Audit 2003 Final
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Audit 2003 Final


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EASTERN MUNICIPAL WATER DISTRICTCOMPREHENSIVE ANNUAL FINANCIAL REPORTFor the Fiscal Year Ended June 30, 2003PAGEINTRODUCTORY SECTIONLetter of Transmittal iDistrict Location Map xiDistrict Officials xiiOrganization Chart xiiiFINANCIAL SECTIONIndependent Auditors’ Report 1-2Management’s Discussion and Analysis 3-9Basic Financial Statements:Balance Sheet 10-11Statement of Revenue, Expenses and Changes in Net Assets 12ent of Cash Flows 13-14Notes to the Basic Financial Statements 15-56STATISTICAL SECTIONRevenues by Source – Last 10 Fiscal Years 57Expenses by Function – Last 10 Fiscal Years 58Revenue Bond Coverage – Last 10 Fiscal Years 59Assessed Valuation of Taxable Property – Last 10 Fiscal Years 60Property Tax Levies and Collections – Last 10 Fiscal Years 61Special Assessment Billings and Collections – Last 10 Fiscal Years 61General Obligation Bond Tax Rates – Last 10 Fiscal Years 62Customer Account Write Offs as a Percentage of Sales – Last 10 Fiscal Years 63Bad Debt Reserves as a Percentage of Accounts Receivable – Last 10 Fiscal Years 63Principal Taxpayers 64Top 10 Agricultural Customers 65Top 10 Recycled Customers 65Summary of Imported Water Rates 66EMWD Water and Sewer Rates 66Water Deliveries 67Water Use Within District’s Service Area 68Computation of Direct and Overlapping Bonded Debt 69-70Demographic Statistics 71August 12, 2003Board of DirectorsEastern Municipal Water District2270 Trumble RoadP.O. Box 8300Perris, CA ...



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EASTERN MUNICIPAL WATER DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2003 INTRODUCTORY SECTION Letter of Transmittal District Location Map District Officials Organization Chart FINANCIAL SECTION Independent Auditors Report Managements Discussion and Analysis Basic Financial Statements: Balance Sheet Statement of Revenue, Expenses and Changes in Net Assets Statement of Cash Flows Notes to the Basic Financial Statements STATISTICAL SECTION Revenues by Source  Last 10 Fiscal Years Expenses by Function  Last 10 Fiscal Years Revenue Bond Coverage  Last 10 Fiscal Years Assessed Valuation of Taxable Property  Last 10 Fiscal Years Property Tax Levies and Collections  Last 10 Fiscal Years Special Assessment Billings and Collections  Last 10 Fiscal Years General Obligation Bond Tax Rates  Last 10 Fiscal Years Customer Account Write Offs as a Percentage of Sales  Last 10 Fiscal Years Bad Debt Reserves as a Percentage of Accounts Receivable  Last 10 Fiscal Years Principal Taxpayers Top 10 Agricultural Customers Top 10 Recycled Customers Summary of Imported Water Rates EMWD Water and Sewer Rates Water Deliveries Water Use Within Districts Service Area Computation of Direct and Overlapping Bonded Debt Demographic Statistics
PAGE i xi xii xiii
1-2 3-9 10-11 12 13-14 15-56
57 58 59 60 61 61 62 63 63 64 65 65 66 66 67 68 69-70 71
August 12, 2003
Board of Directors Eastern Municipal Water District 2270 Trumble Road P.O. Box 8300 Perris, CA 92572-8300
We are pleased to present the Eastern Municipal Water Districts Comprehensive Annual Financial Report for the year ended June 30, 2003.
This report was prepared by the Districts Finance Department following guidelines set forth by the Government Accounting Standards Board and generally accepted accounting principles (GAAP). Responsibility for both the accuracy of the data presented and the completeness and fairness of the presentation, including all disclosures, rests with the District. We believe the data, as presented, is accurate in all material respects and that it is presented in a manner that provides a fair representation of the financial position and results of operations of the District. Included are all disclosures we believe necessary to enhance your understanding of the financial condition of the District. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Managements Discussion and Analysis (MD&A). This letter of transmittal is designed to complement Managements Discussion and Analysis and should be read in conjunction with it. The Districts MD&A can be found immediately following the report of the independent auditors.
