CH3. Please prepare answers for all 4 questions of the continuing problem on page 134 on your text using the 2015 CAFR of the County of Santa Clara. Please upload your answers below.

1. In which section of the Comprehensive Annual Financial Report (CAFR) are the budget?to?actual comparisons of the major funds?

-Required Supplementary Information

a. Which accounting basis did the City follow to prepare its annual operating budget?

-Modified Accrual Basis

b. Are the actual amounts on a GAAP or a budgetary basis? Do the statements include a reconciliation of any differences between GAAP and budgetary amounts? If so, what are the largest reconciled items?

-Budgetary. Yes, the statements included a reconciliation of differences between GAAP and budgetary amounts. Some of the largest reconciled items were proceeds form sales of capital assets, interfund transfers, and other financing sources and encumbrances.

c. Are the reported variances based on the original budget or the year?end amended budget?

-Year-end amended budget

2. Does the CAFR include budget?to?actual comparisons of nonmajor funds? If so, in what section?

-Yes. Other Supplementary Information

3. Does the government encumber goods or services that have been ordered but have not yet been received? How, if at all, are encumbrances reflected on the governmental fund balance sheet? How, if at all, are they reflected on the government?wide statement of net position?

-Yes. Encumbrances reflected on the governmental fund balance sheet under general fund, all other governmental funds

4. Do encumbrances that remain outstanding at year?end lapse? That is, do the amounts that will be expended in the following year, when the goods or services are received, have to be rebudgeted in the following year? How can you tell?

CH4. Based on the 2015 CAFR of the County of Santa Clara, please prepare the answers to the five questions #1, 3, 4, 8 and 11 of the Continuing Problem found on page 180 in your text. Upload the answers in the box below or upload an excel or word file.

1. What are the main sources of the government?s revenues, including those from both governmental and business-type activities?

3. Which of the entity?s governmental functions or activities had the greatest amount of directly identifiable revenues?

4. Does the report discuss the accounting basis for recognizing revenues?

8. When are property taxes due? When do interest and penalties begin to accrue?

11. What is the total fund balance in the general fund? Can this amount be appropriated and spent for any purpose? Explain.

CH5. Based on the 2015 CAFR of the County of Santa Clara, please prepare the answers to the six questions #1, 3, 6, 7, 8 and 9 of the Continuing Problem found on page 227-8 in your text, Upload your answer here.

1. How does the government classify its governmental expenditures, by function or by ?object?? Are the classifications approximately the same in both the government?wide and the fund statements?

3. What are the major differences in expenditures/expenses (i.e., reconciling items) as they are reported in the governmental fund and the government?wide statements?

6. To and from which funds or component units have there been general fund transfers?

7. Explain the nature of any governmental?fund balance sheet classifications related to expenditures.

8. Does the entity report depreciation as an expense in its government?wide statements? If not, why not?

9. What types of other financing sources and uses does the governmental entity report in the general fund? What effect do these items have on the net change in fund balance for the year?

CH6. Based on the 2015 CAFR of the County of Santa Clara, please complete the answers to the four questions #1, 2, 3, and 5 of the Continuing Problem found on page 270 in your text. Upload your answer here.

1. How many capital projects funds does the government maintain? How can you tell? Are any of these major funds? If so, for what purposes are they maintained?

2. How many debt service funds does the government maintain? How can you tell? Are any of these major funds? If so, for what types of obligations are they maintained?

3. How are the capital projects and debt service funds reported in the government?wide statement of net position?

5. Did the government issue additional long?term debt to support governmental activities during the year? Did it repay any long?term debt used to support governmental activities? Did it engage in any in?substance defeasances?

