Loading...
HomeMy WebLinkAboutStaff Report 2301-07516.Approval of Fiscal Year 2022 Palo Alto Public Improvement Corporation's Annual Financial Statement (6:50 – 7:00 PM) 1 4 9 8 PALO ALTO PUBLIC IMPROVEMENT CORPORATION STAFF REPORT From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: February 6, 2023 TITLE Approval of Fiscal Year 2022 Palo Alto Public Improvement Corporation's Annual Financial Statement RECOMMENDATION Staff recommends that the Board of Directors of the Palo Alto Public Improvement Corporation (PIC) approve the Fiscal Year (FY) 2022 Annual Financial Report for the Palo Alto Public Improvement Corporation. BACKGROUND The PIC is a nonprofit corporation formed by the City in 1983, allowing the City to issue Certificates of Participation (COPs) to fund capital improvements. The PIC, through a lease structure, finances the acquisition, improvement, and construction of City facilities. The PIC uses the lease payments by the City’s General Fund to pay the debt service on the COPs. On July 13, 1998, Council adopted a resolution establishing itself as the Board of Directors of the PIC. The bylaws of the PIC require the Board of Directors of the Corporation to meet at least annually and approve the annual financial report for the Corporation. Therefore, the City Council is required to meet annually as the Board of the PIC. In 1983 and 1998, the City of Palo Alto issued COPs to fund improvements to the Civic Center and the Golf Course, respectively. In 2002, the Civic Center bonds were refinanced due to a lower interest rate environment and COPs were issued to finance the construction of commercial space adjacent to the new parking structure on Bryant/Florence Street. These bonds (referred to as the Downtown Parking Improvement bonds or 2002B COP) were used to build a two story above-ground structure of approximately 7,638 square feet at 445 Bryant Street, which was previously leased to a commercial tenant (Form Fitness Gym). The space is currently vacant. In fiscal year 2018, the City issued the 2018 Capital Improvement Project and Refinancing COPs in the amount of $9 million to refinance the 2002B COPs ($0.6 million) and to finance renovations for the Palo Alto Municipal Golf Course ($8.4 million). Fire Station 1 was used as 1 4 9 8 the leased property and collateral for these COPs since it had a market value closer to the COPs issuance amount. The net present value savings of $0.2 million or 6.47 percent on the 2002B refunded bonds and the Civic Center was substituted for Fire Station 1 as the leased property/collateral. This provided flexibility to leverage the high value of the Civic Center to finance the 2021 Public Safety building COPs. In fiscal year 2019, the City issued the California Avenue Parking Garage Tax-exempt Series A ($26.8 million plus $4.9 million premium) and Taxable Series B ($10.6 million) COPs. These bonds were issued to fund the construction of the new California Avenue parking garage. Rinconada Library was used as collateral during the garage construction and, upon completion of the garage, the newly build California Avenue Parking garage became the leased property/collateral for these COPs. To preserve greater operational flexibility to use this garage facility over the life of the bonds (e.g. lease portion of the garage for private parking or other commercial use), a portion of the bonds were issued as taxable bonds. In fiscal year 2021, the City issued the 2021 Public Safety Building tax-exempt COPs ($101.5 million plus $6.5 million premium) for the construction of the City’s new public safety building. The debt service is payable solely from and secured by the lease payments to be made by the City’s General Fund to the Public Improvement Corporation pursuant to the Lease Agreement. Civic Center was used as collateral during the building construction and, upon completion of the building, the newly build Public Safety Building will become the leased property/collateral for these COPs. The reserve account requirement was waived on all the outstanding COPs due to the City being a highly rated bond issuer. This resulted in additional bonds issuance amount and the related interest savings. ANALYSIS The attached financial statement shows the financial condition of the PIC. The debt service payments have been made on time and all financial requirements have been met. At year-end, June 30, 2022, total outstanding debt principal on the COPs equaled $145.6 million as follows: COPs Description Principal Outstanding (millions) Fiscal Year Debt will be Retired 2018 Capital Improvement (2002B Refinance and Golf Course) $ 8.4 2048 2019 California Ave. Parking Garage $ 35.7 2049 2021 Public Safety Building $101.5 2051 Total COPs $145.6 Staff recommends that the Board of Directors of the Palo Alto Public Improvement Corporation (PIC) approve the FY 2022 financial statement for the PIC. 1 4 9 8 POLICY IMPLICATIONS Approval of the Palo Alto Public Improvement Corporation’s financial statements is consistent with prior Council policy direction and resolutions. FISCAL/RESOURCE IMPACT Approval of the Palo Alto Public Improvement Corporation’s financial statements will have no resource impact. STAKEHOLDER ENGAGEMENT Staff works internally and coordinates with the City Auditor’s Office third party external auditor Macias Gini & O’Connell LLP (MGO) to prepare this report. ENVIRONMENTAL REVIEW This activity is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or reasonably foreseeable indirect physical change in the environment. ATTACHMENTS Attachment A: Palo Alto Public Improvement Fiscal Year 2022 Annual Financial Statement APPROVED BY: Kiely Nose, Assistant City Manager Report #: 2301-0751 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2022 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2022 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Management’s Discussion and Analysis (Unaudited) .............................................................................. 