The Districts financial statements have been audited by Conrad and Associates, L.L.P., a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the District for the fiscal year ended June 30, 2003, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the Districts financial statements
for the fiscal year ended June 30, 2003, are fairly presented in conformity with GAAP. The independent auditors report is presented as the first component of the financial section of this report.
The Comprehensive Annual Financial Report is presented in three main sections:
I.Introductory Section provides an overview of the District, its background,  organization, recent activities and accomplishments over the past fiscal year; local economic conditions and forecasts; service efforts and accomplishments; and future plans.
II.Financial Section includes the independent auditors report, managements discussion and analysis, all basic financial statements and notes to basic financial statements.
III.Statistical Sectionincludes a number of unaudited tables and schedules that present historical trends for the past ten years as well as demographic and other information about the District deemed relevant.
INTRODUCTION Districts Service Area The Districts service area lies within the westerly third of Riverside County, encompassing 352,000 acres (555 square miles). The map below indicates the location of the Districts service area in Riverside County, a detailed District map is provided on page xi. When the District was annexed to the Metropolitan Water District of Southern California (MWD) by the Districts voters in 1951, its service area consisted of 86 square miles. Growth has resulted from 70 annexations and 7 detachments of service areas ranging in area from 1 to 72,000 acres. The assessed valuation has grown from $72 million when formed to over $26.5 billion in this past fiscal year.
Riverside Countys population increased to a total of 1,644,300 as of January, 2002. Of this population, approximately 501,000 (30%) live within the District. The current estimate of the Districts population served is at 520,000.
Districts Authority The District was organized under the Municipal Water District Act of 1911 (the Law) on October 16, 1950 for the primary purpose of importing Colorado River water to its service area in order to augment local water supplies. Prior to the Districts creation, the local water supply was primarily groundwater wells. In 1962, the District began providing wastewater treatment services to customers within its service area and, as a consequence, has become actively involved in the production of recycled water (i.e., wastewater that has been treated to a level acceptable for non-domestic purposes). The Districts water and wastewater customers include retail customers (e.g., residential, commercial and agricultural) located in both incorporated and unincorporated areas within the Districts service area, as well as wholesale customers (e.g., municipalities and local water districts) located within its service area. The District is authorized to acquire, control, distribute, store, treat, reclaim, recapture and salvage any water (including sewage) for the beneficial use of the District, its inhabitants or the owners of rights to water in the District. The Law also authorizes the District to exercise the power of eminent domain; to levy and collect taxes; to fix, revise and collect rates or other charges for the delivery of water, use of facilities or property or provisions for service; and to fix in each fiscal year a water standby or availability charge and a sewage and wastewater service standby or availability charge on land within the boundaries of the District to which water and sewage and wastewater services, respectively, are made available by the District. The District may also issue bonds, borrow money and incur indebtedness. Governance The District is a quasi-governmental agency of the State of California. It is not regulated by the Public Utilities Commission, but instead is governed by a Board of five directors who are publicly elected for four-year terms from comparably sized districts based on population. The District is a member of the MWD, which is a cooperative organization of 26 cities and water agencies that are responsible for providing imported water to arid southern California. The District is currently entitled to have one District representative on the MWD Board. Water Services The District receives its water supply from two sources: (1) local groundwater and (2) water imported by the District. The sole source of the Districts imported water is MWD. Approximately 19% of the Districts water supply comes from local groundwater sources. Such sources are heavily dependent upon rainfall and other sources of recharge. The remaining 81% of the Districts water supply comes through purchases from MWD, which in turn obtains its water supply from two primary sources: the Colorado River via the Colorado River Aqueduct and the State Water Project via the Edmund G. Brown California Aqueduct. For the fiscal year ended June 30, 2003, MWD supplied the District 79,578 acre-feet (AF) of water. (Quantities of water are expressed in terms of acre-feet. An acre-foot is the amount of water that will cover
one acre to a depth of one foot and is equivalent to 325,900 gallons, or as much as two families consume in and around their homes in one year.) The District provides water service to retail customers located within the cities of Moreno Valley and Temecula and the unincorporated communities of Good Hope, Homeland, Lakeview, Nuevo, Mead Valley, Murrieta, Murrieta Hot Springs, Quail Valley, Romoland, Sun City, Valle Vista and Winchester (collectively, the Municipalities). The District also supplies water on a wholesale basis to the Cities of Hemet, San Jacinto and Perris, Lake Hemet Municipal Water District, Nuevo Water Company, Elsinore Valley Municipal Water District, Western Municipal Water District, Rancho California Water District (collectively, the Wholesale Customers).
