORPORATION FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 Table of Contents Independent Auditor’s Report ...................................................................................................................1 Component Unit Financial Statements: Combined Balance Sheets ...............................................................: ..........................................................2 Combined Statemems of Revenues, Expenditures and Changes in Fund Balances Debt Service Fund .............................................................................................................................3 Notes to Financial Statements .....................................................................................................................4 AAZE &SS 0 CIA TES ACCOUNTANCY CORPORATION 1670 Riviera Avenue. Suite 100 Walnut Creek, California 94596 (925) 930-0902 ¯ FAX (925) 930-0135 INDEPENDENT AUDITOR’S REPORT The Honorable Mayor and Members of the City Council of the City of Palo Alto, California We have audited the accompanying component unit financial statements of the Palo Alto Public Improvement Corporation, a component unit of the City of Palo Alto, as of and for the years ended June 30, 1999 mad 1998 as listed in the Table of Contents. These financial statements are the responsibility of the City’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence suppol"ting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and sigaaificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the financial statements referred to above present only the Corporation and are not intended to present fairly the financial position of the City and the results of its operations and the cash flows of i.ts proprietary fund types in conformity with generally accepted accounting principles. As discussed in Note 5 to the financial statements, the City has assessed the impact of the Y2K issue on its operations and is now in the process of renovating or replacing, as necessary, the computer applications and business processes to provide for continued services in the new mille~mium. An assessment of the preparedness of external entities that interface with the City. is also ongoing. There can be no assurance that there will not be material adverse effect on the City if its actions and/or those of related third palsies fail to address all significant issues in a timely mariner. In our opinion, the financial statements refen’ed to above present fairly in all material respects the financial position of the Palo Alto Public Improvement Corporation as of June 30. 1999 and 1998. and the results of its operations for the years then ended, in conformity with generally accepted accounting principles. October 1, 1999 A Professional Corporation PALO ALTO PUBLIC IM:PROVEMENT CORPORATION COMBINED BALANCE SHEETS ALL FUND TYPES AND ACCOUNT GROUP JUNE 30, 1999 WITH COMPARATIVE AMOUNTS FOR .rUNE 30, 1998 ASSETS Casll aM investments held by trustee (Note 3) Interest receivable Investment in lease to City of Palo Alto (Note 4) Amount available in debt service fund Amount to be provided for retirement of general long teen debt Total Assets GO VER_NMENTAL AC COUNT FUND TYPE GROUP Capital General Debt Service Projects Long Term Debt $1,578,205 $638,970 18,I75 2,192 12,480,000 $14,076,380 $641,162 $1,596,380 10,883,620 $12,480,000 LIABILITI:ES Deferred revenue 1992 Certificates of Participation (Note 4) 1998 Certilicates of Participation (Note 4) Total Liabilities FUND BALANCES $12,480,000 12,480,000 $4,730,000 7,750,000 TOTALS (Memorandum Only) 1999 1998 Reserved for: Debt service Capital projects Encumbrances Umeserved~ designated for: Um’ealized gain on investments 1,596,380 $171,588 469,574 Total Fund Balances Total Liabilities and Fund Equit3~ 1,596,380 641,162 $14,076,380 $~41 162 $2,217,175 $793,521 20,367 t8,022 12,480,000 5,215,000 1,59~,380 811,543 10,883~620 4,403 457 $27,197,542 $11,241,543 $12,480,000 $5,215,000 4,730,000 5,215,000 7,750,000 12,480,000 24,960,000 10430,000 $12,480,000 See accompany~ag notes to ~inaacial statements 1,596,380 171,588 4~9,574 810,118 !,425 2,237,542 811,543 $27,197,542 $11,241 543 PALO ALTO PUBLIC IMPROVEMENT CORPORATION COM]3INED STATEMENTS OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUND TYPES FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND 1998 REVENUES Lease receipts from City of Palo Alto: Principal Interest Interest from cash and investments Total Revenues EXPENDITURES Debt service: Principal repayment Interest and fiscal agent charges Capital projects Total Expenditnres EXCESS OF REVENUES OVER .(UNDER) EXPENDITURES OTHER FINANCING SOURCES AND (USES) Proceeds from long term debt (Note 4) Payment to Golf Course Corporation (Note 4) Total Other Financing Sources (Uses) EXCESS OF REVENUES AND OTHER FINANCING SOURCES (USES) OVER(UNDER) EXPENDITURES Ftmd balances at beginning of year Fund balances at end of year Debt Service Capital Projects $485,000 508,494 74,787 1,068,281 $109,027 109.027 485,000 701,407 1,186,407 5.842,276 5,842,276 (118,127)(5,733,249) Totals 1999 1998 $485,000 $460,000 508,494 333,526 183,814 48,253 1,177,308 841,779 485,000 460,000, 701,407 356,445 5,842,276 7.028,683 816.445 (5,851,376) " 25,334 1,375,589 6,374,411 7,750,000 (472,625)(472,625) 902,964 6.374,411 7,277,375 784,837 641,162 811,543 $1.596.380 $641.162 See accompanying no~sto financialst~ements 1,425.999 25,334 811.543 786.209 $2,237.542 $811.543 CITY OF PALO ALTO PUBLIC IXVIPROVEMENT CORPORATION Notes to Financial Statements NOTE A. NOTE A. 1 - DESCRIPTION OF REPORTING ENTITY General Description The Palo Alto Public Improvement