3 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position ................................................................................................................... 5 Statement of Activities ....................................................................................................................... 6 Debt Service Fund Financial Statements: Balance Sheet ..................................................................................................................................... 7 Statement of Revenues, Expenditures and Changes in Fund Balance ................................................ 8 Notes to the Basic Financial Statements .................................................................................................. 9 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report The Honorable Mayor and Members of the City Council of the City of Palo Alto, California Opinions We have audited the financial statements of the governmental activities and the major fund of the Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto, California (City), as of and for the year ended June 30, 2022, and the related notes to the financial statements, which collectively comprise the Corporation’s basic financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and the major fund of the Corporation as of June 30, 2022, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinions We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Corporation and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for twelve months beyond the financial statement date, including any currently known information that may raise substantial doubt shortly thereafter. 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • exercise professional judgment and maintain professional skepticism throughout the audit. • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • obtain an understanding of internal control relevant to the audit 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 Corporation’s internal control. Accordingly, no such opinion is expressed. • evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis be presented to supplement the basic financial statements. Such information is the responsibility of management and, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Walnut Creek, California November 16, 2022 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) For the Year Ended June 30, 2022 3 The Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto (City), follows the provisions of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments. The Corporation is controlled by the City and was organized to assist the City in financing public improvements. The Corporation issues debt and turns the proceeds of the debt over to the City under lease agreements that provide a revenue source for the repayment of this debt. The Corporation has three outstanding debts and has turned over the proceeds to the City, which pledged certain lease payments as collateral for this debt as discussed in Note 4 to the financial statements. FINANCIAL HIGHLIGHTS GASB Statement No. 34 requires the issuance of government-wide financial statements as well as fund financial statements. The government-wide financial statements report the balance of the Corporation’s long-term debt while the individual fund statements do not. In fiscal year 2018, the City issued 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to refinance the 2002B Downtown Parking Improvements Certificates of Participation remaining balance of $805 thousand, and also to fund the Palo Alto Municipal Golf Course renovations. In fiscal year 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively. The 2019A and 2019B COPs are issued to fund the construction of the new California Avenue parking garage. In fiscal year 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million plus $6.5 million premium. The 2021 COPs are issued to fund the construction of the new public safety building. As of June 30, 2022, the Corporation has the following outstanding debt: the 2018 COPs, 2019A and 2019B COPs, and 2021 COPs. At the government-wide level, the interest and fiscal agent charges were $4.8 million for fiscal year 2022, an increase of $0.8 million from the prior year. The interest on leases from the City of Palo Alto was $1.7 million, a decrease of $6.9 million from the prior year. The increases of interest and fiscal charges and decrease of interest on leases are due to the issuance of the 2021 COPs during the prior year which lead to the increase of outstanding bonds and incurrence of one-time costs of issuance. The Corporation ended fiscal year 2022 with total assets of $158.8 million, a decrease of $4.4 million from the prior year. Total assets consisted of $1.5 million in cash and investments, $1.1 million of lease interest receivable from the City of Palo Alto, and $156.2 million of investment in leases to the City of Palo Alto. The total liabilities were $157.2 million, a decrease of $1.2 million from the prior year. The decrease of assets and liabilities resulted from scheduled principal and interest payments of the 2018 COPS’s, the 2019A and 2019B COPSs and interest payments of the 2021 COPs. At the fund level, the Corporation’s expenditures exceeded revenues by $3.1 million due to interest payments of the 2021 COPs. As of June 30, 2022, the Corporation had one fund, the Debt Service Fund, which reported a $1.5 million restricted fund balance. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) (Continued) For the Year Ended June 30, 2022 4 OVERVIEW OF THE CORPORATION’S BASIC FINANCIAL STATEMENTS The annual financial report is comprised of two parts: 1) Management’s discussion and analysis (this part), 2) The basic financial statements, which include the government-wide and the fund financial statements, along with the notes to these financial statements. The basic financial statements comprise the government-wide financial statements and the fund financial statements. These two sets of financial statements provide two different views of the Corporation’s financial activities and financial positions, both short-term and long-term. The government-wide financial statements provide a long-term view of the Corporation’s activities as a whole, and comprise the statement of net position and the statement of activities. The statement of net position provides information about the financial position of the Corporation as a whole, including all its long-term liabilities on the full accrual basis, similar to that used by corporations. The statement of activities provides information about all the Corporation’s revenues and expenses on the full accrual basis, with the emphasis on measuring net revenues or expenses of the Corporation’s program. The statement of activities explains in detail the change in net position for the year. The fund financial statements report the Corporation’s operations in more detail than the corporate-wide statements and focus primarily on the short-term activities of the debt service fund. Fund financial statements measure only current revenues and expenditures; current assets, liabilities and fund balances; and they exclude capital assets and long-term debt. Together, these statements along with the notes to the financial statements are called the basic financial statements. DEBT ADMINISTRATION The Corporation issues debt in the form of Certificates of Participation (COPs) to be repaid from future lease receipts from the City. Legally, these COPs issues are the Corporation’s debt only; the City is liable only for the payment of the amounts set forth in the lease securing each debt issue. As of June 30, 2022, the Corporation has the following outstanding debt: 2018 COPs, 2019A and 2019B COPs, and 2021 COPs with outstanding principal balances of $8.4 million, 35.7 million and $101.5 million, respectively. ECONOMIC OUTLOOK AND MAJOR INITIATIVES The economy of the City and its major initiatives for the coming year are discussed in detail in the City’s Annual Comprehensive Financial Report. CONTACTING THE CORPORATION’S FINANCIAL MANAGEMENT These Basic Financial Statements are intended to provide citizens, taxpayers, investors, and creditors with a general overview of the Corporation’s finances. Questions about these financial statements should be directed to the Finance Department of the City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301. Assets Cash held for operations 43,376$ Cash and investments held by trustee 1,488,794 Lease interest receivable 1,070,654 Investment in leases to the City of Palo Alto 156,160,520 Total assets 158,763,344 Liabilities Interest payable 1,070,654 Long-term debt: Due in one year 1,268,253 Due in more than one year 154,892,267 Total liabilities 157,231,174 Net Position Restricted for debt service 1,532,170$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Net Position June 30, 2022 See accompanying notes to financial statements. 5 Expenses Interest and fiscal agent charges 4,808,310$ Program revenues Interest on leases from the City of Palo Alto 1,679,174 Net program revenues (3,129,136) General revenues Investment earnings 424 Change in net position (3,128,712) Net position, beginning of the year 4,660,882 Net position, end of the year 1,532,170$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Activities For the Year Ended June 30, 2022 See accompanying notes to financial statements. 6 Assets Cash held for operations 43,376$ Cash and investments held by trustee 1,488,794 Lease interest receivable 1,070,654 Investment in leases to City of Palo Alto 156,160,520 Total assets 158,763,344$ Deferred Inflows of Resources Unavailable lease receipts from the City of Palo Alto 157,231,174$ Fund balance Restricted for debt service 1,532,170 Total deferred inflows of resources and fund balance 158,763,344$ Reconciliation of fund balance to net position Fund balance restricted for debt service 1,532,170$ Long-term receivables are not available to pay for current period expenditures and are considered unavailable on the governmental fund balance sheet 157,231,174 Some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the Fund: Interest payable (1,070,654) Long-term debt due within one year (1,268,253) Long-term debt due in more than one year (154,892,267) Net position of governmental activities 1,532,170$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Balance Sheet June 30, 2022 Debt Service Fund See accompanying notes to financial statements. 7 Revenues: Lease receipts from the City of Palo Alto: Principal 835,000$ Interest 2,070,960 Other 3,691 Investments earnings 424 Total revenues 2,910,075 Expenditures: Debt service: Principal repayment 835,000 Interest and fiscal agent charges 5,192,787 Costs of issuance 11,000 Total expenditures 6,038,787 Deficiency of revenues under expenditures (3,128,712) Net change in fund balance (3,128,712) Fund balance, beginning of the year 4,660,882 Fund balance, end of the year 1,532,170$ Reconciliation of net change in fund balance to change in net position Net change in fund balance - debt service fund (3,128,712)$ Amounts reported for governmental activities in the statement of activities are different because: Repayment of bond principal is an expenditure in the governmental funds, but in the statement of net position the repayment reduces long-term liabilities. 