Hercules Public Financing Authority
(A Component Unit of the City of Hercules, California)
Hercules, California
Independent Auditors’ Report and
Basic Financial Statements
For the Year Ended June 30, 2021
Hercules Public Financing Authority
(A Component Unit of the City of Hercules, California)
Basic Financial Statements
For the Year Ended June 30, 2021
Table of Contents
Page
Independent Auditors’ Reports:
Report on the Financial Statements................................................................................................................. 1
Report on Internal Control Over Fi nancial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ............................................................................... 3
Basic Financial Statements:
Government-Wide Financial Statements:
Statement of Net Position ............................................................................................................................. 7 Statement of Activities ....................................................................................................... .......................... 8
Governmental Fund Financial Statements:
Balance Sheet.................................................................................................................. ............................ 11 Reconciliation of the Governmental Fund Balance Sheet
to the Government-Wide St atement of Net Position ............................................................................ 12 Statement of Revenues, Expenses, and Changes in Fund Balances ........................................................... 13 Reconciliation of the Governmental Fund Statement of Revenues, Expenses and Changes in Fund Balances to Government-Wide Statement of Net Position ............................... 14
Notes to the Basic Financial Statements ........................................................................................................... 19
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INDEPENDENT AUDITORS’ REPORT
To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California
Report on the Financial Statements
We have audited the accompanying financial statements of the governmental activities and each major fund of the Hercules Public Financing Authority (the “Authority”), a component unit of the City of Hercules, California (the “City”), as of and for the year ended June 30, 2021, and the related notes to the basic financial statements, which collectively comprise the Authority’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 prepara tion and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express opinions on these financial st atements based on our audit. We conducted our audit in accordance with auditing standards generally accepte d in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards , issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit 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 Authority’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 e ffectiveness of the Authority’s 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 ma de 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, the financial statements referred to above present fairly, in all mate rial respects, the financial position of the governmental activities and each major fund of the Authority as of June 30, 2021, and the changes in financial position, thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.
200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.c
pa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California
2 Emphasis of Matter
As described in Note 1 to the basic financial statements , these financial statements present only the Hercules Public Financing Authority and do not purport to and do not present fairly the financial position of the City as of June 30, 2021, the changes in its fina ncial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.
Other Matters
Required Supplementary Information
Management has omitted the Management ’s Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financ ial statements. Such missing information, although not a part of the basic financia l statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operati onal, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our re port dated January 19, 2022 on our consideration of the Authority's intern al control over financial reporting a nd on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financia l reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Authority’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority’s intern al control over financial reporting and compliance.
Santa Ana, California
January 19, 2022
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND
OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Independent Auditors’ Report
To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California
We have audited, in accordance with the auditing standa rds generally accepted in the United States of America and the standards applicable to fi nancial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities and each major fund of the Hercules Public Financing Authority (the “Authority”), a component unit of the City of Hercules, California (the “City”), as of and for the year ended June 30, 2021, and the related notes to the basic financial statements, which collectively comprise the Authority’s basic financial st atements, and have issued our report thereon dated January 19, 2022.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the Authority's internal control over financial reporting (“internal control”) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opini on on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Au thority's internal control. Accordingl y, we do not express an opinion on the effectiveness of the Authority's internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assi gned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited pur pose described in the first paragraph of this section and was not designed to identify all defici encies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, duri ng our audit we did not identify any defi ciencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether th e Authority's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on co mpliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opi nion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.c
pa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California
4 Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and co mpliance. Accordingly, this communication is not suitable for any other purpose.