Sales Mix (Acre Ft) 3% 4% 21% 72%
Dom-Retail Dom-Whole Ag-Retail Ag-Whole
Sewer Services The District is currently divided into five sewer service areasHemet-San Jacinto, Moreno Valley, Sun City, Temecula Valley and Perris Valleyfor purposes of transmission, treatment and disposal of wastewater. The Sun City plant has been deactivated as a cost reduction measure and all flows are treated at the larger Perris facility. Each service area is served by a single regional water reclamation facility (RWRF), for which costs and methods of treatment vary. The facilities are capable of treating 53 MGD of wastewater and serve approximately 520,000 people. They are linked to a network of nearly 1,200 miles of pipeline and 35 active lift stations. District Recycled Water Supply The policy of the District is to promote the use of recycled water to provide for the conservation and reuse of all water resources and to utilize this resource for any approved purpose to the maximum extent possible under the laws of the State of California. The District currently generates approximately 37 MGD of effluent at its four active regional water reclamation facilities. The amount of effluent is expected to grow to 48 MGD by the year 2013. Approximately 60%-70% of the effluent currently generated is sold to agricultural and irrigation users. These customers include 94 agricultural sites, 5 golf courses, 30 landscape irrigation sites, 2 wholesale customers, 5 private duck clubs, 1 demonstration wetland project, and 1 wildlife area. During 2002/03, sales of recycled water in the District totaled $1,409,824.
Unsold recycled water is transferred to storage ponds and utilized to meet peak demands or is recycled by groundwater recharge. During 2003, markets were available for nearly 100% of the anticipated recoverable recycled water production. However, only 55% of the total recycled production was sold due to a longer winter. Systems under design will serve additional schools, parks, a cemetery, golf courses, open space, streetscapes and agricultural uses. ECONOMIC CONDITIONS AND OUTLOOK Generally speaking, about 90% of the residential demand is attributable to single family, detached homes. The balance of residential demand is attributable to multi-family, attached residences (e.g., apartments, duplexes, condominiums, townhouses, etc.). Future residential growth within the Districts service area could be curtailed if the County of Riverside were to impose more stringent environmental land use requirements in response to ongoing concerns about urban sprawl . Over the next five to ten years, wholesale deliveries will become the Districts second most significant market segment due in large part to the balancing of groundwater pumping resulting from a groundwater management plan being developed for the Hemet and San Jacinto areas. Through 2010, the commercial component will continue growing in significance, but not at a rate as fast as the wholesale segment. For simplification, the demands due to agricultural, landscape, and industrial market segments are considered to be relatively minor. In March 2003, the District retained a consultant to complete a socioeconomic study. This study was designed to forecast growth by census tracts for residential, commercial, industrial and institutional customers throughout the Districts water and wastewater service areas. The most significant conclusion was that, by 2025, the District could expect roughly 142,000 more housing units in its service area. This will nearly double the Districts customer base. MAJOR INITIATIVES In 1990, the District completed a study to identify District capital improvement requirements for the Water and Sewer System to the year 2005. This Water and Wastewater Facility Master Plan is currently being updated to reflect new requirements up to the year 2025. These updates reflect the latest growth projections available to the District and define the facilities that will be required to meet the needs of this growth. Although the growth projections have been revised downward from the 1990 study, the population is expected to double from its current size of nearly 520,000. This Master Plan becomes the document from which the District develops its annual Capital Improvement Program, (CIP). This CIP spans five years and identifies projects from the Master Plan that are currently required, adds projects where necessary, and defers projects when possible. This plan schedules the necessary construction by project year and the financing necessary to meet this schedule.