835,000 Interest accrued on long-term debt and amortization of bond premium do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. Change in interest payable (12,776) Amortization of bond premium 408,253 Some amounts reported in the statement of revenues, expenditures and changes in fund balances reflect the timing of collection of assets which are not includable as revenues on the statement of activities. Lease receipt for bond principal repayment (835,000) Lease receipt for interest payment 12,776 Impact of bond premium amortization on lease receipt (408,253) Change in net position of governmental activities (3,128,712)$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended June 30, 2022 Debt Service Fund See accompanying notes to financial statements. 8 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements For the Year Ended June 30, 2022 9 NOTE 1 – DESCRIPTION OF REPORTING ENTITY 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, California (City). 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 annual comprehensive financial report for the year ended June 30, 2022. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation Government-wide Statements: The statement of net position and the statement of activities include the financial activities of the Corporation. Eliminations have been made to minimize the double counting of internal activities. The statement of activities presents a comparison between direct expenses and program revenues for each function of the Corporation’s activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include (a) charges paid by the recipients of goods or services offered by the programs, and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including investment earnings, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the Corporation’s funds. The emphasis of fund financial statements is on major individual funds, of which the Corporation only reports one debt service fund. (b) Major Fund Major funds are defined as funds that have either assets, liabilities, revenues or expenditures equal to ten percent of their fund-type total and five percent of the grand total. The Corporation has one fund which is reported as a major governmental fund in the accompanying financial statements as follows: Debt Service Fund – This fund accounts for debt service payments on the Corporation’s long-term debt. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 10 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned ad expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers revenues susceptible to accrual to be available if the revenues are collected within ninety days after year-end. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. (d) Investment in Leases Improvements financed by the Corporation are leased to the City for their entire estimated useful life and will become the City property at the conclusion of the lease on November 1, 2050. The Corporation therefore records the present value of the lease and considers the leased improvement to have been sold for this amount when leased. (e) Net Position The government-wide financial statements utilize a net position presentation. Net position is further categorized as net investment in capital assets, restricted and/or unrestricted. As of June 30, 2022, the entire net position was considered restricted. Restricted Net Position – This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. (f) Deferred Inflows of Resources A deferred inflow of resources is defined as an acquisition of net asset or fund balances applicable to a future reporting period and will not be recognized as an inflow of resources (revenue) until that time. On the governmental fund balance sheet, the lease receipts from the City corresponding to the debt are recorded as deferred inflows of resources since the balances are not current financial resources. (g) Fund Balances At June 30, 2022, the Corporation’s governmental fund’s fund balances include the following classification: Restricted Fund Balance – includes amounts that can be spent only for the specific purposes stipulated by external resource providers, constitutionally or through enabling legislation. Restrictions may effectively be changed or lifted only with the consent of resource providers. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 11 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Effects of New Pronouncements As of July 1, 2021, the Corporation implemented the following Governmental Accounting Standards Board (GASB) Statement:   In June 2017, the GASB issued Statement No. 87, Leases. The objective of this statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. The application of this statement did not have a material impact on the financial statements of the Corporation for the fiscal year ended June 30, 2022. The Corporation is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB Statement: In June 2022, the GASB issued Statement No. 100, Accounting Changes and Error Corrections – An Amendment of GASB Statement No. 62. The primary objective of this statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable, reliable, relevant consistent, and comparable information for making decisions or assessing accountability. The requirements of this statement are effective for the Corporation’s fiscal year ending June 30, 2024. (i) Estimates The preparation of basic financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (a) Interest Rate Risk Interest rate risk is the risk that a change in market interest rates will adversely affect the fair value of an investment. Normally, the longer it takes an investment to reach maturity, the greater will be that investment’s sensitivity to changes in market rates. Information about the sensitivity of the fair values of the Corporation’s investments to market interest rate fluctuations is provided by the following table that shows the distribution of the Corporation’s investments by maturity: Investment Type Amount Maturity Date Money Market Mutual Fund 1,488,794$ 19 days PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 12 NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (Continued) Credit Risk Generally, 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. As of June 30, 2022, the Corporation’s investments in money market mutual funds are rated AAAm by Standard & Poor’s. (b) Fair Value Hierarchy The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value of the assets. Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs. The Corporation’s investments in money market mutual funds are not subject to the fair value hierarchy. (c) Investment Policy The Corporation must maintain required amounts of cash and investments by trustee under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged as reserves to be used if the Corporation fails to meet its obligation under these debt issues. The California Government Code (Code) requires these funds to be invested in accordance with bond indentures or State statutes. All these funds have been invested as permitted under the Code. The Investment Policy is described in detail in the City’s Annual Comprehensive Financial Report. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 13 NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (Continued) The table below identifies the investment types that are authorized by the City’s Investment Policy. The table also identifies certain provisions of the City’s Investment Policy that address interest rate risk, credit risk and concentration of credit risk. Maximum Maturity Minimum Credit Quality Maximum Percentage of Portfolio Maximum Investment in One Issuer U.S. Government Securities 10 years (*) N/A No Limit No Limit U.S. Government Agency Securities 10 years (*) N/A No Limit (A) No Limit Certificates of Deposit 10 years (*) N/A 20% 10% of the par value of portfolio Bankers Acceptances 180 days N/A 30% $5 million Commercial Paper 270 days A-1 15% $3 million (B) Local Agency Investment Fund N/A N/A No Limit $75 million per account Short-Term Repurchase Agreements 1 year N/A No Limit No Limit City of Palo Alto Bonds N/A N/A No Limit No Limit Money Market Deposit Accounts N/A N/A No Limit No Limit Mutual Funds N/A N/A 20% 10% Negotiable Certificates of Deposit 10 years (*) N/A 10% $5 million Medium-Term Corporate Notes 5 years AA 10% $5 million 10 years (*) AA/AA2 30% No Limit Supranational 5 years AA/AA2 20% 10% of the par value of portfolio (A) (B) The lesser of $3 million or 10% of outstanding commercial paper of any one institution. (*) The maximum maturity is based on the Investment Policy that is approved by the City Council and is less restrictive than the California Governmental Code. Authorized Investment Type Bonds of State of California Municipal Agencies & Other U.S. States Callable and multi-step securities are limited to no more than 25% of the par value of the portfolio, provided that: 1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step-up" are known at the time of purchase, and 3) the entire face value of the security is redeemed at the call date.   PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 14 NOTE 4 – CERTIFICATES OF PARTICIPATION The Corporation’s long-term debt activities are presented below: Balance Balance Amount due July 1, 2021 Additions Retirements June 30, 2022 in one year Certificates of Participation 2018 Capital Improvement Project 2.20-4.22%, due 11/1/2047 8,570,000$ -$ 190,000$ 8,380,000$ 195,000$ 2019 California Ave. Parking Garage Series A & B 2.5%-5%, due 11/1/2048 36,365,000 - 645,000 35,720,000 665,000 2021 Public Safety Building 2%-5%, due 11/1/2050 101,505,000 - - 101,505,000 - Add: Unamortized Premium 10,963,773 - 408,253 10,555,520 408,253 Total 157,403,773$ -$ 1,243,253$ 156,160,520$ 1,268,253$ On June 1, 2018, the City issued the 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to fully refinance the 2002B COPs and to fund the renovation of the Palo Alto Municipal Golf Course. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2018 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 21, 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively, for the construction of the new California Avenue Parking Garage. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2019A and 2019B COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 24, 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million plus $6.5 million premium for the construction of the new public safety building. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2021 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2022 15 NOTE 4 – CERTIFICATES OF PARTICIPATION (Continued) Future annual debt service on the outstanding debt is shown below: For the Year Interest Total Ending June 30, Principal Payment Payment 2023 860,000$ 4,970,244$ 5,830,244$ 2024 3,025,000 4,880,640 7,905,640 2025 3,170,000 4,729,196 7,899,196 2026 3,335,000 4,569,844 7,904,844 2027 3,495,000 4,402,268 7,897,268 2028-2032 20,295,000 19,309,115 39,604,115 2033-2037 24,830,000 14,769,404 39,599,404 2038-2042 28,925,000 10,665,351 39,590,351 2043-2047 33,520,000 6,059,329 39,579,329 2048-2051 24,150,000 1,179,520 25,329,520 145,605,000$ 75,534,911$ 221,139,911$ Events of Default and Acceleration Clauses Generally, the Corporation is considered to be in default if the Corporation fails to pay the principal of and interest on the outstanding long-term debt when become due and payable. If an event of default has occurred and is continuing, the principal of the long-term debt, together with the accrued interest, may be declared due and payable immediately.