Santa Ana, California
January 19, 2022
BASIC FINANCIAL STATEMENTS
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6 ASSETS
Cash with fiscal agents 9,893,085$
Lease receivable 13,618,758
Interest receivable 593,432
Advances to Successor Agency 6,703,250
Total assets 30,808,525
LIABILITIES
Interest payable 546,009
Bonds payable, due within one year 515,000
Bonds payable, due in more than one year 22,564,646
Total liabilities 23,625,655
NET POSITION
Restricted for debt service 7,182,870
Total Net Position 7,182,870$
Hercules Public Financing Authority
Statement of Net Position
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 7 EXPENSES:
Interest and fiscal agent charges 7,322,599$
PROGRAM REVENUES:
Lease revenues 6,832,101
(EXPENSES) OVER REVENUES (490,498)
GENERAL REVENUES
Investment earnings 945,549
CHANGES IN NET POSITION 455,051
NET POSITION:
Beginning of year 6,727,819
End of year 7,182,870$
Hercules Public Financing Authority
Statement of Activities
For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 8 GOVERNMENTAL FUND FINANCIAL STATEMENTS
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10 2003B PFA 2009 PFA 2010 PFA 2020 PFA
Lease Taxable Lease Wastewater Lease Revenue
Revenue Bonds Revenue Bonds Revenue Bonds Refunding Bonds Total ASSETS
Cash with fiscal agents - $ 1,923,294$ 7,679,725 $ 290,066 $ 9,893,085 $ Lease receivable - 6,461,706 1,570,275 5,586,777 13,618,758 Interest receivable - 350,018 185,078 58,336 593,432 Advances to Successor Agency - - - 6,703,250 6,703,250 Total assets - 8,735,018 9,435,078 12,638,429 30,808,525
DEFERRED INFLOWS OF RESOURCES
Unavailable revenues - 6,811,724 1,755,353 5,645,113 14,212,190 Total deferred inflows of resources - 6,811,724 1,755,353 5,645,113 14,212,190
FUND BALANCES
Restricted for debt service - 1,923,294 7,679,725 6,993,316 16,596,335 Total fund balances - 1,923,294 7,679,725 6,993,316 16,596,335 Total deferred inflows of resources
and fund balances -$ 8,735,018$ 9,435,078 $ 12,638,429 $ 30,808,525 $ Hercules Public Financing Authority
Balance Sheet
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 11 Total Fund Balances - Governmental Funds 16,596,335$ 14,212,190
Bonds outstanding (23,511,843)
Unamortized discount on bonds outstanding 432,197
Accrued interest on long-term debt (546,009)
Total Net Position - Governmental Activities 7,182,870$ June 30, 2021
Amounts reported for governmental activities in the statement of net position are different from those reported in the governmental funds because of the following:
Long-term liabilities are to use and payable in the current period and, therefore are not reported in the governmental funds. Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. All liabilities are reported in the statement of net position:
Lease receivables and related interest receivable are not available to pay for current period expenditures and, therefore, are deferred in the governmental funds.
Hercules Public Financing Authority
Reconciliation of the Governmental Funds Balance Sheet
to the Government-Wide Statement of Net Position
See accompanying Notes to the Basic Financial Statements. 12 2003B PFA 2009 PFA 2010 PFA 2020 PFA
Lease Taxable Lease Wastewater Lease Revenue
Revenue Bonds Revenue Bonds Revenue Bonds Refunding Bonds Total REVENUES:
Lease revenues 5,773,379 $ 897 $ 739,176$ 103,455 $ 6,616,907 $ Use of money and property - 837,889 722 106,938 945,549 Total revenue 5,773,379 838,786 739,898 210,393 7,562,456 EXPENDITURES:
Debt services:
Principal 5,705,000 200,000 285,000 - 6,190,000 Interest and fiscal charges 68,379 709,715 449,175 377,365 1,604,634 Total expenditures 5,773,379 909,715 734,175 377,365 7,794,634
EXCESS (DEFICIENCY) OF REVENUES
OVER (UNDER) EXPENDITURES - (70,929) 5,723 (166,972) (232,178)
OTHER FINANCING SOURCES (USES)
Proceeds from bond issuance - - - 5,876,843 5,876,843 Payment to the escrow agent - - - (5,705,000) (5,705,000) Transfers in - - - 6,988,445 6,988,445 Transfers out (6,988,445) - - - (6,988,445) Total other financing sources (uses) (6,988,445) 7,160,288 171,843 NET CHANGE IN FUND BALANCES (6,988,445) (70,929) 5,723 6,993,316 (60,335) FUND BALANCES:
Beginning of year 6,988,445 1,994,223 7,674,002 - 16,656,670 End of year - $ 1,923,294$ 7,679,725 $ 6,993,316 $ 16,596,335 $ Hercules Public Financing Authority
Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 13 Net Change in Fund Balances - Governmental Funds (60,335)$ Amounts reported for governmental activities in the statement of activities are different because:
215,194
Change in Accrued Interest on Long-Term Debt 11,604
Principal repayments on Long-Term Debt 485,000
Payment to the escrow agent for retirement of Long-Term Debt 5,705,000 Proceeds from the issuance of Long-Term Debt (5,876,843) Amortization of Discounts (24,569)
Change in Net Position - Governmental Activities 455,051$ Long-term debt proceeds provide current financial resources for governmental funds, but issuing debt increases long-term liabilities in the statement of net position. Payment of debt principal is an ex
penditure in the governmental funds but repayment reduces long-term liabilities in the statement of Hercules Public Financing Authority
Reconciliation of the Governmental Fund Statement of Revenues, Expenses and Changes in Fund Balances to Government-Wide Statement of Net Position June 30, 2021
Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are to be reported as expenditures in governmental funds. In addition, interest on lon
g-term debt is not accrued in governmental funds.