The projects on the CIP are tracked during the current construction year and the entire five-year program is reviewed and revised on an annual basis. During the annual review, projects are added or deleted based on the current construction schedules, and any newly identified requirements are prioritized into the respective construction years. The current CIP calls for expenditures of $280 million through 2007. This is a very aggressive plan driven by the recent development that we have experienced over the last two years and a forecast of continued growth at a rate not seen since the late 80s. Of this amount, $165 million is for water projects, $71 million for wastewater projects, and $44 million for recycled water projects. Nearly 49% of the project costs will be funded from pay as you go proceeds, 44% from external financings, and 7% from grant funds. The major projects include: 1)Perris Valley Desalter, Pipeline and Wells - $41 million 2)Hemet Water Filtration Plant - $25 million 3)Recycled Water Pipeline and Booster - $38 million 4)Wastewater Treatment Plant Expansions - $52 million
Operations The potable water system achieved greater diversity and reliability in the past year. The 15 cubic feet per second (cfs) Perris Water Filtration Plant was brought on line at full capacity. The Menifee Desalter also began continuous operation and will produce at least 1,500 AF of additional water for the Districts service area. These projects will supplement the Districts dependence on the MWD. Operations staff also implemented remote access and control of the Desalter and Water Filtration Plants Supervisory Control and Data Acquisition ("SCADA") to allow 24/7 operation without around the clock staffing. These control systemsin conjunction with the District wideoperate SCADA system.
Significant progress was also achieved in developing 1.8 megawatts of electrical power generation. This represents approximately 12% of the Districts power consumption and is critical in light of Californias recent power crisis and high-energy rates experienced from the Southern California Edison Company.
Revenues The District had not increased its water rates for over five years and had been utilizing a rate policy that was adopted in 1992. In 2002, a team was developed to review the current methodology and rates being applied to the wholesale and retail customers for potable and non-potable water. The objectives were; 1) simplify the rate structure; 2) ensure equity within the District among like users; and 3) be able to explain the various rates. The objectives were met. However, due to the impact on the agricultural market, there was a partial implementation of these proposed rates. All other rates were implemented in May of 2003 and a review of the agricultural rates is currently underway.
Bond Credit Rating The District was upgraded in July of 2003 from A1/A+ by Moodys Investors Service and Standard & Poors to AA3/AA-. Moodys states that The upgrade primarily reflects the Districts continued very strong financial condition and managements capable handling of the enterprises rapid growth. Standard & Poors cites The Districts strong track record of financial management, providing debt coverage of over 2x since 1998, and over 1 years worth of operating expenditures in cash reserves.
Technology Eastern Municipal Water District has over 49 multi-departmental systems. These systems are deployed in all sections of the District, and are used in the management of nearly all of the District's functions. During this past fiscal year, the District implemented major upgrades to its financial systems and security of many of its key applications and data warehouses.
Specifically, the District upgraded its Enterprise Resource Planning (ERP) system and implemented new procedures for requesting purchases. This entailed an extensive project that resulted in the implementation of Oracle Financial System version 11.i, iProcurement. The Districts billing and customer information application also underwent a major upgrade to increase its reliability and longevity.
As it relates to security, the District's information technology environment underwent two security audits and implemented a pro-active training and detection process. The District also finalized a Business Resumption Plan which will serve to hasten recovery of business functions should the need arise.
Safety The California Safety Through Accountability and Recognition (Cal/STAR) program is administered through the state Division of Occupational Safety and Health, which provides recognition to those sites whose programs have achieved occupational safety and health excellence. The District is the first public agency to be awarded Cal/STAR designation for its excellent total safety program. In July of 2003, the District was recertified for another 3 years.
THE DISTRICTS FUTURE The area that the District serves is one of the fastest growing regions in the country. The District is a major economic driver for the region and is challenged to continue to meet growing service demands in a safe and economical manner.
The desert-like climate can cause demand shifts of up to 40 million gallons per day (MGD) on the same date from one year to another. The District must anticipate the future needs and plan to construct the infrastructure to deliver water where and when needed. It must be able to convey and treat wastewater and utilize or dispose of the end products.
The District, like other water agencies in southern California, must deal with the uncertainties associated with the long-term availability of imported water from the State Water Project and the Colorado River. Over the next few years, the CalFed process and approval of the Quantification
Settlement Agreement should help clarify longterm water supply issues. However, regardless of the outcome, it is clear that the Districts strategy for long-term water supply development must include: expanded water conservation and recycling; conjunctive use of local basins to store imported water; management plans to protect local groundwater; desalination of brackish groundwater; and improved coordination and joint planning with MWD to optimize the use of available imported water supplies. The District must develop these water supply components in a timely, cost effective manner while achieving full compliance with all regulatory and environmental constraints and ensuring that the rights and interests of all local stakeholders are protected through cooperative planning and implementation of water supply projects. Water and wastewater utilities are among the most heavily monitored and regulated industries in this nation. Full service agencies such as the District, which supply water and collect, treat, and reuse wastewater, must take great care in permitting, monitoring, and documenting the environmental and regulatory compliance of their operations as a core business function. This function is made more difficult by the continuous and accelerating rate of change in local, state, and federal regulations. The tendency of regulations to become more detailed and stringent over time is coupled with increasing public awareness and concern over water supply safety. The publics low tolerance for perceived water supply risks is adding a community involvement and public education overlay to a business function that ten years ago was almost purely technical. The Districts regulatory monitoring and environmental compliance efforts must meet the combined challenges of increasing regulatory constraints, expanded permitting and reporting requirements, and greater public scrutiny.