Corporation (the Corporation) was incorporated in- September 1983 under the General Nonprofit Corporation Law of the State of California to acquire, construct and lease capital improvement projects. The Corporation is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. The Corporation provides financing of public capital improvements for the City through the issuance of Certificates of Participation (COPs), a form of debt which allows investors to participate in a stream of future lease payments. Proceeds from the COPs are used to construct projects which are leased to the City for lease payments which are sufficient in timing and amount to meet the debt service requirements of the COPs. The Corporation is an integral part of the City of Palo Alto. It primarily services the City and its governing body is composed of the City Council. Therefore, the financial data of the Corporation has also been included as a blended component unit within the City’s comprehensive annual financial report for the year ended June 30, 1999. 2- SIGNIFICANT ACCOUNTING POLICIES [ Fund Accounting In oi:der to ensure proper identification of individual revenue sources and the expenditures made fi’om those revenues the accounts of the Corporation are organized on the basis of individual funds mad account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self balancing accounts that~ comprise its assets, liabilities, fund equity, revenues and expenditures. The Corporation resources are accounted for in these individual funds based on the purposes for which they are to be spent and the means by which spending activities are controlled. In the financial statements, these funds are grouped into the governmental fund types below: Debt Service Funds - These funds are used to account for the accumulation of financial resources for the payment of general long-term debt principal, interest, and related costs. As with all governmental funds, debt service funds are accounted for on a spending or financial flow measurement focus which means that current assets and current liabilities are generally included on its balance sheet. The repot"ted fund balance represents net current assets, which is considered only to be a measure of m,ailabIe spendable resources. Governmental fund operating statements present a summary of sources and uses of ca,ailable spendable resources during a period by presenting increases and decreases in net current assets. CITY OF PALO ALTO PUBLIC IMPROVEMENT CORPORATION Notes to Financial Statements NOTE ,, C. Do 2- SIGNIFICANT ACCOUNTING POLICI~ES (Continued) General Long-Term Debt Account Groups are used to account for long-term obligations of the Corporation. Because of their spending measurement focus, governmental funds exclude fixed assets and noncurrent liabilities. Instead, these assets and liabilities are reported in the-General Fixed Assets Account Group and the General Long-Term Debt Account Group. These account groups measure only financial position; they are not funds and they do not measure results of operations. They maintain accounting control over governmental fund fixed assets and long-term debt. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. All governmental funds are accounted for using the modified accrual basis of accounting. These fund revenues are recognized when they become measurable and available as net current assets. Measurable means the amount of the transaction can be determined and available means the amount is collectible within the current period or soon enough thereafter (generally sixty days) to be used to pay liabilities of the current period. Amounts which could not be measured or were not available were not accrued as revenue in the current fiscal year. Expenditures are also generally recognized under the modified accrual basis of-accounting. An exception to this rule is principal and interest on general long-term debt, which is not recognized by debt service funds until it is due. Investment in Lease to City of Palo Alto and Deferred Revenue Investment in lease to City of Palo Alto and deferred revenue reflect the present value of remaining future lease payments. Since lease paylnents are not available to fund cun’ent operations, the Investment in Lease to City of Palo Alto has been offset by deferred revenue. As lease revenues are received, both the investment and deferred revenue balances are reduced. "Totals ~emorandum Only)" Columns on the accompanying financial statements captioned "Totals (Melnorandum Only)" do not present consolidated financial information. They are not necessary for a fair presentation of the" financial statements, but are presented only to facilitate additional financial analysis. CITY OF PALO ALTO PIYBLIC I1V[PROVEMENT CORPORATION Notes to Financial Statements NOTE 3 - CASH AND INVESTMENTS I-IELD BY TRUSTEE A Trustee under the provisions of the Corporation’s COP issues holds and invests all the Corporation’s cash. The Corporation’s investments are categorized below to give an indication- of the level of credit risk assumed by the Corporation at June 30, 1999. Category 1 includes investments that are insured or registered or for which the securities a~e held by the Corporation or its agent in the Corporation’s name. Category 2 includes uninsured and unregistered investments for which the securities are held by the counterpa~-ty’s trust department or agent in the Corporation’s name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty, or are held by the counterparty’s trust department or agent but not in the Corporation’s name. Pooled investments are not categorized because of their pooled, rather