Lease receivables are reported as financial resources in the fund statements; however these amounts represent the change in the long-term investment in leases to the Hercules Public Financing Authority and decrease net position.
See accompanying Notes to the Basic Financial Statements. 14 15
NOTES TO THE BASIC FINANCIAL STATEMENTS
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Hercules Public Financing Authority
Index to the Notes to the Basic Financial Statements
For the Year Ended June 30, 2021
17 Note 1 – Summary of Significant Accounting Policies ........................................................................................... 19
A. Financial Reporting Entity. ............................................................................................................................ 19 B. Basis of Accounting and Measurement Focus ............................................................................................... 19 C. Cash and Investments ..................................................................................................................................... 20 D. Long-Term Debt ................................................................................................................ ............................ 20 E. Fund Balances ................................................................................................................................................ 21 F. Net Position .................................................................................................................................................... 21 G. Spending Policy ............................................................................................................................................. 21 H. Use of Estimates............................................................................................................... .............................. 22
Note 2 – Cash and Investments ................................................................................................................................ 22
A. Investments Authorized by Debt Agreement. ................................................................................................ 22 B. Risk Disclosures ............................................................................................................................................. 23
Note 3 – Lease Receivable............................................................................................................................... .......... 25
Note 4 – Capital Lease – Sales Type ........................................................................................................................ 25
Note 5 – Advances to the Former Hercules Redevelopment Agency .................................................................... 26
Note 6 – Long-Term Debt ......................................................................................................................................... 26
A. 2003B PFA Lease Revenue Bonds. ............................................................................................................... 26 B. 2009 PFA Taxable Lease Revenue Bonds ..................................................................................................... 27 C. 2010 PFA Wastewater Revenue Bonds ......................................................................................................... 28 D. 2020 PFA Lease Revenue Refunding Bonds ................................................................................................. 29
Note 7 – Contingencies .............................................................................................................................................. 29
A. Lawsuits. ........................................................................................................................................................ 29
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Hercules Public Financing Authority
Notes to the Basic Financial Statements
For the Year Ended June 30, 2021
19 Note 1 – Summary of Significant Accounting Policies
The basic financial statements of the Hercules Public Fina ncing Authority (the “Authority”) have been prepared in conformity with accounting principles generally accepte d in the United States (“U.S. GAAP”) as applied to governmental agencies. The Governmental Accounting Sta ndards Board (“GASB”) is th e accepted standard setting body for establishing governmental accounting and financial re porting principles. The following is a summary of the Authority’s significant policies:
A. Financial Reporting Entity
The Authority is a joint powers authority organized by the City of Hercules, California (the “City”) and the former Hercules Redevelopment Agency (Agency) on July 24, 2001 under the laws of the State of California.
The Authority was organized to provide financing fo r public capital improvements and working capital for the City and the Agency through lease, acquisition, or construction of such public capital improvements.
Administrative and related normal business expenses incurre d in the day-to-day operati ons of the Authority are provided by the City and are not included in the accompa nying basic financial statements. Management believes that such expenses are insignificant to the Authority’s operations.