County of Santa Clara State of California Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2015 Emily Harrison Director of Finance This page is intentionally left blank. COUNTY OF SANTA CLARA, CALIFORNIA 70 West Hedding Street, San Jose, California 95110 COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2015 Prepared by the Finance Agency Emily Harrison, Director of Finance This page is intentionally left blank. COUNTY OF SANTA CLARA Comprehensive Annual Financial Report Table of Contents For the Fiscal Year Ended June 30, 2015 Page INTRODUCTORY SECTION: Letter of Transmittal ...............................................................................................................................i GFOA Certificate of Achievement ......................................................................................................vi Board of Supervisors and Principal County Officials ........................................................................ vii County of Santa Clara Organization Chart ........................................................................................ viii FINANCIAL SECTION: Independent Auditor's Report ....................................................................................................................... 1 Management's Discussion and Analysis (Required Supplementary Information - Unaudited) ................... 5 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position ............................................................................................................... 23 Statement of Activities ................................................................................................................... 24 Fund Financial Statements: Governmental Funds: Balance Sheet .............................................................................................................................. 26 Reconciliation of the Governmental Funds Balance Sheet to the Government-wide Statement of Net Position - Governmental Activities ..................... 27 Statement of Revenues, Expenditures, and Changes in Fund Balances ...................................... 28 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Government-wide Statement of Activities - Governmental Activities ....................................................................................... 29 Proprietary Funds: Statement of Fund Net Position .................................................................................................. 30 Statement of Revenues, Expenses, and Changes in Fund Net Position ...................................... 31 Statement of Cash Flows ............................................................................................................. 32 Fiduciary Funds: Statement of Fiduciary Net Position ........................................................................................... 34 Statement of Changes in Fiduciary Net Position ........................................................................ 35 COUNTY OF SANTA CLARA Comprehensive Annual Financial Report Table of Contents For the Fiscal Year Ended June 30, 2015 Page Notes to the Basic Financial Statements: (1) Summary of Significant Accounting Policies ..................................................................... 37 (2) Stewardship, Compliance and Accountability .................................................................... 48 (3) Cash and Investments.......................................................................................................... 49 (4) Receivables ......................................................................................................................... 55 (5) Interfund Transactions ........................................................................................................ 58 (6) Capital Assets...................................................................................................................... 60 (7) Capital Leases ..................................................................................................................... 64 (8) Short-Term Debt ................................................................................................................ 64 (9) Long-Term Liabilities ........................................................................................................ 65 (10) Healthcare Programs ........................................................................................................... 79 (11) Net Position/Fund Balances ................................................................................................ 83 (12) Pension Plans ...................................................................................................................... 86 (13) Other Postemployment Benefits Plans ................................................................................ 95 (14) Risk Management ............................................................................................................. 102 (15) Commitments and Contingencies ..................................................................................... 104 (16) Pollution Remediation....................................................................................................... 108 (17) Subsequent Events ............................................................................................................ 108 REQUIRED SUPPLEMENTARY INFORMATION (other than MD&A) (Unaudited): Schedule of Changes in Net Pension Liability and Related Ratios ................................................... 109 Schedule of the Cost Sharing Plans' Proportionate Share of Net Pension Liability ......................... 110 Schedules of Pension Plans Contributions ........................................................................................ 111 Notes to the Schedule of Pension Plans Contributions ...................................................................... 112 Schedules of Funding Progress - Other Postemployment Benefits................................................... 113 Budgetary Comparison Schedule - General Fund - Budgetary Basis .............................................. 114 Notes to Required Supplementary Information ................................................................................. 124 OTHER SUPPLEMENTARY INFORMATION: Combining and Individual Fund Statements and Schedules: Discrete Component Units ........................................................................................................... 125 Combining Statement of Net Position ....................................................................................... 126 Combining Statement of Activities ........................................................................................... 127 Nonmajor Governmental Funds: Combining Balance Sheet ......................................................................................................... 129 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances ................. 130 COUNTY OF SANTA CLARA Comprehensive Annual Financial Report Table of Contents For the Fiscal Year Ended June 30, 2015 Page OTHER SUPPLEMENTARY INFORMATION (Continued): Nonmajor Special Revenue Funds ....................................................................................... 