The Districts leadership is obligated to provide these services at a reasonable cost, comparable to other public agencies. It must promote a level of customer service and satisfaction that meets or exceeds all benchmarks, while adhering to all state and federal regulatory requirements in keeping with its full compliance ethic.
Accounting System The Finance Department is responsible for providing the financial services for the District, including financial accounting and reporting, payroll and accounts payable, custody and investment of funds, billing and collection of water and wastewater charges, taxes, and other revenues. The Districts books and records are maintained on an enterprise basis, as it is the intent of the Board to manage the Districts operations as a business, thus matching revenues against costs of providing the services. Revenues and expenses are recorded on the accrual basis in the period in which revenue is earned and expenses are incurred.
Internal Controls The Districts management is responsible for establishing and maintaining a system of internal controls designed to safeguard the Districts assets from loss, theft, or misuse and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in accordance with generally accepted accounting principles. The internal control structure is designed to provide reasonable assurances that these objectives are met. To this end, the District contracted with the audit firm of Ernst & Young in 2000 to conduct a comprehensive review of all departments within the District as it relates to controls of data and processes. No major weaknesses were discovered, but recommendations for improvements have been implemented.
Budgetary Controls The District is not legally required to adopt and adhere to a budget or present budgetary comparison information; however, the Board chooses to approve an annual budget as a management tool. The budget is developed with input from the various department levels of the organization and adopted prior to the start of each fiscal year. Monthly comparison reports of budget to actual are prepared and distributed to all department heads with top level information provided to the Board at the second Board meeting of the month. Cash Management The District invests its temporarily idle cash in investments legally permissible by California Government Code Sections 53601 et seq., and in accordance with its own investment policy adopted by the Board of Directors. The investment objectives of the District are to first preserve the capital of the portfolio, followed by maintaining liquidity to meet cash flow requirements, and finally maximizing the rate of return without compromising the first two objectives. The District has formally adopted a cash reserve policy, which states the purpose, source, and funding limits for each of its designated reserves within its four main funds; operating, construction, debt service, and trust. Risk Management This past fiscal year, the District was self-insured up to $500,000 (S.I.R.) per occurrence for any workers compensation claims with a $25,000,000 limit (excess coverage) for each accident. The District was insured against any automobile liability up to $1,000,000 (primary coverage) per occurrence with a limit of $10,000,000 (excess insurance) over primary coverage, and self-insured up to $2,000,000 for its general liability with an excess coverage limit up to $10,000,000. The exposure this past year was reduced to $788,700 from $922,698 the year before. However, due to escalating costs of workers compensation excess coverage, the District has opted to not purchase any excess and 100% fund this area beginning in July of 2003. All other excess coverage will remain in effect. See footnote 11 of the notes to the financial statements for additional information. Pension Plans The District is a member of the California Public Employees Retirement System (PERS), a multiple-employer pension system, which provides a contributory defined benefit plan for all regular public employees of the District. These benefit provisions and all other requirements are established by California law. On behalf of its employees, the District pays the employees required contribution of 7%. The District, as employer, is required to contribute the remaining amounts necessary to fund PERS, using the actuarial basis specified by California law. Over the past two fiscal years, the District has been classified as superfunded (actuarial value of assets exceeds the present value of benefits). This has allowed the District to utilize these excess assets to pay for the employees required contribution. This has saved the District approximately $1.7 million each year. This superfunded status is in effect for the 2003/04 fiscal year. See footnote 6 of the notes to the financial statements for additional information.
Acknowledgments We would like to thank Carolyn Rynda, Accounting Manager, the Finance Department and the independent accounting firm of Conrad and Associates, L.L.P for the efforts put into the preparation of this report. We would also like to thank the Board of Directors for their continued interest and support towards achieving excellence in financial management.
Respectfully submitted,
Anthony J. Pack Charles E. Rathbone, Jr. General Manager Director of Finance