The funds of the Authority have been included within the scope of the financ ial statements of the City because the City Council of the City is the governing board and has financial accountability over the operations of the Authority. Only the financial activity of the Authority is included herein and these financial statements, therefore, do not purport to represent the financial position or results of operations of the City.
B. Basis of Accounting and Measurement Focus
The accounts of the Authority are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are account ed for by providing a separate set of self-balancing accounts that comprise its assets, deferred outflows of r esources, liabilities, deferred inflows of resources, fund balance, revenues and expenditures. These funds are established for the purpo se of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
Government-Wide Financial Statements
The government-wide financial statements are presented on an “economic resources” measurement focus and the accrual basis of accounting. Accordingly, all of the City ’s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, including capital assets, as well as infrastructure assets, and long-term liabilities, are included in the accompanying statement of net positi on. The statement of activiti es presents changes in net position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred.
Governmental Fund Financial Statements
All governmental funds are accounted for on a spending or “current financial resources” measurement focus and the modified accrual basis of accounting. Accordingly, only current assets, current liabilities, and deferred inflows of resources are included on the balance sheet. Th e statement of revenues, expenditures and changes in fund balances presents increases (revenue and other fi nancing sources) and decreases (expenditures and other financing uses) in fund balances. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current period.
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
20 Note 1 – Summary of Significant Accounting Policies (Continued)
B. Basis of Accounting and Measurement Focus (Continued)
Governmental Fund Financial Statements (Continued)
Reconciliations of the fund financial statements to the government-wide fi nancial statements are provided to explain the differences.
The Authority reports the following major Governmental Funds:
2003B PFA Lease Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the payment a nd principal interest on the bond issued to cover the financing of the original City Hall debt issue and to ge nerate additional resources to assist in the construction of a new library building.
2009 PFA Taxable Lease Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover the financing of the acquisition of certain commercial condominium properties, consisting of approximately 96,847 square feet located at 203-295 Linus Pauling Drive within the City.
2010 PFA Wastewater Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover capital improvements to the City of Hercules wastewater system.
2020 PFA Lease Revenue Refunding Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover the financing of the original City Hall debt issu e and to generate additional resources to assist in the construction of a new library building.
C. Cash and Investments
The Authority’s cash and investments are held by a fiscal agent for the redemption of bonded debt and maintaining required reserves. Investments have b een made only as permitted by specific State Statutes governing their investments or applicable Authority resolution or bond indenture.
D. Long-Term Debt
In the government-wide financial stat ements, long-term debt and other l ong-term obligations are reported as liabilities in the Statement of Net Position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount.
In the governmental fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. Th e face amount of debt issued is reported as other financing sources. Premiums received on debt issuan ce are reported as other financing sources while discounts on debt issuance are reported as other financing uses. I ssuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
21 Note 1 – Summary of Significant Accounting Policies (Continued)
E. Fund Balances
In the governmental fund financial statements, fund balances are classified as follows:
Nonspendable – Nonspendable fund balances include amounts th at cannot be spent because they are not in a spendable form, such as loans receivable or inventor y, or because resources legally or contractually must remain intact.
Restricted – Restricted fund balances are the portion of f und balance that have externally enforceable limitations on their usage through legislation or lim itations imposed by creditors, grantor, laws and regulations of other governments or enabling legislation.
Committed – Committed fund balances are self-imposed limita tions by the highest level of decision-making authority, namely the Board of Directors, prior to the end of the reporting period. The Board adoption of a resolution is required to commit resources or to rescind the commitment.
Assigned – Assigned fund balances are limitations imposed by management based on the intended use of the funds. Modifications or rescissions of the constraints can be removed by the same type of action that limited the use of the funds. Assignment of resources can be done by the highest level of decision making or by a committee or official designated for that purpose. The Authority has aut horized the Executive Director for that purpose.
Unassigned – Unassigned fund balances represent the r esidual net resources in excess of the other classifications.
F. Net Position
In the government-wide financial statements, net position is classified as follows:
Investment in Capital Assets – This component of net position consists of capital assets, net of accumulated depreciation, related debt, and deferred inflows of resources.