131 Combining Balance Sheet ............................................................................................... 132 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances ....... 134 Budgetary Comparison Schedules: Roads Fund ............................................................................................................... 136 County Library Fund ................................................................................................ 137 Parks Operation and Maintenance Fund ................................................................... 138 Housing and Community Development Fund .......................................................... 139 Clerk-Recorder Fund ................................................................................................ 140 Fire Districts Fund .................................................................................................... 141 Emergency Medical Services Fund .......................................................................... 142 Environmental Health Fund ...................................................................................... 143 Vector Control Fund ................................................................................................. 144 Tobacco Securitization Fund .................................................................................... 145 Proposition 63 Fund... .............................................................................................. 146 Child Support Fund... ............................................................................................... 147 Other Special Revenue Funds ................................................................................... 148 Nonmajor Debt Service Funds ............................................................................................. 153 Combining Balance Sheet ............................................................................................... 154 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances ....... 155 Budgetary Comparison Schedules: Multiple Facilities Bonds Fund................................................................................. 156 Justice Facilities Bonds Fund.................................................................................... 157 Morgan Hill Courthouse Bonds Fund ....................................................................... 158 General Obligation Bonds Fund ............................................................................... 159 Qualified Energy Conservation Bonds Fund ............................................................ 160 Technology Bonds Fund ........................................................................................... 161 Nonmajor Capital Projects Funds......................................................................................... 163 Combining Balance Sheet ............................................................................................... 164 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances ....... 165 Budgetary Comparison Schedules: General Capital Improvement Fund.......................................................................... 166 Parks Acquisition and Development Fund ............................................................... 167 Qualified Energy Conservation Bonds Fund ............................................................ 168 Technology Bonds Fund ........................................................................................... 169 COUNTY OF SANTA CLARA Comprehensive Annual Financial Report Table of Contents For the Fiscal Year Ended June 30, 2015 Page OTHER SUPPLEMENTARY INFORMATION (Continued): Nonmajor Enterprise Funds .......................................................................................................... 171 Combining Statement of Fund Net Position ............................................................................. 172 Combining Statement of Revenues, Expenses, and Changes in Fund Net Position ................. 173 Combining Statement of Cash Flows ........................................................................................ 174 Internal Service Funds .................................................................................................................. 175 Combining Statement of Fund Net Position ............................................................................. 176 Combining Statement of Revenues, Expenses, and Changes in Fund Net Position ................. 178 Combining Statement of Cash Flows ........................................................................................ 180 Fiduciary Funds ............................................................................................................................ 183 Investment Trust Funds: Combining Statement of Fiduciary Net Position ................................................................. 184 Combining Statement of Changes in Fiduciary Net Position ............................................... 185 Agency Funds: Combining Statement of Changes in Assets and Liabilities ................................................ 186 STATISTICAL SECTION (Unaudited): Net Position by Component ...................................................................................................... 190 Changes in Net Position ............................................................................................................ 192 Fund Balances of Governmental Funds .................................................................................... 196 Changes in Fund Balances of Governmental Funds ................................................................. 198 General Governmental Tax Revenues by Source...................................................................... 200 Taxable Assessed Value of Property .........................................................................................201 Property Tax Rate - Direct and Overlapping Governments ..................................................... 202 Principal Property Taxpayers .................................................................................................... 203 Property Tax Levies and Collections ........................................................................................204 Ratios of Outstanding Debt by Type ......................................................................................... 205 Ratios of General Bonded Debt Outstanding ............................................................................ 207 Direct and Overlapping Bonded Debt ....................................................................................... 208 Legal Debt Margin Information ................................................................................................ 210 Pledge Revenue Coverage......................................................................................................... 211 Demographic and Economic Statistics ...................................................................................... 212 Principal Employers .................................................................................................................. 213 Full-time Equivalent County Employees by Function / Program ............................................. 