than individual, nature. At June 30, 1999 the Corporation’s investments were recorded at market value and comprised the following: Category 2 Investments: U.S. Agency obligations Pooled Investments (non Categorized): California Arbitrage Management Program Mutual funds 1999 $755,175 738,564 723,436 1998 $760,800 32,721 Total cash and investments held by trustee $2,217,175 $793,52t No The Trustee is only permitted to invest in US Agency securities, US dollar denominated deposit accounts, federal funds, banker’s acceptances, mutual funds, money market accounts, pre-funded municipal obligations, written repurchase agreement, and the California Arbitrage Management Program. Investments are purchased and held in the name of the Trustee on behalf of the Corporation and are held to maturity to match with payments required under the COP issue. Investments Carrying Value The Corporation’s investments are carried at fair value instead of cost, as required by generally accepted accounting principles. The Corporation adjusts the carrying value of its investments to reflect their fair value at each fiscal year end, and it includes the effects of these adjustments in income for that fiscal year. CITY OF PALO ALTO PUBLIC IMPROVEMENT CORPORATION Notes to Financial Statements INOTE 4 -INVESTMENT IN LEASE AND CERTIFICATES OF PARTICIPATION In 1992, the Corporation issued $7,670,000 principal amount of 1992 Civic Center Project Certificates of Participation (Civic Center COPs) to refinance 1983 Project Costs consisting of the assembly of a third elevator and seismic restructuring of the Civic Center and to finance additional improvements consisting of the structural retrofitting of the police headquarters and a portion of the Civic Center for sprinkler system fire prevention facilities. These improvements have been pledged as collateral under a lease agreement with the City which provides lease payments to be used to pay deb~ service on the Civic Center COPs. Upon retirement of the Civic Center COPs and related interest, the lease agreement terminates and title to the improvements reverts to the City. The Civic Center COPs bear interest at 3.6% to 6.7% and are due serially each March 1 until 2003. Interest payments are due semi-annually on March 1 and September 1. A $1,345,000 6.5% term bond will be due March 1, 2005, and a second 6.7% term bond in the mnount of $1,130,000 will be due March 1, 2012. The Civic Center COPs maturing on or after March 1, 2001 may be prepaid on any payment date beginning March 1, 2001 at par plus 2%. The prepayment price decreases one percent each year until March 1, 2003, at which time the bonds may be prepaid at par. In August 1998, the Corporation issued the Golf Course Capital Improvements and Refinancing Project Certificates of Participation, Series 1998 in the amount of $7,750,000 to refund the 1978 Golf Course Lease Revenue Bonds issued by the City through the Palo Alto Golf Course Corporation, and to finance various improvements at the Palo Alto Public Golf Course, including upgrading five fairways and various traps, trees and greens, constructing new storm drain facilities, replacing the existing irrigation system, upgrading the driving range, and installing new cart paths. Under the terms of the 1998 COPs, the Corporation transferred $472,625 to an agent for the Golf Course Corporation which used the funds to retire 1978 Bonds. The COPs are payable and secured by lease revenues received by the Public Improvement Corporation from a.ny City General Fund revenue source. Principal and interest are payable semi- annually each March 1 and September 1 beginning in 1999. ¯ CITY OF PALO ALTO PUBLIC I1VIPROVEMENT CORPORATION Notes to Financial Statements I NOTE 4 -]2NVESTMENT IN LEASE AND CERTIFICATES OF PARTICIPATION (Continued) ] Future ann~al debt service on the COPs is expected to be provided by the lease receipts discussed above, and equaled the following: For the Year Ended June 30:Amount 2000 $1,500,271 2001 1,525,271 2002 1,521,146 2003 1,518,996 2004 1,366,751 Thereat~er 10,648,680 Total debt service 18,081,115 Less amount representing interest 5,601,115 Principal $12,480,000 _NOTE The Bond documents requires a Trustee to hold a portion of proceeds in a reserve fund for debt service purposes only. At June 30, 1999, the Trustee held $1,578,205 reserved, as discussed in Note 3. 5 - YEAR 2000 CO1VIPLIANCE ] Like other entities around the world, the City of Palo Alto could be adversely affected if the computer systems it uses and those used by significant vendors, etc., do not properly process and calculate date-related information and data. This is commonly known as the "Year 2000 Issue." The City conducted a study of its computer systems to evaluate the Year 2000 viability of the various systerns and to determine which might need to be replaced or modified. As a result of this study and further evaluation, the City has determined which systems are to be replaced or modified and this work is in process. Testing and validation of the systems is expected to be completed on time. The City has made inquires of its significant vendors, the majority of whom have indicated they do not expect to experience any interruption of operations. Because of the unprecedented nature of the Year 2000 issue, its effects and the success of related remediation efforts will not be fully determinable until the year 2000 and thereafter. Management cannot assure that the City is or will be fully Year 2000 ready, that the Cit?"s remediation efforts will be successful in whole or in part, or that parties with whom the City does business with will be Year 2000 ready.