Restricted – This component of net positi on consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets.
Unrestricted – This component of net positi on is the amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position.
G. Spending Policy
Government-Wide Financial Statements
When expenses are incurred for purpo ses for which both restricted and unrestricted components of net position are available, the Authority’s policy is to apply the restricted component of net position first, then the unrestricted component of net position as needed.
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
22 Note 1 – Summary of Significant Accounting Policies (Continued)
G. Spending Policy (Continued)
Governmental Fund Financial Statements (Continued)
When expenditures are incurred for purposes for which both restricted and unrestricted fund balances are available, the Authority’s policy is to apply restricted fund balances first, then unrestricted fund balances as needed.
When expenditures are incurred for pur poses where only unrestricted fund ba lances are available, the Authority uses the unrestricted resources in the following orde r of committed, assigned and unassigned, except for instances wherein an ordinance specifies the fund balance.
H. Use of Estimates
The preparation of financial statements in conformi ty with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Note 2 – Cash and Investments
At June 30, 2021, the Authority’s cash and investments ar e held by fiscal agents totali ng $9,893,085. Fiscal agents are mandated by bond indentures as to the types of investments in which debt proceeds can be invested.
A. Investments Authorized by Debt Agreements
Investments of debt proceeds held by bond trustee are govern ed by provisions of the debt agreements, rather than the general provisions of the Californi a Government Code or the investment policy of the City. The table below identifies the investment types that are authorized for inv estments held by bond trustee. The table also identifies certain provisions of these debt agreements that address interest rate risk and concentration of credit risk.
Maximum Maximum
Maximum Percentage Investment
Authorized Investment Type Matu rity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 Million $50 Million U.S. Treasury Obligations 30 Years 20% None
U.S. Government Agency Issues 30 Years 20% None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 6 Months 40% 30% Commercial Paper 6 Months 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 1 Years 20% None
Repurchase Agreements 30 Days None None
Reverse Repurchase Agreements 92 Days 20% None
Medium-Term Notes 5 Years 30% 15%
Mutual Funds N/A 20% None
Money Market Funds N/A None None
Insured or Passbook Savings Accounts N/A None $100,000
Guaranteed Investment Contract N/A None None
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
23 Note 2 – Cash and Investments (Continued)
B. Risk Disclosures
Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will a dversely affect the fair value of an investment. Generally, the longer the maturity of an inv estment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Authority manages its exposure to interest rate risk is by purchasing a combination of shorter term and l onger term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.
Information about the sensitivity of the fair values of the Authority's investments held by bond trustee to market interest rate fluctuations is provi ded by the following table that shows the distribution of these investments by maturity:
Maturity
12 Months
Investment Type Total or Less
Investments with fiscal agents:
Money Market Mutual Funds 9,893,085 $ 9,893,085 $ Total 9,893,085$ 9,893,085 $
Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations
Interest rate risk is the market value fluctuation due to overall changes in the interest rates. It is mitigated by limiting the average maturity of the Authority’s portfolio, not to exceed three years.
As a means of maintaining liquidity and minimizing inter est rate risk, the City’s investment policy limits are as follows:
Percentage
Maturity of Portfolio
Up to One Year 10% Minimum
One Year to Five Years 60% Maximum
More Than Five Years 30% Maximum
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
24 Note 2 – Cash and Investments (Continued)
B. Risk Disclosures (Continued)
Credit Risk
Generally, credit risk is the risk that an issuer of an i nvestment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating requi red by (where applicable) the California Government Code, the City of Palm Springs, or debt agreements, and the actual rati ng as of year-end for each investment type. The U.S. treasury securities are not analyzed since they are not deemed to have credit risk.
Minimum
Legal Not
Investment Type Total Rating AAA Rated
Investments with fiscal agents:
Money Market Mutual Funds 9,893,085 $ N/A 9,893,085 $ - $ Total 9,893,085$ 9,893,085 $ - $ S&P Rating as of Fiscal Year Ended
Concentration of Credit Risk
The investment policy of the City contains no limitation on the amount that can be invested in any one issuer beyond that stipulated by the California Government C ode. There were no investments in any one issuer that represent 5% or more of the total Authority investment or 10% of its net investment for mutual funds.