215 Operating Indicators by Function / Program ............................................................................. 216 Capital Asset Statistics by Function / Program ......................................................................... 218 Miscellaneous Statistical Data .................................................................................................. 220 Introductory Section This page is intentionally left blank. County of Santa Clara Office of the County Executive County Government Center, East Wing 70 West Hedding Street San Jose, California 95110 (408) 299-5105 December 31, 2015 To the Board of Supervisors of the County of Santa Clara and The Residents of Santa Clara County California law requires that every general-purpose local government publish a complete set of audited financial statements within six months of the close of each fiscal year. This Comprehensive Annual Financial Report (CAFR) is published to fulfill that requirement for the fiscal year that ended June 30, 2015 (FY 2015). County management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive internal control framework established for this purpose. Because the cost of internal controls should not exceed the anticipated benefits, the objective is to provide a reasonable, rather than an absolute, assurance that the financial statements are free of any material misstatements. Macias Gini & O'Connell LLP, Certified Public Accountants, have issued an unmodified (\"clean\") opinion on the County of Santa Clara's financial statements for the fiscal year that ended June 30, 2015. The independent auditors' report is located at the front of the financial section of this report. Management's discussion and analysis (MD&A) immediately follows the independent auditors' report and provides a narrative introduction, overview, and analysis of the financial statements. The MD&A section complements this letter of transmittal and should be read in conjunction with it. Profile of the Government The County of Santa Clara (the County) is located at the southern end of the San Francisco Bay and occupies an area of 1,316 square miles. The County was established by an act of State legislation in 1850 and was one of the original 27 counties in the State of California. The County is named after Mission Santa Clara, which was established in 1777, and named for Saint Clara of Assisi, Italy. The name Clara means "clear" or "bright." The County has been steadily growing for the last several decades. The population of the County has grown more than 25 percent since 1990 and it is the sixth most populated county in California. Santa Clara County was home to approximately 1,894,605 in 2014, which is nearly 5 percent of the State's population. There are 15 incorporated cities located within the County where more than 95 percent of the County's residents reside. The County seat is located in San Jose, which is the largest city in the San Francisco Bay Area. San Jose is also the third largest city in California, and the tenth largest city in the United States. The County operates under a Home Rule Charter adopted by the voters of the County. Policy making and legislative authority are vested in the County Board of Supervisors (the Board), which consists of an elected supervisor from each of the County's five districts. The Board is responsible, among other things, for passing ordinances, adopting the budget, appointing committees, and appointing the County Executive and certain non-elected department heads. Supervisors are elected to four-year staggered terms. The County has three elected department heads responsible for the offices of the Assessor, the District Attorney, and the Sheriff. All elected officials serve four-year terms. The members of the Board of Supervisors are limited to three terms. Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian County Executive: Jeffrey V. Smith i The County, with over 17, 000 full-time equivalent employees, provides a wide range of services to its residents. These services include general government (administration and finance), public protection (law enforcement, detention, and criminal prosecution), roads maintenance, health care, public assistance, fire protection, libraries, sanitation, and general aviation airports. The County's operations include various component units, which provide specific services countywide or to distinct geographic areas within the County. They are legally separate entities for which the County is financially accountable as their governing boards are substantially the same as the County Board of Supervisors. Because of this governing board relationship, and the exclusivity of County services, financial operations of some component units are blended in the County's basic financial statements. These component units are the Santa Clara County Central Fire Protection District, South Santa Clara County Fire District, Los Altos Hills County Fire District, Santa Clara County Vector Control District, County Sanitation District No. 2-3 of Santa Clara County, Santa Clara County Financing Authority, Santa Clara County Library, Silicon Valley Tobacco Securitization Authority, and the Santa Clara County Tobacco Securitization Corporation. The Housing Authority of the County of Santa Clara, Santa Clara County Health Authority, and the FIRST 5 Santa Clara County are reported as discretely presented component units. Factors Affecting the Financial Condition The following information presented in the financial statements is best understood when it is considered from the broader perspective of the specific environment within which the County operates. Economy In recent years, Silicon Valley, the economic region of which Santa Clara County is the largest member, has been synonymous with technology and innovation. Over the past decades, Silicon Valley has demonstrated its ability to reinvent itself to meet opportunities and challenges. It has transitioned from agriculture-based economy to one where technology, services, and manufacturing predominate. The economy has high-productivity and cutting-edge innovation as a prominent feature. Innovation in technology and advances in business models drive Silicon Valley's economic success. In the recent years, Silicon Valley experienced a level of innovation and economic activity that leads both California and the nation. The County's unemployment rate decreased from 5.8% to 4.3% from February 2014 to February 2015. By comparison, the State unemployment rate only decreased from 8.0% to 6.7%. Although this is a positive for the County's economic future, it also has increased income inequality among its residents. The County's economy continues to exhibit notable strength as home values are rising and revenue from property tax growth is increasing. Employment growth was outstanding in 2014 and is nearing its pre-recession peak regionally. Home price appreciation continued last year, and home prices are now above their pre-recession peak; however, the growth rate slowed considerably compared to 2013. Growth in the regional housing market has been an important contributor to the strength of the local economy. From the fourth quarter of 2013 to the fourth quarter of 2014, the median price for an existing single-family home increased from $729,000 to $810,000, or 11.1%. With tightening