Issuer Type Amount
U.S. Treasury Obligation Mutual Funds 9,893,085 $
Custodial Credit Risk
Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposit or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the ri sk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a go vernment will not be able to recover the value of its investment or collateral securities that are in the po ssession of another party. The California Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposit or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secu re deposits made by state or local governmental units by pledging securities in an undivide d collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of th e pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agen cies. California law also allows financial institutions to secure City deposits by pledging first trust deed mo rtgage notes having a value of 150% of the secured public deposits.
For investments identified herein as held by bond trust ee. the bond trustee selects the investment under the terms of the applicable trust agreement, acquires the investme nt, and holds the investments on behalf of the reporting government.
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
25 Note 3 – Lease Receivable
The Authority has entered into several noncancelable lease agreements with the City as part of its issuances of debt.
These agreements call for the Authority to receive lease amount s that are structured to be sufficient in timing and amount to meet the Authority’s related debt service pa yments. Interest earned on these lease payment account and other monies held by trustee are applied to the lease payments made by the City.
Future estimated minimum lease payments to be received are as follows:
Year Ending June 30,
2009 PFA
Taxable Lease
Revenue Bonds
2010 PFA
Wastewater
Revenue Bonds
2020 PFA Lease
Revenue Refunding
Bonds Total
2022 911,140 $ 733,288 $ 129,878 $ 1,774,306 $ 2023 907,371 731,288 512,269 2,150,928 2024 907,159 728,691 564,937 2,200,787 2025 905,296 730,181 563,430 2,198,907 2026 906,578 730,622 561,212 2,198,412 2027-2031 4,511,491 3,634,749 2,814,035 10,960,275 2032-2036 4,241,500 3,626,375 1,679,498 9,547,373 2037-2041 2,875,880 3,598,875 - 6,474,755 Total 16,166,415 14,514,069 6,825,259 37,505,743 Less: amount representing interest (7,781,415) (5,264,069) (948,416) (13,993,900) Less: fiscal agent cash (1,923,294) (7,679,725) (290,066) (9,893,085) Total principal outstanding 6,461,706$ 1,570,275 $ 5,586,777 $ 13,618,758 $
Note 4 – Capital Lease – Sales Type
On August 14, 2008, the City of Hercules and Bio-Rad Laboratories, Inc. entered in to a lease agreement, which Bio- Rad agreed to lease from the City of Hercules, the premises, consisting of the land located in the City of Hercules, County of Contra Costa, state of California, commonly known as the Venture Commerce Center located at 203-295 Linus Pauling Drive, including five (5) buildings consisting of approximately 96,847 rentable square feet, together with the parking lot and associated improvements serving the buildings.
The term of this lease shall be for thirty (30) years, commencing on September 15, 2008 and ending on September 14, 2038, or terminated sooner pursuant to the te rms of this lease. Bio-Rad Laboratories, Inc. has the option to terminate this lease anytime on or after the fifteenth (15 th) anniversary date as to a portion or the entire
premises by delivering to the City not later than three (3) months prior to said fifteenth (15th) anniversary date or any applicable later termination date, a notice of such election.
The City granted to Bio-Rad Laboratories, Inc. the optio n to purchase the premises, Bio-Rad Laboratories, Inc. may elect to exercise the Purchase Option by delivering to the City of Hercules writte n notice of such election within 30 days prior to either of the following dates: (i) the fifteenth (15th) anniversary date; (ii) the twentieth (20th) anniversary date; or (iii) the twenty-fifth (25 th) anniversary date, If Bio-Rad Laboratories, Inc. has not elected to exercise the Purchase Option during the time period said above, then the Purchase Option shall automatically be deemed elected by Bio-Rad Laboratories, Inc. as of the expiration date unless Bio-Rad Laboratories, Inc., provides prior written notice to the City of Hercules within fifteen (15) days prio r to the expiration date electing not to pursue the Purchase Option, If Bio-Rad Laboratories, Inc. elects to exerci se the Purchase Option on the expiration date, the purchase price for the premises shall be one dollar ($1.00).