labor and housing markets, property values in Santa Clara County are expected to continue to grow, supporting a forecast for continued property tax growth. Both the State and Federal governments are also continuing to recover financially, which lessens the risk of outright program reductions and revenue losses that have contributed to local deficits in the past. Despite an improving economy, the FY 2016 budget is built on some uncertainty and unpredictability. The strong local and statewide economy has provided a period of relative stability for the County. At the same time we know that business cycles occur at regular intervals and the pain of the last downturn remains a lasting memory. There are several aspects of the County's cost structure that are \"locked-in\" as future obligations. These include the implementation of five-year labor contracts, the approval of an ordinance locking in the required funding of retiree health, and the projected costs of pensions over the next several years. In the short term, management estimates a 5% growth in the cost per unit of service, or an increase of $100 million annually. ii General Fund revenues are projected to total $2,594.6 million in FY 2016, compared to $2,407.4 million in the FY 2015 Approved Budget; an increase of $187.2 million or 7.8%. Major year-over-year increases are attributable to an increase in property tax revenue ($65.0 million), State revenue ($69.4 million), and Federal revenue ($23.5 million). Relevant Financial Policies Use of Fund Balance Any unassigned General Fund balance at the fiscal year end is treated as a one-time source of funding. Board policy discourages using one-time funds for ongoing operations and limits appropriation only to meet one-time expenditures. The only exception is the use of one-time reserves to ease the transition to downsized and/or reorganized operations. Reserves The County utilizes several discretely budgeted unobligated reserve accounts to address various priorities totaling $187.0 million. Reserves are funded with one-time funds and are re-examined each year. The largest reserve is the Contingency Reserve. Use of Contingency Reserves is restricted by Board policy to support costs for one-time needs for the following purposes: When the County is impacted by an unanticipated reduction in State and/or Federal grants and aid. When the County faces economic recession or depression and the County must take budget action before the beginning of any fiscal year. When the County is impacted by a natural disaster. When the County is presented with an unanticipated or unbudgeted lease expense that is necessary for the delivery of local services. When the County is affected by unforeseen events that require the allocation of funds. The County can use Contingency Reserves to support ongoing costs when presented with critical program initiatives that have a time requirement that cannot be deferred. For FY 2016, the Board set aside $155.6 million in Contingency Reserves. This is above the policy level of 5% of General Fund revenues, net of pass-through funds. In FY 2016 the Board also reserved $31.4 million for other uses including the Valley Medical Center Emergency Room and Correctional Realignment to reintegrate parolees. Capital Project Financing The County has a capital improvement plan (CIP) that identifies how the County plans to fund both its \"pay-asyou-go\" and its debt financed capital improvement projects over the five-year period. This plan includes: a) all capital projects being considered for a possible future bond issue; b) all capital projects that would be deferred to a subsequent bond issue; and c) all \"pay-as-you-go\" projects set for design and construction over the next five years. While the plan covers a five-year period, it is updated annually to reflect ongoing changes as new projects are added, existing projects modified, and completed projects deleted from the plan document. The five-year CIP does not appropriate funds; rather it serves as a budgeting tool, identifying those capital budget appropriations to be made through the adoption of the County's annual budget. The 5-year capital improvement plan (CIP) projects future capital needs for the County. It identifies how the County plans to fund its capital projects over the five-year period. The FY 2016 budget includes $52.9 million for various projects. iii Debt Management The debt management policy sets forth certain debt management objectives for the County and establishes overall parameters for issuing and administering the County's debt. The Board supports the management's effort to appropriately issue short-term debt to cover cyclical cash flow needs. The policy allows for the issuance of longterm debt to finance major capital improvements. However, the County historically has required a careful assessment of capital improvement priorities, capital costs, annual debt service capacities, and annual operating and maintenance costs on the scheduled improvement in advance of incurring the indebtedness. On June 3, 2015, the Santa Clara County Financing Authority issued $102.4 million in lease revenue bonds, Series P. These bonds refunded the Series I bonds issued in 2006, which were issued with an original value of $149.7 million to build the Crime Laboratory Facilities, Valley Health Clinics in Sunnyvale and Gilroy and the seismic retrofitting of the Santa Clara Courthouse. Cash Management - Commingled Pool The County's pooled deposits and investments are governed by California Government Code and by a County investment policy. This policy is reviewed annually by the County Treasury Oversight Committee and approved annually by the Board of Supervisors. The County Board of Supervisors and the Treasury Oversight Committee monitor adherence to the statutes and policies. The County's investment policy stipulates, among other items, approved investment categories, maturity limits and credit rating minimums for County investments. The objectives of the policy, in order of priority, are safety of principal, maintenance of liquidity, and attainment of a market rate of return, which considers risk constraints and cash flow requirements. Major Initiatives In the County's FY 2016 Recommended Budget, the County Executive outlines various major programs (initiatives), accomplishments, and challenges aligned with the County's Strategic Plan. That document is available via the internet at https://www.sccgov.org. The key initiatives included in the recommended budget are: Rebuild and strengthen the County's administrative infrastructure to support the service delivery networks that are central to the County's mission. This includes $7.0 million in ongoing funds to support a combination of newly implemented systems. In addition, this budget allocates $27.0 million in one-time funds to replace or develop new systems and improve the technology our employees use to serve the residents of Santa Clara County. Address needs within the County's jail system that are the result of statutory changes at the State level and the need to address aging of jail facilities. This includes $5.2 million on ongoing funds and $22.6 million in one-time funds to improve outdated facilities and increase capacity. Focus resources to address the problems of homelessness and affordable housing. This includes strategic investments such as the development of a homelessness pay-for-success project utilizing 102 available units to house chronically homeless individuals. The County has budgeted $2.0 million for payments to service providers if individuals are housed for 12 consecutive months. The above initiatives were approved by the Board during Budget Hearings and funded in the FY 2016 Adopted Budget. iv Other Information Certificate of Achievement The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the County for its comprehensive annual financial report for the fiscal year that ended June 30, 2014. This was the fifteenth consecutive year the County has achieved this prestigious award. In order to be awarded a Certificate of Achievement, the government must publish an easily readable and efficiently organized CAFR. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current CAFR continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments The preparation of the comprehensive annual financial report and its timely issuance is the result of a concentrated, dedicated, and coordinated effort of the staff of the Controller-Treasurer Department and the cooperation and assistance of all County agencies and departments and the assistance of staff at the component units. We would like to acknowledge the role played by the Board of Supervisors in developing and enforcing policies, which enhance the current and future fiscal stability of the County. Respectfully submitted, Emily Harrison Director of Finance Jeffrey V. Smith County Executive v vi COUNTY OF SANTA CLARA BOARD OF SUPERVISORS AND PRINCIPAL COUNTY OFFICIALS JUNE 30, 2015 BOARD OF SUPERVISORS Mike Wasserman District 1 Cindy Chavez District 2 Dave Cortese District 3 Ken Yeager District 4 S. Joseph Simitian District 5 PRINCIPAL COUNTY OFFICIALS Jeffrey V. Smith County Executive Emily Harrison Director of Finance Jeff Rosen District Attorney Laurie Smith Sheriff viii Orry P. Korb County Counsel Larry Stone Assessor COUNTY OF SANTA CLARA ORGANIZATION CHART Deputy County Executive Financial Section This page is intentionally left blank. Certified Public Accountants Sacramento Walnut Creek Oakland Los Angeles Century City Newport Beach Independent Auditor's Report San Diego The Board of Supervisors County of Santa Clara San Jose, California We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the County of Santa Clara, California (the \"County\"), as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the County's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the FIRST 5 Santa Clara County; Santa Clara County Health Authority; the County Sanitation District 2 - 3 of Santa Clara County; the Santa Clara County Vector Control District; and the Santa Clara County Central Fire Protection District, the South Santa Clara County Fire District, and the Los Altos Hills County Fire District (collectively, \"Fire Districts\"), which collectively represent the following percentages of the assets, net position/fund balances, and revenues/additions of the following opinion units. Opinion Unit Assets 3.5% 0.4% 35.7% 1.9% Governmental activities Business-type activities Aggregate discretely presented component units Aggregate remaining fund information Net Position/ Fund Balances 6.2% 19.6% 32.8% 2.1% Revenues/ Additions 4.1% 0.2% 73.4% 0.8% Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's Macias Gini & O'Connell LLP 505 14th Street, 5th Floor Oakland, CA 94612 1 www.mgocpa.com internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the County as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matters Change in Accounting Principles As described in Note 1(q) to the basic financial statements, effective July 1, 2014, the County adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68. Deficit Net Positions As discussed in Note 2, several County internal service funds have deficit net positions at June 30, 2015, which include the Workers' Compensation, Retiree Healthcare, and Pension Obligation internal service funds with deficit net positions of $34.5 million, $234.6 million, and $426.3 million, respectively. Our opinion is not modified with respect to these matters. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis; the schedule of changes in net pension liability and related ratios, the schedule of the cost sharing plans' proportionate share of the net pension liability, the schedule of pension plans contributions, the schedule of funding progress - other postemployment benefits; and the budgetary comparison schedule - General Fund - budgetary basis listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, 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 and other auditors 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. 2 Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County's basic financial statements. The introductory section, combining and individual fund statements and schedules, statistical section, and glossary section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America by us and other auditors. In our opinion, based on our audit, the procedures performed as described above, and the reports of the other auditors, the combining and individual fund statements and schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Walnut Creek, California December 31, 2015 3 This page intentionally left blank. 4 Management's Discussion and Analysis This page is intentionally left blank. COUNTY OF SANTA CLARA Management's Discussion and Analysis Required Supplementary Information - Unaudited As management of the County of Santa Clara (the County), we offer readers of the County's financial statements this narrative overview and analysis of the financial activities of the County for the fiscal year which ended June 30, 2015. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages i to v of this report. FINANCIAL HIGHLIGHTS The liabilities and deferred inflows of resources of the County exceeded its assets and deferred outflows of resources by $1.54 billion (net position) at June 30, 2015. Of this amount, a negative $3.02 billion (unrestricted net position) resulted from the implementation of Governmental Accounting Standards Board (GASB) Statement Nos. 68 and 71 and its requirement to record a net pension liability in the amount of $2.57 billion on the government-wide financial statements. The $469.0 million (restricted net position) may be used for the County's ongoing obligations related to programs with external restrictions. The County's net investment in capital assets was $1.01 billion. (See further detail in Table 1 on page 8). In FY2015, the County implemented GASB Statement Nos. 68 and 71 and restated the beginning net position on the government wide statements by $3.31 billion ($2.36 billion governmental activities and $952.6 million businesstype activities). The restatement resulted in establishing the deferred outflows of resources balance of $271.9 million related to the County's pension contributions made subsequent to the measurement date of June 30, 2014 and the net pension liability balance of $3.2 billion and the removal of the net pension asset of $377.5 million measured under the prior pension standards. GASB Statement No. 68 also changed the way the County measured pension costs under the accrual basis of accounting. Under GASB Statement No. 68, pension expense reflects the change in net pension liability and related