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
26 Note 4 – Capital Lease – Sales Type (Continued)
Total lease revenue of $26,723,100 will be received from the Bio-Rad Laboratories, Inc. during the term of lease.
The interest rate on the lease payments is 8.0381%. M onthly lease payments vary from $55,300 to $83,699 will be received on the first day of each month without notice, off set, deduction, or demand, in advance, during the lease term.
Note 5 – Advances to the Former Hercules Redevelopment Agency
The Authority has advanced funds to the former Redevelopm ent Agency (Agency) of the City. At June 30, 2021, the balance was $6,703,250. There was no set repayment schedule as of June 30, 2021.
With the dissolution of the Agency on February 1, 2012, th ere is uncertainty as to whether the Fund will be repaid the balance in the amount of $6,703,250 loan owed by the Agen cy and the Authority to fund costs on behalf of the Agency was signed within two years of the creation of the Agency. The City is currently working with the California Department of Finance to determine the outcome of these loans. The possible outcome of this matter cannot presently be determined. Accordingly, no provision for any allowa nce for doubtful accounts has been made in the financial statements for possible forgiveness of these loans.
Note 6 – Long-Term Debt
The following is summary of changes in long-term liabilities for the year ended June 30, 2021:
Balance Balance Due within Due in More
July 1, 2020 Additions Deletions June 30, 2021 One Year Than One Year Publicly Offered:
2003B PFA Lease Revenue Bonds 5,705,000 $ - $ (5,705,000)$ - $ - $ - $ 2009 PFA Taxable Lease Revenue Bonds 8,585,000 - (200,000) 8,385,000 220,000 8,165,000 Less: Discount on issuance (311,332) - 17,297 (294,035) - (294,035) 2010 PFA Wastewater Revenue Bonds 9,535,000 - (285,000) 9,250,000 295,000 8,955,000 Less: Discount on issuance (145,434) - 7,272 (138,162) - (138,162) 2020 PFA Library Construction - 5,876,843 - 5,876,843 - 5,876,843 Total 23,368,234 $ 5,876,843 $ (6,165,431) $ 23,079,646 $ 515,000 $ 22,564,646 $
A. 2003B PFA Lease Revenue Bonds
The Public Financing Authority issued lease revenu e bonds, series 2003B, dated October 15, 2003, totaling $9,150,000. The purpose of the bonds was to refinance th e 1994 Refunding Certificates of Participation and to finance a portion of the construction for a public library. The interest rate on the bonds ranges from 2.00% to
5.00%. The interest is payable semia nnually on June 1 and December 1, commencing December 1, 2003. The bonds are subject to optional and mandatory early re demption provisions. The bonds are payable from and secured by revenues consisting primarily of the base rental payments of the facility lease. Principal is due annually beginning on December 1, 2005, in amounts ranging from $170,000 to $2,480,000. The bonds mature on December 1, 2033.
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
27 Note 6 – Long-Term Debt (Continued)
A. 2003B PFA Lease Revenue Bonds (Continued)
The City is obligated to pay only its Base Rental Pa yments and Additional Paymen ts under the Lease. The obligation of the City to pay Base Re ntal Payments or Additional Payments does not constitute an obligation of the city for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation.
On August 1, 2020, outstanding balance was ref unded with the proceeds from the 2020 PFA Library Construction bonds.
B. 2009 PFA Taxable Lease Revenue Bonds
The Authority issued taxable lease revenue bonds, series 2009, dated July 29, 2009, totaling $10,080,000. The purpose of the bonds was to finance the acquisition of cer tain commercial condominium properties, consisting of approximately 96,847 square feet located at 203-295 Linus Pauling Drive within the City from the City, funding a reserve fund for the Bonds and to paying the costs of issuance of the Bonds. The interest rates on the bonds range from 6.00% to 8.40%. The interest is payable semiannually on January 1 and July 1, commencing January 1, 2010. The bonds are subject to optional special mandatory redemption, and mandatory sinking account redemption provisions. The bonds are payable fro m and secured by revenues consisting primarily of the base rental payments of the property lease, Principal is due annually beginning on July 1, 2010, in amounts ranging from$165,000 to $845,000. The bonds mature on July 1, 2038. The balance at June 30, 2021 is $8,385,000.