pension deferred outflows and inflows of resources. This is different than the prior accounting requirement, where the expense is measured as the County's actuarially determined annual required contributions. The County's total net position decreased by $3.07 billion for the year due primarily to the implementation of GASB Statement Nos. 68 and 71 as explained above. The County did not restate the prior years' balances because the information was not available. (See further detail in Table 2 on page 12). At June 30, 2015, the County governmental funds reported combined fund balances of $1.07 billion, an increase of $183.4 million from the prior year. Approximately 57.3 percent of the combined fund balances, $610.7 million, is available to meet the County's current and future needs. The County's investment in capital assets increased by $72.9 million or 3.2 percent. (See further detail in Table 5 on page 19). The County's total long-term debt decreased by $30.8 million or 1.4 percent during the current fiscal year mainly due to scheduled debt service payments. The County also issued 2015 Series P Lease Revenue Bonds to advance refund 2006 Series I Lease Revenue Bonds during the year (See further detail in Table 6 on page 20). At June 30, 2015, the County's unassigned fund balance for the General Fund was $364.9 million, 16.4 percent of total General Fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS Management's discussion and analysis are intended to serve as an introduction to the County's basic financial statements. The County's basic financial statements comprise three components: 1) governmentwide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. Required supplementary information is included in addition to the basic financial statements. 5 COUNTY OF SANTA CLARA Management's Discussion and Analysis Required Supplementary Information - Unaudited Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of County finances, in a manner similar to a private-sector business. The statement of net position presents information on all County assets, deferred outflows of resources, liabilities, and deferred inflows of resources with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. The statement of activities presents information showing how net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in the government-wide statements for some items that will result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). The government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include general government, public protection, public ways and facilities, health and sanitation, public assistance, education and recreation and culture. The business-type activities of the County include healthcare operations [a hospitalSanta Clara Valley Medical Center (SCVMC) and a health plan (Valley Health Plan)], airport operations (2 airports - Reid Hillview and South County), and a sanitation district (County Sanitation District No. 2-3 of Santa Clara County). Component units are included in the basic financial statements and consist of legally separate entities for which the County is financially accountable. Because of the governing board relationship and the exclusivity of County services, the financial operations of some component units are blended in the County's basic financial statements. These component units are the Santa Clara County Central Fire Protection District, South Santa Clara County Fire District, Los Altos Hills County Fire District, Santa Clara County Library, Santa Clara County Vector Control District, County Sanitation District No. 2-3 of Santa Clara County, Santa Clara County Financing Authority, Santa Clara County Tobacco Securitization Corporation and the Silicon Valley Tobacco Securitization Authority. The Housing Authority of Santa Clara County, Santa Clara County Health Authority, and the FIRST 5 Santa Clara County are reported separately as discrete component units of the County. The government-wide financial statements can be found on pages 23 - 25 of this report. Fund Financial Statements A fund is a grouping of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate finance-related legal compliance. All of the funds of the County can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental funds financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the County's near-term financing requirements. 6 COUNTY OF SANTA CLARA Management's Discussion and Analysis Required Supplementary Information - Unaudited Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, the reader may better understand the long-term impact of the government's near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The County maintains 25 individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures and changes in fund balances for the General Fund. Data from other governmental funds are combined into a single aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements and schedules elsewhere in this report. The governmental funds financial statements can be found on pages 26 - 29 of this report. Proprietary funds The County maintains two kinds of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The County uses enterprise funds to account for one hospital - Santa Clara Valley Medical Center (SCVMC), one health plan (Valley Health Plan), two airports (Reid Hillview and South County), and one sanitation district (County Sanitation District No. 2-3 of Santa Clara County). Internal service funds are an accounting device used to accumulate and allocate costs internally among the County's various functions. The County uses internal service funds to account for its information services, fleet management, insurance, printing services, unemployment insurance, workers' compensation, employee benefits, pension obligations, and retirees' healthcare. The internal service funds have been allocated between the governmental activities and business-type activities based on the relative percentage of use of the internal service funds in these activities. Proprietary fund statements provide the same type of information as the business-type activities column in the government-wide financial statements, but with more detail. The proprietary fund financial statements provide separate information for the SCVMC and Valley Health Plan, which are considered major funds. The financial statements of the non-major enterprise funds (Airport and Sanitation District) are combined into a single aggregated presentation. Similarly, the County's nine internal service funds are combined into a single aggregated presentation in the proprietary funds financial statements. Individual fund data for the enterprise funds and the internal service funds is provided in the form of combining statements section of this report. The proprietary funds financial statements can be found on pages 30 - 33 of this report. Fiduciary funds The Fiduciary Funds are used to account for resources held for the benefit of parties outside the County. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds except for agency funds. The fiduciary funds financial statements can be found on pages 34 - 35 of this report. Notes to the Basic Financial Statements The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes can be found on pages 37 - 108 of this report. 7 COUNTY OF SANTA CLARA Management's Discussion and Analysis Required Supplementary Information - Unaudited Required Supplementary Information The required supplementary information (RSI) is presented with additional information related to County's defined benefit pension plans and other postemployment benefits (OPEB) to its employees, and the County General Fund budgetary comparison schedule. The County adopts an annual appropriated budget for its General Fund. A budgetary comparison schedule has been provided for the General Fund to demonstrate compliance with this budget. Required supplementary information can be found on pages 109 - 124 of this report. Combining Statements and Schedules The combining and individual fund statements and schedules referred to earlier provide information for discrete component units, non-major governmental funds, non-major enterprise funds, internal service funds, and certain fiduciary funds and are presented immediately following the required supplementary information. Combining and individual fund statements and schedules can be found on pages 125 - 187 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS The County's liabilities and deferred inflows of resources exceeded its assets and deferred outflows of resources by $1.54 billion (net position) at June 30, 2015. As stated earlier, the County's negative change in net position was due to the implementation of GASB Statement Nos. 68 and 71, which required governments to record a net pension liability on their accrual basis financial statements including the government-wide financial statements. When applicable, prior year numbers have been reclassified to make them comparable to the current year. However, the County did not reclassify nor restate the prior years' amounts related to the implementation of these statements because the information was not available. Table 1Net Position (in thousands) Assets Current and other assets Capital assets Governmental Activities 2014 2015 $ Total assets Deferred outflows of resources Liabilities Current and other liabilities Long-term liabilities Net pension liability Noncurrent derivative instrument liabilities Total liabilities Deferred inflows of resources Net position: Net investment in capital assets Restricted Unrestricted Total net position 2014 Total 2015 Dollar Change Total 2,037,367 $ 1,215,325 696,259 $ 1,113,980 723,698 $ 1,128,705 2,753,396 $ 2,271,117 2,761,065 $ 2,344,030 3,214,274 3,252,692 1,810,239 1,852,403 5,024,513 5,105,095 80,582 1.6% 886 186,401 26,529 117,355 27,415 303,756 276,341 1008.0% 295,313 2,242,289 - 494,804 2,291,688 1,741,149 - 326,629 622,661 16,976 365,108 603,046 832,128 18,206 621,942 2,864,950 16,976 859,912 2,894,734 2,573,277 18,206 237,970 29,784 2,573,277 1,230 38.3% 1.0% n/a 7.2% 2,537,602 4,527,641 966,266 1,818,488 3,503,868 6,346,129 2,842,261 81.1% 13,870 405,356 192,556 13,870 597,912 584,042 4210.8% 651,958 290,318 (983,562) 982,361 457,451 94,398 663,688 $ 1,022,889 468,254 (2,985,047) (1,493,904) $ 617,486 363,612 (110,596) 870,502 $ (41,286) $ 1,534,210 $ 1,014,864 468,998 (3,019,052) 7,669 72,913 Percent Change 2,057,137 $ 1,157,137 959,157 456,393 (751,862) $ Business-type Activities 2014 2015 0.3% 3.2% 32,503 11,547 (3,113,450) 3.3% 2.5% -3298.2% (1,535,190) $ (3,069,400) -200.1% In accordance with GASB guidance, the County reclassified $289.6 million of the primary government's total net position amounts from restricted to unrestricted and $660.0 million from net investment in capital assets to unrestricted. Additional information on the presentation can be found in Note 11 on page 83 of this report. 8 COUNTY OF SANTA CLARA Management's Discussion and Analysis Required Supplementary Information - Unaudited Assets and Deferred Outflows of Resources The County's total assets and deferred outflows of resources increased $356.9 million or 7.1 percent primarily due to the following: Governmental activities. Total assets and deferred outflows of resources for the governmental activities increased by $223.9 million or 7.0 percent. Current and other assets decreased by $19.8 million. The primary reason was an increase of $363.6 million in unrestricted cash and investments, which was offset by a removal of $377.5 million in net pension assets. The removal in net pension assets was due to change in new pension reporting requirements under GASB Statement No. 68. The increase in unrestricted cash was due to increases of $246.3 million in State funding for various County programs related to public assistance and public health, $76.8 million from Proposition 63 funding for mental health programs, and $9.0 million from Senate Bill (SB) 90 State Mandated Programs. Additionally, there was an excess in the Educational Revenue Augmentation Funds (ERAF) apportionment which resulted in an increase of $34.7 million for the County at the end of the current fiscal year. Capital assets increased $58.2 million or 5.0 percent. Non-depreciable capital assets increased by $53.8 million and depreciable capital assets increased by $4.4 million. Changes in capital assets will be discussed in the Capital Assets section on page 19 and Note 6 on page 60. Deferred outflow of resources increased by $185.5 million mainly due to the implementation of GASB Statement No. 71 which changed the reporting of pension contributions made subsequent to the measurement date in FY2014. Business-type activities. Total assets and deferred outflows of resources for the business-type activities increased by $133.0 million or 7.2 percent. Current and other assets increased $27.4 million and capital assets increased $14.7 million. The increase in current and other assets of $27.4 million was primarily a result of higher cash receipts from patients, governmental agencies, insurers and others. In addition, deferred outflows of resources increased $90.8 million due primarily to the implementation of GASB Statement No. 71 which changed the reporting of pension contributions made subsequent to the measurement date in FY2014. Changes in capital assets will be discussed in the Capital Assets section on page 19 and Note 6 on page 60. Liabilities and Deferred Inflows of Resources The County's total liabilities and deferred inflows of resources increased by $3.42 billion or 97.4 percent mainly due to the following: Governmental activities. Total liabilities and deferred inflows of resources for the governmental activities increased by $2.38 billion or 93.3 percent due to increases of current and other liabilities of $193.5 million, noncurrent liabilities of $55.4 million, and deferred inflows of resources of $391.6 million. In addition, the County recorded a net pension liability of $1.74 billion in accordance with GASB Statement No. 68 as previously discussed. The increases in current and other liabilities of $193.5 million was due primarily to the following: Increase of $135.2 million in unearned revenues primarily due to $89.3 million in property tax and $30.0 million in vehicle license fee receipts that were set aside for uncertainties. Furthermore, the County recorded $15.3 million related to advances received from the State for Title IV-E Waiver and Wrap-around services contracts. Increase of $76.9 million in due to other government agencies due to increases in the Short Doyle Medi-Cal program as a result of additional audit reserves for this uncertainty. The increases in other long term liabilities will be discussed further