The Bonds constitute limited obligations of the Authority payable solely from Revenues. The Authority has no taxing power. The obligation of the City to make City Advances does not constitute an obligation of the City which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation.
Future debt service requirements on the 2009 Public Fina ncing Authority Taxable Lease Revenue bonds are as follows:
Year Ending
June 30, Principal Interest Total
2022 220,000 $ 691,140 $ 911,140 $ 2023 235,000 672,371 907,371 2024 255,000 652,159 907,159 2025 275,000 630,296 905,296 2026 300,000 606,578 906,578 2027-2031 1,910,000 2,601,491 4,511,491 2032-2036 2,845,000 1,396,500 4,241,500 2037-2039 2,345,000 530,880 2,875,880 Total 8,385,000 $ 7,781,415 $ 16,166,415 $
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
28 Note 6 – Long-Term Debt (Continued)
C. 2010 PFA Wastewater Revenue Bonds
The Authority issued revenue bonds, series 2010, date d August 1, 2010, totaling $11,765,000. The purpose of the bonds was to finance improvements to the City’s wast ewater system, fund a reserve fund for the bonds, and pay the costs of issuances of the bonds. The interest ra tes on the bonds range from 2.00% to 5.130%. Principal and interest payment are due a nnually beginning August 1, 2011, in amounts ranging from $230,000 to $700,000. The bonds mature on August 1, 2040. The balance at June 30, 2021 is $9,250,000.
The Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or a ny of its income or receipts, except the Revenues. The full faith and credit of the Authority and the Agency and the City, which are parties to the agreement creating the Authority, are not pledged for the payment of the princi pal of, or interest on, the Bonds and no tax or other source of funds, other than the Revenues, is pledged to pay the principal and interest on the Bonds.
The annual debt service requirements to maturity for the 2010 PFA Wastewater Revenue Bonds as of June 30, 2021 are as follows:
Year Ending
June 30, Principal Interest Total
2022 295,000 $ 438,288 $ 733,288 $ 2023 305,000 426,288 731,288 2024 315,000 413,691 728,691 2025 330,000 400,181 730,181 2026 345,000 385,622 730,622 2027-2031 1,970,000 1,664,749 3,634,749 2032-2036 2,505,000 1,121,375 3,626,375 2037-2041 3,185,000 413,875 3,598,875 Total 9,250,000 $ 5,264,069 $ 14,514,069 $
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
29 Note 6 – Long-Term Debt (Continued)
D. 2020 Hercules Public Financing Authority 2020 Lease Revenue Refunding Bonds
The Hercules Public Financing Authority issued Lease Revenue Refunding Bond series 2020, dated August 1, 2020, totaling $5,876,843. The purpose of the bonds was to finance and to refinance the acquisition and or construction of certain real property and public capital improvements of the City. The issuance of the 2020 Lease Revenue Refunding Bond (the “2020 Refunding Bond”) resulted in cash flow savings of $947,702 over the life of the Bond. The City has structured the refinancing to achieve nearly all of the cash flow savings in the first three fiscal years: $458,377 in FY 2021, $435,857 in FY 2022, and $53,463 in FY 2023.
The annual debt service requirements to maturity for the 2020 Hercules Public Financing Authority 2020 lease Revenue Refunding Bonds as of June 30, 2021 are as follows:
Year Ending
June 30, Principal Interest Total
2022 - $ 129,878$ 129,878 $ 2023 386,663 125,606 512,269 2024 448,561 116,376 564,937 2025 457,061 106,369 563,430 2026 465,032 96,180 561,212 2027-2031 2,494,386 319,649 2,814,035 2032-2033 1,625,140 54,358 1,679,498 Total 5,876,843 $ 948,416 $ 6,825,259 $
Note 7 – Contingencies
A. Lawsuits
The Authority is not involved in any matters of litigati on that have arisen in the normal course of conducting Authority business. Additionally, Authority management believes that the Authority’s insurance programs are sufficient to cover any potential losses should an unfavorable outcome materialize.
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